Some small firms are looking to list, yet coming up with the view that IPOs aren’t worth considering, largely because of the cost barriers thrown at them by traditional mechanisms. Avenir Registrars Managing Director Hardeep Tamana shows exactly how to get your firm ready for public listing the efficient way
How does one take a relatively young yet ambitious industry to global prominence? Go public, that’s how.
During the middle of last decade, the established retail FX brokerages which are now synonymous with having pioneered the retail sector and thus have a gold-plated corporate image, were privately owned.
At that same time, they were joined on the retail marketplace by a deluge of newly established retail FX companies that had approached the business from a completely different angle, that being to make use of an at the time recently launched off-the-shelf system that would reduce entry barriers and make it possible for pretty much anyone to become a retail brokerage.
That system was MetaTrader 4, and by 2006, literally hundreds of white label licenses had been purchased by people who had no financial markets or electronic trading industry background, and following a very rudimentary licensing procedure in an offshore jurisdiction, began actively targeting a global audience.
At this stage, the highly respected established firms began to increase their status by listing with great ease on the New York and London Stock Exchanges, their balance sheets, corporate governance and standing in the world of commerce having been a perfect fit for offering shares to the public via prestigious venues, and their reporting abilities and fiduciary duties equally so.
Thus, FXCM, Interactive Brokers, IG Group and GAIN Capital became mainstays of the now publicly reporting retail financial sector.
At that time, the MetaTrader 4 brokerages which had recently come to fruition were not what they are today. They had a lowbrow image and were operated via a ‘me vs the house’ methodology, and all offered a virtually identical experience, hence the seasoned traders of the mainstays would never defect.
As the MetaTrader 4 world began to evolve, however, and traders began to become far more discerning, specialist companies developed means by which the MetaTrader system could be connected to live liquidity, and larger brokers began to emerge, garnering a dedicated client base at the same time at which fully automated portfolio management systems began to be developed around MetaTrader, sealing its future as the de facto off the shelf platform.
By 2013, some of the largest firms in this ‘second tier’ sector were very prominent, examples being FxPro, XM, Plus500, and AvaTrade.
The management teams of such firms were faced with a commercial decision on how to elevate the status of such companies, and listing their stock on a prestigious venue in a major financial markets center became the preferred choice.
IPO fever – it came and went
Four years ago, within very close proximity to each other, Plus500 listed its stock on London’s Alternative Investment Market, as did Teddy Sagi’s Safecharge. Playtech, previously a humble gaming software firm from Israel, became a mainstay of publicly listed London-based companies that is now fully engaged in acquiring institutional and retail FX firms of great provenance, and FxPro began to look seriously at listing.
These are just some examples, however the corporate interest in taking the public route was massive, but has now died down.
Indeed, the costs and barriers for smaller firms are quite simply too much… Or are they?
Today, FinanceFeeds spoke to Hardeep Tamana, Managing Director of London-based Avenir Registrars with regard to how this can be achieved with ease, good prior organization and low costs.
Mr Tamana holds a PhD in geochemistry from Manchester University. Mr Tamana has over twenty years of financial markets experience from banking and stockbroking and served as CEO at a UK stockbroking firm for 8 years. In addition, he has developed a number of next-generation tools for financial services, including share screening software.
Avenir Registrars is industry-neutral, and has broad experience across the complexity of London’s commercial environment.
Mr Tamana explained today “The registry business is a backwater that gets neglected, but is the critical component for settlement of all securities. Our focus is more on the shares and bonds area, but essentially it crosses to others and we can get into the detail on many of these.”
“One of the reasons that we got into this area is that many people seem to think that CREST is quite antique, but what they don’t realize is that it is not CREST that is antique, but some of the traditional registrars are sitting on old technology” said Mr Tamana.
CREST is a UK-based central securities depository that holds UK equities and UK gilts, as well as Irish equities and other international securities.
It was named after its securities settlement system, CREST, and has been owned and operated by Euroclear since 2002.
The name CREST is not an acronym. There have been attempts to devise backronym for what CREST could mean such as “Certificateless Registry for Electronic Share Transfer”, and then there are some pranksters in the UK Money Markets who use phrases such as “Could Reasonably Expect Settlement Today” and “Can’t Remember Ever Sanctioning Taurus” however these can be dismissed as lighthearted.
CREST allows shareholders and bondholders to hold assets in a dematerialised, i.e. electronic form, rather than holding physical share certificates and also serves a number of other important functions, such as assisting in the payments of dividends to shareholders.
It is also an “electronic trade confirmation system” (“ETC”) using Trax. In order to list any company on an exchange, the use of CREST is very much instrumental.
“Importantly, when parties to a transaction make a deal, they both electronically confirm their sides of the transaction via electronic transfer. Both parties are required to submit confirmation details to CREST” explained Mr Tamana. “In the event that transaction details do not match, CREST will highlight the issues and ensure that the problems are resolved as soon as is practicable” he said.
“Our approach was to bring in brand new technology, as we were from the outset very conscious that pricing and the service element was important. Those aspects are key to opening up to the small-to-medium enterprise sector. Everything has become more detailed and expensive, therefore if you are a FTSE 100 or one of the top 50 firms, you’ll get the attention of the registrars, but smaller and newer companies are overlooked” Hardeep Tamana, Managing Director, Avenir Registrars
“Companies which are not currently listed, but may be wishing to approach a public listing, need to have a register of shareholders, however they are reliant on the actual holders to keep updating it, but no reaon why that system can’t be available. One of the reasons that we came into this business was to bring in new technology to the registry area” siad Mr Tamana.
“If you bought and sold shares, your title is being transferred from you to another person. That title, when ownership changes, everyone expects it to be totally seamless, however it can end up with errors and complications behind the scenes. We have integrated with stockbrokers and derivatives firms to ensure that this can be done very smoothly and without lots of bureaucracy and cost” he explained.
“It is very important to consider the benefit at the smaller end of the market where companies are either being priced out, especially on London’s Alternative Investment Market (AIM), hence the number of companies listing is falling” said Mr Tamana.
“Also, worthy of note is the current situation with regard to crowdfunding and other microfunding ventures where all of a sudden you have smaller firms that have to keep a share register and have to do so at a reasonable cost. The market needs more streamlined lower cost solutions that otherwise wouldn’t be there” he said.
“If your business is a small or medium sized firm going for a crowdfunding solution, you would be given a registry solution, which is usually an Excel spreadsheet which is not scalable” – Hardeep Tamana, Managing Director, Avenir Registrars
“There are a plethora of providers but most CREST providers have grown up servicing a very old elite, and the newcomers are working on fix-up solutions that give an immediate answer but arent scalable” said Mr Tamana.
“There is a need to work with smaller firms to allow them to grow, and chopping and changing solutions that are used is a procedure that has data risk that impacts individual holders. Risk mitigation is important and technology plays a large part in that. For most of the users, even crowdfunding ones, many have realized quickly that what they get is an electronic register which can be viewed on a realtime basis. Even if its a small firm, most of the current solutions that are provided comprise simply a list of email addresses for holders” explained Mr Tamana.
“Ultimately database management and extraction and utilization is almost secondary. Having a core database of holders which is maintained is important” – Hardeep Tamana, Managing Director, Avenir Registars
Currently, an advantage of having shares impressed in the registry system is that it will open the door for funds to invest in the companies that do so.
Mr Tamana explained that this is actually a very core aspect. “Many entities do not realize that they do not need to be listed to be a CREST participant without being listed. Unlisted firms can use CREST to hold shares in electronic format, but then once it is CREST enabled, a lot of investors will look to invest more as many investors will shy away from firms that don’t have their shares in electronic format. We have some are biomedical firms that have gone down this route, and in that sector which, like the financial services industry, consists of recently established technology, this is important.”
“Ultimately, most of the visibility toward quality investors relies on the technology used. If a SME, the owners may not know that shares can be held in electronic form. We recommend to attempt to speak to some competitors in order to discover that they don’t entertain unlisted companies, they have a prefrence only for listed firms” said Mr Tamana.
Mr Tamana said “With regard to IPOs in the FX industry, many firms may find that these days they either cannot get investors which would make it viable, or are blocked due to lack of regulatory approval. Some just want to be on a platform where the shares are ported, or on a technical exchange with a technical listing in an offshore jurisdiction such as Jersey, for example.”
“Some small firms are looking to list, yet coming up with the view that IPOs aren’t worth considering, largely because of the cost barriers thrown at them by traditional mechanisms, whereas having CREST access can be done at a relatively low cost and once they have a technical listing, the IPO market becomes open to them. There is nothing to stop them getting the investment from smaller investors and being CREST enabled in preparation.
In summary, Mr Tamana considers that generally, firms that approach advisors think often think that they have to go to Euroclear or Clearstream, however the lesson is that the domestic bond market was destroyed by costs and it only survived by a few firms doing it on a certificate basis about 10 years ago, however a lot of these could have been done on the CREST system. This highlights how the market goes with the herd instead of thinking of a suitable solution, hence there is absolutely no reason at all why a relatively small company cannot be on par with the top 100 firms.”
Photograph: Royal Exchange Buildings, London. Copyright FinanceFeeds