Underutilized equity financing | Business
Management consultant Dr William Lawrence found equity financing to be heavily underutilized by local businesses, especially among operators outside the financial sector.
Although there are more than 12,000 large and medium-sized businesses that contribute to government taxes each year, less than one percent of local businesses release equity capital and tax credits through the stock market, he said. he said at a forum hosted by the Jamaica Stock Exchange.
Small and medium-sized businesses are allowed to raise between $ 50 million and $ 500 million in equity through the junior stock exchange market, in return for which they benefit from 10 years of tax breaks. For the first five years, they pay no corporate tax and for the rest of the period, they are granted a 50 percent exemption.
Since its creation on April 1, 2009, more than 40 companies have been listed on the junior market. Access Financial Services was the pioneer list in October 2009.
But Lawrence, who is also the director of the Professional Services Unit at the Mona School of Business and Management, noted that the majority of junior listed companies have not exploited other equity options to raise capital. , such as preferential share offers and rights issues, after their initial public offerings.
Ironically, while financing is often seen as a major issue for businesses in Jamaica, very few businesses are preparing to access this affordable and patient capital, even though the steps are listed on the JSE website. , did he declare.
âMy research shows that this neglect not only limits the profitability of the company, but also slows down Jamaica’s recovery from the COVID-19 pandemic,â he told the forum on âRaise and deploy equity capital , Whose panelists also included investor Michael Lee-Chin and Sygnus. CEO Berisford Gray.
JSE records indicate that approximately four junior stock exchange companies have issued preferred stock over time: CAC 2000 Limited; Derrimon Trading Company Limited; Eppley Limited; and Paramount Trading Limited. Eppley also completed a capital increase around 2016. The investment company, which has four prefs in the market, migrated from the junior index to the main index at the end of 2019.
Derrimon Trading is the only junior company to make an additional public offering, which it did successfully in January, raising around $ 4 billion. As a result of this transaction, the distribution company repurchased its single preferred share early on March 5.
Between 2010 and 2020, only 44% of publicly traded financial companies issued preferential stock offers, and even fewer had additional public offerings and rights issues. Lawrence says his research shows that only 18% of listed companies have issued preferred shares in the market, only 5% have done rights issues, and 2% have gone to supplemental public offerings, or APOs.
“Consider this: a bank that has a capital ratio of 15% is considered by regulators to be sufficiently capitalized, but a manufacturing company with a capital ratio twice as high is likely to run into cash flow problems or difficulties. financial. It is clear that listed non-financial companies need to seriously consider using more JSE avenues for additional capital, âhe said.
For Lawrence, the model company that has continually sought capital on the stock market is the JMMB group, which currently owns around eight preferred shares in the market and completed an additional public offering of common shares last year. JMMB is currently seeking an additional $ 6 billion from two fixed rate preferences currently on the market.
âJMMB is a company that frequently uses new equity on the JSE to generate profit and its expansion. Its organic and inorganic growth has been financed by equity. When you look at the period 1995 to 2020, it shows that JMMB has an 88% correlation between equity at the start of each year and profit at the end of the year, âLawrence said.
âDespite strong evidence that equity is a driver of profitability and GDP growth, very few listed companies have tapped into this source of capital after an IPO. This neglect is more chronic for non-financial companies listed on the JSE, âhe added.
The JSE has more than 100 regular and preferential lists. Listed companies are currently valued at over $ 1.7 trillion.