Venture Capital Europe-Asia 2000 Conference
28 March 2000 |   By : Dr Nik Ramlah Nik Mahmood, Director of Market Policy and Development, Securities Commission

'Opportunities for the Venture Capital Industry: The Capital Market'

Dr Nik Ramlah Nik Mahmood,
Director of Market Policy and Development,
Securities Commission

at the
Venture Capital Europe-Asia 2000 Conference

28 March 2000
Putra World Trade Centre, Kuala Lumpur


The increasingly significant and strategic role of the venture capital industry as a potential source of finance for new businesses and enterprises and hence in driving the economy, especially the new economy, needs no further elaboration. Indeed it has been said that there is usually a direct correlation between the amount of venture capital available to a company and the pace of growth of the company. Similarly the greater the amount of venture capital available in a country the quicker the economy can grow.

In Malaysia, we have seen the size of the venture capital industry growing steadily over the past decade or so. In 1991 there were 8 venture capital companies with total funds mobilised amounting to RM 173 million ringgit. By 1998, there were 23 venture capital companies with total funds mobilised exceeding RM1 billion. While the official figures for 1999 will be out very soon with the release of the BNM Annual Report, I am sure that we would see an increase in these figures for 1999. In fact today's Business Times quoted the Malaysian Venture Capital Association as saying that there are today 35 venture capital companies with funds of RM1.5 billion. While the rate of growth is encouraging, the amount is still relatively small when viewed against the experience of more developed countries where venture capital is the driving force behind the new economy.

Venture Capital as the Driving Force for the New Economy

Economic growth thrives on new businesses which create new industries and hence a whole gamut of new economic opportunities. New businesses in the era of technology and K-economy has several unique characteristics:

  • Increasingly new businesses are created by small agile companies, seldom by big established ones.
  • New businesses do not usually attract bank financing. They therefore need equity capital.
  • However, raising equity capital in the form of public money through public markets tends to be easier, a lot easier, for big established companies with track record than for small companies with new businesses. This is because traditionally stock exchanges do not cater for small companies.

It is against this backdrop that venture capital has an important, indeed critical role to play. Venture capital bridges the gap between bank financing and equity financing via the public markets. But venture capital is not just about money although that is a crucial aspect. Venture capital is also about successful partnerships between entrepreneurs, investors and management, it is about promotion of enterprise, about prudent risk taking and about nurturing managerial skills and business acumen. Given that the new economy is expected to be powered by small businesses with lots of intellectual capital with little or no size or track record, venture capital will increasingly be a significant force driving the new economy.

Given the above realities and given the Government's commitment and emphasis on promoting high-tech, high growth knowledge-based enterprises, there will be even stronger demand for forms of financing that bridges the traditional gaps between bank financing and equity.

Linkages between venture capital industry and the capital market

There are several very significant linkages between the capital market and the venture capital industry. Indeed these linkages have always existed although of late these linkages have seen significant strengthening. With the growing importance of venture capital further strengthening of these linkages can and must be expected.

Move to equity financing

First, as I have alluded to earlier, there is the well recognised need to move away from over-dependence on bank financing for funding our growth and reinvigorating our economy. Both the equity market and the corporate debt market must take a greater share in funding economic growth in order to avoid funding mismatches. Indeed for most venture-type enterprises and businesses especially at the seed and early stage financing, banks just do not provide financing for such activities. Neither is it desirable for banks to do so. Banks may not have the expertise to evaluate such deals and may rightly not have the appetite for such high risks. As a result funding for such activities is likely to come from private equity channelled through venture companies.

IPO as an exit mechanism

For venture capital to be able to be a sustainable engine that will continue to power a nation's economic growth, there must be appropriate exit mechanisms so that venture funds can be used to support other new ventures. While it is recognised that there are several exit mechanisms available for venture capitalists such as management buy-out and mergers, an IPO with a listing on an exchange can offer numerous benefits, such as:

  • Efficient valuation - a public listing, particularly in a disclosure-based regulatory environment is seen by many as providing the best valuation of the company concerned.
  • Ensures liquidity - being listed on an exchange means that investors, both retail and institutional have access to the shares of the company. This is particularly true today where internet, on-line trading and other aspects of technology have made trading on exchanges more accessible to all.
  • Public access to information of publicly listed companies coupled with increasing use of technology and e-commerce in the capital market will also add further value and profile to the company concerned.
  • A public listing also facilitates the raising of additional capital. Once listed, the company can raise additional capital through mechanisms like rights issues within a shorter time frame. This is important as companies will need to sustain growth by further access to the market.
  • Attract a wider spectrum of investors. Most institutional funds are restricted either by statute or by their own charter or trust deed from investing in unlisted companies. A listing on the exchange will therefore enable the company to tap the funds of larger but more conservative institutions such as pension and insurance funds as well as funds of unit trust and other collective investment schemes.

Traditional stock exchanges are not vc-friendly

Notwithstanding the above-mentioned benefits of an exit via an IPO for a venture capital company, the fact of the matter remains that traditional stock exchanges all over the world are encased within a regulatory paradigm that focuses on size and track record. And there are good reasons for this - given that stock exchanges are accessible to all and sundry and that regulators are statutorily mandated to protect investors.

Hence, traditional stock exchanges were never intended to attract young, small venture-type upstarts with little or no track record. As such, listing requirements on main exchanges everywhere in the world have never been designed to be "venture-capital friendly". On the contrary , the growth and evolution of stock exchanges over the last few decades have typically been characterised by increasingly more stringent listing requirements and criteria.

The Emergence of New Markets

But the story does not end there as far as the linkage between venture capital and the capital market is concerned. Things have begun to change. While national markets continue to insist on stringent requirements relating to size and track record and indeed justifiably so, new markets have evolved which are intended to provide more facilitative listing mechanisms for smaller and younger companies. New or second markets have been created often with government facilitation and encouragement, in many jurisdictions in the region and elsewhere.

Recent examples include :

The Growth Enterprise Market or GEM which is part of the Hong Kong government's initiative to encourage the development of Hong Kong's technology companies and to provide listing opportunities for high-tech companies from China and other countries in the region. Considering that it was launched only last year this market has made a significant mark on the venture capital industry in the region.

Japan has introduced the Market for High Growth and Emerging Stocks which is intended to provide easier funding for emerging companies with high growth potential and to offer a wider choice of investment instrument.

UK launched TechMARK, a new market for technology companies in November 1999. This new market provides a new approach to stock market investment, by uniting companies that share common attributes with a commitment to technological innovation.

And even as I speak other markets are being conceived. Last week South Korea's Financial Supervisory Commission announced the opening of a new market, a third market for start-up companies that do not qualify for listing on Korea's main exchange or on KOSDAQ.

Back in Malaysia the genesis for the establishment of MESDAQ can be found in the 7th Malaysia Plan which called for the setting up of a third board for the listing of high growth and high technology companies. MESDAQ was intended to complement the KLSE by providing an avenue for the listing of small high growth companies with potential but little or no track record - particularly high technology companies. In short the sort of companies that need to raise equity capital but do not qualify to be listed on either the Main Board or the Second Board of the KLSE.

While I do not wish to delve into the specifics pertaining to the listing requirements on MESDAQ as the Executive Chairman of MESDAQ will be speaking at tomorrow's session, I wish to make the point that the very creation of MESDAQ reflects the government's commitment towards ensuring that smaller companies have an avenue for raising capital from the equity market. To ensure that this objective is achieved, the SC together with MESDAQ will continue to try and address difficulties faced by companies in seeking a listing on MESDAQ. However, from the regulatory perspective, it has to be noted that while MESDAQ is intended to be an exchange for smaller high growth companies and hence its regulatory regime should rightly be one that is far more flexible and facilitative than that for the main market, it is still a public exchange. As a public exchange it is accessible to all types of investors, retail and institutional alike. Both the exchange and the regulator must therefore strive to find the delicate balance between ensuring a facilitative regulatory regime that will be sufficiently attractive for the targeted companies and yet ensure that investors are adequately protected and that a fair efficient and orderly market is continuously maintained.

As it is a market that operates within a disclosure-based environment, listing on MESDAQ necessitates rigorous due diligence and extensive disclosure of information. These and other listing requirements are often viewed by smaller companies as impediments to a MESDAQ listing. As I have mentioned earlier, these are areas where the SC and MESDAQ are continuously working together to improve so that as many companies can find a home in MESDAQ. Of course, this has to be done without losing sight of the other side of the equation - the regulator's role to protect investors and the exchange's obligation to maintain a fair and orderly market.

Collective Investment Schemes

The ability of venture companies to exit through an IPO is just one aspect, albeit a strong one, of the linkage between venture capital and the capital market. The other aspect of the linkage lies in the potential provided by the capital market to meet the demands for funds by the venture capital industry.

Collective investment vehicles, namely unit trust funds and closed-end funds are investment vehicles designed to effectively mobilise funds for investment in the capital market. Managed by professional fund managers and regulated by relevant laws and regulations these collective investment schemes tap the funds of retail investors for professionally managed investments in the capital market. Both Unit Trust Funds and Closed-end Funds can invest up to 10% of their funds in unlisted companies. While this figure seems small, it has to be borne in mind that currently the total net asset value of all unit trust and closed-end funds stand at around RM43 billion. 10% of this amounts to RM4.3 billion. Even if only half the amount that can be invested in unlisted securities is invested in venture-type companies, this amounts to RM2 billion, far in excess of the total venture funds of RM1 billion in 1998.

Of course for professionally managed funds to invest in venture-type activities there must be a core of professional and experienced fund managers with thorough understanding and appreciation of the concept of venture capital. Only specialists with the pre-requisite skills and expertise would be in a position to make decisions pertaining to venture capital. In this regard, venture capitalists trained in the art of sophisticated risk management and investment diversification has a lot to contribute to the pool of investment professionals within the capital market. In particular, the ability of venture capitalists to promote entrepreneurship and innovation is a skill which would be useful to all investment intermediaries in this day and age. With specialist skills being developed, it is not inconceivable for special unit trusts or closed-end funds to be set up which can invest more that 10% in unlisted securities. Of course, this would be subject to appropriate disclosure requirements relating to the risks of investing in such funds.

Corporate Governance

The other important linkage between venture capital and the capital market is something that is close to my heart - venture capital can contribute to enhancing corporate governance. I believe all present are aware that since 1996, the SC has embarked on a phased shift from a merit-based regulatory environment to one that is based on disclosure. This calls for enhanced disclosure, due diligence and corporate governance. It involves, inter-alia, changing the roles and responsibilities of all participants within the capital markets, regulators, intermediaries, investors as well as management and boards of companies. As an intermediary between funders and investee companies, venture capitalists demand high standards of corporate discipline and accountability. Investee companies must have financial and business plans that are satisfactory to the funders. Hence investee companies learn about the desirability of good governance and accountability very early on in its life - not just when it goes public. Venture capital therefore helps lay the foundation for prudent and effective corporate governance. Hence when successful ventures are taken to the capital market via an IPO these companies would already have a firm grounding on issues relating to corporate governance.

The term 'incubator' is often used to describe the process by which venture capitalists nurture small start-up businesses into successful ventures. To me, the word 'incubator' has an added dimension - venture capitalists provide small businesses with early lessons and discipline with regard to corporate governance. As a result, by the time these companies go public, good corporate governance is already 'second nature' to them.

Indeed it is not untrue to say that in some jurisdictions, the venture capital industry has been at the forefront in enhancing corporate governance. In the UK for instance, the venture capitalists were using audit and remuneration committees long before the Cadbury Committee had even discussed their case in public companies. More recently the venture capital industry in the UK has already begun to examine governance issues raised by the growing presence of e-commerce and start-up companies.


Venture capital is about entreprenurship, about recognising opportunities and about being at the right place at the right time. I'm told that failure in venture capital is not a stigma, rather it is a rite of passage. All these are useful attributes as we position ourselves to develop a knowledge based economy that will power us ahead towards developed nation status in 2020.

The government has clearly shown its recognition of the important role that venture capital can play in transforming the economy. The establishment of MESDAQ and numerous institutions meant to promote venture capital are clear testimonies to this. Of late there has been numerous other efforts to boost the industry including announcements in the 2000 budget with respect to provision of additional funds and tax incentives for venture capital. I am sure the industry would say more could be done and I believe more would in due course be done. But meanwhile let us not lose sight of the various opportunities that are currently available for venture capital, particularly within our capital markets. After all venture capital is about recognising and capitalising on opportunities available.

Thank you.

about the SC
The Securities Commission Malaysia (SC) was established on 1 March 1993 under the Securities Commission Act 1993 (SCA). We are a self-funded statutory body entrusted with the responsibility to regulate and develop the Malaysian capital market.

General Line: +603-6204 8000
General Email: [email protected]
© Copyright Securities Commission Malaysia.  Contact Us   |    Disclaimer   |   The site is best viewed using Microsoft Edge and Google Chrome with minimum resolution of 1280x1024
Generic Popup