Softlogic has the unique distinction of raising private equity through many marquee names including Actis, FMO, DEG, and Samena and the first round investors exiting to similar marquee investors such as TPG and Leapfrog with significant upside.
“And the listed entities in our group have included many top tier public market funds said Chairman of Softlogic Holdings PLC, Ashok Pathirage, to the Daily News Business “INSIGHTS BY LISTED CORPORATES” feature series conplied by the Colombo Stock Exchange.
“We constantly engage with our investors and have gained significantly from their knowledge, experience and insights in other markets. We do not presume to know everything and there is a vast accumulated wealth of knowledge and experience with both foreign and local investors that have been proved extremely useful to us. In addition, we have gained through the connectivity of our investors for business opportunities and Joint Ventures.”
The shares of Softlogic Holdings PLC (Ticker: SHL.N0000) commenced trading on the Colombo Stock Exchange (CSE) in2011 on the DiriSavi Board of the CSE under the ‘Capital Goods’ sector.
Pathirage, Chairman of Softlogic Holdings shared the company’s experience of listing on the CSE.
Q: Raising funds via the exchange is a cost- effective alternative to traditional funding means. What were your reasons for accessing funds for growth via the public market?
A: Ever since we commenced operations in 1991, Softlogic has been expanding rapidly, and now within a short space of 30 years, have reached consolidated turnover of almost LKR 100b. This created and will continue to create a significant demand for capital. In our journey thus far, we have tapped into a wide range of sources of capital, ranging from straight equity, to straight debt to more complex forms of debt and equity including the public market for both equity and debt through debentures.
We have found that each method and source has their own pros and cons. A key determinant of success lies with timing, both in terms of economic and market sentiment as well as the position in the life cycle of our businesses.
in times of positive sentiment/positive growth momentum of the business, the public markets tend to value business on a higher multiple be it PER or EBIDTA.
The fact that there is a ready exit mechanism via the market also lowers the risk so overall, for equity, we have found that public markets offer a relatively higher valuation plane with less complications of negotiations as opposed to raising funds through a single source or a syndicate. The public markets also open up a vast pool of investable funds via many investors.
Accessing the public markets in addition provides the opportunity to discover true value of the business through price discovery.
Q: Can you share your thoughts on why raising funds via the exchange can accord a company greater flexibility and be cost-effective over the long-run as compared to traditional forms of funding?
A: I will confine my answer here to equity. From the outset, raising equity through the public markets does come at a cost and with a duty to look after the rights of the minority investors. And, there are continuous listing regulations and governance that has to be diligently applied. However, these are positives as proper governance will raise the profile of the company and the brand both in financial and other terms.
The primary advantage comes in the form operating flexibility for equity, with the funds raised forming a perpetual base of the company capital. We do not have the repayment onus on the company as a ready exit is available via the market.
If the funds obtained are put to proper use, the cost of servicing that capital will be the dividends with rewards to the equity holder coming in dual form via the dividend and capital gains which the market will attribute based on growth expectations.If the returns of the company are proven healthy, the company can keep accessing the markets for more funds via rights issues etc.
The quantum of funds raised can be navigated in such a manner that any control issues or concerns the promoters may have can be negated.
Q: At what point of the growth curve do you think a company in a similar market as yours should consider listing?
A: We have found that accessing the market at a point in the latter growth stage of the life cycle is more beneficial. Private equity may offer better valuations during the early growth stages as global fund managers may have a multitude of benchmarks and experience markers.
Q: In the local context, there is hesitancy to access funds via the exchange. What do you think those reasons are and how would you address them for those on the fence?
A: Primarily stems from concerns over potential loss of control for promotors and a perception of post listing requirements and governance regulations. The concerns of not getting proper valuations may also pause entry.
Here the remedy is constant communication by the CSE and SEC and the investment banking community with the business community. Concerns of loss of control can be easily addressed by the proper structuring of the issue and allaying the concerns on regulations post listing can be done highlighting the benefits of not only adhering to but actually even raising the bar on governance.
Q: How should companies view organizational structure pre-IPO in order to ensure success post-IPO?
A: In terms of structure per se, there should be clear visibility as to the use of funds. A clean structure will help investors to identify this and yield better valuations.
In terms of governance, the SEC and CSE have mandated governance requirements. Our experience is that it helps to engage with the two entities and incorporate the required structures well before approaching the public markets.
Q: Has the transformation into a public entity reinforced or strengthened any practices at your company?
A: Absolutely. When there is framework thinking becomes aligned and then you have the ability and the desire to raise the bar higher with governance and disclosure practices. This is clearly visible where Annual Report disclosure is concerned with entities vying to set the benchmark higher each year.
Q: Can you share your thoughts on the importance of effective communication regarding your future plans with your shareholders post-listing and how that reinforces the success of the share price?
A: The share price is a reflection of both the past and the prospective future. The past is there available on the financial disclosures. Therefore it is imperative that the market understands the future prospects of the company to properly price the share. The share is built on confidence. Therefore, be it good or bad, it is extremely important that the proper message gets to the investing public so that confidence is built.
Q: The CSE has relaxed the regulatory framework to facilitate more listings. Would you like to comment on it?
A: A robust regulatory framework is vital for the longevity of the market. However we welcome any well thought of move to encourage more companies into the market framework.
Q: How vital is it for an organization to manage its debt-to-equity ratio?
A: The debt to equity ratio is a fluid one. It will change from lifecycle to the nature of the business etc. An group like ours which is predominantly retail top line heavy will necessarily have a higher debt to equity than say a manufacturing entity. However, it is important to gauge what your optimum is and make adjustments accordingly with correct injections of equity. A more pertinent ratio to keep an eye out will be your debt to EBIDTA.
Q: How has your company adjusted to the current global environment?
A: The global environment is constantly changing. So it’s a case of constant monitoring, anticipation and change. We are fortunate to have on our board’s people with global experience and resource banks that we can draw on.
Q: How do you foresee the growth of your company going forward? Are there any specific opportunities or initiatives you are exploring and would like to share with the investing public?
A: Softlogic has always focused on growth. In this short space we have grown our top line to circa 100m and now employ over 11,000 people in our country. Our strategy has been to grow, learn and gain significant market positions domestically in the sectors that we operate in. We have done that in healthcare, Insurance and certain subsectors of Retail. We will continue to grow our local footprint, because we believe in the future of our country.
We have also instilled financial partnerships with renowned marquee equity funds that we can now draw on to expand our footprint regionally.