A couple of quick disclaimers. Craig Gradidge’s firm was the very first advertiser on Biznews.com. He spotted our potential virtually from Day One. So for obvious reasons, he has a special place in my heart. Disclaimer number two is that the subject of this article, Singular Systems, is the sponsor of the OTC section. That said, I am the one who asked Craig to write something about trading in the BEE share market, a field where he is regarded by the SA media as the pre-eminent expert. He obliged with a In this contribution, in which he contrasts his personal experience with trying to sell BEE shares before Equity Express arrived with what it now available. Biznews celebrates Disruptors, those businesses which change their industries for the better. Through its Equity Express offering, Singular Systems has already done so with BEE share trading. We expect this might just be the start. – AH
By Craig Gradidge*
As the owner of a fledgling start up business I have found myself dipping into my balance sheet a lot since leaving the comfort of a corporate paycheck. In January 2011 I found myself in the coffee shop at the Morningside MediClinic looking through my balance sheet again. I had just become a father for the first time, and was presented with a bill as beautiful as my new born daughter.
My medical aid did not cover all the expenses (but luckily I get cheap movie tickets from them) so I needed to find some cash quickly. Having decimated my share portfolio to pay for a wedding, a deposit on a house, an MBA and a Post Grad in Financial Planning, I unfortunately had to turn to my BBBEE share portfolio. After much soul searching, number crunching and crystal ball gazing, I finally and reluctantly decided to sell my Thembeka Capital shares.
What a process! I had to phone a call centre, download forms, complete and return the forms, FICA, then call every so often to see if there were buyers and what they were offering. In short it was a ball-ache of note. I had to tap into an overdraft facility to ensure that MediClinic would release mom and baby and not hold them ransom because of an unsettled invoice (our local hospitals are a real caring bunch…). I eventually received the proceeds of the sale of my shares over a month later. I had a similar experience offloading my Sasol Inzalo shares 21 months later to pay for the birth of my son…
These experiences alerted to me a significant challenge that faced investors in some of the BBBEE deals. Getting into the investments was somewhat painful in many instances, but proved to be a cake walk compared to trying to get out of them. Enter Singular Systems (SS) with their Equity Express (EE) product. Being a regular commentator on BBBEE public share offers in the media, I have watched EE grow in stature as its role became increasingly recognised in the industry.
Singular Systems was founded in 2002 by Anthony Wilmot and Nick Kruiskamp and has grown into a market leader in software development. The company initially focussed on providing software products and outsourcing services in niche areas such as share scheme administration and Capital Gains Tax, but its service offering extended into support and also into building bespoke software solutions for their clients. In a recent interview Anthony noted that he spends his life speccing systems that do not exist.
It is their Equity Express (EE) offering that has grown to become the dominant player in the over-the-counter (OTC) space. It was a system that was born out of a client need. Anthony’s stockbroker, Etienne Nel, who was working at BJM, also had a keen interest in the OTC market. After a coffee meeting between the two Etienne decided to join forces with Anthony and bring his experience and insight to bear on developing and growing Equity Express.
Equity Express is a sophisticated share trading platform and administration system which facilitates the buying and selling of shares over-the-counter (OTC). Providing an end-to-end solution, the system stores information about all shareholders as well as simplifies the process of matching buyers and sellers of financial instruments.
The software also carries out the cash settlement function and ensures that all the necessary documentation is in order before a transaction is considered complete. Both existing and new participants, as well as independent stockbrokers, are able to log into the system online to view completed trades, existing trade requests and to request new trades.
Equity Express currently manages the OTC platforms of African Bank’s Eyomhlaba (EYO) and Hlumisa (HLU) schemes, Phuthuma Nathi (PN), Welkom Yizani (WY), Yebo Yethu (YY), Ukhamba (UKH), Thembeka Capital (TC), and Sasol Inzalo (SI). In addition to these schemes Equity Express manages the OTC platforms of the recently demutualised niche insurer Assupol, private healthcare company Lenmed and a number of other platforms.
Part of the reason for the growth in Equity Express’s OTC platforms has been the fact that the JSE’s BEE board is limited in its ability to deal with conditionality. EYO and HLU investors have been able to trade their shares for almost three years now. However, in the first year investors could only trade a third of their shares. They could trade two thirds a year later. But there were other conditions. Only individuals could trade EYO and HLU shares. Companies and groups can trade PN, TC, SI, UKH, YY and WY shares, but they have to be 100% black owned in order to be able to trade TC shares. Equity Express is able to set up the various OTC platforms to ensure that these conditions are implemented.
According to Etienne and Anthony, OTC markets are important for a number of reasons; they bring liquidity early for private companies, they help drive a culture of savings, they offer controlled liquidity ( for example BBBEE shares are only available to black South Africans, Co-ops often only available to farmers) which is difficult for a traditional bourse such as the JSE to administer, they can operate without a stock broker community (there are pros and cons on that score).
One of the most exciting developments for me in the BBBEE space has been around the story of Ukhamba Holdings (UKH). UKH started life as a staff scheme and is a legacy of the late Imperial CEO Bill Lynch. Imperial recognised the importance of staff being able to access economic benefit from their investment and approached Equity Express about setting up an OTC platform. The result of this is that not only can staff realise economic benefit, but the black investing public can further diversify their portfolios by including a company like Imperial in their portfolios via an investment into UKH.
There aren’t any similar companies available to such investors with the existing crop of BBBEE share schemes. Hopefully other large companies follow suit and bring their staff schemes to market and increase their profile among black investors. SAB, Old Mutual, Standard Bank and many others have decent sized staff schemes that the public may be interested in.
The recent debacle around the MTN Zakhele OTC platform has put the spotlight on this market. The FSB is taking a closer look at the market, with the delay of the reopening of the MTNZ platform being as a result of the authorities having to give its approval first.
In a recent interview Bruce Whitfield, the host of 702’s Money Show, asked me whether investors were taking a chance by investing through these OTC platforms. His very direct question was simple ‘are these platforms safe for investors?’ Anthony Wilmot noted in my interview that Equity Express ‘did not have a single failed trade in the over 70,000 trades’ across the various platforms it manages. It recently celebrated a significant milestone – over R1bn worth of trades – going through Equity Express platforms, and not a single failed trade or any issues with the matching engines. Nel further noted “EE platforms run on a pre-paid model. Buyers first put up cash before they are able to trade their shares, and sales are confirmed with sellers”
My aging mother recently remembered that I had bought her some TC shares back in 2007 and she wanted to know what they were worth. After I told her how much she could expect if she sold at the ruling price, she instructed me to assist her with selling her shares. Her experience has been much more pleasant than mine. The difference? Sometime after I sold my shares, Equity Express were appointed to run the TC platform. My mom is holding out for a higher price at the moment (go mom!) but she is certainly benefitting as a result of the change.
I expect that Singular Systems and Equity Express will grow to be a force in further changing the investment landscape in South Africa, but I expect there will be many challenges along the way, especially if a credible competitor emerges from the MTNZ debacle somehow, or if the JSE is able to revitalise their BEE Board somehow. Whatever the future holds, my wish is that it is investors like my mom that continue to reap the benefit.
* Craig Gradidge is the head of investments at Gradidge-Mahura, a Black owned and managed investment management and wealth advisory firm whose specialities include the BEE share market.
