The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A BISX-listed company has sprung to the stock exchange's defence by "vehemently rejecting" charges it is "useless", saying: "We are living proof that the system can work."

Julian Brown, Benchmark (Bahamas) president and chief executive, told Tribune Business that unrealistic expectations, and a misunderstanding of its role, continued to plague perceptions of the Bahamas International Securities Exchange (BISX) both within and outside the capital markets.

Arguing that BISX could not be expected to achieve a "level of efficiency" comparable to leading global exchanges within 18 years, due to the Bahamian market's small size, Mr Brown said it is up to participants to drive solutions rather than simply criticise.

He revealed that Benchmark planned to use its newly-acquired broker/dealer status to help small retail investors enjoy "better execution" of their "buy" and "sell" orders, and was prepared to act as a "market maker" by providing "risk capital" to encourage initial public offering (IPO) and listing activity on BISX.

The Benchmark chief also called on the Government to assist through the privatisation of more state-owned entities, suggesting that it create a sovereign wealth fund into which such assets were transferred to ready them for going public by selling shares to Bahamian investors.

Mr Brown, rejecting arguments by David Kosoy, Sterling Global Financial's chairman, that BISX is "useless" in its current form and needs "new life", said the exchange needs to be used for "gathering capital" to finance companies and entrepreneurs - rather than viewed as a trading platform - at this stage of its evolution.

"For the gentleman [Mr Kosoy] who just reached on Friday to say that it's useless, give me a break. Where was he 18 years ago? Certainly not in The Bahamas. If he wants to do something I agree that it needs to be changed, but it ain't useless," Mr Brown told Tribune Business.

"We would be the first to agree that there are issues for the exchange to solve. However, we would also defend its purpose and vehemently reject the notion or view 'that right now it is useless'. We [Benchmark] are living proof that the exchange does work. It just needs to have the support and for people to be able to understand the process."

Mr Brown pointed to Benchmark's own IPO, which coincided with BISX's launch in 2000, as evidence that the Bahamian capital markets can work as a finance-raising mechanism even though the benefits had taken some time to materialise for company and investors.

"Eighteen years ago my father and I did an IPO and listed the company on BISX (one of the first 18) at that time​," he recalled. "We were able to raise through the Bahamas capital market $2.7m to capitalise the company at $4.959m. Today, the capital of the company is $13 million.

"We had our share of challenges as we emerged, which we worked through, but the moral of the story is that we fully appreciated and understood the value of the capital market and used it to our advantage. Are we happy with the pricing mechanism on the exchange? No. Does it concern us? Yes, to some degree.

"However, we believe that over the long-term these limitations will naturally correct themselves so long as we consistently do a good job of managing and growing the company. Our objective when doing the IPO was not for the trading opportunity, but rather for the capital raising ability as well as to add value to the company and the Bahamian economy. We believe there are more Benchmarks waiting for the same opportunity; they just need to be encouraged, supported and guided."

Mr Brown's reference to the "pricing mechanism" alludes to restrictions that limit daily movement in a BISX-listed stock to ten percent either side of the previous day's closing price, although the exchange has recently moved to be "more proactive" in stimulating the market for specific stocks by expanding their trading "bands" beyond these limits.

"I don't think you can use the structure of the exchange in the way it presently functions as a rationale for saying it's useless," he told Tribune Business. "It's a function of those on the exchange. The exchange is really a platform for everybody to have a central meeting place to transact. It's just a common ground.

"Yes, the pricing mechanism can be better, but when the news is good the sellers go away, and when it is bad, the buyer goes away. We don't have a trading exchange, but that's a mechanism of your intellect and the people who use the exchange.

"The exchange is only a mechanism where people know they can come in and acquire a particular public company's stock whose shares are listed on the exchange, and place an order to sell. It's a platform of functionality. You have to grow with it."

Mr Brown said BISX was currently operating as an "execution", rather than "trading" platform, due to the relatively illiquid market with few buyers and sellers willing to transact. As a result, broker/dealers were currently organising trades and then bringing them to the exchange to execute, something he described as "a fact of life" and not a criticism of participants.

"In a market where less than 1 percent of the population directly own shares, it [the exchange] shouldn't be for trading; it's the gathering of capital for funding ideas," the Benchmark chief said. "In its infancy, that's what it should be for.

"We believe that it is unfair for anyone to expect that an economy such as The Bahamas, which is still emerging, could have a capital market functioning with new issues regularly, and trading activity that causes the exchange to price and trade securities listed on the exchange effectively.

"Emerging capital markets in economies like The Bahamas don't evolve in 18 years to that level of efficiency; it takes a lot more time and a collective community effort. After 18 years of operation the authorised broker/dealers on the exchange still don't provide risk capital for the exchange​ which would allow them, through the exchange, to actively make a market for any stocks listed on the exchange," Mr Brown continued.

"The reason being that they don't have that level of risk capital, and the market does not offer liquidity which would give them the comfort to do so. Entrepreneurs with striving businesses are reluctant to bring their companies to the market because they believe it is ​too complicated and problematic to maintain, while new companies are subject to stiff regulations which stunt their opportunity. Therefore, in recent times the only issues to come to the exchange as initial public offering are those that the Government encourages based on circumstances."

The last two Bahamian IPOs were Commonwealth Brewery in 2010 and Arawak Port Development Company (APD) in 2012, both of which were driven by the Government. The former was a trade-off in return for approving Heineken's buy-out of the Finlayson family, while the Government's 40 percent equity stake gave it significant influence over the latter.

Mr Brown, meanwhile, signalled Benchmark's willingness to help solve some of BISX's problems after it became the exchange's latest broker/dealer member.

"We have a strategy to assist the smaller investors trading on the exchange with receiving better execution of their orders," he explained. "We can certainly assist the smaller guy once we're fully functional on the exchange. Why should it take two to three weeks to get 200 shares sold?

"We also have a strategy to provide some level of risk capital to the Bahamas capital market, which we believe will improve the frequency of new issues of IPOs and listing on the exchange. Hopefully our efforts will be followed by others in the economy and market."

Mr Brown also urged the Government to do its part by establishing a national privatisation policy for government agencies, possibly through an Act of Parliament, and creating a sovereign fund that would hold these assets and ready them for sale to Bahamian investors.

"BTC should have been privatised through the exchange rather than having the shares held in trust for the benefit of the Bahamian people," he said, with NewCO - the entity that currently holds the Government's 51.75 percent equity stake in Aliv, the second mobile operator, the next candidate for privatisation via IPO.

"This sovereign fund should be a public​/private relationship. Such a development will give the Government the much-needed ​cash for the Public Treasury and assist with the reduction of the national deficit and the potential drag these enterprises have on the international credit rating of the country.

"A sovereign capital fund would be properly capitalised, and can be registered as a broker/dealer on BISX to provide the necessary liquidity for the exchange as well as capital for new business opportunities such as IPOs, crowd funding and venture capital investments."

Mr Brown's comments echo a core element of BISX's founding strategy, which saw the exchange ramp up its business in anticipation of receiving government bond and debt listings, plus the fruits of BTC's privatisation. None of this materialised, helping to plunge the exchange into heavy losses which resulted in its government-aided bail-out after just three to four years.

"We believe that BISX did not do a good job at its inception of properly defining and marketing its mission and purpose, which in our view has caused the exchange to come under continuous criticism," the Benchmark chief added.

He called on the exchange to relaunch "with a clearly defined mission statement which, in our opinion, is to assist entrepreneurs with funding their capital needs via IPO or crowd funding. The mission statement must clearly give the entrepreneur a high level of comfort and support to appreciate that the exchange is there to offer assistance and guidance during and after its IPO or crowd funding".

Mr Brown also recommended upgrades to BISX's technology platform, saying: "The Bahamas suffers from a transitional challenge in that our economic infrastructure is superior to the average Bahamian's ability to comprehend. This creates pockets of stress in our communities as our country continues to struggle to grasp all the opportunities that this 21 century offers.

"Not until we advance more of the populous into the 21st century, its technology and mode of doing business will BISX function to its optimum potential. Until then those of us who are in the lead must do all we can to ensure that none of us get left behind."