By Brian Robins
E-sports, technology, biotech and primary producer stocks are all experiencing growing interest from Asian investors.
This partially reflects rising investor sophistication, as well as the chance to pursue Australian investments in sectors where opportunity may be more limited in Asia.
For smaller Australian companies, the shift to focusing on Asian investors follows regulatory changes in Europe, which has made it more difficult to get in the door than in the past.
Specifically, the introduction of the so-called ‘markets in financial instruments directive’ (MiFID II) has led to the unbundling of research and the imposition of trading and access fees.
As a result, in Europe, brokers and bankers are now less willing to organise meetings with investors. With the door open to very few Australian companies outside the ASX100, companies have been forced to cast a wider net to drum up investor interest.
And as Asian investors chase opportunities in Australia, both share market liquidity and corporate governance are key attractions.
But, as always, it comes down to an attractive investment proposition.
Indicative of the level of potential interest in Australian shares, a bunch of small caps have experienced recent share price increases after pitching to Asian investors.
Explorer Pepinnini Lithium (ASX:PNN) enjoyed a 37 per cent share price surge following a pitch to Asian investors, with the likes of Nanollose (ASX:NC6) and Bass Oil (ASX:BAS) seeing a 25 per cent uplift.
De.mem (ASX:DEM) and Auctus Alternative Investments (ASX:AVC) both saw a 16 per cent gain.
Others such as BNK Bank (ASX:BBC), New Zealand Coastal Seafoods (ASX:NZS), Genesis Energy (ASX:GNE) and Recce Pharmaceuticals (ASX:RCE) have also seen rising Asian interest following pitches.
Asian investors have been especially active in the local life sciences sector, where there have been a number of deals over the past 18 months or so.
Chinese investor Lepu put $29 million into Viralytics (ASX:VLA), just weeks before Merck paid $500 million for the entire company.
Similarly, Chinese buyers outbid an American outfit to acquire Sirtex in a $1.9 billion deal, while Mesoblast (ASX: MSB) has done deals with both Japanese and Chinese operators.
The share registers of Asian biotech plays are often dominated by founder families, with little opportunity for new investors to take a meaningful position.
Also, in Asia it is unusual for biotechs to go public at the early stage — something commonly seen in Australia.
Investments usually need to be ‘derisked’ which means Asian investors are keen on stocks which have made it through to Phase 1 or Phase 2 trials, the hurdle most biotechs fail.
It is only once the risk profile of biotechs has been reduced by getting their new drugs through these initial trials that Asian investors will look at putting money on the table.
But there are exceptions.
Take Recce Pharmaceuticals. Even though it has no drug candidates in clinical trials, the sheer size of the market opportunity it is focused on — broad-spectrum antibiotics capable of even handling superbugs — has sparked investor interest in Asia.
It estimates around 7 per cent of its capital is held by Asian-based investors.
“We see that growing,” Recce executive director James Graham told Stockhead.
Last week it raised $7 million via a share placement with a quick book closing which meant Asian investors couldn’t participate.
Even so, there was subsequent strong interest from family investment offices in the region.
“We’ve seen significant family investment office interest, which we expect to flow through to market activity,” Recce’s Graham said.
Often, Asian investors are looking for Australian companies with exposure to Asia, which offer the opportunity to work together in entering Asian markets.
For recent backdoor listing New Zealand Coastal Seafood, the chance of working together in Asia was a prime attraction for some Asian investors. Omar Taheri, the founder of Spark Plus, a Singapore-based specialist in organising investment roadshows to introduce clients to investment offices, says Australian companies targeting Asian markets may trigger quick interest from Asian investors.
“We see food or beef, anything with potential to supply Asian customers, doing well,” he told Stockhead.
“Also, those with Asian revenue streams.
“Anything to do with e-sports generates good interest, even though there are only four listed entities on the ASX at the moment.
Most Asian companies in this sector are still private.
“Any more listings here could see investor interest. Fintech also does well, because it is scalable. But if the story is too domestic-focused, then Asian investors are not interested.”
And this class of investor will also look hard at management, since for the most part they’re not interested in quickly flipping an investment. So management’s ‘skin in the game’ and how much they pay themselves will come in for scrutiny.
“Management over-paying themselves or issuing themselves with too much paper [ie. shares] are among the first things Asian investors will focus on,” Taheri said.
“Paying management $200,000-300,000 is OK. But issuing shares with performance bonuses causes concern.”
Then there is skin in the game.
“If management has around 10 per cent of the register, that’s a positive. If management has less than 5 per cent, that is a concern since they’re not backing themselves.”