It has been an exciting week for the local crowdfunding scene. Taking retail investors by storm, Apple product reseller EpiCentre has completed (almost) three tranches of fundraising on crowdfunding platform Moolahsense for close to $1.5 million.
This development is significant for a few reasons. The size and the speed notwithstanding, this is the first time a listed company has taken to crowdfunding for funds. It is a small but significant step as crowdfunding moves into heads and hearts of retail investors. Kudos also to Moolahsense for pulling this off. This deal is a significant one for CEO Lawrence Yong and it will no doubt cement their position as the front runner in the fledging crowdfunding space.
First up, some background. EpiCentre Pte Ltd, a subsidiary of the Catalist board listed EpiCentre Holdings is looking to raise up to $2mil for the ‘purchase of inventory and general working capital’. They will be offering a nominal interest rate of 13.5% per annum. An investor can contribute to this amount via the Moolahsense platform, and expect to receive interest payouts every quarter. For more details, check out this post by SGYI.
The fact that retail investors practically queued up to participate in this deal is hardly surprising. I would like to share some reasons why I think it is so.
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A listed company operating in the SME space
EpiCentre Holdings has been on the catalist board since 2008. A listing is a pedigree. It is a stamp of approval from the regulators. Investors see listed companies as more credible, more stable and consequently more investible than other non-listed company.
Like an Ivy League education, a listing creates that sense of awe in the minds of investors. Whether the listed company is better run, growing faster or even making bigger profits is another issue altogether. There are a variety of ways for listed companies to raise capital including but not limited to the issuance of more shares or bonds. There is also the traditional avenue of bank financing.
Being the first ever crowdfunding campaign from a listed company, EpiCentre is a big fish jumping into a small pool. Compared to other guppies swimming around the pond, they have made a splash. It is only right that retail investors get all excited about the campaign.
Retailers advantageThey have retail store fronts in the middle of town right smack in the heart of Orchard Road. Unlike a business supplying say soil testing equipment for construction companies, visibility and brand awareness is crucial for the success of a B2C business like Epicentre.
Crowdfunding is still a new game in town. Many lenders are early adopters. It will be no surprise then if many of them are Apple aficionados as well. Long time Apple users would have found EpiCentre a familiar name.
Because they can be seen, because they are easy to understand, because they are familiar, it makes it easier for the investor to part with their money to fund the business.
Not just retailing, Apple retailing
Apple is like a religion. Apple products are the epitome of cool. According to Forbes, Apple is the most valuable brand globally, with a perceived brand value of US $145 Billion.
If you are sitting near a waterfall you cannot help but get wet. If the main business is in selling Apple products, it would be almost impossible for some of that coolness to rub off the company.
Taiwanese researcher Feng Jui Tsu and his team wanted to find out if branded stocks performed better overall. They divided stocks in the US into a branded portfolio vs a regular one. They found that the branded portfolio outperformed the S&P500 Index and generated a positive risk adjusted alpha.
Other studies have found a correlation between marketing budgets and stock performance. There is little doubt that investors invest in what they are more familiar with.
13.5% yield – WOW!
In a world where fixed deposit rates are hovering around one percent, where the property market is treading water and rental yields are low, where Singapore Savings Bonds clock in at less than 3%, 13.5% per annum sounds like an extremely exciting proposition.
The reality is – it is. To make it even more appealing, it is not even an estimate or a projection. It is a confirmed payout. Unlike stocks, it is not dependent on market conditions. Unlike properties, it is not dependent on securing tenants. Unlike bonds or commodities, it is not dependent on interest rates, global market conditions, demand and supply. No matter what happens, come rain or shine, investors will receive their interest payout.
There is only one scenario where the payout does not materialise – i.e. if Epicentre defaults. Looking at the take up, it seems like a situation where investors are more than happy to overlook.
The most comfortable decision
As investors we obtain information, process them and eventually come to an investing decision. Unfortunately this entire process is subjected to biases and thinking. The nature of the business and the position of the company and the macroeconomic conditions has made it easy for the retail investor to commit without much thought.
Given that all stars are in alignment for EpiCentre, it would be tough for them not to reach the amount they set out to raise. For the retail investor, it is a very comfortable decision to make. But is it the right decision?
The Elephant in the Room
I want to go back to the first reason I have listed above. For many, a listed company represents the reason why they must invest in this campaign. For me, it represent the exact reason why I will not.
There are many avenues for companies to raise capital, much more so for a listed one. A profit maximising company will choose the option that will cost the least. A 13.5% yield may represents a great investment for individual investors but on the other side of the coin it represents a huge cost to the company.
For Epicentre to even consider raising at this price, there must be an extremely compelling reason.
And that, for me, is the Elephant in the Room. Could they have exhausted other sources of financing? Would going the traditional way take too long? Do they need cash that urgently?
Until this issue is throughly addressed, I will not be touching EpiCentre with a ten foot pole.
In tomorrow’s article, Alvin will share three possible reasons why EpiCentre choose crowdfunding to raise cash. Watch this space!