Investing in Private Limited Coy

[marandaz]

Hi all,

Does anyone has experience investing in private limited company? 

Care to share your journey?

I have a few questions I hope some of you can answer...
1. Are you able to request for their accounts or balance sheet? Is it a warning sign if they "denied" your request? or is that common practice?

2. I understand that the max no. of shareholders in a Pte Ltd is 50 under SG Law. Is there exception or wavier if the coy intends to list in a foreign exchange market

3. What are the due diligence that you undertake?

[marandaz]

A bit of the story here...
I recently went to a private limited coy (let's called it ABX) and ABX was still looking for investors. They were doing this as they claimed that they are preparing to list in a foreign exchange market and one of the listing requirement is for the entity to have at least >400 investors.

ABX's business focuses on a trading algo app that they have already developed. Their earnings would be through monthly subscription service and proprietary trading. ABX is registered with ACRA (means nothing any way).

So, the first thing I asked from them is a copy of their accounts or balance sheet. They were pretty defensive on this (Is this normal?). In the end, I did not managed to get hold of it.

So I moved on to ask what is their business model and what are the figures they are projecting. Again, they are defensive about it, telling me about their upcoming listing in a foreign exchange market.

In the end, I am not confident with how it went and did not participate.

But for the sake of expanding one's knowledge and view, I wish to hear the views and knowledge from other people....

Thanks

[CityFarmer]

Firstly, it sound fishy to me. A requirement for foreign exchange listing, need at least >400 investors i.e. local investors? Pardon me for my ignorance.

[marandaz]

Hi Cityfarmer,

let's say it is listing in ASX, and indeed their ASX website do say that the min. shareholders needs to be 400.

My other question is
1. What is the average ROI/ROIC of a HFT firms or proprietary trading firms/individuals that use trading algo to do trading? Is it possible to have the average MONTHLY ROI to be >20% over three years period (Personally, I am skeptical) .
2. Is Proprietary trading firms based in SG regulated by MAS?

[GFG]

Hi Cityfarmer,

let's say it is listing in ASX, and indeed their ASX website do say that the min. shareholders needs to be 400.

My other question is
1. What is the average ROI/ROIC of a HFT firms or proprietary trading firms/individuals that use trading algo to do trading? Is it possible to have the average MONTHLY ROI to be >20% over three years period (Personally, I am skeptical) .
2. Is Proprietary trading firms based in SG regulated by MAS?

I have experience investing in private companies, and all I can tell you is to proceed with EXTREME caution.
There are millions of ways you can get screwed as a minority shareholder in a private company. I say this from experience.
It's a very simple thought process. Either:
1) Invest enough so that you are the majority shareholder and call the shots.
2) Invest as a MI, but have almost blind trust in the guy running the show aka the CEO.
Blind trust in i) the honesty and integrity ii) the competence

For example, the major SH/CEO/whoever has a controlling stake can issue share options to himself or allies and dilute you and there's nothing you can do about it as a pte company. (seen the movie about Facebook? happens in real life too)
Sure, they can do that in a listed company as well but there is much more public scrutiny.

The major SH can set up a separate company, divert business to that company and eventually you own a MI in a shell, useless company. In a listed company, it's illegal as the director/CEO has a fudiciary responsibility and can be called out by SH.
In a pte company? good luck proving that.

The major SH and allies can simply keep the company going, pay themselves fat pay cheques and there's nothing you can do. Essentially, indirectly your investment would be for paying them.
In a listed company, again they'd get called out for that in AGM, media attention, share price would drop etc.

Now I can go on and on and on, and trust me I'm speaking from real life experience so be really careful.
In this particular instance, I'd be even more wary because isn't doing an IPO the way to increase your SH base and sell shares to the public?
The pte companies I've invested in or considered investing in, are always more than keen to show me their financials. sure, mostly unaudited but still they're more than happy to show me with a caveat that it's confidential. How else would they be able to get investors? At that stage, there is no branding, no revenue visibility (I'm talking about mainly Series A venture funding), almost nothing to talk about except an idea and a sexy story.

I'd walk away immediately from anyone who is reluctant to show me audited financials and still ask for money.
Even if you're wrong and you miss out on a supposedly "good" investment, it's not a mistake. You can only make good judgement calls from data available to you. In this way you miss out on potential catastrophic disasters. There's always another opportunity around the corner if you work hard enough to unearth it. But 1 catastrophic disaster is enough to screw up many many yrs of hard work.
That's my honest opinion.

[weijian]

Hi Cityfarmer,

let's say it is listing in ASX, and indeed their ASX website do say that the min. shareholders needs to be 400.

My other question is
1. What is the average ROI/ROIC of a HFT firms or proprietary trading firms/individuals that use trading algo to do trading? Is it possible to have the average MONTHLY ROI to be >20% over three years period (Personally, I am skeptical) .
2. Is Proprietary trading firms based in SG regulated by MAS?

hi Marandaz,
I am a little confused - Is the min 400 shareholder requirement at pre or post listing?

It doesn't make sense that one needs 400 shareholders, before they are eligible to apply for a listing.
The 400 shareholder requirement is a requirement to be listed, ie. it needs to have min 400 shareholders to completeits listing. If it wants to be listed with an IPO process, it will need to make its audited accounts public and there would be no more secret.


http://www.asx.com.au/listings/listing-c...ements.htm
The company must have at least 300 shareholders with holdings valued at a minimum of $2000 each, and at least 50% of the company’s shares must be held by parties unrelated to the company and its directors. If between 50% and 75% of shares are held by related parties, the company must have at least 350 shareholders. If more than 75% of the company’s shares are held by related parties, the company must have at least 400 shareholders.

It is not necessary to have the required spread before the listing application is made. Typically approval for listing is granted subject to the company meeting the shareholder spread requirement through the offer of shares associated with the listing application.

[marandaz]

Hi all,

Thanks for the reply GFG.

I walked away once they became defensive in their accounts and the business model. But, I am still asking these question since, as a normal retail investors, it is a new experience to me towards "investing" in a Pte Ltd (I am not too sure whether to apply the same evaluation of investing in public shares for this case. For instance, I am not too sure whether you have the right to ask for their accounts in the first place.), hence it will be great to absorb these information.

To weiijian,

Thanks for the clarification. I think I have overlook that clause. But, it makes ABX's case more fishy.

I wish I could hear more views even though it may the same as what had been mentioned. Thanks.

[GFG]

Hi all,

Thanks for the reply GFG.

I walked away once they became defensive in their accounts and the business model. But, I am still asking these question since, as a normal retail investors, it is a new experience to me towards "investing" in a Pte Ltd (I am not too sure whether to apply the same evaluation of investing in public shares for this case. For instance, I am not too sure whether you have the right to ask for their accounts in the first place.), hence it will be great to absorb these information.

To weiijian,

Thanks for the clarification. I think I have overlook that clause. But, it makes ABX's case more fishy.

I wish I could hear more views even though it may the same as what had been mentioned. Thanks.

"For instance, I am not too sure whether you have the right to ask for their accounts in the first place"

Yes, of course. In fact, if the sum to be invested in is large enough, you can either negotiate for them to get it audited, or you can pay to get it audited.
If you're taking up a majority stake, the due diligence would have to be even more thorough, aside from auditing. You can even get in consultants to look at corporate structure, think of a branding plan, work out a turnaround plan, draw up contracts. For eg. make current management provide a profit guarantee for x number of years, lock in current management in service contracts, make current management provide provisions to prevent future dilution from issuance of shares (this is in fact quite common in many series A funding) etc. The list is endless.
Even if it's just a minority stake, well, if anyone wants to invest in a pte company without access to any financials whatsoever, it means you're just taking the word of whoever's selling their shares to you.
If that's the case, do drop me a PM, cos I have this pte company that sells magic stones that can cure all ailments including AIDS and all cancers and even hair loss. The story doesnt get any sexier than that right?

[Triple70]

Hi all,

Does anyone has experience investing in private limited company? 

Care to share your journey?

I have a few questions I hope some of you can answer...
1. Are you able to request for their accounts or balance sheet? Is it a warning sign if they "denied" your request? or is that common practice?

2. I understand that the max no. of shareholders in a Pte Ltd is 50 under SG Law. Is there exception or wavier if the coy intends to list in a foreign exchange market

3. What are the due diligence that you undertake?

This train of thought is really wrong.

Being a shareholder of a pte ltd company managed by a stranger can not be considered an "investment". Usually, shareholders of a pte ltd are frens or business associates, never strangers.

Even auditors themselves do not put any faith in audited accounts. There are so many loopholes in today's regulatory environment, the audited accounts is a joke. Sg investment climate is attractive to foreign investors simply because Sg regulations ask no questions. Even if found guilty of ACRA violations, the guilty party's fines are usually less than the investments received.

Shareholders are only entitled by law to see the audited accounts at the AGM. Only directors have the power to review the accounts as and when.

Ask yourself, are u investing in a product, or a business? If the selling point is a product, then why deal with the business issues of a company? It's good to read up how the big companies set up various SPV JV companies to run individual projects.  

Smart investors invest through convertible bonds.. loans with the option of conversion into shares.. and the bonds are backed by personal guarantees. If the person receiving the funds is willing to give personal guarantees, then the transection is credible. If the business model is so sound, this is not an issue, but if the person is out to screw investors, this is the circuit breaker he will not omit.

ok.. lets say your investment is about being a Pre-IPO investor, ok.. what if the IPO doesn't happen? What is the exit plan for the next 10 years?

[marandaz]

Hi GFG,

Thanks for the analogy

Hi Triple70,

Can you explain more on the differences between investing a product Vs. business? For the former, do you mean buying the product or...?

And why do you say "Being a shareholder of a pte ltd company managed by a stranger can not be considered an "investment"". what do you mean by this?

Also, what do you by wrong "train of thought". Which part is wrong e.g. the investment thesis or due diligence process? And what should, in your opinion, be the right one?