In order to help bring together investors who are more tolerant to risk and companies which are seeking capital for growth, but do not yet have a long and proven track record, the Warsaw Stock Exchange (WSE), in 2007, introduced a new regulated market called New Connect as an alternative trading system providing new sources of financing and a trading platform for start-ups and young companies with high growth potential. This new trading vehicle is in many ways similar to the AIM platform introduced by the London Stock Exchange to help smaller and growing companies raise growth capital.  Today, New Connect has over one hundred companies listed with a market capitalisation of PLN 2 387.43 million. 

New Connect was conceived to serve the high-tech sector; however, today, the list includes companies from a wide range of industries such as IT, electronic media, biotechnology, alternative energy, modern services and so on. Companies looking to be listed on New Connect must have stable revenues and should, at least in theory, seek capital injection to be able to grow, although some applications come from brand new companies with little more than an idea for a business.  According to Michal Szukalski, partner at M&M Doradztwo, a business consulting firm and New Connect Authorised Advisor with several successful placements, “entrants that have the greatest chance of raising capital through New Connect are usually not the start-ups, but companies in the early stages of development, able to convince investors that their investment will translate into profit in a relatively short period of time.”  He continues, “innovative companies in biotechnology, IT and those with interesting and innovative ideas are held in high regard by investors.”

To be listed on New Connect, an applying firm must first of all be a joint stock company (or a joint stock limited partnership company) with unlimited transferability of its shares, cannot have been declared insolvent or be in the process of an ongoing liquidation proceeding.  Also, in the majority of cases, the company must be willing to co-operate with an Authorised Advisor and a Market Maker.   The Authorised Advisor – it can be an investment company, legal firm, auditor or financial advisory company – assesses whether an applying company is ready to introduce its shares to the New Connect market in a private placement, supports the applicant in its preparation for entry and co-operates with the company for at least the first year of trading.  A Market Maker is an investment company which will support the company for a minimum of two years, mainly by ensuring the liquidity of its shares.   A single investment company can act both as an Authorised Advisor and as a Market Maker.  New Connect has less stringent entry requirements than ‘fully fledged’ markets, which undoubtedly lowers the cost of capital for those deciding to use it. 

There are two ways in which a company can raise capital on New Connect: through a private placement with up to ninety-nine investors, and through a public offering.  The private placement takes less time (usually two to three months) and admission to trading is based on a short information document prepared by the Authorised Advisor.  A public offering, on the other hand, involves the same steps as those required in getting listed on the WSE, takes approximately the same amount of time - six to nine months - and has more stringent information requirements. 

Aside from the main benefit of being able to raise relatively cheap capital, there are a number of other advantages for a company getting listed on New Connect, such as increased exposure to the press – it is always keen to spot a future giant – increased credibility, improved liquidity of company shares whose value most of the time remains steady in comparison to similar unlisted firms. Investors, on the other hand, enjoy easier access to growth companies, low transaction costs and security of trading.

So, is it worthwhile for investors to invest in companies listed or looking to be listed on New Connect?  In general, the answer seems to be ‘yes’, since many applicants as well as many companies already listed become very successful and continue to show lots of potential in the future.  One example includes a company called Hotblok, one of the most innovative firms in the building materials sector, whose assets include a patent that is unique on a world-wide scale:  a system of building blocks made of lightweight concrete, with a foamed polystyrene insulation insert, which, among other benefits, significantly increases the energy efficiency of buildings. Another example is a company called Orzeł.  It sells tires through the internet and through physical locations in Poland. More interestingly, the firm is in the final stages of gaining EU funding for what will likely be the most modern recycling plant in Europe.  

Thus far, the vast majority of companies on New Connect and their investors have been Polish; however, foreigners as well are starting to take notice. Currently there are two foreign companies on New Connect, both of them from the Czech Republic:  Photon Energy, which develops solar panel installations (ground and rooftops), and BGS Energy Plus, also from the sector of renewable energy sector, which owns, designs and builds biogas-fired power plants. Foreign investors can and do invest in companies on New Connect.  They can either invest before a company goes on New Connect, through a private placement, or buy shares once a company has been listed.  Foreign investors can also have majority shares in companies listed on New Connect. For example, a company called Virtual Vision (M&M is its authorised advisor) has a main shareholder that is registered in Germany.  One of the main strategic goals for the exchange will be to attract more foreign investors the near future, with a main focus on those from the CEE region. 

On the whole, the shares of majority of companies initially increase in price:  approximately 75% of shares since the inception of New Connect have gone up in value during their first day of trading following an IPO on the exchange.  More recently, in 2009, the shares of approximately 85% of companies have gone up following an IPO.  However, it is important to keep in mind that, despite the significant potential for a very high return on investment, there is also a large degree of risk which needs to be carefully managed.  Also, like all the world’s stock exchanges, New Connect has experienced tough times due to the recent economic crisis.  According to Szukalski, during the first months of the crisis, the New Connect index fell by approximately 40% and the number of new entrants, with only four new listings in the first quarter of 2009, also decreased.  Still, Szukalski goes on to say, things have improved noticeably as compared to what was observed in the past year. There has been a noticeable  increase not only in the number of companies interested in once again raising more capital through New Connect, but also in the demand on the part of investors looking for interesting projects.  As the economic situation continues to improve, not just in Poland but also abroad, investors who have capital to invest and are not afraid to take on a bit more risk than with investing on the traditional market will continue to be drawn to the innovative companies listed on New Connect.   They can have a good chance of getting a very high return on their investment. The key to success for all involved will be the ability to diversify risk effectively.  Of course, the overall economic climate will also have to continue to change for the better. 

Further Information

For further information on New Connect, visit www.newconnect.pl

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