The European SME sector is growing at an exceptionally fast pace and has truly become the backbone of the GDP growth. The role of SMEs in employment creation, innovation, and furthering an entrepreneurial spirit has been crucial in fostering competitiveness in the economy and boosting inclusive growth, creating local demand and consumption and is the fountain head of several innovations, especially in the manufacturing and service sectors.
SMEs are expected to drive the next-level growth of the European economy provided they have enabling platforms and avenues including capital markets.
Limited capital market financing for SMEs and a heavy reliance on bank lending (particularly the case in certain economies within Europe) has made small companies vulnerable to banking system dynamics, with constrained access to lending arising in times of financial stress.
“…there is a need for wider use of
the capital markets by SMEs, particularly
at the current juncture”
As mentioned in the OECD’s report on “New Approaches to SME and Entrepreneurship Financing: Broadening the Range of Instruments”, published Oct 28th 2015, although full disintermediation of SME financing is neither achievable nor desirable, there is a need for wider use of the capital markets by SMEs, particularly at the current juncture. Given the fixed-cost nature of sourcing and monitoring particularly small and mostly local firms, capital market funding (as well as lending by non-banks) should have a complementary role alongside traditional bank lending channels.
“…equity and debt markets are required for efficient
and effective SME financing and for the build-up of
balanced and healthy balance sheets throughout
the life cycle of an SME”
Indeed, the different forms of SME financing are not necessarily exclusive: equity financing should go “hand in hand” with debt financing and the existence of both well-functioning equity and debt markets are required for efficient and effective SME financing and for the build-up of balanced and healthy balance sheets throughout the life cycle of an SME.
SME-focused equity platforms have been established across the globe, offering an alternative to main listing boards on national stock exchanges. Equity platforms provide SMEs with the opportunity to IPO once they have become well-established. In most markets the SME platform acts as a second-tier listing alternative to the main stock exchange. Such platforms are characterized by lower listing requirements and costs to list than the main board, helping to make it a viable solution for SMEs seeking finance. SME equity platforms are best suited to the largest SMEs (i.e. the medium segment) given the initial cost and ongoing listing requirements most platforms demand.
Several platforms around the world have proved successful: AIM Alternate Investment Market (UK – Italy), TSX Venture (Canada), HK GEM (Hong Kong), Mothers (Japan), Alternext (Europe) and AltX (South Africa).
The development perspectives of the SME dedicated trading platforms follow three main directions: the evolution of specialized investment funds; the enhancement of best practice of SMEs in transparency and information disclosure; the introduction of tax benefits for the listed SMEs and for the investors.