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The World Federation of Exchanges (WFE) has published a report into exchanged-based financing of Small and Medium Enterprises (SMEs), aimed at identifying globally-consistent barriers and opportunities for enhancing SME access to equity finance.
The report noted that the sub sector remain a significant employers and potential contributors to global economic development.
Whereas it argued that the growth of SMEs is vital to the nourishment of any vibrant economy, WFE said access to external finance, which may help an SME transition into becoming a bigger company – is, however, a major barrier to this successful growth.
The key findings of the new report indicated that obtaining access to finance is important, with more than 90% of respondents raising capital at the time of their listing, but other reasons for listing were also cited, such as positioning the firm for growth (90%) and diversifying the investor base (80%).
On access to information, it said responses suggest that companies may not know enough about aspects of listing, such as corporate governance requirements and ongoing listing costs, to make an informed decision about the relative costs and benefits. Financial education for SMEs is, therefore, a critical component for a successful listing environment.
Both retail and institutional investors would like to have greater information, for example more research and analysis (57%), about SMEs, to encourage them to invest more in listed SMEs.
Explaining more on compliance with listing requirements, the report said the sample group confirmed that SMEs perceive, and find, the process of listing and ongoing compliance to be burdensome, costly and time consuming. Indeed, this may act as a disincentive to list.
Perhaps because of this, companies value the support and assistance of authorised market intermediaries in complying with listing requirements.
In addition to investors and market intermediaries, issuers also valued and recognised the importance of liquidity.
Both retail and institutional investors expressed concern about the (typically) low liquidity of SME stocks. Respondents (85% of institutional, 67% of retail) cited ‘mechanisms to increase liquidity’ as the most important lever to enhance the SME ecosystem.
71 per cent of market intermediaries service the SME market because clients demand it; but not necessarily because it is profitable to do so (only 58%).
Nandini Sukumar, CEO, WFE said: “Our report – the first piece of global research that collates viewpoints from the supply, demand and intermediary segments of the SME market – gives new insight into the current understanding of SME markets. The results around the listing burden, the need to focus on quality not quantity of disclosure, and liquidity, are particularly relevant at this time. The report aims to give regulators and exchanges a benchmark when it comes to creating and assessing SME initiatives. Exchanges are at the heart of the real economy, and work daily to enable markets-based financing.”
Also, Siobhan Cleary, Head of Research & Public Policy, WFE said: “A vibrant and growing economy requires not just SMEs as employers, but the ability for these companies to access the necessary finance that enables them to grow. We are confident that our recommendations will contribute positively to the understanding of what can be done to enhance SME access to capital markets financing.”
The report was compiled by collecting quantitative and qualitative information from the main participants in the SME ecosystem: listed and unlisted companies, institutional and retail investors, and market intermediaries, such as brokers, financial advisors, underwriters etc. Respondents were from five developed and emerging market jurisdictions: Canada, China, Mexico, Nigeria and South Africa. The WFE was supported in its research by an Advisory Group that included representatives from WFE member exchanges and securities market regulators.