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Angel exchanges to help plug financing gap

Exchanges are beginning to see the value in serving the SME market.

According to Paul Calvey, the associate partner of market infrastructure at firm Oliver Wyman, the future will see stock exchanges playing a more prominent role in the SME space. Calvey was speaking at the African Securities Exchanges Association (ASEA) conference, which kicked off at The Maslow Hotel on Monday morning, where he mentioned SME support as one of the emerging trends among global exchanges.

There is an opportunity, he said, for exchanges to provide alternatives to private companies that are finding it difficult to access funds. He said it would allow companies to get support from investors while they are still in the development stage.

“Traditionally exchanges have only been involved from a financing perspective where usually you have a secondary market, like the Alt-X here in South Africa, which is dedicated to those types of companies,” he said. However, now there is a focus on engaging with SMEs and connecting them with other companies with whom relationships would be mutually beneficial.

“Exchanges are now even looking at pre-idea platforms that allow companies in the development stage to get initial support from potential investors and it does not necessarily have to be in the form of financial injection.

“It’s saying, ‘we have the infrastructure to be able to connect you with investors as well as peripheral services such as management consultants, financial accountants and/or law firms’”.

Businesses that are struggling to access funding are looking at alternative methods like crowd-funding and exchanges are realising that they have to be players in that space. Investors are increasingly looking for opportunities to invest before companies reach the IPO stage. And because technology has made it easier for data collection and collation, exchanges should be looking at innovative solutions to address this need.

Not easy

However, exchanges around the world have been trying to stimulate secondary markets with little results, primarily because liquidity was always going to be more difficult for SME markets compared to main board listings. There is a challenge in terms of getting a critical number of listings and having a diverse selection of companies for investors to choose from. There are also the added problems relating to costs, and how to manage to treatment of companies in terms of reporting and the regulatory environment.

According to Oscar Onyema, CEO of the Nigerian Stock Exchange (NSE) and president of ASEA, there is a $2 trillion financing gap in the SME market. And, in Africa, the shortfall is $140 billion. The NSE has made efforts to plug the hole but, like many secondary markets in the world, has struggled.

Nigeria’s rebranded Alternative Securities Market (ASM) changed the listing requirements to make it more attractive for companies to list, but authorities are still trying to see what more can be changed from government policy and other regulators in the economy to find the best way to encourage market participation of SMEs.

“There is also securitisation…creating SME funds, listing them on exchanges, and using these funds as a conduit to invest and buy equity in SMEs,” said Onyema.

Alt-X the exception

JSE CEO Nicky Newton-King said the Alt-X has done extremely well in the ten years or so of its existence. She said it is one of the best performing small-cap markets in the world, if measured according to the percentage of companies that migrate from the Alt-x to the main board.

“Essentially, exchanges are, at their heart, funding places for entrepreneurs who contribute to the real economy and I think there’s a lot more we can do in that space,” she said.

“Our premier (David Makhura) talks about a township exchange using the stock market to help fund very small entrepreneurs. What we’re looking at is how we might use the JSE’s deep capital markets to fund very small entrepreneurs the likes of which are finding it difficult to get bank funding and are not currently serviced by the Alt-X.”

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