How can small and mid-sized businesses access the capital they need?
It is now generally accepted that, even in the best of economic times, big companies such as the FTSE 100 (INDEXFTSE:UKX), do not create jobs – or at least not domestic jobs. The continuous pressure to increase profits over short timeframes results in redundancies as companies strive to create more from less using technology to fill the gaps.
That leaves SMEs with the role of riding to the rescue of the economy. But how can small and mid-sized businesses access the capital they need?
Corporate debt markets
There are several current attempts to create SME corporate debt markets. The UK was historically strong in this area but lost investor appetite over the last thirty or so years. But some larger UK corporates have been able to access this route, most recently with National Grid raising £260m in October 2011.
In Germany corporate bond issues by smaller mid-market corporates have recently proved a real success for the Stuttgart Exchange. Following a quite different model, the French are about to launch an umbrella bond structure designed to allow much smaller companies to access the public debt markets through a joint effort.
The other alternative is to encourage equity finance. This is why the London Stock Exchange’s junior market, AIM, was invented. Since its inauguration in 1995, AIM has been enormously successful with the last three years showing its underlying strength. The loss of many companies from the lower end of the market over that period has increased average market capitalizations and served to create a perception of quality amongst those which remain.
When AIM was founded, companies using the London Stock Exchange’s Rule 4.2 matched bargain trading facility either joined AIM or moved to another matched bargain facility run by stockbrokers JP Jenkins and known as OFEX. In 2004 OFEX was bought out from Jenkins and rebranded as PLUS Markets. In the course of doing so, it modelled itself closely on AIM, adopting a similar rulebook and creating a Corporate Adviser network along the way. However as an IPO platform PLUS remains widely perceived as most suitable for companies which are generally smaller than those on AIM.
Although the market for IPOs has suffered significantly since 2008, the last few weeks has seen a new equity trading platform for SMEs open for business in the UK.
GXG Markets is regulated by the Danish financial services regulator and has opened in the UK using EU passporting provisions. Like the London Stock Exchange and PLUS Markets, GXG offers a fully regulated market and an exchange regulated market. It also offers an “over the counter” market for trading by investment professionals, sophisticated investors and high net worth individuals.
Matched bargain trading
The most obvious difference between GXG’s offering and those of LSE and PLUS are GXG’s reliance on matched bargain trading. GXG’s marketing materials emphasise the disadvantages of large bid/offer spreads – which increase in almost inverse proportion to the frequency a stock is traded. The GXG trading system claims it has eliminated the need for market makers to set the price of transactions providing the market place with greater transparency and faster transaction reporting.
While there is merit in the argument about spreads, matched bargain trading is hardly a new concept. The London Stock Exchange operated a matched bargain facility until 1995 when it was hived off to OFEX. On the continent, the junior market in Amsterdam, Brussels, Paris and Portugal, NYSE Euronext, still operates on a matched bargain system.
But the disadvantage of a matched bargain system is that trades can only happen where there is both a buyer and a seller. Consequently matched bargain stocks are often considerably less liquid than stocks which have market makers prepared to trade on their own account at published prices. There was a reason that, by the time OFEX became PLUS, it had switched from a matched bargain system to a market maker system.
Attractive additional feature
However GXG appears to be deliberately targeting companies at the smaller end of the market, certainly smaller than the AIM average, and is positioning itself as a venture capital market. With the recent increase in the amount which can be raised without the need for an approved prospectus from €2.5m to €5m and with the already announced increases in the value of the Enterprise Investment and Venture Capital Trust schemes coming into force in April 2012, a quote on GXG may be an attractive additional feature in early stage deals.It has been some years since a matched bargain system has been launched in the UK and GXG’s Scandinavian connections may well stand it in good stead as a fresh and timely addition to the options available to small companies raising capital in challenging times.
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