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WFE Focus December 2011
Alternative financing SMEs
Peter Clifford
Deputy Secretary General,

The core mission of an exchange is to help financing for companies; this role is especially important for smaller companies.

As John Katovich notes in the article that follows, 99% of the US economy is made up of small and medium-sized enterprises (SMEs), and these firms generate 2/3rds of all new jobs.

While the US marketplaces have a reputation for financing SMEs, a rough estimate is that only 1% are financed through exchanges. With bank lending facing challenges from new rules on capital requirements, and with economic forecasts pointing to a continued climate of risk aversion, the need for alternative sources of financing is likely to grow.

There are models of successful exchanges dedicated to listing SMEs in cities such as Warsaw, Shenzhen, Sao Paulo, London and New York.

Investors are always concerned about the liquidity in smaller stocks. The WFE market segment study included in this month’s issue and, which was released this month, points to some encouraging figures, such as the leap in liquidity in for micro cap stocks. Over the past four years, the number of trades per listed companies of this segment is up by 73% on a global level. (see Federation News)

The major points of the study are discussed in the interview with Jeremy Grant of the Financial Times. (

One criticism of exchanges is that while mergers have created bigger pools of liquidity, this has focused international investors’ interest on a smaller number of big companies. The data for this period is hard to interpret, for while there was a downturn in listings at the start of the millennium versus the Internet-listing period, the impact of exchange mergers compared to other economic and market structure factors is unclear. Mergers also swept away the boutique banks of the 1990s that were at the forefront of research and underwriting SMEs, and the economic conditions and regulations (ex. Sarbanes Oxley) were different, too, from one decade to the next.

The WFE domestic market cap study also underlined that, during the period overcome under review, the number of micro and small cap companies declined in some regions such as Asia Pacific, and EAME. In order to make the number of listings of micro and small companies grow, several impediments should be neutralized: the costs of going public and the burdens of reporting must not dissuade companies to list; and the rules for SMEs should be adapted to their scale. (click for the complete study)

This month in Focus, Carl Johan Högbom and Henrik Wagenius discuss Alternativa, another solution to funding companies in Europe. From the US, John Katovich cited above looks to new ways that retail investors can be brought into the financing of firms. While there is no doubt more regulation in the market than before, there are new ways of mobilizing capital and energizing networks of people that have only partly been explored in this context. That prospect makes for good news to start the year with.


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