Interview with Xavier Rolet of LSEG on SMEs

Author Name: 
Xavier Rolet


Xavier Rolet, Chief Executive of London Stock Exchange Group (LSEG) talks to Focus Magazine on SMEs and steps the Group is taking to advocate on their behalf. LSEG has been operating AIM, the world’s largest market for small and medium sized investors for over 15 years and has helped thousands of companies raise financing.

Focus: In order to get investors to consider alternative investments, governments are sometimes willing to create fiscal incentives. What would be LSEG’s advice to national and European institutions on incentives for investors?  What has the Government reaction been to your advice?

Xavier Rolet: London Stock Exchange Group has, for a long time, been actively engaged in the debate with policy makers and market participants on how to create a more balanced and sustainable industrial policy for the UK and Europe. We recently delivered a Budget Submission to the UK government, in which we highlighted steps needed to ensure that any new policies generated would create a sustainable and diverse funding environment, allowing the blue chips of tomorrow to thrive.  

For example, we have been active proponents of eliminating Stamp Duty on the purchase of AIM shares which increases the cost of equity fundraising for UK businesses by up to 13 per cent. Eliminating this tax will improve company valuations, increase capital investment and boost interest from a new set of investors, thereby reducing the overall cost of capital.

Another area where we believe the Government can encourage investor interest, thereby boosting liquidity, is through the introduction of a lower tax rate on capital gains made on direct or indirect investment in growth market companies. As well as enhancing liquidity, this would encourage investors to re-invest profits into smaller companies.

However, any fiscal incentives introduced by Member States have to be compliant with EU State Aid rules. And, we also need to ensure that these rules also remain relevant and continue to help investment flows into smaller European companies.  

Focus: How would you measure the importance of AIM to the UK, especially given reports that less bank lending to smaller companies is acting as a brake on the economy?

Xavier Rolet: Small and medium sized companies form the backbone of the UK economy. There are 4.8 million SMEs in the UK alone. Economic recovery in the UK can only be achieved by harnessing the growth of SMEs.  Through our platform for small and fast growing companies, AIM, London Stock Exchange Group has been instrumental in allowing a move away from a reliance on bank financing, particularly in an environment where bank lending is constrained. AIM also provides an exit route for earlier stage investors, allowing them to recycle their capital, and creates an aspiration for entrepreneurs.

Historically, the UK has underutilised equity financing and over 50 per cent of business finance has been through bank lending, in contrast to just 18 per cent in the US.[1] We believe that equity financing provides companies with a more stable source of support throughout their life from seed and venture capital through to public markets and should be encouraged by Government and regulators alike.

LSEG is committed to nurturing SMEs and since its launch in 1995, AIM has helped over 3,300 companies raise more than £77 billion. A Grant Thornton study published in 2010 found that UK AIM companies directly contributed £12 billion to UK GDP and supported 250,000 jobs. Additionally, they indirectly contributed a further £9 billion to UK GDP and supported 320,000 jobs through supply chain and multiplier effects.[2] We believe that SMEs have the potential to lead UK economic recovery. If the 4.8 million SMEs in the UK each created just one job, unemployment in the UK would be eliminated.[3] This demonstrates that in order for London and the UK to recover and prosper, SMEs must be able to fulfill their potential.

Focus: In your view, what is an effective capital raising framework for SMEs?  Do smaller companies need specific regulation?  Is over regulation hindering companies coming to market?

Xavier Rolet: An effective capital raising framework for SMEs must take into account many factors. In particular, it must balance the need for transparency and liquidity. Transparency boosts investor confidence in a company’s ability to deliver returns, whereas liquidity provides comfort in an investor’s ability to trade in and out of an investment.  Bearing this in mind, we believe there are several measures that EU policy makers should implement to develop a more favorable environment for SME issuers and help boost direct investment flow into companies.

We support the current proposal under MiFID II for a distinct and dedicated SME markets regime. This highlights the important role that these types of markets play in the European funding environment. Creating such a structure would enforce the regulatory status of SME markets and increase market confidence in smaller companies.

In order to boost investor confidence, there needs to be an appropriate regulatory framework set in place. However we do not believe, as some have suggested, that there should be a differentiated regime for SMEs within the Regulated Markets framework. Creating differentiation will only lead to investor confusion and lower levels of credibility for issuers. Such a tiering system may reinforce the current trend of perceived risk in smaller companies, diminishing the goal of lowering the cost of capital for SMEs in the long term.

While we do not support a tiering structure, there is a need to examine regulation which may be hindering investment in small caps. Regulation should promote transparency without making it more difficult to invest in smaller companies. Setting up a new SME market regime under MiFiD would allow for these changes without compromising credibility.

Focus: What can be done to stimulate investor demand? What can governments do? And should there be different treatment for those SMEs?

Xavier Rolet: In addition to enhancing SME access to equity finance, there need to be other innovative ways for small companies to access capital, specifically non-bank debt. We believe that developing the public corporate bond market can offer a great alternate financing mechanism. LSEG launched the Order Book for Retail Bonds (ORB), the UK’s first retail bond market in 2010. Over the last two years, ORB has raised over £1 billion and proved a sustainable platform to provide credit to businesses. It allows companies the opportunity to issue corporate debt, in small tranches, making it attractive to both retail and institutional investors.

While ORB has opened up a new pool of finance for UK businesses, we believe the Government should do more by integrating it into the credit easing initiative. One of the key proposals in our Budget Submission is for a government or quasi-government entity to manage the funding for SMEs and offer a guarantee for the bonds, thereby removing some of the credit risk and encouraging a wider pool of investors.

The Government can go even further to encourage direct investment in corporate bonds by introducing an additional £2,000 tranche ISA savings level for bonds and reducing the ISA maturity band from five years to between two and three years.

Furthermore, while ORB has opened up access to retail bonds, UK investors remain wary of investing in debt due to a lack of available information and education. The Government should encourage high street banks to include this asset class in their in store literature or provide access to trading through their online share dealing portals.

LSEG is committed to helping smaller companies make use of the retail bond market to fund their needs. Many larger companies including Tesco, National Grid and Places for People have used ORB to fund their growth, and we believe with the help of the Government, ORB can make a real difference in providing a new source of debt financing for SMEs.

[1] Office for National Statistics, The Characteristics of Patenters, December 2009.

[2] Grant Thornton: Economic Impact of AIM and the role of fiscal incentives(

[3] HM Treasury, The Plan for Growth, May 2011. Unemployment estimate based on Office for National Statistics estimate of UK unemployment at 2.67 million people, February 2012.