Listing on a public market can bring a number of benefits to small and medium-sized enterprises (SMEs), such as a higher public profile and less dependency on banking credit. But despite this, few European SMEs seek a listing of their shares. The European Commission's Capital Markets Union initiative aims to make it easier for SMEs to go and remain public, by tearing down regulatory and market barriers standing in the way.

A Capital Markets Union

In September 2015, the Commission launched its "Capital Markets Union" action plan, which seeks to develop market-based finance in EU countries. Beyond a proposal for a revamped prospectus, which should make it less costly for businesses in general to raise funds publicly, the action plan aims to make it easier for SMEs more specifically to list their shares on public markets. The goal is also to boost the profile of the 'SME Growth Markets', a new category of multilateral trading facilities that are being created under MiFID II and will apply from 2018.

Of the 20 million SMEs in Europe, only 3,000 are listed on stock-exchanges. But this avenue of financing has far greater advantages for the broader economy than its size might suggest. The SME markets make a significant contribution to the overall economy and job creation. For example, between 2006 and 2012, companies that listed their shares on First North Stockholm increased their workforce by 17% annually after the initial public offering (IPO), compared to an annual growth of 5% for all private companies in Sweden.

The benefits for SMEs

Listings can unlock access to capital for SMEs. Public equity markets help ambitious companies to make a step change in their development. For instance, companies listed on AIM – an SME-dedicated multilateral trading facility in the UK – show on average a turnover growth of 37% in the year after their initial public offering. For SMEs, the benefits of public markets over other types of financing include less dependency on bank financing, more resilient form of capital, higher degree of diversification of investors, easier access to additional equity capital and debt finance (through secondary offers) and higher public profile and brand recognition.

SME markets can also be beneficial to retail and institutional investors: Small caps have a higher growth potential than large companies and allow a higher level of portfolio diversification. Investors need this opportunity, especially in the current low interest environment. Exchanges for SMEs also provide venture capital and equity funds with an exit solution, which can, in turn, encourage them to supply more early-stage funding to SMEs.

Finally, junior markets can act as a pipeline for promising companies that may graduate one day to the main market.

The challenges ahead

Despite their strategic importance as a cornerstone of economic development, public listings of SMEs remain low in Europe. Worse still, the number of IPOs and the amount of equity raised on SME markets has not returned to pre-crisis levels.

There are three main reasons that can explain the limited number of listed SMEs. First, there is a weak pipeline of companies seeking a listing. The costs of being and remaining listed are discouragingly high. The lack of business education, the reluctance of entrepreneurs to relinquish ownership as well as the erosion of the local ecosystem (e.g. analysts, brokers…) that traditionally supported SMEs on public markets also restrict the supply of companies seeking a listing. Secondly, there is a narrow investor base for SME shares. Many SME markets suffer from a lack of retail, institutional and foreign investors. For instance, in 2013, domestic investors accounted for 79% and 95% respectively of the investors on AIM in the UK and NewConnect in Poland. Last but not least, many SME markets suffer from lower levels of liquidity. This can have an impact on the costs of capital for SMEs and prevent investors from having a reliable valuation of their investment. 

The next steps

In October and December 2016, the Commission organised two workshops on "barriers to listing for SMEs", which brought together trading-venue operators, small issuers, investors, services providers specialised in SMEs (brokers, certified advisors, accountants…) and a number of representatives of public institutions (ESMA, OECD, EBRD and IASB).   

The workshops had two goals.  Firstly, they aimed to identify market and regulatory obstacles hindering the listing of European SMEs, as well as barriers that could prevent the 'SME Growth Market' label from growing across the EU. Secondly, the workshops sought to pinpoint existing market-led and public initiatives that encourage the admission of SME shares to trading. The Commission also hoped to get feedback that could help it pinpoint solutions to regulatory issues and market failures that still remain unaddressed.

The Commission will use the insight and improved understanding garnered from the workshops to feed into any policy follow-up in the context of the Capital Markets Union mid-term review in the first half of 2017. 

Read more on SMEs and the Capital Markets Union initiative