Prospects – An alternative source of funding for SMEs

Small and medium-sized enterprises (SMEs) are the backbone, or perhaps the beating heart, of many economies. Virtually all companies within the European Union are SMEs. The vast majority can actually be classified as micro enterprises, as they generally employ fewer than ten people, and have a turnover, or balance sheet value, which is less than €2,000,000. Typically, such businesses are family-run operations. Like any other enterprise, they need access to financial resources to sustain and grow their operations, and to continue to generate employment and value for all stakeholders. In reality, however, small businesses find it difficult to access alternative sources of finance and tend to rely primarily on bank finance, family funds and their own retained earnings. Such constraints severely limit their potential, and the greater role they could play in growing the economy. The ‘risk capital’ which fuels the growth and expansion of larger businesses is simply not available to SMEs, which thus face a ‘financing gap’. While entrepreneurial owners and managers are the dynamos that keep SMEs going, such people have little time for financial planning, and, moreover, their ability to provide collateral to support bank finance can also be restricted.

Succession statistics are stark. Though estimates vary, in many countries, a third of businesses do not successfully make the transition from the third generation to the next. Given the high incidence of family-run businesses, this reality raises a number of concerns about why businesses do, or do not, survive and the owner’s or managers’ attitude to proper succession planning.

Larger SMEs already have access to capital markets; almost half of the organisations listed on the Malta Stock Exchange (MSE) are entities of this size. This is very beneficial as listed organisations outperform their unlisted counterparts in terms of turnover, employment and profitability, thanks to better corporate governance, efficiency and brand value. Indeed, in most countries the route to access the capital markets is currently through regulated markets which involves an extensive, complex and costly process, and is subject to significant criteria which neither small enterprises, nor start-ups would be able to comply with.

In response to industry needs, on 17 February 2016, the Malta Stock Exchange launched Prospects, a new market specifically oriented at the financing needs of SMEs and start-up companies. The new market, which is operated by the Exchange, has the structure of a multilateral trading facility (MTF) which is intended to facilitate access to capital by SMEs and start-ups by providing an efficient and low-cost alternative option for sourcing funds for these companies.

Prospects creates an opportunity for SMEs and start-ups to access capital markets relatively easily, and efficiently, and to benefit from the advantages which, so far, have only been available to much larger entities.

Small- and medium-sized businesses are now able to raise capital by issuing bonds, issuing new shares, or selling existing shares to a pool of people far greater than their own family or business partners.

In a tangible and practical way Prospects, therefore, opens up a paradigm shift for many businesses, offering them growth opportunities which have hitherto been simply out of their reach. This new market has been designed specifically for SMEs, and, therefore, reflects their particular needs.

In order to achieve this effective process, Prospects has a number of key features, chief of which is that a company may come to the market purely for succession planning reasons without having to offer any securities for sale. Furthermore, admission to Prospects requires the engagement of a Corporate Advisor by the Issuer to ensure, among other matters, compliance with the relevant rules and to guide the company during the listing process and on a continuous basis after admission, thereby adding another layer of investor protection. Corporate Advisors may be both individuals and corporates. The admission of both Corporate Advisors and Issuers is within the competence of the Exchange; the admission process is electronic and templated cutting down time-frames and costs and a business plan is required. Admission and ongoing costs for both Issuers and Corporate Advisors are also very competitive.

Since its launch, a number of Corporate Advisors have already been admitted and a number of prospective Issuers, both local and overseas are preparing for the admission process.

The Malta Stock Exchange also has a responsibility to support economic reform, national policy and growth. The development of Prospects is in line with the Exchange’s commitment to open up new capital market opportunities, create economies of scale, and to allow businesses more competitiveness, and more sustainability.

There is another, equally important, benefit: greater investor access to the capital market leads to more efficient utilisation of capital resources. Experience clearly shows that there is significant pent-up demand for IPOs, and there is, therefore, space for additional investment opportunities throughout Europe.

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