The majority of public markets now offer dedicated Small and Medium-sized Enterprise (SME) listing platforms or segments and provide additional support for them to list and access affordable finance, according to research by the World Federation of Exchanges (WFE), the global industry association for exchanges and CCPs. However, these initiatives are met with varying levels of success, which depend on the manner, and level, of regulatory and government support.
More than two thirds (68%, 49 out of 72 exchanges polled) of member exchanges now offer specialized SME listing platforms or segments, featuring innovative listing and regulatory requirements, reduced fees and profitability prerequisites, or smaller issuances.
They are doing so in response to the needs of investors, by providing access to information and the ability to allocate capital to these businesses, and for SMEs by responding to the significant challenges around accessing finance and, in some markets, to a decline in listings.
Of the different benefits that SME platforms offer to issuers, the most frequent are exemptions from the minimum profitability requirement (57%), a less frequent reporting schedule (33%), no minimum free-float requirement (30%), and no historical financial statements requirement (7%).
The survey results published today provide a snapshot of the initiatives exchanges have introduced to attract and enable SMEs to access public markets, and where these initiatives are working best.
Additional key findings from the research:
- Of the world’s SME public equity markets, those in advanced economies remain the world’s largest by market capitalisation (79%).
- Emerging and developing countries have seen the number of listings nearly double from 2012 to 2022, primarily driven by the developing countries in the East Asia and Pacific region which account for 49% of global SME listings.
- Conversely, the number of listings in the North America and Latin America and Caribbean regions has been decreasing during the same period.
- In emerging and developing countries, the market capitalisation of SMEs has increased thirteen-fold since 2012, reaching roughly USD 2.13 trillion in 2022. The East Asia and Pacific region also dominates, accounting for 90% of the total market capitalisation, surpassing USD 2.41 trillion by the end of 2022.
- SME markets generally exhibit lower liquidity compared to main markets making it challenging for SMEs to raise capital and attract investors.
- Volatility in SME markets has increased post-Covid, with policies like stimulus packages amplifying market fluctuations, especially in SME markets dominated by retail investors.
While the initiatives by exchanges to attract more SMEs have shown some success, particularly in emerging and developing countries, the impact varies significantly across different regions. While exchange initiatives are beneficial, their effectiveness is often amplified when supported by a vibrant and widely-supported financial ecosystem, implying that a combination of tailored exchange initiatives and broader financial ecosystem action is necessary to drive substantial growth in SME listings.
In the survey, exchanges reported that the three most important issues SMEs cited as concerns about going public were:
- Losing the control of the firm
- More onerous reporting and disclosure obligations
- Difficulty in attracting investors
To address these concerns the WFE states that the following actions should be taken:
- Regulators must put on an educational programme for SMEs to highlight the benefits of listing and explain the different ownership structures on offer.
- Regulators must recognise the needs of SMEs and work alongside exchanges to develop particular platforms or segments with less onerous obligations for SMEs.
- Exchanges should continue to encourage investors to invest in SMEs by introducing reduced fees, research coverage, and investor training/education programmes.
Pedro Gurrola-Perez, Head of Research at the WFE commented: “Rapidly raising funds for SMEs in the capital market is crucial for their development and prosperity. Adopting these initiatives for specific platforms or venues provides an alternative access to capital previously closed to SMEs and benefits the financial market as a whole, with a greater degree of transparency and more investment opportunities than if these businesses stayed private.”
Nandini Sukumar, CEO at the WFE commented: “Exchanges are recognising the needs of SMEs and are finding ways of adapting listing requirements to match those needs, while keeping the adequate levels of transparency to ensure efficient markets. Only when the whole financial ecosystem takes action will we see global prosperous SME markets. Policymakers need to consider how best they can enhance the attractiveness of their domestic exchanges through initiatives such as tax incentives or the simplification of listing regimes.”
The full paper can be read here.
