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Alternative equity markets can supply the capital you need

Friday, 24th March 2017


AEMs offer the opportunity to raise capital from both private and institutional investors.

 

There is a feeling that a lack of external funding sources has led to slow growth in the SME sector in recent years. One route to funding that many SMEs have not considered is a listing on one of the many alternative stock exchanges aimed at SMEs. In this article we will examine how a stock market listing can offer an alternative way of raising finance.

Why consider a stock market listing?

There are several reasons why you might consider listing your company on a stock exchange. One major reason is to raise capital for investment but there are other reasons too:

  • It becomes easier for you and investors to realise an investment by trading shares
  • It makes it easier for investors to invest by creating a market for your company’s shares
  • It gives your business a value
  • You can incentivise your employees using share options
  • It increases your profile and business credibility.

Despite the obvious advantages many SME owners consider a stock market listing unfeasible. A lack of knowledge of the governance requirements, the legal and regulatory frameworks, an inexperienced management team, and a perceived high cost of entry are often enough to deter most SME owners.

However, there is an alternative designed with SMEs in mind; what we might call an alternative equity market.

Alternative equity markets

There are many of these alternative equity markets (AEM) around the world, some better known than others. Examples include:

  • AIM (UK)
  • NASDAQ (US)
  • Alternext (Europe)
  • NSX (Australia)
  • ChiNext (China)
  • KOSDAQ (South Korea)

An AEM offers a share trading platform primarily for SMEs wanting to gain entry to capital markets to raise finance to fund growth plans. AEMs are particularly attractive to young businesses on a steep growth curve, management buyouts, and family run businesses. Since the global financial crisis, banks are sometimes reluctant to lend to small businesses, and AEMs offer the opportunity to raise capital from both private and institutional investors.

Raising capital through an AEM

While timescales will vary depending on the jurisdiction, preparing to list on an AEM will take several months. The various stages you will need to go through include appointing advisers, legal and financial due diligence, and preparing the necessary documentation.

It is important you get the planning stage right otherwise you can jeopardise the whole exercise. Also, don’t underestimate the amount of management and financial resources you will need; right from the outset you should create a team of key executives and business experts to manage the process.

Marketing is important too. The success of any stock market flotation depends entirely on raising the required capital by attracting the necessary investors.

Life after flotation

A successful stock market listing is not the end: being listed brings new challenges. These include:

  • Sensitivity to market fluctuations that are beyond your control
  • Responsibilities to shareholders whose interests may differ from yours
  • More stringent corporate governance requirements
  • A need for regular communication with investors to maximise the benefits and attract more investment
  • Possible loss of ownership through being acquired by another firm.

However, done properly a stock market listing can give you the capital you need to invest and take your business to another level.

Peruvian stock market reform and the creation of the MAV

The primary stock exchange in Peru is the Bolsa de Valores de Lima (BVL). In comparison with its Chilean and Colombian neighbours, it is a small player, both in terms of market capitalisation and trading volumes. It is also heavily concentrated towards mining stocks.

To address this, the Peruvian government introduced reforms. While one of the reforms sets out to boost participation in the BVL, another created the MAV (Mercado Alternativo de Valores) as an alternative aimed at SMEs.

The MAV as an intermediate platform for SMEs

The MAV serves a specific niche: SMEs that are new to capital markets. In forming the MAV, the regulators focused on reducing the cost and regulatory burden for SMEs wanting to access capital by listing on the stock market. SMEs can use the MAV to list equity shares, short-term financial instruments, and bonds in both the primary and secondary markets.

The MAV offers SMEs certain advantages over the BVL:

  • Only one risk assessment, rather than the usual two, saving SMEs around $15,000
  • Half-yearly financial reports, instead of quarterly, reducing accountancy costs
  • Standard templates for SMEs to use reducing legal costs.

The MAV follows the model used for London’s Alternative Investment Market (AIM). According to the latest AIM 15-year report, published in 2010, that particular exchange has grown from 10 constituents in 1995 to 1200 in 2010. In the same way the MAV differs from the BVL, the AIM offers much greater flexibility than its counterpart, the London Stock Exchange.

The MAV and its potential to grow

In Peru, SMEs account for 70% of employment and 40% of GDP. However, only 20% of business finance comes from the capital markets. This suggests the MAV can grow significantly and offer a boost to SMEs and the Peruvian economy.

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Luis Marino Nava, Lima, Peru


Luis Marino is a Finance & Strategic Advising Partner in Russell Bedford Perú, based in Lima. He has more than 15 years of professional experience, specialising in corporate finance, strategic planning, banking and microfinance, leading projects in several Latin American countries. In recent years, he has served as a specialist in financial markets within the Peruvian Ministry of Economy and Finance, and has taught the Financial Derivatives course in the Master of Administration and Finance programme at the Antenor Orrego Private University, Trujillo. lmarino(at)russellbedford.com.pe

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