COVID-19 and Opportunities for Stock Markets Innovation

Sweeping across the globe, the COVID-19 pandemic is disrupting the economic and social life of almost every society. It poses a particularly severe challenge to businesses, especially small and medium-sized enterprises (SMEs). Nimble and responsive, SMEs are crucial for sustained economic growth and employment. Market-based financing is again called upon to help corporate issuers, especially SMEs, weather the storm and capture emerging business opportunities.

Capital markets have proved their resilience and shown the strength of stock exchanges in supporting corporate financing. In response to the impact of the pandemic, market infrastructure operators across the world have maintained continuous and stable operations and been applauded for their positive roles as market organizers, regulators and service providers. Appropriate and timely contingency arrangements have been made including relaxing listing requirements, information disclosure or delisting for issuers as well as simplifying the refinancing process. All of those measures have helped reduce the impact of the epidemic and maintain the confidence of market participants.

According to the WFE’s Q1 2020 Market Highlights, the global number of IPOs and the amount of funds raised in the first quarter of 2020 significantly increased from the year-earlier period.

New opportunities

Despite wreaking havoc, a crisis can also create new opportunities. The same is true for the market infrastructure industry. Private financing boomed following the financial crisis in 2008. Since then legal restrictions for private equity have become increasingly relaxed, emerging technologies have been widely adopted, and global liquidity has increased significantly. As a result, more and more enterprises turn to the private equity market for financing. This provides increasingly mature conditions for exchanges to build private-equity platforms. Statistics show that more than 15 exchanges have launched their own private-equity platforms in the past decade, mainly in Europe, the US, and Asia.

The exchange-based private-equity platform is generally designed to serve SMEs and innovative businesses, and is strongly technology-driven, aiming to improve the fundraising capability of SMEs through new technologies. At present, represented by NPM in the US, KONEX in South Korea, ELITE in the UK, TOKYO Pro in Japan and EnterNext of Euronext, four different development models have been formed, namely trading platform, conduit platform, service platform, and hybrid platform. Through its advanced trading system and algorithm, NPM in the US provides “online + offline” services for equity transfer of innovative start-up companies, forming a brand new private-equity trading ecosystem with institutional buyers at the core.

In contrast, for instance KONEX in South Korea provides equity transfer services for technology-based SMEs. With government policy support coupled with links to markets such as KOSDAQ, KONEX has become the conduit for enterprises to get listed on KOSDAQ. ELITE in the UK is not a market in a strict sense. It provides comprehensive, full-life services for technology-based SMEs, covering competitiveness assessment, incubation, financing, and consultation. At the same time, it uses information technology to reduce intermediate costs, thus effectively cutting service costs.

Deepening innovation

“Exchange + private platform” breaks the limitation of past internal tiers of exchanges, and therefore represents a deepening and innovation of exchange functions.

Among the four types of platforms, the service platform consolidates the local enterprise foundation, and reserves a pipeline of high-quality listing candidates by providing all-round incubation services for innovative and micro, small- and medium-sized enterprises. The trading platform meets the development needs of innovative enterprises and the diversified investment needs of institutional investors, and fully embodies the deep integration of capital, talents, and technology.

The conduit platform accommodates a number of start-up companies that have not yet reached the listing stage, and provides them with special issuance and transfer channels in advance, which improves the coverage and inclusiveness of the capital market.

Although it is still difficult to judge the prospects of the various platforms, they have meaningful explored how to actively apply new technologies, improve the efficiency of financing SMEs and support the formation of innovative capital. And here I would like to focus on the V-Net platform launched by the Shenzhen Stock Exchange in China as a case study.

Focus on Technology

Compared with its overseas peers, the V-Next platform is similar to a service platform in terms of its positioning and service scope.

Since its establishment, V-Next has provided investment and financing information services for hi-tech SMEs. Its resource pooling effect has become more and more pronounced. It has also actively adopted new technologies to empower clients and partners. As of the end of March 2020, the platform had covered 41 countries and regions in the world. It has served about 12,360 technological enterprises (or projects), gathered over 7,700 investment institutions, over 2,600 listed companies, and about 20,000 investors, and raised RMB 41.5 billion for technology-based start-ups, thus becoming a global innovation and entrepreneurship service platform with a wide range of participants, leading user base, and growing market influence.

V-Next has also played a positive role in responding to the COVID-19 outbreak by providing support for the COVID-19 Epidemic Prevention & Control Technology Innovation and Entrepreneurship Special Competition, part of the 9th China Innovation and Entrepreneurship Competition.

Identifying technology-based SMEs with advanced technology in epidemic prevention and control, the competition provided eligible companies with more policy support and value-added services, promoting the application of relevant scientific and technological achievements in frontline epidemic prevention and control and work resumption.

Generally speaking, a private-equity platform is niche market-oriented, efficient, and flexible. Driven by multiple factors such as technological innovation, and wide application of information technology, it is showing a diversity of development patterns. As long as the new round of technological revolution continues, the integration of “technology + capital” will continue to accelerate, and various innovations of private-equity platforms will occur.

For exchanges, the coordinated development with the private-equity platform not only will enlarge the potential for exchanges’ innovative development, but also provide SMEs’ financing services and product development with more choices. We believe that after the COVID-19 epidemic, “Exchange + private platform” will continue to demonstrate vitality and dynamism.

Probably this is worth of a consideration for us, to supplement the Enterprises Growth Markets (EGM) – the alternative listing platform for SMEs and start-ups, the DSE may consider providing a platform to listing the pre-IPO SMEs whose investor base would be Private equities (PEs), Venture Capital funds (VCs) and other Qualified Investors (QIs). Upon PE, VCs and QIs exit from these companies they would pursue exists via IPOs and listing in either the EGM or the Main Investment Market – this can be the extension of the currently DSE Enterprises Acceleration Program which helps in building capacity to business leaders and owners on various aspects of capital raising and sustainable businesses management.

Opportunity and Challenges of building SMEs-based Exchange

EGM, the DSE’s Enterprise Growth Market, began as a dream to offer small-and medium-sized enterprises (SMEs) a path to access the Tanzania capital market. It is a parallel equity market with lighter listing requirements that makes it easier for SMEs to list and get access to the capital they need to grow their business.

Currently, it is estimated that the SME sector makes up about 35 percent of total GDP in Tanzania, with the goal of enhancement and further contribution and growth, with access to capital/finance. Therefore the “EGM – Alternative Market” aims at playing a significant role in making this a reality, from the long-term financing perspective.

In October 2013 EGM started operations with one company listed on the day, and there has been 5 public offerings and listings since then. To ensure market stability and access (as well as opportunity) for all, trading in EGM is not limited to Qualified Investors, as is the case with similar markets in other jurisdictions.

EGM has come a long way from its modest beginnings, overcoming numerous challenges with book coverage, liquidity, participants and regulations. Each issue had its own challenges, but were carefully studied in turn, and solutions were developed that resulted in improvements in EGM market overall performance benefiting issuers and investors alike.

The Dar es Salaam Stock Exchange (DSE), alongside the CMSA (Capital Market and Securities Authority), has ever since seen some enhanced appetite – but one of the fundamental challenges has been structural, i.e. limited skills and capacities by advisers, non-availability of transactions underwriters as well as qualified investors. The virtually non-existence of the private equity and venture capital participants is also a hindrance.

Despite of these challenges, the limited awareness of the operability and benefits of the EGM is also a key challenge. For example, one of the most important features of the EGM is that of direct listing (by introduction), which allows companies to list their shares directly on EGM without a public offering – this enhances the company visibility and its profile to the investing public in case of future capital raising needs.

This can be done through two methods: floating the company’s shares with a staged liquidity plan; or through private placements.

If a company opts for the liquidity plan, an independent financial advisor provides a valuation and prepares the plan with the issuer to be submitted as part of the listing application and described in the listing document.

The private placement transaction method can take place before the direct listing in order to meet the entry requirements, which also helps the price discovery process.

A particularly important feature is to help potential issuers and increase flexibility in listing requirements, so as to separate between capital raising and the need for listing with a target for future capital raising.

There are also flexibility in reporting frequency where companies in the EGM are to report their performances in a semi-annual basis that helps such companies to also reduce the cost of compliance and lessened the burden on management, allowing SMEs to spend more time creating value by focusing on developing their core business.

Furthermore, the above combined with the decrease in the free float guard to at least 20 percent, compared to the Main Market’s 25 percent as well as the reduction in the number of shareholders to 100 compared to 1,000 in the Main Investment Market and also the amount of qualified capital prior to listing, better captures the listing and trading environment and the overall objective of facilitating SMEs to access public funds for their growth and expansion, leading to a fundamental increase in market growth, stability and confidence in companies’ governance; not mentioning its multiplier effect to the economy including jobs creations, more tax revenue, innovations, etc.

To support SMEs’ expansion plans further, DSE provides its EGM listed entities the opportunity to transition to DSE’s Main Investment Market, provided they have met all of the requirements for listing on the Main Investment Market (including market capitalization, free float, number of shareholders, etc).There are some EGM listed companies that are currently qualified and can graduate/upgrade to list into the Main Investment Market, but none of them have opted so for the time being. Much as this is choice by the company, however, the choice of not pursuing the upgrade denies the DSE an opportunity of affirming EGM’s credentials as a segment in the market that provides a fast-track to growth for SMEs and a springboard onto the Main Investment Market, indication of gradual growth and ambitious intent by listed companies.

Despite of the above, the EGM has enabled and enables businesses to fund their growth plans, provides investors with opportunities to generate financial returns and support overall economic growth.

To achieve further profiling and encourage more listings on the EGM the DSE has introduced the Enterprise Acceleration Program whose main objective is to build capacities to entrepreneurs, business owners and managers of SMEs to enhance their broader understanding of the financial markets, particularly capital markets and need to manage businesses sustainability. This program aims to increase the number of listed entities, eventually provide an opportunity for market depth and increase liquidity in the market.

One of DSE’s more recent initiatives is the amendment of its rules to provide for independent research providers to conduct research on EGM listed stocks. The results will be made available through the exchange, providing more information and further boosting market transparency. The government has also been keen to assist SMEs to list on DSE and has provided a number of fiscal incentives for companies to encourage them to make the leap onto the DSE’s EGM, creating opportunities for investors and issuers.

DSE’s main goal is to provide a diverse selection of products and services that add real value to all market participants. All changes and improvements are made towards this goal which upon crystalizing will translate into a stronger and more stable domestic market for access to long term capital and wealth creation.

DSE is proud to have been able to make such significant developments to the Tanzania capital market in such a short time. With DSE’s passion and commitment to innovation we are confident that SMEs on the EGM market will continue to blossom into much larger and successful companies, and we are honored to be able to help these companies on their journey.