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a call for a large and ambitious SME marketa call for a large and ambitious SME market
Paris, July 3 & 4, 2012
Pavillon d’ArmenonvilleAllée de Longchamp 75116 Paris
Eric le Boulch
Chairman and CEO of CM-CIC SecuritiesChairman of ESN NA
Board member of AMAFI
CONTENTSCONTENTS
I. Future access to market solutions is key for SME
II. 2012 environment
III. Constraints a. BASEL III and SOLVENCY II: finding stable long-term financing
b. Domestic saving is risk adverse and favours liquid assets
c. Competition between stocks exchanges is not relevant for Small and Mid-caps
d. Unbundling and best execution, two killers of SME expertise
IV. SME expertise a loss making business for broker
V. A call for an ambitious SME Market : La Bourse de l’Entreprise
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Future access to market financing solutions is key for SMEFuture access to market financing solutions is key for SME
The need to revive the market for financing small and mid-caps seems to be as much a subject of consensus as the need to establish a specific framework for European Small and mid-caps (Small Business Act) was. Up to now no « credit crunch » is taking place in France. Indeed, outstanding corporate loans is up +4,4% end of march 2012 (versus march 2011) in France against +0,3% in euro area, +1,5% in Germany, -0,2% in Italy, -3,9% in Spain. From 2008 to 2011, it is up 4,4% in France, down 4,3% in Germany and 2,2% in euro area.
But the profound change brought about by Basel III and Solvency II combined with crisis impact has led big corporate to look increasingly to the market for financing themselves. But the access of large companies to the capital markets and to international investors is incomparable with that of Small and mid-caps. Moreover, while access to the equity markets has been thoroughly compromised, access for small and mid-caps to the bond market is impossible at present.
Access to stable, long-term market financing will be crucial to the continuity, independence and growth of these companies.
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Future access to market financing solutions is key for SME Future access to market financing solutions is key for SME
Despite a difference in economic size, the more than 500 French small and mid-caps listed on EUROLIST and ALTERNEXT, with market caps ranging from a few dozen million euro to one billion euro, share severaldisadvantages:
Highly dependent on domestic savings while outflows from French equity funds and high aversion to risk prevail
Practically no autonomous access to the bond market
Highly dependent on bank credit
Unsatisfactory equity market valuation often preventing them from raising capital under satisfactory conditions
Listing and related regulatory costs and restrictions often disproportionate to their size
Unlike large market caps, they are listed only on national stock exchanges
Local brokers are key players for SME but are not in a good shape
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Future access to market financing solutions is key for SMEFuture access to market financing solutions is key for SME
Channeling domestic savings towards small and mid-caps is key. Since international investors cannot replace this illiquid asset class, national investors, both professional and individual, must play a big role. Unless there is a dynamic involving inflows of domestic savings towardsSmall and mid-caps, the market infrastructure initiatives to revive the primary and secondary markets will not overcome the crisis environment.
It would therefore be of little use to expect the answer to lie in stock market access only and changes to market organization rules and costs. However, the renewed emphasis on market infrastructures to enable these stocks to be listed seems to be a prerequisite and a necessary condition for a reversal of the trend. What is essential is that the interests of issuers, brokerages, investors and the stock exchange, NYSE EURONEXT be realigned.
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Global overview of IPOs: a significant drop in recent quartersGlobal overview of IPOs: a significant drop in recent quarters
In Q1-2012, 36 IPOs were cancelled and 7 postponed according to Dealogic(17 deals with the US, 10 in China, etc.)
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Global breakdown of capital raisedGlobal breakdown of capital raised
In Q1-2012
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In 2011
Number of IPOs in Europe and capital raisedNumber of IPOs in Europe and capital raised8
Capital raised per IPO in Europe, per month and in EURmCapital raised per IPO in Europe, per month and in EURm
Austria, Belgium, Denmark, France, Germany, Greece, Netherlands, Ireland, Italy, Luxembourg, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the UK
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The market context in France has enjoyed a slight improvement, then a trend reversal since the start of 2012The market context in France has enjoyed a slight improvement, then a trend reversal since the start of 2012
After a difficult period in 2011, especially in Q2, the French (and European) indices started to rise again in early 2012. Note that the small- and mid-cap indices outperformed the CAC 40. Since April 2012, the trend has changed again.
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Market volatility is an essential component in access to the stock marketsMarket volatility is an essential component in access to the stock markets
At end-2011, financial players’ excessive concerns over future macroeconomic scenarios resultedin highly volatile equity markets. The climate remained uncertain at the beginning of 2012 and the markets were still subject to unexpected changes, although volatility decreased sharply and the climate eased considerably. However, since the end of Q1-2012 the aversion to risk has increased and the window of opportunity has disappeared.
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The easing seen at the beginning of 2012 enabled some companies to carry out IPOs: EUR225m in capital raisedThe easing seen at the beginning of 2012 enabled some companies to carry out IPOs: EUR225m in capital raised
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Euronext25 January 2012
Specialised in the research and development of biotherapeutic products intended for tissue regeneration and the treatment of chronic illnesses.
Price fixed at the top end of the rangeCapitalisation: EUR96m
EUR25.3m in capital raised (excluding the current over-allotment clause)
Institutional investment of 84%, oversubscription of 1.6x, Average institutional ticket: EUR483k
Retail investment of 16%, oversubscription of 2.2x,Average retail ticket: EUR3,403
Alternext3 February 2012
Design and development of medical imaging software
Price fixed more at the bottom end of the range Capitalisation: EUR21.3m
EUR4.2m in capital raised (excluding the current over-allotment cause)
Institutional investment of 78%, oversubscription of 1.1x, average institutional ticket: EUR218k
Retail investment of 22%, oversubscription of 1.6x,Average retail ticket: EUR2,108
Euronext1 February 2012
Design, manufacturing and marketing of orthopaedic imaging systems (low radiation dose, 2D and 3D imaging).
Price fixed at the top end of the rangeCapitalisation: EUR119.5m
EUR37.7m in capital raised (excluding the current over-allotment clause)
Institutional investment of 87%, oversubscription of 3.4x, Average institutional ticket: EUR979k
Retail investment of 13%, oversubscription of 3.2x,Average retail ticket: EUR4,006
Euronext6 February 2012
Development and marketing of embedded software intended for secure payment, identification and access control applications, etc.
Price fixed more at the top end of the rangeCapitalisation: EUR261.3m
EUR69m in capital raised (excluding the current over-allotment clause)
Institutional investment of 92%, oversubscription of 5,3x, Average institutional ticket: EUR3,210k
Retail investment of 8%, oversubscription of 1x,Average retail ticket: EUR3,361
The easing at the start of 2012 has allowed some companies to go public: EUR225m raisedThe easing at the start of 2012 has allowed some companies to go public: EUR225m raised
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Euronext28 March 2012
A unique technology. patented worldwide, used to administer an allergen through healthy skin without large amounts passing into the blood stream.
Price fixed at the bottom of the rangeCapitalisation: €119m
€40.5m raised (excl. over-allotment clause)
Institutional investment 86%. oversubscription 1X. average institutional ticket: €1.1m
Retail investment 14% oversubscription 1X.average retail ticket: €2300
Euronext12 April 2012
ID Logistics is one of the main French specialists in contractual logistics.
Price fixed at the top of the rangeCapitalisation: €115m
€29m raised (excl. over-allotment clause)
Institutional investment 86% oversubscription 1.3X. average institutional ticket: €576k
Retail investment 14% oversubscription 1.2X.average retail ticket: €3700
Alternext26 April 2012
Designed and markets SpineJack, which is a unique implant able to give a fractured vertebra back its original shape and restore the anatomy of the spinal column.
Price fixed mid-rangeCapitalisation: €31.5m
€18m. i.e. 92% of the initial amount
Institutional investment 61%. average institutional ticket: €372k
Retail investment 39%.average retail ticket: €2275
Capital increases: €1244m raised since the start of 2012Capital increases: €1244m raised since the start of 2012
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CAPITAL INCREASES - 2012
ISSUES Market where listed Approval date Issue amount
(in €m)% of market
capitalisationForm of
operation ParityDiscount or premium /
Market price
Participation of reference
shareholder
MEMSCAP Euronext 11/01/2012 1 18% PSR 1 for 4 23% discount
HUBWOO Euronext 23/02/2012 5.3 29% PSR 2 for 9 37.50% discount
PROLOGUE Euronext 29/02/2012 1.2 30% FR SSW AW yes
PEUGEOT Euronext 05/03/2012 999 46% PSR 16 for 31 42.1% discount yes 32%
FONC. DES MURS Euronext 13/03/2012 124.5 11% FR SSW AW 1 for 1. 29 b=4a 11.36% discount yes
UBISOFT ENTER. Euronext 03/04/2012 60.5 14% FR SSW AW 1 for 1. 11 b=1a 21% premium yes
GRPE GO SPORT Euronext 04/04/2012 30 X 1.92 PSR 2 for 1 36% discount yes
DIAGNOSTIC MED Euronext 04/05/2012 5.4 67% PSR 77 for 100 52% discount yes
PAREF Euronext 24/05/2012 7.5 19% PSR 1 for 7 3.37% discount yes
PONCIN YACHTS Euronext 31/05/2012 10.3 64% PSR 3 for 4 7.55% discount yes
1244.7
Large capital increases on the Paris market and volatility of equity indicesLarge capital increases on the Paris market and volatility of equity indices
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LBO debt to be refinancedLBO debt to be refinanced16
BASEL III and SOLVENCY II BASEL III and SOLVENCY II A joint QIS5 report by Oliver Wyman and Morgan Stanley shows that insurers could put together three times more capital to invest in a 10-year credit investment than what would be necessary for the same financial instrument with a three year maturity
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BASEL III and SOLVENCY IIBASEL III and SOLVENCY II
For the banking sector, the introduction between now and 2018 of the net stable funding ratio (NSFR) will oblige banks to issue long-term loans, which will necessarily be more costly. In addition to the impact on their cash positions, the liquidity ratios and higher capital requirements will also increase lending costs. More over the yield curve is not going to stay as “flat” as it is in the future.
In a report published by it in September 2011, S&P stressed that European companies have a particular dependency on bank loans. In fact, while the corporate debt market quadrupled between 1999 and 2010, the euro area corporate bond market represented only USD2,200 billion at the end of 2010 compared with USD4,500 billion for the US, whereas there is not such a gap between their respective GDPs. Non rated corporate bond market is four to five times bigger in the US.
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BASEL III and SOLVENCY IIBASEL III and SOLVENCY II19
BASEL III and SOLVENCY IIBASEL III and SOLVENCY II
In the same report, S&P noted that while “large listed European companies accompanied the development of the euro with enthusiastic recourse to its capital markets, privately owned firms have generally, almost exclusively gone to banks for their financing, and purely borrow at prices that do not accurately reflect their risk levels.”
It added : “we believe that the traditional banking model which involves a combination of underwriting and pooling will be difficult to maintain in the future without price setting that better reflects the related risks.”
“We believe that companies will have to increasingly turn to the capital markets as bank financing is required to start integrating risks by setting more restrictive terms and conditions.”
It is also worth noting that, over and above the very large groups, many large unlisted groups (Legrand, Havas, Bollore, etc.) have made their first issues over the last two years. Rexel recently indicated during the presentation of its 2011 annual results that it wants, going forward, to replace all of its bank financing with market debt and to use bank loans only as a back-up or for bridging purposes.
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French small and mid-caps: highly dependent on domestic savings, that is risk-averse and favour liquid assets French small and mid-caps: highly dependent on domestic savings, that is risk-averse and favour liquid assets
The small and mid-cap market is essentially a national market, a local market in the sense that the investors likely to invest in these stocks are principally of the same nationality as the issuer
The integrated European financial market that has been resolutely sought over the last twenty years is in one aspect directly correlated to the market capitalization and liquidity of issuers: the weaker the capitalizations and liquidity, the more modest the capacity of an issuer to attract investors on a broad geographical, pan-European basis. The only players that overcome this reality are Small and mid-caps positioned in high growth market niches[1].
For all others, i.e. those in more mature sectors, it is very rare that they succeed in attracting investors that are not geographically close to them[2]. For these companies therefore, the investors likely to invest in the securities they issue are necessarily of a national nature, if not regionally close to them[3].
On the Alternext, French investors account for 70% of total invested funds[4]. A quick analysis based on the free floats of French companies reflects this, despite limits in terms of disclosure.
[1] New technologies, biotechnology, etc[2] Moreover, one of the reasons for a listing is often the fact that it enhances a company’s reputation, which ultimately helps to
enlarge the pool of investors.[3] Besides, in terms of access to credit, the same phenomenon applies, with marginal access of Small and mid-caps to the credit
distributed by foreign banks.[4] Source: LionShare; Disclosed holdings only; includes last quarterly data available.
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French small and mid-caps: clearly dependent on domestic savings, that is risk-averse and favours liquid assetsFrench small and mid-caps: clearly dependent on domestic savings, that is risk-averse and favours liquid assets
Therefore it is crucial to ensure that the savings of French residents is sufficiently allocated to small and mid-caps. The institutional and private investor base likely to be interested in this type of stock is particularly narrow and is on a declining trend. The data below illustrates this.
The share of UCITS dedicated to French equities is very low overall at just EUR29.8bn on 31 December 2010. The table below demonstrates that the share of UCITS dedicated to French equities is particularly low and is on a downward trend. At the end of 2010, these UCITS accounted for just 2.87% of the total UCITS versus 11.19% ten years previously. The number of French equity UCITS fell by roughly 60% from 502 to 205 during this period.
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2000 2005 2010
Outstandings Number Outstandings Number Outstandings Number
French equities 82.8 502 55.6 297 29.8 205
Total UCITS 739.8 6913 1066.4 7073 1132.8 7132
French small and mid-caps: clearly dependent on domestic savings, that is risk-averse and favours liquid assetsFrench small and mid-caps: clearly dependent on domestic savings, that is risk-averse and favours liquid assets
The situation is even more critical for funds dedicated to small and mid-caps. For instance, the assets under management invested in mid-caps of the leading French asset management company accounted for only 2% of the total assets under management invested in equities by this same company (the assets under management invested in equities themselves account for 13% of the total assets under management).
Insurance and mutual companies also have limited investments in French equities. At end-2011, insurance and mutual companies held EUR290bn in equities of listed and unlisted companies, including through UCITS[1], of which 10% (EUR30bn) were invested in small and mid-caps. The amount represents 17% of the EUR1680bn of insurers’ investments in the economy.
French households are continuing to prefer non-risky investments. Out of EUR3682.6bn assets in Q2 2011, only 204.6, i.e. 5.6%, represent listed equities, owned by households[2]
[1] Source FFSA[2] Source Banque de France
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Small and mid-caps: … while in 2011 French collective asset management saw the largest outflow in its historySmall and mid-caps: … while in 2011 French collective asset management saw the largest outflow in its history
In 2011, UCITS fell by EUR82.1bn to EUR726.5bn in France
The fall in assets breaks down as follows:EUR39.2bn for cash UCITS
EUR13.1bn for bond UCITS
EUR14.6bn for equity UCITS
EUR11.2bn for diversified UCITS
EUR2.4bn for guaranteed UCITS
EUR1.5bn for alternative UCITS
Regarding equities, the outflow of EUR14.6bn should be added to a performance effect of EUR24.8bn, in other words an ultimate fall in assets of around EUR40bn. This drop in assets will considerably reduce management fees and will lead to a return to a sharp contraction of lists of brokers. According to the EFAMA’s data, at end-November the European UCITS fund market reported -EUR84.5bn of annual redemptions. Although every country saw large withdrawals in H2 –over the period from July to end-November, -EUR125bn were withdrawn from UCITS funds –, note, however, that there are large disparities between investment flows. For example, only the French market, and to a lesser degree the Italian market, already reported a large outflow at the end of H1, including for long-term assets. By contrast, the collective asset management markets in Northern Europe, which were already more buoyant the previous year, held up better in 2011, whereas the outflow is continuing on the south European markets (France, Spain and Italy).
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MIFID and market infrastructuresMIFID and market infrastructures
The competition between trading systems that the European Authorities wished to establish in order to create a European stock market and introduced in 2007 through MIFID in reality concerns only a limited number of highly liquid stocks. In practice, the revenue from the mid-cap segment is marginal, while long-standing stock exchanges have been under very strong and unfair competitive pressure from MTFs in the large cap segment. As a result of the considerable pressure that they are under, the long-standing stock exchanges, and particularly NYSE-EURONEXT, have justifiably focused their efforts on more liquid stocks, as they offer greater economic potential. The competition between trading infrastructures in the listed small/mid-cap segment has remained non-existent, or very marginal. In fact, these stocks are not liquid enough to bear fragmentation without simultaneously causing a loss of market efficiency. Since the start of the 90s, the technological one-upmanship between stock exchanges and the development of quantitative, derivative and passive management has gone hand-in-hand with and determined the fact that a growing share of the volumes traded daily do not originate from long-only asset managers acting for third parties. These volumes, consisting essentially of proprietary trades, are now the source of most large cap trades.
The simultaneous listing of large caps on several listing platforms transformed investors’ execution requirements as brokers now had to ensure a “continuous supply” at any time not just from one “shop” but from “several shops”. The notion of “best execution” has moreover become a regulatory concept. MIFID therefore questioned brokers’ execution and clearing infrastructures.
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Unbundling / Commission Sharing AgreementUnbundling / Commission Sharing Agreement
The introduction of separate remuneration for consultancy (decision-making advice services = work of the analyst and the salesperson) and execution was well intended (SEC ADOPTS REVISED SOFT DOLLARS SAFE HARBOR - 2006).
What we have called the unbundling was not introduced as part of the MIF directive. However, in the context of MIFID, it makes the funding of Investment Research a little more dependent on execution against a back drop of falling commission rates and orders concentrated with a decreasing number of brokers. Trades are continuing to “pay ” for Investment Research but the share allotted to the funding of this service (which includes financial analysis and sales) is fairly modest.
As the technological and human investments of major brokers to ensure the “best execution” of trades involving large caps simultaneously listed on several stock exchanges are outside the reach of local brokers, and particularly those specializing in mid-caps, the latter have been gradually marginalized and then removed from the list of order-executing brokers to receive remuneration only for providing advice. As small and mid-caps are becoming increasingly marginal in the assets of asset management companies, and the amounts available have themselves been reduced by the deflation of order execution rates and the fall in assets, a specialization in small and mid-caps now no longer suffices.
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Contrary to the desired effect, the primacy of execution and of “Best Execution” under the MIF directive, and the Unbundling, are favouring “global”players and stepped up the attrition of local research in the crisis environment:
Given the crisis environment and the concentration of execution with major brokers that has ended the equality between large and mid-caps (that allowed the remuneration of brokers specializing in mid-caps), unbundling has tended to produce exactly the opposite effects to those expected. The high level of attrition of local research is perhaps the key issue as it determines both the intensity of the service to small to mid-sized domestic investors and the decision-making advice service in the small and mid-cap segment. Maintaining diversity in research is essential and is no longer ensured.
The share of brokerage fees earmarked for the remuneration of research on mid-caps has remained modest, or even non-existent, because of both the attrition of the assets allocated to mid-caps and the limited share allocated to mid-caps (with brokerage fees remunerating the work of the sales force and analysts).
The fees paid for execution services have fallen sharply in 10 years. mid-cap execution costs have not fallen, however .
The financing of this service now relies too heavily on corporate services, which is inadequate and contrary to the regulation’s aims …
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Unbundling / Commission Sharing AgreementUnbundling / Commission Sharing Agreement
The need to boost the primary marketThe need to boost the primary market
The amount of capital raised on the stock market, the number of IPOs and the volumes traded on the markets that characterise the liquidity of stocks are all criteria that can be used to assess the vitality of a stock market. In these areas, the changes seen over the past few years on the French market have been fairly negative in absolute terms, and relative to the UK or even German markets.On the primary market, Paris has raised USD6.7bn since 2007, while over the same period, ten times as much capital was raised in the UK (USD60bn) and three times as much in Germany (USD18bn). Furthermore, in France, most of the capital raised since 2007 has come from a handful of major operations (e.g. MEDICA and CFAO), while the capital raised in the UK has been more evenly split between large and small caps. Some French stocks also choose to list on markets other than the French market.
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IPO UK Germany France
Number of operations 351 77 106
Capital raised since 2007 USD59.2bn USD18.3bn USD6.7bn
Share of the largest three 9% 35% 65%
Share of the largest ten 27% 69% 84%
A small and mid-cap market that relies on domestic brokers is facing very unfavourable trendsA small and mid-cap market that relies on domestic brokers is facing very unfavourable trends
In factual terms, when considering the amount of fees available to brokers specialised in small and mid-caps, the very low level of viability of the small and mid-cap business model is clearly visible in the numbers below.
[1] It is interesting to note, for instance, that London-based brokers generated roughly 65% of trading volumes on Euronext Paris in 2010.
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EUROLIST2011
A B C
ALTERNEXT
Number of companies listed on the Paris segment of NYSE-Euronext 126 140 288 169
Shares traded (€ million) 989,050 16,738 8,704 1,881
Capital giving rise to brokerage fees (1) 791,240 20,086 17,408 3,700
Brokerage fees 10 bp 15 bp 15 bp 15 bp
Total fees (€m) 791.2 30.1 26.11 5.55
Average amount of fees per company (€) 6,279,682 215,202 90,667 32,840
A small and mid-cap are relying on domestic brokers that are facing very unfavourable trendsA small and mid-cap are relying on domestic brokers that are facing very unfavourable trends
These figures imply that brokers on Eurolist B, C and Alternext, excluding revenues derived from services to issuers (including primary brokerage), are loss making. The full cost of producing an equity analysis service per company covered works out at between €30,000 and €35,000 per annum according to a study by AMAFI.This does not include the cost of the sales (equity sales) and trading forces. Trading costs are in turn structured by the size of the human interface on SMEs. As such, the full execution of a €0.5m-1m order on a small or mid-cap may take several days unless it concerns the trade of a block, while less than one second is sufficient for a CAC 40 stock, using algorithmic trading. The use of “algos” on SMEs, while making progress, is the consequence of the consolidation of orders by global brokers.
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Local brokers are doing the job on SMELocal brokers are doing the job on SME31
Nyse Euronext COS : a call for a large and ambitious SME market Nyse Euronext COS : a call for a large and ambitious SME market
It is time to act together positively and to promote jointly a profitable and ambitious market, “la Bourse de l’Entreprise”We support the creation of a broad and liquid market with strong institutional credibility allowing the asset management industry to move in, creating dedicated fundsA market granting more solutions, more specific services and paying more attention to SME : creation of a committee to advise the corporate pre IPO and post IPO; regulation; cost of listingEquity, Bonds, Convertible, Investment vehicles to be listedGovernance of this company and management skills will be key to realign the interests of issuers, brokers with those of Nyse EuronextRegional proximity is critical : promoting the market solutions for SME in the European regionsA new status for brokers (listing / market partners) : a market structure and tariff granting advantage and incentives to brokers truly servicing corporate and final investors on listed SME; new rights and new duties
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