Building an exchange-based private equity platform to promote SME financing

Published by: Dr Xiaojin Wang, Associate Head Researcher of Research Institute, Shenzhen Stock Exchange Jun 2020

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, 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.

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

Technology focus 

Since its establishment in 2014, 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 12,359 technological enterprises (or projects), gathered 7,737 investment institutions, 2,587 listed companies, and 19,842 investors, and raised RMB 41.497 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.