Ungad Chadda, SVP, Head of Enterprise Strategy & Former President, Capital Formation, TMX Group was a panellist at the WFE SME Conference on a session focused on new models for SME market-based financing; he takes us through the key discussion points.
Against the gorgeous and deeply historic backdrop of Malta, a group of global exchange-junkies came together to discuss a key issue for our respective companies and countries. I had the pleasure of chairing the first in-person WFE SME Working Group on SME Finance, and then participated in a vibrant panel debate including Cedar Asset Management's Chairman Bill Brodsky and other impressive panellists including Simon Zammit, CEO, Malta Stock Exchange and Sunil Benimadhu, CEO, Stock Exchange of Mauritius.
Why is SME finance so topical these days?
While the front pages of most business media sources tend to focus on the household names that are primarily comprised of multi-billion dollar enterprises, most leaders know that it is the smaller companies that, in aggregate, drive a substantial amount of economic development. Without the SME entrepreneurs and owner-managers, job creation, patents and IP production will suffer. Further, the oxygen for economic development is capital formation, therefore we must ensure that we support SME capital formation.
In Canada, the TSX Venture Exchange has been putting risk capital investors together with SMEs for well over 100 years. One impressive outcome over the past decade has been the production of over 700 graduates who have ascended from the TSX Venture Exchange to the Toronto Stock Exchange, or other senior marketplaces, or as part of M&A activity by the likes of Paypal, Motorola, etc.
One size does not fit all - access to capital is the key
A common question raised during the WFE SME Malta event was "How?" How does one embrace and nourish SME capital formation? One of the keys is to constantly question and re-evaluate what it means to 'go public' on junior markets. Most listing standards for SME exchanges have been derived from taking a senior market model and simply dividing the quantitative listing standards by four, and adding a catchy mission and vision statement. Successful SME markets will examine issues such as balancing liquidity and investor protection with the quest for 'oxygen' for SME - i.e. capital, flexibility on follow-on financings from a pricing perspective, and the use of blind pools (such as the Capital Pool Company Program) to establish an ecosystem of SME deal supporters etc.
Another key is proportionate regulation. Is independence more important than intelligence and know-how when it comes to SME boards of directors? What does ‘right-sized’ disclosure for SMEs look like? How does one support the smaller boutique investment banks while embracing the move to digital capital formation? These are all things that we grapple with as leaders of our respective exchanges.
How can we get further, together?
Finally, while our industry has witnessed many a failed stock exchange merger, the less talked about route takes us to the inter-governmental relations file. Consider this...if securities regulatory authorities could work together with a view to have reciprocity arrangements between jurisdictions, the output would be to advance access to new pools of capital globally, but at a far reduced regulatory cost - something that is a key consideration for SMEs.
The digital transformation wave will not spare the exchange business. Using technology as the enabler to bridge distance and jurisdiction for SME finance is a great option. Add to that the fact that most jurisdictions have securities regulations that, although not identical, are often equivalent, and it seems to make sense to me.