It’s time for the stock market to change or go their separate ways
While the COVID-19 pandemic poses a significant threat to traditional industry and commerce, it will be even more devastating for small and medium-sized enterprises (“ SMEs ”), as large numbers may not survive the economic impact of the crisis. This problem affects the activity of SMEs around the world, but it is particularly pronounced in emerging markets, where access to capital is generally more limited than in developed markets.
The World Bank States that formal SMEs contribute up to 60% of total employment and up to 40% of national income (GDP) in emerging economies, and these statistics would be significantly higher if they included informal SMEs.
Before the crisis, SMEs were already less likely to obtain bank loans than large firms, but instead relied on internal funds, or cash from friends and family, to initially launch and manage their businesses. The International Finance Corporation (IFC) estimates 65 million enterprises, or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financial need of $ 5.2 trillion per year, which is equivalent to 1.4 times the current level of global loans to MSMEs.
It is important that measures are put in place to save as many SMEs as possible from collapse, thereby protecting jobs and livelihoods. In addition, SMEs in the medical services sector need support to respond to the immediate health challenges presented by the pandemic. On the other hand, SMEs in the food and agriculture value chain need assistance to enable them to contribute to the humanitarian response in the aftermath of the pandemic in order to strengthen food security.
How are emerging market exchanges responding effectively and mitigating the impact of COVID-19 on their respective markets, and does the current model need to change?
The challenge for SMEs
Many SMEs find it difficult to fund advisors to prepare them for a stock market listing. The process can be cumbersome and costly, and as such, overwhelming, even when the rules for listing the growth segment on the exchange are more flexible. This is contradictory because SMEs have huge capital needs and the economy generally cannot function without them. In many markets, the solution has been to classify SMEs as “companies large enough to finance their listing”. This, while allowing larger SMEs to access exchange-traded facilities, worsened the situation of smaller ones, condemning them only to sources of capital from which the money raised would come in small amounts.
Market growth segments have been established with the aim of solving these challenges and creating a flow of issues of corporate securities that will become the primary users of the exchange-traded route to raise capital. However, by establishing such a segment, many emerging market exchanges did not foresee challenges like COVID-19. It might seem like an obstacle on the first consultation, but it translates into a major opportunity to establish the segment. The example given by the most advanced countries, which have set aside significant stimulus funds for the SME sector due to COVID-19, must be emulated in emerging markets, as the SME sector is the most a large employer and perhaps the most productive sector. in the economy. That said, changes to the emerging market stock market model are needed to exploit such an opportunity.
The main priority for most emerging markets is to increase the volume of securities transactions. Achieving this requires more registrations, especially SMEs, more investors and lower overall fees for participants. On top of that, millennials now expect instant access to real-time market data and the ability to trade anytime, anywhere.
There must be a new way of investing in securities, to enable all the possible benefits that will attract more investors, make it easier for MSMEs to raise capital, improve the trading experience for participants and provide services. value-added to the ecosystem.
What are the problems to be solved?
The process of raising capital is too manual and outdated at the moment, as matching investors and assets is fraught with challenges and time consuming, with the secondary market non-existent in most cases. This new model must connect with investors to galvanize capital in the most effective way, whether an asset is tokenized or traditional.
Most start-ups and SMEs lack the capacity to easily raise capital to finance their creations or projects. Bank loans are either expensive or not even an option for most SMEs, as banks often need assets to support lending. IPO requirements are a giant leap that most SMBs won’t even consider an option given all the effort and cost involved.
Private equity is another possibility, but it should be clear which profiles among angel investors, venture capitalists and private equity (PE) investors are most suited to the local market.
On another note, SMEs face difficulties in getting their customers to pay their invoices on time. The liquidity problem is a massive cause of bankruptcy of SMEs in many countries and the crisis will only exacerbate this problem.
However, new initiatives have emerged over the past decade, paving the way for comprehensive financing solutions for SMEs with value-added services for every stage of development, from inception to IPOs, in a continuum perfectly consistent service. However, most emerging market exchanges don’t really embrace them in a cohesive and integrated fashion, and many just end up being stand-alone side initiatives after the fact.
What facets and what advantages should a new model have?
The objectives of strengthening the role of the stock exchange by optimizing the conditions for the growth of the stock markets and the volume of transactions can be achieved by:
- Provide the most efficient means of securing initial and subsequent investments through crowdfunding, venture capital / PE or traditional listing, and then allow secondary trade and market interest to continue;
- Increase the number of “segments” managed by the stock exchange with SMEs, micro-enterprises and start-ups;
- Offer invoice factoring and project financing services to SMEs;
- Allow the greatest number of mass market players to invest and negotiate;
- Offer KYC / AML services; and
- Limit intermediaries to those who add value, with the stock market playing a more active role in this facilitation in order to effectively match capital with companies and projects.
Tokenization of securities is essential to achieve all these benefits, and therefore integrate digital assets with traditional assets to create a hybrid exchange (traditional and digital combined). Tokenized securities solutions can lead to a complete transformation of the stock market into a catalyst for a stronger SME ecosystem by:
- Provide significant value-added services to SMEs at lower cost so that they are more inclined to be listed;
- Create a strong SME ecosystem with fewer intermediaries and barriers to entry;
- Reach out to the mass market by democratizing investments through co-ownership;
- Ensure the sustainability of the exchange so that other types of tokenized assets can be added; and
- Being able to use the immutable digital data stored on the blockchain to combine it with artificial intelligence (AI) so that the needs of SMEs can be anticipated more effectively.
In order to enable emerging markets to seize digital opportunities, exchanges need a suitable end-to-end solution for digital securities to serve the SME ecosystem in the most modern and comprehensive way. It needs to be different from the current exchange construction by not only being hybrid, but also combining the current exchange models with crowdfunding, venture capital / PE and factoring platforms into an integrated structure. from start to finish. The trading, clearing and settlement of any asset, whether digital or not, must be transparent with aligned business, technological and operational processes.
What should happen after the crisis?
The response to COVID-19 requires urgent and immediate implementation, in order to minimize the resulting considerable economic impact. The capacity of SMEs in the health, food, agriculture and other key sectors can contribute to the immediate response to disruption caused by the pandemic. Stock exchanges, in particular, can play their role in the response to the pandemic, through the trusting responsibility they bring, in the distribution of national and global emergency funds in addition to private funding galvanized by the crisis. .
As a result of the crisis, the stock market model of emerging markets must change or risk losing its relevance. There is an opportunity for long-term infrastructure development as well as job preservation and creation. The entire ecosystem of SMEs will need to be served by exchanges that offer the best services to businesses, from their creation to their entry into the main board, through a one-stop portal platform. This will make it possible to retain SMEs, over time, and allow the stock market to accompany them on their long journey with appropriate financing and other value-added services at each stage of their development in the most regulated environment and the most secure.