A big message for European small-caps

Last week I reported that investment and market structure experts would this week lobby Europe on creating an easier framework for SMEs to access funding through capital markets. The meeting is with with markets watchdog, the European Securities and Markets Authority (ESMA), and its Securities and Markets Stakeholder Group, which will detail concerns and suggestions for improving IPO pipelines and liquidity in small- and mid-caps.

The stakeholders group has a narrow mandate. It is there to answer requests from ESMA on level two regulatory matters, like the data requirements of a consolidated tape. But it also has an key role in raising issues that it believes are important to the financial system.

The group felt it was wise to anticipate what may come out of the European Parliament’s revision of MiFID II impacting SME fundraising and investment.

The group did not look at what was the best use of capital for SMEs. It is believed to have been more concerned with the balance between investor and company needs, transparency and the risk that MiFID could cause to capital raising and investor participation.

Perhaps more than any other issue, the plight of SMEs in Europe and the framework for investment in these businesses was one that concerned the broad membership of the 30-strong ESMA stakeholder group, which consists of fund management experts, retail investors, stock exchanges, academics and SME groups. The drafting of these documents is an open process where a couple of content matter experts take the lead in drafting the submission under the guidance of a working group of around ten members. The final text is then signed off by the entire membership.

Speaking to me candidly on the condition of anonymity, a person involved in the writing of the paper said what will be presented this week to the ESMA board will aim to strike a balance between the regulatory costs and burdens of SMEs and the needs of investors looking to inject capital. It is not so much the specific issues of transparency or trading that the stakeholder group is worried about, but rather the economic model for funding as a whole.

The group will warn ESMA that focusing on SME transparency and trading models could lead to a divergence of treatment across Europe’s fragmented markets.

Another key issue for the group is how SMEs should be defined legally in a pan-European context. For instance, what constitutes a blue chip in some markets may be an SME in others. Many in the stakeholder group believe consistency is key to providing an effective framework for which SMEs can utilise capital markets and investors can better understand opportunities.

Presently businesses are unsure what to expect from the next iteration of MiFID II, currently under debate in the European Parliament. An idea originally made public in a December draft called for the creation of an opt-in tailored regime called an SME Growth Market. This market would be developed under the rules governing multilateral trading facilities and would be for SMEs – as defined by MiFID – with an average market capitalisation of less than €100,000,000 on the basis of year-end quotes for the previous three calendar years. It is understood that the ESMA stakeholder group takes issue with this definition and also the requirements MiFID II lays down for listing.

If ESMA is eyeing the scarcity of SME liquidity as circumspectly as the trading community, let’s hope it takes these stakeholder ideas to Brussels so that a serious conversation can be had on how to make the capital markets more available to SME issuers and liquidity to investors.