SMEs and Public Equity Financing: A New Dataset of SME Boards in Emerging-Market and Developing Economies John Schellhase and Jim Woodsome August 2017 Introduction In recent years, a number of stock exchanges in emerging-market and developing economies have established dedicated market segments for small and medium-sized enterprises (SMEs). The main purpose of these SME boards, as they are often called, is to expand access to equity finance for relatively small but growing firms with the potential, as a group, to significantly contribute to economic growth and employment. In some cases, SME boards also serve as feeder exchanges, incubating firms for later graduation to a stock exchange’s main board. Today, there around 30 dedicated SME boards in emerging-market and developing economies, the majority of which have been established in the last decade or so. Due to the role these firms can play in creating jobs and diversifying economies, improving access to finance for SMEs is a long-standing policy goal in developed and developing countries alike. As banks have curbed their lending to SMEs in the wake of the global financial crisis, policymakers and industry bodies are now increasingly emphasizing non-bank financing alternatives for SMEs. Public equity financing is one option that may be suitable for fast-growing SMEs with the capacity to meet the listing requirements. SME boards may contribute to expanding financial access for SMEs both directly, by facilitating access to public equity financing, and indirectly, by incentivizing listing firms to improve their financial reporting and corporate governance practices, which may, in turn, make them more appealing to credit-based lenders. What follows is a brief stocktaking of SME boards in emerging-market and developing countries. The analysis is based on a unique dataset created jointly by the Milken Institute Center for Financial Markets and the World Federation of Exchanges. The dataset covers 26 SME boards over the period 2002-2015. As far as we know, this will be the first time this kind of time-series, composite dataset on multiple indicators for SME boards has been published. Below, we examine whether these SME boards have managed to maintain or grow their listings over time, how much capital listed firms have raised, and how common it is for firms to delist. Additionally, we offer an initial assessment of how well these boards have performed as incubators for graduating firms to senior markets. We expect that the data presented in the appendix at the end of this paper will be of interest and of use to policymakers and researchers who want to further investigate and evaluate the role of SME boards in expanding access to capital. About the Data The analysis draws on a newly aggregated collection of data from SME boards located in emerging- market and developing economies, as defined by the International Monetary Fund (IMF).1 Overall, the set includes 26 exchanges from a geographically diverse set of 22 countries (see Table 1).2 The dataset includes data collected by the World Federation of Exchanges (WFE) from its members and shared with the Milken Institute, as well as data collected by the Milken Institute Center for Financial Markets on non-WFE-member exchanges. Nearly all of the data was obtained directly from the exchanges themselves.3 TABLE 1. SME market segments in emerging-market and developing countries Number of Market SME market Year listed capitalization Country Affiliated main exchange segment launched companies (US$ millions, (end- 2015) end-2015) Botswana Venture Capital Botswana Stock Exchange 2004 8 747 Market China ChiNext Shenzhen Stock Exchange 2009 492 861,176 China SME Board Shenzhen Stock Exchange 2004 776 1,600,960 Egypt NILEX Egyptian Exchange 2007 31 131 Ghana Ghana Alternative Ghana Stock Exchange 2013 4 n.a. Market (GAX) India SME Platform Bombay Stock Exchange 2012 119 1,311 India Emerge National Stock Exchange 2012 10 78 Jamaica Junior Market Jamaica Stock Exchange 2009 23 581 Kenya Growth Enterprise Nairobi Securities 2013 4 n/a Market Segment Exchange Malaysia ACE Market Bursa Malaysia 1997 109 2,754 (formerly MESDAQ) 1 The IMF’s World Economic Outlook (WEO) classifies economies as either “advanced” or “emerging market and developing” based on three criteria: per capita income level; export diversification; and integration into the global financial system. For the current list of economies classified as “emerging market and developing,” see IMF, World Economic Outlook: Subdued Demand: Symptoms and Remedies, 2016, pp. 210- 211. 2 The dataset does not include SME boards in Peru, where mostly foreign mining companies are listed; Chile, where the Santiago Stock Exchange, Venture was established in May 2015; Cambodia, where the Growth Board was established in September 2015; and Morocco, due to lack of accessible data. The dataset also excludes over-the-counter (OTC) markets, including the Hanoi Stock Exchange’s Unlisted Public Company Market (UPCoM) in Vietnam and Bovespa Mais in Brazil. 3 Independent efforts have been made to verify the data submitted by the exchanges to the WFE and to the Milken Institute, but given that available information on developing-country exchanges is often incomplete and can be inconsistent, full accuracy cannot be guaranteed in all instances. 2 Number of Market SME market Year listed capitalization Country Affiliated main exchange segment launched companies (US$ millions, (end- 2015) end-2015) Malaysia Second Board* Bursa Malaysia 1988 *Merged with main market in 2009 Malawi MSE AltX Malawi Stock Exchange 2007 0 0 Mauritius Development & Mauritius Stock Exchange 2006 44 1,377 Enterprise Market Nigeria Alternative Securities Nigeria Stock Exchange 2013 11 43 Market Philippines SME Board Philippine Stock Exchange 2001 4 608 Poland NewConnect Warsaw Stock Exchange 2007 418 2,233 Russia Innovations and Moscow Exchange 2009 17 1,638 Investment Market Rwanda Alternative Market Rwanda Stock Exchange 2013 0 0 Segment South AltX Johannesburg Stock 2003 52 905 Africa Exchange Tanzania Enterprise Growth Dar es Salaam Stock 2013 4 n/a Market (EGM) Exchange Thailand Market for Stock Exchange of 1999 122 8,981 Alternative Thailand Investment (MAI) Tunisia Alternative Market Tunisia Stock Exchange 2007 12 7 Turkey Emerging Companies Borsa Istanbul 2011 20 244 Market Turkey Second National Borsa Istanbul 2003 **Merged with main market in Market** 2015 Uganda Growth Enterprise Uganda Securities 2013 0 0 Market Segment Exchange Zambia Alternative Market Lusaka Stock Exchange 2014 0 0 Source: Milken Institute Center for Financial Markets and World Federation of Exchanges Market Capitalization and Total Listings In 2002, SME boards in emerging-market and developing countries had a market capitalization of US$4.8 billion. By 2015, market capitalization on SME boards in these economies, excluding China, had grown to US$21.6 billion, an 80 percent increase. The two Chinese SME boards on the Shenzhen Stock Exchange (SZSE), though, are in a league of their own. Launched in 2004 and 2009, respectively, the SZSE SME Board and the ChiNext grew from nothing to a combined market capitalization of $2.5 trillion by the end of 2015. The aggregate number of listed companies on the SME boards in this dataset has increased more than six-fold from 2002 to 2015. As indicated above, though, this increase is driven largely by listing activity in China (see Figure 1). Other Asian SME market segments only saw listings grow by 25 percent—from 314 to 391 companies—during the period covered in the dataset, though the 2007 merger of the Malaysian SME-dedicated Second Board with the main board of Bursa Malaysia affects this figure. Before the 3 launch of the AltX in South Africa in 2003, there were no SME boards in Sub-Saharan Africa. By the end of 2015, though, there were 127 listings across seven active SME boards in this region.4 Four exchanges in the dataset—most of them newer—did not report a single listing as of end-2015. These included the Malawi Stock Exchange’s AltX (founded in 2007), the Rwanda Stock Exchange’s Alternative Market Segment (founded in 2013), the Uganda Securities Exchanges Growth Enterprise Market Segment (founded in 2013), and the Lusaka Stock Exchange’s Alternative Market (founded in 2014). Addressing the lack of listings in Rwanda, the Rwanda Capital Markets Authority noted that most SMEs in the country were family-run and “are not used to having outsiders examine their businesses.”5 Similarly, the CEO of the Malawi Stock Exchange attributed the lack of listings “to issues of control of their entities... [and] issues of corporate governance.”6 One reason the number of listed companies is of interest is that it may give some indication of the sustainability of an SME board’s business model. In a study of capital-market financing for SMEs across developed and developing countries, Peterhoff, Romeo, and Calvey (2014) estimated that, based on the costs of setting up SME platforms, making SME market segments sustainable requires having a critical mass of 100-150 listings in place after five years.7 Overall, only six—less than a third—of the examined SME boards now exceed 100 listings (see Table 2). However, many SME boards are subsidized by the main exchange; in such cases, it may not be necessary for these boards to become financially self- sufficient. SME boards necessarily adopt their business models to suit the local context and the particular SME population they serve, though, in many smaller markets, even the main boards may struggle to attract a regular stream of new listings. 4 Eleven countries in Sub-Saharan Africa have established SME boards, but four of these boards have not listed a single company. 5 Gasore, “SMEs Shy Away from Listing on the Bourse,” The New Times, April 17, 2014 6 Chinamulungu, “MSE Urges SMEs to List on AltX Market,” The Nation, September 17, 2016.