SME Finance Policy Guide

G-20 SME FINANCE POLICY GUIDE
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equity investors; and (iv) the size of both the private
sector and the qualified institutional investor community
is sufficiently large to support the growth of the
market generally. 50
Experience suggests that it is important to get the
details of the market micro-structure right in order for
an SME exchange to function effectively and become a
venue where SMEs can readily access the capital they
require. The following mitigate against success and
should be avoided:
• Imposing expensive requirements such as maximum
bid-ask spreads;
• Applying trading regulations that are more relevant
for larger companies and do not provide incentives
for market participants to get involved with smaller
companies; and
• Failing to address relatively high issuance and trading
costs caused by the introduction of systems and
technologies developed for large-cap shares.
It is important to develop less formal, more lightlyregulated
capital markets that can cater largely to SMEs.
In Kenya, where there is an informal and largely
unregulated capital market that caters mainly to SMEs,
a number of small companies have been able to raise
capital from local investors such as private equity
firms. While aware of its existence, the securities
market regulator in Kenya does not regulate the activity
in this market, but at the same time appears reluctant
to see it disappear altogether or close down.
A variety of other suggested policies have potential to
increase listings and liquidity on SME exchanges,
including:
• The size of qualified SMEs should not be capped at
very low levels, as this may have adverse effects
on liquidity and discourage the participation of
fund managers;
• The public float should have a minimum size, as an
excessively low float will also constrain liquidity.
Some successful SME exchanges impose a minimum
float of 10 percent, combined with commitments of
market-making and research by the broker;
• A large minimum number of shareholders may be
necessary to improve liquidity;
• Lock-up periods of 6-12 months or longer during
which certain shareholders (with 5 percent or more
of the shares) cannot sell their stake following an
IPO can prevent the early exit of corporate insiders
and curtail insider trading; and
• Governments might consider tax incentives for SMEs
that go public.
In addition to less formal markets such as those
described above, another approach that may be more
suitable for meeting the needs of SMEs in smaller
economies is to promote the establishment of regional
SME funds, or in some cases to encourage eligible SMEs
to consider using other nearby or regional stock markets
as a venue where they may be able to raise the
funding they need. Particularly for SMEs located in
smaller economies, regional approaches like these may
be the most, if not the only, suitable way to access
equity capital.
Priorities and challenges for LDCs
In developing economies, where the financial sector is
typically characterized by marked weaknesses that constrain
the access to finance, private equity can be a valuable
source of stable, longer-term financing for some
firms. This is particularly true in economies where
public equity and bond markets are not accessible other
than to a handful of companies, and where bank credit
is expensive and provided primarily on a short-term
basis, when available at all. The “smart-money” features
of private equity investments and the selection of investment
targets are particularly valuable for economies
where business and management expertise constitute
scarce commodities. This financing tool has a direct
impact on the active management of the firm via the
value created post-investment, which in turn has potential
spill-over effects to the rest of the economy. It
enhances value by fostering innovation and access to
markets, building capacity at the management level in
50 Mako, 2010