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Tuesday, October 6, 2009

The notion of a secondary market for SME's in The Caribbean!

Access to capital for Small and Medium Sized Businesses (SME's) has been a consitent challenge for economies. Lack of adequate access to financing can have a serious effect on local businesses. For example, some companies borrow money for payroll. Some companies, borrow money, or, use leverage for various business expansions; e.g., a new warehouse, external trade expenses, upgrading equipment and the like.

What ever the reason, whether a company is large or small, access to capital is a component of doing business and national development. However, SME's, sometimes, find it difficult to secure financing through the formal market mechanisms; commercial banks, insurance companies or, in some cases, credit unions.

Financial institutions in the formal sector tend to ask for up to date financial activity of your company, a general outlook for your business as well as, in some cases and is now increasingly asked for, auditing of your company from an external, unbiased source.

Generally speaking, SME business structures tend to be family owned with the owners being very protective of the money floating around the till. They normally don't like any and everyone in their business, even though these family owned companies are very structured and do have to show some sort of financial fitness, for them to be presentable to lending institutions. Also, because they have "gotten this far without it", tend not to update their management and operational practices to suit rapid changing market trends- this lends to a financier's fear of your company's viability, if you happen not to have a sound succession plan, or if something drastic were to happen, for an extended period of time, to the organisation's chief executive.

In light of this, some companies go to the informal sector to access capital for their businesses; i.e., a multi-billionaire family member or friend who actually cares about your success, the local lotto dealer who happens to have a no strings attached policy, or the neighborhood "pharmacuetical provider", who has been champion on the one end for persons who need a little extra help and a "probable" boon to local authorities, depending on your level of cynicism, on the other.

To combat this, and to simultaneously develop national stock exchanges, some countries have moved towards putting in place a specialised capital market for SME's. The reason for constructing a secondary market - also called a Junior Market or an Alternative Market- is very straight forward; increase the avenues and access to financing for SME's

Some notable secondary markets in the world are The Alternative Market (Alt-M) in the United Kingdom, which has been in operation since 1995 and The American Stock Exchange, which has evolved over the years to find its niche in providing services to smaller capitalised (cap) and mid-cap companies.

However, recent developments in Jamaica give us some idea of how far the idea and the promotion of specialised markets for SME's has come. While the junior market on the Jamaican Stock Exchange (JSE) was "officially" launched in April of 2009 and several SME's have expressed interest being listed, none have yet do so.

This raises one critical issue with staring a secondary market; that being the overall actual interest in having one.

As said prior, there has been some reluctance on the part of SME's in Jamaica to want to be listed on the jr. market, for what ever reason- in addition to what was stated as their general structure earlier- even though an amount of SME's have initially expressed interest and worked with the JSE's steering committee on the matter. Considering, even relatively, SME's and micro-enterprises are a staple of developing, small markets, this does not neccesarily mean, however, that their CEO's have small and least developing outlooks on the economy or finance- even though they may not have the will to act promptly.

In order bypass this bottleneck, there must be, as a pre-requisite, pre existing arrangements with companies that not only indicate that they are ready to list on secondary market, but also made to pre-committ to being listed and steps taken to ensure that they are, operationally, ready to roll and understand the risks involved in relation to the overall standards any local stock exchange requires of them, when countries are looking forward starting a secondary market.

Basically, not only must the leg work with regard to the market research be done, but also provisions made for the agreements to be signed, in principle, with what the initiative is and what is expected from both parties and work towards this in the meantime before a secondary market is initialised.

Another issue is if whether or not there is any benefit from local investors who wish to buy shares in a small or mid-cap company, enough to expend resources on brokerage fees and manpower, to actually buy-in?

This can be easily mitigated if there is liberalisation in the financial services sector, which increases the amount of brokers in the industry that able to provide service and perhaps, tied into the formal sector providers already providing financial services in some form or fashion. There can be criteria for prospective brokers who wish to only buy small or big or both, respectively. With this regard, patient capital must be required as well as encouraged and the insurance backed plans and specialised vehicles, for investors, must and as a consequnece, be a product in play.

In addition, and dove-tailing off of broker/dealer expansion, a specialised secondary market must be relaxed with regard to the stringeny of the prospectus companies wishing to participate must put forth to the stock exchange, as well as sensitive to company ownership who wish to keep their company, predominatly, family owned and away from any hostile takeover.

Simply limmiting the amount of shares SME's are allowed to offer in their public offerings (IPO's) as a percentage of their market cap, would solve this issue- depending on the risk both investor and owner wish to take in their exchange, under other forms of specialised arrangements.

While there are other operational and developmental concerns, I have discovered that those mentioned in this article are foremost.

The benefits, overall, are evident and irrefutable. For starters, companies will have a reason and incentive to upgrade, especially if the local stock exchange offers, as a service, management consultancy services. The capital market would have a chance to expand and develop more sophisticated products. Wealth will be increased through returns to investors and through more efficient and accountable companies that learn to squeeze profit margings. And, more importantly, a greater amount of persons will, automatically, become more educated about financial services and matters.

Everyone wins-- or something to that effect!
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