Enternext: A new stock exchange dedicated to microeconomics !

Schild 115 - Investor

In these times of scarce credit, the issue of financing has become crucial for many companies. From SMEs (Small and Medium-sized Enterprises) to multinationals, companies are focused on their cash flow. With a common imperative: to avoid the liquidity crisis, i.e. the inability to cope with immediate disbursements, from supplier payments to employee salaries and loan maturities. Because even a profitable company can find itself in this uncomfortable situation, with disbursements and receipts rarely coinciding.

In France, corporate financing follows an established order. While the financing of innovative companies is the prerogative of private equity firms, while multinationals are financed largely through financial markets, SMEs/ETIs have traditionally been financed through bank loans.

Following the 2007 financial crisis, banks were subject to regulatory constraints (Basel 3) reducing their lending capacity. As SMEs are the most fragile customers of banking institutions, they are the ones who suffer from this capital outflow. As a result, the stock exchange, and therefore the financial markets, appear to be an alternative solution for financing mid-cap companies.

Companies have the choice between going to the financial markets, drawing on their own capital, using bank loans or using private equity.

With regard to the use of financial markets, there are two forms of financing:

– debt or

– the issuance of shares

If the company chooses debt, it issues debt securities called bonds. This can be summarized by the promise to pay a fixed amount each year unless it is in default and to repay the nominal amount at maturity of the security.

As for the issue of a share: it consists in granting a right to the future (uncertain) profits of the company, associated with a right to vote at meetings and a right to information: a shareholder owns the company. If the company issuing shares does not make a profit or distribute dividends, shareholders do not withdraw money from the securities they own when bondholders continue to receive the promised interest, unless the firm fails. In addition, in the event of bankruptcy, bondholders have more rights than shareholders over residual assets and can therefore more easily recover their investment.

On the other hand, companies generally favour a third option when it is within their reach: the use of equity capital, i.e. the capital initially set up by shareholders plus undistributed profits. In other words, firms prefer when they can pick from their cash registers rather than using the markets. These are long-term resources. This equity is broken down into contributions made by shareholders and past profits placed in reserve. They represent an unlimited resource in time for the company, since they do not have to be reimbursed at a given time and free of charge insofar as their remuneration is not in theory at least not mandatory. Remuneration is provided through dividends paid to shareholders in the event of the company’s success. A sufficiently high level of equity capital is therefore a guarantee of stability for the financing of a company.

However, shareholders do not necessarily have sufficient capital to finance all long-term assets. In addition, the lower the amount of equity capital mobilized, the greater the return on equity.

The financing of fixed assets will therefore often be supplemented by long-term debt, as companies can also take out a bank loan.

As for private equity, it is a fundamental issue to encourage the emergence of young, innovative companies that will be France’s growth. Indeed, French companies and particularly SMEs frequently face a recurring difficulty: the narrowness of the French stock market and the shortage of long-term capital that hinders their growth. In this context, to increase its equity without losing control of the company, the use of risk capital is often an optimal solution.

Private equity is the acquisition of a generally minority stake in the capital of mostly unlisted SMEs. It is, therefore, an equity investment. It is organized in 4 phases:

  • Seed phase: during the start-up phase, the company needs to raise funds to invest while business income is low or non-existent.
  • Development phase: it occurs when the break-even point is reached and profits appear. These funds are intended to increase production capacity, develop the sales force, new products and increase working capital. It is a question of raising “development capital”.
  • Transmission phase, which marks the end of the initial logic for managers. During this phase, investors recover their funds and realize a capital gain. The transmission capital or LBO “Leverage Buy Out” is used. In 2008, 81% of the companies supported by this type of financing were SMEs.

As the terms and conditions for financing a company in general and for SMEs have been defined, let us now understand the issue of creating a dedicated exchange.

Small and medium-sized enterprises (SMEs) have for years been the subject of increasing attention from both public authorities and economists. As important players in the economy in terms of innovation and job creation, they could be even more so if they managed to find the conditions for their development under better conditions and, in some cases, to establish themselves as world leaders.

SMEs are the backbone of all economies and are an essential source of economic growth, dynamism and flexibility in both advanced industrialized countries and emerging and developing economies. They constitute the dominant form of company organisation, and represent between 95% and 99%, depending on the country, of the company population. They account for between 60 and 70% of net job creation in OECD (Organisation for Economic Co-operation and Development) countries. Small companies play a particularly important role in bringing innovative techniques or products to market.

SME financing is provided in our country by four major actors, institutional investors, mainly banks and insurance companies, public authorities, large companies and individuals.

Small and medium-sized enterprises (SMEs) are enterprises whose size, defined by a set of criteria (mainly the number of employees), does not exceed certain thresholds. The other size criteria used are annual turnover, and sometimes an independence criterion is also used, expressed as not belonging to a too large group. SMEs consist of companies with less than 250 employees and: – whose turnover does not exceed 50 million euros or whose annual balance sheet total does not exceed 43 million euros – which are independent of a large group (not being 50% or more owned by a group with more than 250 employees).

SMEs launching new investment projects are now facing reduced credit from commercial banks due to their lack of liquidity. However, since 2008, companies have increasingly relied on bank credit, while financial market financing has collapsed.

Given that the granting of credit to companies is tightening, the objective is to create an alternative source of financing to that of banks. As a result, announced on April 30, 2013 by NYSE Euronext Group, the exchange dedicated to small and medium-sized companies and mid-cap companies, called “EnterNext”, opened its doors on May 23, 2013, with the objective of taking over from banks and facilitating the growth of SMEs and ITEs. French SMEs have difficulty growing and often suffer from a comparison with the Mittelstand, the famous industrial fabric of German SMEs.

EnterNext was created to facilitate SMEs’ and ETIs’ access to capital markets but also to meet the financing needs of SMEs and ETIs, in addition to bank loans. The purpose of the new exchange is to represent an alternative financing method for companies that wish to open their capital to investors on the markets and give SMEs and ETIs the means to face competition from other domestic and foreign companies.

EnterNext is therefore a subsidiary specifically dedicated to small and medium-sized companies and Intermediate Size Enterprises (ITEs). This new scheme is aimed at companies with a capitalization of less than €1 billion. It offers them the possibility, under certain financial communication conditions in particular, of being listed on both the regulated market (compartments B, mid-cap and C small caps of NYSE Euronext) and the organised market (Alternext).

750 Euronext and Alternext companies are concerned in France, Belgium, the Netherlands and Portugal. In addition, Enternext’s CEO, Eric Forest, expects 80 listings over the first three years of the stock market’s activity. This exchange aims to have offices spread throughout France in order to attract companies located throughout the national territory; but will also target SMEs in all European countries, most of which do not have a tool like this one. The question now is whether Enternext is a sufficient and effective means of financing SMEs and ETIs?

The future will tell us!

Marylin BAKOULA

Marylin BAKOULA


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