Supporting the new wave

  • Thirty four private Equity firms

    Partnering ELITE. There are 70 advisers on board, ad a secure, moderated social network through which ELITE firms can connect with their peers.

 

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Smaller companies are the backbone of economic growth and London Stock Exchange Group supports them on AIM, ELITE, STAR and the High Growth Segment, as David Waller explains.

The spotlight may have shone on IPOs by companies such as Countrywide, Direct Line and Royal Mail in 2013, but global economic prosperity is not just about big, well-known names. Out in the wings, dynamic growing businesses are making progress too. And, through initiatives and markets such as AIM, ELITE, STAR and the High Growth Segment, London Stock Exchange Group (LSEG) can train, support and nurture a vital and vibrant generation of companies.

In the UK, for example, a wave of innovative businesses is emerging, from digital design in London’s Tech City to graphene manufacturing in Manchester and new media in Sheffield and Newcastle. These firms are growing fast. Often backed by venture capital, they are a new breed with new demands, which have themselves inspired innovation in the markets.

In March 2013, for example, LSEG launched its new High Growth Segment, for fast-growing UK and European companies that are not yet ready for the Main Market’s Premium segment. The High Growth Segment is designed for companies with compound growth of at least 20 per cent over three years that need a minimum free float of just 10 per cent to IPO rather than the 25 per cent required for a Premium listing on the the Main Market.

“This new segment can help a company transition from private to public more seamlessly,” says Marcus Stuttard, Head of UK Primary Markets and AIM. “Venture capital backers can float these companies without having to give up a large share, enabling more companies to consider flotation as a viable avenue for growth.”

Learning from Italy

The rationale for new schemes such as the HGS is amply demonstrated by the success, in Italy, of the ELITE programme. Since launching in April 2012, the Borsa Italiana scheme has welcomed at least 30 companies every six months. A unique partnership system designed to make selective private SMEs more attractive to investors, ELITE offers training, change management support and funding advice.

“ELITE is innovative in a very traditional market. It’s the first time that a stock exchange has built long term relationships with private companies, rather than public companies. And we’re not pushing them to go public, rather providing them with a set of value added services: their final destination may just as easily be private equity investment, bonds issuance or a strategic partnership to fuel further growth,” says Luca Peyrano, LSEG’s Head of Primary Markets in Europe.

A look at the current ELITE crop shows the scale of its ambition. The youngest firm, Neomobile, is seven years old; the oldest, Marchesi de’ Frescobaldi, a Tuscany wine producer, traces its history back seven centuries. And while the smallest, WIIT, was worth €7.5 million in 2012, the largest, food company Granarolo, was worth a hefty €923 million. ELITE’s geographical spread is equally wide: at least 10 companies hail from Campania in southern Italy, an area not traditionally well represented in the ranks of listed firms.

Aside from the direct benefits of the ELITE programme, companies also gain international exposure and media opportunities, as well as far greater networking potential. There are 34 private equity firms partnering the scheme, 70 advisers on board, and a secure, moderated social network through which ELITE firms can connect with their peers.

“The stock market traditionally reflects the health of the entire industrial and social landscape,” says Peyrano. “We’re working to improve the landscape, rather than merely reflecting it.”

It certainly seems to be working. By the end of 2013, more than a dozen ELITE companies were looking at IPOs in the medium-term; six were planning to issue bonds; six had completed private equity transactions, and four had been involved in M&A activity. In October 2013, the average revenue of the ELITE group was €70 million, with an average growth rate of 13 per cent. Considering that growth across Italy was in negative territory during 2013, these are particularly impressive results.

Though ELITE has proved to be such a success, it is not the only initiative designed to benefit high-growth companies in Italy. STAR, which launched in 2001, sits between AIM Italia and Italy’s Main Market, and aims to give more visibility to listed companies that are small yet high in quality. With strict rules around corporate governance and transparency and a minimum 35 per cent free float, it is designed to allay fears commonly expressed by investors when dealing with smaller entities.

“STAR’s set-up gives a clear message to investors that these small and midsized companies are behaving like large companies and adhering to the best industry standards,” says Peyrano. “And every single year STAR companies have outperformed the rest of the market.”

Indeed, from the beginning of 2013, STAR posted a rise of 44.6 per cent, against the 16.1 per cent increase posted by FTSE Italia All Share. “When you convince a small company to be more transparent and improve its governance standard, you immediately see the differences in investors’ attention,” he adds.

AIM ahead

Back in London, AIM remains the go-to market for small and growing companies, welcoming 70 new companies to market in 2013. The AIM 50 was the best-performing UK index in 2013 while the market in general has seen an upturn in activity, thanks to improved economic confidence, an inflow of money into equities and an increase in private equity and venture capital exits.

A number of stars stand out. Tech company Plus500, for example, has seen its share price jump 400 per cent, while biotech firm Retroscreen Virology is up 200 per cent.

“Since April last year really there’s been an increase in strong companies coming to the market from a wide range of sectors – in particular software, biotech and technology. Successful IPOs show other companies the benefits of floating and this strengthens the pipeline. Since launching in 1995 we’ve consciously ensured the AIM environment is less prescriptive and more tailored for small or high-growth businesses, compared to the Main Market. The market and pipeline is very healthy,” says Stuttard. It has also experienced some fiscal developments. In April 2014, the Government abolished stamp duty for companies on growth markets including AIM. And in August last year, AIM shares became eligible for inclusion in ISAs, which were previously open only to Main Market shares.

“We’re always looking at initiatives to widen the base of investors able and willing to support high growth businesses,” explains Stuttard. Such developments highlight LSEG’s commitment to the high-growth sector and, in turn, to broader economic growth.

“Ensuring that our markets are innovative and supportive of growth helps to show companies that exit options are out there, which reassures investors across the board, be they venture capitalists, business angels or friends andfamily making early stage investments,” says Stuttard. “This is very positive, and it is vital for economic growth.”