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Attracting retail investors to EU capital markets - Financing of the EU economy
Attracting retail investors to capital markets: more than a matter of regulation
By Lemmers Niels - Managing Director, Dutch Shareholders Association (VEB)
These are challenging times for retail investors. In a time where individuals are expected to take more responsibility for their own financial security, interest rates are at historic lows, growth rates are just above zero, and a corporate bond market bubble lurks. Add to this the unpredictability of stock markets due to stagnating economic growth in emerging markets. What appears is a rather gloomy picture.
On a more positive note, there are ample companies, notably SMEs, with significant growth potential. These would be an attractive addition to the portfolio of retail investors. However, capital markets seem to be unable to connect retail investors that seek investment opportunities that generate above-benchmark return with companies that are in desperate need for finance to fulfil their growth potential. Markets appear to have turned more and more into trading platforms primarily providing liquidity to large multinational companies. Their traditional role- financing small, local companies – has faded into the background.
There are various reasons for this. First of all, listing is extremely costly nowadays, not least because of transparency requirements (e.g. prospectus). Often private companies are also anxious to lose control and enter into the “hassle” of having to deal with a deconcentrated group of shareholders whose rights have been expanded over the years. Banks on their part are reluctant to assist relatively small and illiquid companies in the listing process.
But there is, at the same time, also a clear lack of confidence among retail investors. Since the financial crisis the appetite for investment in individual companies has declined, aggravated by the frequent debacles at listed companies (e.g. Volkswagen). It is no wonder then, that many retail investors do not feel comfortable investing in companies on which relatively little market information is available and which are not recommended or brought to their attention by brokers, financial advisers, analysts and the media who focus almost exclusively on blue chips.
Without doubt the potential of retail investors to stimulate the real economy is not exploited sufficiently. And this potential is huge. Not only because of the size. Retail investors are, contrary to popular belief, not inherently risk-averse or short-term oriented. A perfect fit with companies that are in their early stages of development and need long-term financing.
In the end, we rely on the market to find ways to put savings to productive use.
The CMU is an initiative European Investors fully supports and I hope it will have the envisaged effect: to better connect savings and growth. Notable is the revision of the prospectus. While being a burden for issuers, the prospectus’ usefulness is limited at the moment. What it has become, is a liability management tool. For example, the prospectus drawn up by ABN AMRO consisted of 700 pages. The risk-factors section comprised 56 pages of generic risks that could just as well be in the prospectus of any other bank in Europe. The revision of the prospectus regime could potentially kill two birds with one stone: alleviate the burden for issuers and, at the same time, increase the usefulness of the prospectus. However, there is a limit to what can be achieved by tweaking the EU regulatory framework. In the end, we rely on the market to find ways to put savings to productive use.
As an example, imagine a fund (with a size of for instance €2 billion) taking a sub-49% control in a number of private companies, those that need finance but are not yet ready for a listing. The manager of the fund creates an ecosystem of specialized advisers that, at a reduced rate, help these companies to prepare for all the obligations that they will face in case of a future listing. In the meantime, the owners of the companies maintain full control and do not have the interact with the fund’s individual shareholders. The fund itself is listed on the exchange and sold to retail investors who can freely trade the fund’s units on the market.
These kind of innovative market solutions could help to attract retail investors as well as high-growth companies to capital markets and enable private individuals to get decent returns in these gloomy and challenging times.