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Recognising opportunities in challenges

25 Nov 2019

Recognising opportunities in challengesRenata Bandov, Head of Pre-IPO & Capital Markets, Deutsche Börse AG

IPO can be a long-term stable and independent source of financing – it is up to entrepreneurs to defend their competitiveness

Renata Bandov, Head of Pre-IPO & Capital Markets, Deutsche Börse AG

Small and medium-sized companies (SME) continue to be one of the main pillars of the German economy. Almost 32 million people or more than 70 per cent of all employed persons were employed by SMEs last year – a new record. Our economy is therefore dependent on a strong, functioning SME sector. In particular, because German SMEs contribute to the strengthening of numerous regions outside the major metropolises through their decentralised distribution.

Small and medium-sized enterprises, ranging from small independent businesses to established family businesses, have always managed to progressively deal with changes and requirements. Disruptive changes, however, present new challenges and opportunities for SMEs: industry 4.0 means a far-reaching change for all of us. Our daily lives, products and processes are becoming more digital, networked and information more transparent. New technologies such as blockchain, artificial intelligence or autonomous driving are opening up new fields of business for small and medium-sized enterprises, including the change of existing business models. Here, too, SMEs will find a way to take advantage of these opportunities. 

One topic in which SMEs still present themselves traditionally, however, is their own financing – through borrowed capital or equity. This can be the right financing solution, especially in the current low-interest environment and in a still good economic situation. However, anyone who is thinking ahead and wants to be able to face major upcoming challenges should also consider the topic of going public as a realistic financing option and open up to new investor groups.

This is because if companies, that have been managed across generations, can demonstrate strong yet sustainable growth and have already successfully survived difficult market phases, important prerequisites for effective capital market financing are already in place.

SMEs must always show they have the courage to change. This also applies to financing their own company. Classic bank financing may not be sufficient for a strategic, future-related orientation of one's own company and the associated extensive investments in new technologies, possibly coupled with expansion or internationalisation plans. Other options, such as internal financing, may also reach their limits in this case. In order not to obstruct one's own development opportunities, the question of a suitable financing strategy arises – and the stock market can provide an important building block.

The raising of capital via an initial public offering (IPO) enables the company to obtain large-volume and recurring financing opportunities through capital increases. Through an IPO, companies can raise the financial resources that digital and dynamic markets require. A higher equity ratio also has an impact on the creditworthiness of the company and can therefore bring advantages in future discussions with lenders. Once access to the capital market has been established, debt capital can be raised via bonds in addition to equity capital.

In addition to the financial effects, there are other effects that listed companies may use for themselves. Recruiting skilled workers currently presents employers with a challenge, which they can master somewhat more easily with a stock exchange listing due to the  increased public awareness of their own company. This primarily benefits fast-growing scale-up companies and SMEs, which are often located outside of conurbations and their existence is often not sufficiently anchored in the minds of potential talents. In this context, the IPO also brings added value for existing employees: company shares become tradable so that employee participation programmes can be implemented. This promotes employee motivation and loyalty to their employer.

The next generation

An IPO is also an option if a successor is missing in the event of a pending generational change. The opening towards the capital market enables the previous owner to gradually withdraw from management and to continue to make his experience available to the company.

For family businesses that wish to maintain a high degree of control over their own business despite going public, the legal form of a partnership limited by shares (KGaA) is a suitable option. Henkel, Merck, Hella and Ströer are good examples of this from very different sectors. They show that the IPO preserves the entrepreneurial freedom of action and at the same time secures the financing of the company's own corporate strategy. 

When it comes to access to the capital market, Deutsche Börse offers individually tailored stock market segments to suit the size of the company. Two years ago, it created Scale, a segment especially for small and medium-sized companies. In order to be included in Scale, companies must meet selected key figures that ensure a certain degree of stock market readiness. Deutsche Börse supports Scale issuers with targeted services for investor relations and communication with the capital market. These include offers such as research reports or Investor Targeting, which brings companies together with investors. The Prime Standard, on the other hand, the segment with the highest transparency requirements, is aimed at established companies and large corporations that wish to address international investors. Listing in the Prime Standard is also a prerequisite for inclusion in one of the selection indices such as DAX, MDAX or TecDAX.

Whether start-up, medium-sized company or group: entrepreneurs have it in their own hands to ensure their competitiveness and to recognise opportunities within challenges. As diverse as the reasons for an IPO can be: the strategy and development of one's own company must be at the forefront. An IPO can be a stable and independent source of financing in the long term and can provide more attention and greater attractiveness as an employer.

This bylined article was first published in Börsen-Zeitung (in German) on 23 November 2019.

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