Rude VC: Euronext’s SME Marketplace

Rude VC: Euronext’s SME Marketplace
Finance

imagesLast week NYSE Euronext announced the imminent launch of an “SME Marketplace.” Managed by a dedicated subsidiary set up in France, it will have its own brand, operating budget and team.

It is hard to understand exactly what this means. Judging from the Euronext press release, the initiative appears to represent more of a hierarchical restructuring of reporting lines than a new dedicated exchange.

Apparently, the Marketplace will encompass companies that are listed on the B & C compartments of Euronext, as well as the Alternext listed companies in Paris, Amsterdam, and Brussels, a total of 800 public companies, essentially small and mid-caps. It does not appear, however, to involve any kind of merger or aggregation of the three exchanges.

If this move merely represents an administrative reshuffling, that would be a pity. However, to the extent that this launch represents a concerted effort to improve accountability, visibility, and by consequence, trading volumes, there may well be some benefits in this.

I’ve long been a skeptic of small French tech companies going public too early. The Alternext tends to be the market of choice for such companies: it is lightly regulated (technically ‘unregulated’); there are a handful of local investment banks that will serve as listing sponsor for a modest fee; and raising capital in the range of 10M€ is fairly straightforward (albeit still requires a formal filing process and a successful sales effort of securities to the public market).

My beef with small firms going IPO is that after the initial capital injection occurs, many companies fall into some sort of purgatory. The trading volumes, and hence liquidity, are low. Two detrimental consquences ensue. First, low trading volumes often handicap a company’s stock price, resulting in a market cap that sits below the intrinsic value of the firm. The danger of a consistent situation of undervaluation is its demotivating effect on management, employees, and shareholders. It also taints any discussion with potential strategic acquirers with whom hypothetical negotiations would inevitably anchor toward the low market cap.

The dirty little secret of French VCs

The second consequence is a dirty little secret in the French retail VC world. It is not uncommon for French VC funds to push their venture-backed companies toward an IPO. The ostensible justification is the quest for an exit. However, barring a few limited exceptions, an IPO on these smaller markets is not an exit. Far from it. The trading volumes are simply not sufficient to enable a significant shareholder like a VC to sell its block of shares, even over the course of several years. Yet, this is where the dirty little secret comes in: VC’s that IPO a portfolio company while remaining a shareholder can still assess management fees to the funds’ investors. Furthermore, since management fees are calculated on the net asset value of assets under management, a VC can effectively increase its take in management fees if the IPO valuation of the company is higher than its initial investment cost (which is almost always the case). It’s the best of both worlds for a VC management company: boast about an exit while still milking high management fees.

A re-branding effort of the Alternext and its lightly traded counterparts B & C of the Euronext, with a veritable commitment to provide resources to and to promote the exchanges’ listed SMEs, would be a welcome boon to the investors and the companies who are floundering today on the public market.

6 Responses

  1. Avatar
    Philippo Pogio

    About your “dirty little secret of French VCs” :

    * FCPI’s (French retail funds) management fees are not calculated on the basis of the fund’s Net Asset Value. As a journalist, you could have done the minimum research before writing this. By-Laws (or DICIs) of FCPI are public documents that contain articles that describes how the management company of the fund is calculating their management fees.

    * 95% of the FCPIs holding a stake in a company listed on Alternext or Euronext B&C, with limited liquidity are selling their stake outside of the market, on what we call in France “vente en bloc”,

    * FCPIs have a hard cap of 20% on listed companies (legal quota) which means the potential dirty secret is not only very limited but also subject to various quotas and limitations that makes impossible to manage a fund using this kind of “dirty secrets” as a way to mananage funds.

    I hope you are not paid to write that kind of article.

  2. Avatar
    mark bivens (@markbivens)

    looks like i hit a nerve ! i expected this. to respond to your remarks:
    1. i’m afraid you’re mistaken. they are indeed calculated on the basis of the “valeur liquidative”, which i loosely translated as the net asset value.
    2. is 95% a scientific figure or just your swag? regardless, this doesn’t change the point i made.
    3. sorry, you’re wrong again. there is no legal cap on FCPI’s investments in Alternext listed companies.

    i do sincerely appreciate your comments, but you went 0-for-3 on this one.

  3. Avatar
    PP

    OK, let’s do it step by step :

    * on the 20% quota : section II of article L 214-28 of the French Fiancial and Monetary Code. Here is a link for your convenience :
    http://www.legifrance.gouv.fr/affichCode.do;jsessionid=13E8E77BB5FD722372ECF7A68CC26206.tpdjo05v_2?idSectionTA=LEGISCTA000024421693&cidTexte=LEGITEXT000006072026&dateTexte=20130513

    * on the NAV point: I am afraid you are quite junior in this VC industry and you are confusing different notions. I think if ou want to avoid being more ridiculous, you should concentrate on your business paln analysis and avoid the subjects you have no understanding at all.
    I confirm the FCPI do not, in a large majority, invoice their management fee on the basis of the NAV of the financed companies.
    May be you should juste scout on the internet the By-Laws of any FCPI other than the one of the company you are working in andf have a look on the article realted to the Management Fees.

    * on this 95% thing: maybe you should just think about it a little more objectively.
    How to exit a company liste on Alternext with something like 5 shares sold per day, and you own several millions of share ?

    Think about it 😉

    I repeat what I said previously, your article is full of confusions, mistakes and approximations.

    Cheers

  4. Avatar
    PP

    I thought that maybe, reading the French law is too complicated for you so I found this :

    http://www.afic.asso.fr/Images/Upload/Juridique/flash27_0407.pdf

    Please read it crefully, you will find quite fast this 20% quot in listed companies (below < 150M€ market cap).

    Are you sure you work in the French VC industry ?

  5. Avatar
    PP

    You will notice that this 20% quota in listed companies has been introduced in French law back in ……… 2007 !

    You just are 6 years late !

    But as we say in French: “mieux vaut tard que jamais”

  6. Avatar
    PP

    No comments, nor answers to my posts, after several weeks. It seems you become really invisible when you contradictor proves you are wrong. And what kind of proof is better than the law ?

    I think the score is final: 3-0 for me, thanks for playing 😉

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