What is the added value from market-based financing, and why should you consider it as an alternative or complement to bank-based financing?
Capital markets (including private equity, loan funds, trading platforms) play an important role in supporting economic growth as market-based finance enhances the efficiency of the Company financing mix.
With funding sourced from capital markets, either exclusively or as a complement to bank-based financing, your Company can grow quickly and take on new projects and/or expand geographically with more flexible and efficient funding models. These advantages come along with a potential huge appreciation of your brand by clients, suppliers, and other stakeholders. This credibility is usually perceived as a Company´s commitment to more consistency, accuracy and safety. In the case of Equity, your Company may be funded while decreasing leverage, thus mitigating the negative impact on financial ratios and the long-term maturity risk of holding a portfolio entirely composed of loans. Additionally, market-based financing enables risk rebalancing, which will improve the risk profile of the business and better manage the economic cycles.
Market-based finance is also a good option from an environment, social and governance (“ESG”) perspective, as it encourages the alignment of your Company´s policies with best market practices in this fields. Capital markets can also be very adaptable to the specific characteristics of each Company and offer great flexibility in terms of pricing and maturity, as well as access to a wider investor base. They can also offer funding for innovation projects with a risk profile that may not fit into the typical models for granting bank loans. Furthermore, with a wide range of funding instruments offered, companies benefit from more financing alternatives, entrepreneurs are able to increase the liquidity of their personal assets, reducing risk and investors in capital markets diversify their portfolios and financial risk. Market-based finance also triggers a virtuous cycle between entrepreneurs, companies and investors.
For companies looking for market-based finance, the process of planning and preparing for market access has many benefits as this process will provide the Company’s management with the opportunity to deeper analyze the Company’s strategy, as well as, to receive valuable feedback from market players with new perspectives, which ultimately lays the ground for better decision making. This feedback will be received not only during the process, but after it, opening a communication channel with stakeholders, including investors, analysts, and the media. Additionally, the reporting and corporate governance protocols arising from entering the market will encourage greater professionalization, efficiency and transparency, attracting the attention from existing and potential new investors. As consequence of increased transparency, the Company’s image and prestige, nationally and abroad, will be boosted, as well as its credibility with clients, suppliers, business partners, and financial institutions.
You may currently be thinking on how you can successfully execute this process to capture the opportunities referred above. This guide was prepared to help you confidently face this process by managing its impacts and choosing the right partners to go along you in this challenging but fruitful path. CMVM will be available for any clarification you may need regarding the matters contained in the guide, as well as a close participant during the process of accessing to the market.
Capital markets bring buyers and sellers together to invest and divest in shares, bonds and other financial assets. Market-based finance promotes the transformation of ideas into entrepreneurial initiatives and small businesses into big companies.
Capital markets have evolved and now offer a wide range of products to fill the different needs of companies, while providing information transparency and legal certainty for all market participants and enhancing liquidity of all products traded.
Their main functions are to:
Finance the economy
Capital markets offer continuous availability of funds to finance companies, by linking companies, savers, and investors, facilitating transaction settlement, promoting saving habits, and channelling part of the savings into new and attractive investment opportunities. Such process contributes to the financing of the economy while improving the effectiveness of capital allocation, supporting innovation, and facilitating entrepreneurship.
Promote liquidity in the markets
Capital markets provide the possibility to invest in securities with different risk profiles, appealing to different investors’ preferences. Accordingly, the capital markets facilitate the movement of capital and liquidity, given the possibility to invest and divest through the purchase and/or sale of the securities in the market. Entrepreneurs may find in capital markets an alternative to reduce their risk, as they can transform parts of their business assets into liquidity.
Provide funding alternative
Capital markets minimize transaction and information costs for Issuers and Investors, and provide an alternative source of funding that may be used in addition to bank finance.
Efficient price discovery
Capital markets enable assets’ pricing, by having prices determined by matching supply and demand, which is (almost) immediately present, based on the information available on the companies. On some trading platforms, price formation takes place in real time.