Part 2 of the Alternext liquidity conundrum

June 18, 2013

Last week I wrote a fairly critical piece about France’s IPO market for tech firms. helix-magnifySpecifically, I claimed that the Alternext, which is the main market on which VC-backed tech firms can go public in France, does not represent an adequate avenue for sustained financing and liquidity potential for these firms.

Rude maybe, but surprisingly uncontroversial

I expected a backlash to my post, notably from the tech investment banks whose business is to take such tech firms public as listing sponsor. Indeed, there was some, though to my surprise, even those people who make their livelihood from tech IPOs, agreed with my assertions. I bring this up not out of vindication, but rather because this highlights two factors worthy of reflection. First, the lack of sufficient tech market liquidity is the sad truth of affairs, and I submit that we all have a vested interest to ameliorate the situation.

Furthermore, a second factor became clear which may provide a clue to possible solutions to this liquidity problem: tech equity analysts in France are few in number. It is the very job of equity analysts to follow the listed companies in a given sector, to explain them to the public, to provide informed analysis, and as a by-product generate more public participation in the stock market, and hence liquidity for the stocks.

By way of rough comparison, the six highest volume stocks on the Alternext are followed by only one or at most two equity analysts. A random basket of Nasdaq-listed companies of similar size boast a range of 5 to 14 equity analysts following their stocks.

Coming back to that silver lining…

I also wrote last week about a silver lining amidst the dismal liquidity desert on the Alternext: life science companies. Last month life science firms accounted for over 70% of the Alternext’s trading volumes (by value), and they represented four of the top six volume capitalization firms.

So why do biotech firms have better liquidity than say, ICT firms ?

As a VC specialized in ICT investments, I really wish I knew the answer but I don’t. Here are a few theories of possible explanations:

  • It’s often easier to understand the story of a life science firm’s mission. Everyone can understand the value of a breakthrough drug promising to cure cancer more easily than the next generation internet advertising technology.
  • Similarly, a breakthrough cancer drug firm announcing a successful clinical trial can generate euphoria among the public and spur high interest in buying the stock. Barring outliers like when Apple released its first iPad, news flashes from ICT firms tend to be much more mundane.
  • The very nature of a life science firm’s upside potential (e.g. cure cancer and you’ll make billions) also makes it easier to swallow a high valuation. The higher the valuation, the broader the spectrum of investors for the stock (large institutional funds can only invest in firms above a certain size for capital deployment reasons).
  • Perhaps another factor is that, due to the long development cycles and uncertain timeframes, many life science companies, like biotech firms, do not make short-term financial forecasts (i.e. there are no revenues to forecast in the early years). Public ICT firms, in contrast, always have revenues, usually profits, and often even set expectations for next year’s performance (explicitly or subtly). The nice thing about not setting revenue expectations is that the market is never disappointed about missing them.

There are undoubtedly other, better explanations about the higher liquidity for listed life science firms, and I invite anyone who has some insight to share their wisdom on the matter.

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posted in venture capital by mark bivens

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  • Thanks Giuseppe for the very helpful historical perspective. I couldn’t agree more with your point about consistent IR and PR, especially internationally.

  • Giuseppe Albanese

    Hello Mark,

    I have read with interest your review of the never-ending debate around small caps’ lack of liquidity and would like to give my contribution.

    I think my view can be an interesting one having started my career as an equity analyst covering big and mid caps and
    having being part of the growth stock listing revolution back in mid nineties where a group of VC’s, including some of your visionary colleagues, decided that in order to give visibility to growth tech companies, Europe needed its own Nasdaq.

    As a result Easdaq was born with the aim to provide the widest possible investor audience across Europe, and the US for those who were able to apply for the dual quotation.
    Most importantly Easdaq introduced the market-making facility with trading firms competing and taking risk on their books for small caps too, which is the most important feature that underpins trading of small caps on Nasdaq.
    Regardless of the sector, after 2 years of existence Easdaq was able to line-up an average of 8 market-makers per stock (if my memory does not falter) most of which were also covering the stock with in-house analysts.

    The sector approach was the key driver. There were Belgian brokers covering Italian stocks and vice-versa and French brokers covering and trading UK stocks, to give you an example. In addition to traditional brokers, US specialist market-making firms
    moved to Europe to participate to this market including the likes of Knights Securities and Spear, Lead, Kellogs, to the benefit of market liquidity.

    Clearly those companies that went through the public offering process had higher trading volumes and frequency than those who decided to go for institutional placement only.

    At some point n ationalisms were stronger than a vision of a truly European venue for growth stocks and brokers
    reverted to national platforms for domestic stocks, most of which lost their European visibility.
    I have not seen since similar initiatives dedicating such efforts to the benefit of growth stock financing and trading.
    Easdaq was the first platform listing biotech stocks in Europe with an extraordinary participation of retail investors, something
    that I have always find difficult to understand given the natural aversion for risk for this investor profile.

    Other life science stocks had wonderful runs and impressive liquidity on local exchanges, namely Nicox or Morphosys in Germany. Once again that was most mostly the result of substantial free floats and repeated follow-on offerings with unprecedented PR efforts.

    Coming to our days, which I have experienced as a corporate broker for a number of Alternext companies, I have witnessed the lack of liquidity that you describe in this market segment which on the other hand has enabled small companies to finance their growth.

    Many of them have benefited from the listing facility further to a private placement and they are those who suffer the most, together with their shareholders.

    You cannot expect research analysts to pop-up and cover small tech stocks until their institutional clients show interest for

    And they have been more reluctant in recent times for the risk of not being able to unwind quickly their positions in downturn

    Remedies exist but they need to be undertaken altogether for the best possible result. Those specialised investment banks will be able to help you but my recipe would be a combination of:

    a) A hearty liquidity contract
    b) Regular IR and PR efforts not limited to the domestic market.
    c) Issue of free warrants to existing shareholders (emission et attribution gratuite de BSA) when markets continue to be weak
    d) Secondary placements or follow-on offering to retail investors

    Liquidity and research coverage should grow as a result.

    We use to call it “a chicken and egg situation”.

    All the best
    Giuseppe Albanese

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