Twelve years since its foundation, the Alternative Investment Market (AIM) stock exchange has changed its name to Euronext Growth Milan. Despite the name change, the mission remains the same: to offer businesses a simplified trading route by establishing minimum access acquirements and obligations calibrated to the actual capabilities of SMEs as an alternative to the main market, Euronext Milan operated by Borsa Italiana. Dedicated to dynamic and competitive SMEs, Euronext Growth Milan enables these types of businesses to access the finance they need to grow quickly but sustainably. These characteristics make the AIM a natural focal point for companies aiming to grow through the use of venture capital. Massimo Trabattoni, Head of Italian Equity, offers this analysis:
“In recent decades there have been several attempts to create a market able to open up capital to new businesses. Of these, Euronext Growth Milan has been the most successful,” he explains. It is no coincidence that several companies that were first listed on this stock exchange later moved to Star or the MTA segment, and others are now following the same route. In most cases, before being listed these businesses were able to find the capital needed to grow and carve themselves a more stable position on the market, enabling them to join the main stock exchange with a better standing. “If we look at venture capital, in a few years Euronext Growth Milan could represent the starting point for businesses that begin as venture capital companies before making the transition to listing,” explains Trabattoni.
However, it’s important to note that in the venture capital world, the failure rate for investments is higher than in more mature segments such as MTA and even compared to mid and small capital stock markets. Consequently, in terms of the risk-return profile, it is not advisable to focus exclusively on companies listed on Euronext Growth Milan. The function of venture capital in a portfolio is to aim for medium to long-term growth, conscious that volatility and illiquidity may be short-term companions along the way.
“It is encouraging that the success experienced by Euronext Growth Milan in the last few years has encouraged many equity funds and large bank groups to operate on this list. In the future, this could improve liquidity in negotiations,” adds the Head of Italian Equity. At the moment, low liquidity in exchange transactions is one of the limitations of Euronext Growth Milan. This means that as well as having the potential to grow value over time, investments must also aim to be traded on more liquid segments, enabling them to make profit without encountering pricing problems for the quantity of stocks they wish to sell. “We don’t enter this type of investment to engage in trading activities,” Trabattoni explains. “It’s more a question of discovering hidden gems, assessing them over time and taking the time to create the conditions to capitalise on their revaluation on the market.” This approach doesn’t necessarily mean pulling out of an investment completely, with one example being an investment made a few years ago with the acquisition of a 10% stake in a company listed on Euronext Growth Milan: “In the meantime, the company has grown to the extent that it is now listed on the Star segment and we still hold around 3% of its market value,” explains the asset manager.
In fact, Kairos goes further than simply supporting businesses that grow from venture capitals to being traded on Euronext Growth Milan. If the conditions for further growth are there, the support process can continue over time. “Over the years we have developed expertise in the IPO phase, and now we also operate through the ELTIF fund,” explains Trabattoni. It’s no accident that Kairos is one of the top three operators on the Euronext Growth Milan in terms of value of invested securities and one of the top 20 operating on the entire Italian stock market. But the investments are only pursued under certain conditions: “We only invest in businesses on Euronext Growth Milan if we see clear growth prospects and if the focus on this stock exchange is intended as a launchpad towards more liquid market segments.” But identifying businesses with these characteristics can be challenging. It requires the skills and professionalism – both present in the Kairos team – to be able to explore investments across the Italian economy and make conscious choices.
Comment by Massimo Trabattoni, Head of Italian Equity.