A public-private partnership (PPP) would be best placed to realise the potential of a family of CMU equity market indices, CEPS, a think tank, has told the European Commission.
The EU’s executive arm is interested in the idea of creating such a suite of indices as a means of improving access to finance for smaller and medium-sized companies in the EU, especially those in the Baltics, and central and eastern Europe (CEE). Overall the goal is fostering market integration across the EU.
Willem Pieter de Groen, the project manager behind a feasibility study carried out by CEPS, said the think tank’s conclusion captured both the business and policy perspectives.
“We didn’t find there is a huge business potential and we say that,” he told IPE. “There is a reason why the CMU Index Family does not exist yet, but that does not mean there wouldn’t be any investor demand and reason to create the index family from a policy perspective.”
In its report for the Commission, CEPS said the overall impact of a CMU index family on the development and integration of the EU equity markets was likely to be limited. “But as most of the smaller EU markets are relatively small in size, diverting a limited amount of equity investments from large to smaller markets might already make a big difference for these markets.
“Moreover, the launch of the CMU Index Family could also contribute to the enhancement of the equity investment culture among households in the EU,” the report said.
Based on extrapolations of survey responses from institutional investors, CEPS determined that a CMU index family could attract a maximum of €725bn, for benchmarking and tracking. This was equivalent to about 13% of the total free-float adjusted market capitalisation of a potential CMU All Share index.
However, realising this potential would depend largely on the quality of the index provider, pricing of the use of the indices and implementation strategy, according to the report.
With insufficient demand among global investors seemingly the main reason why the indices being considered by the Commission did not yet exist, a PPP appeared “the most reasonable” way forward, the report said.
It recommended that a task force be created to explore “the most viable alliance” of public and private partners for a launch of the envisaged indices.
One or more national governments, or an EU body, could for example support an independent index provider, a stock exchange or a consortium to launch the indices, said the report.
The Commission and the European Bank for Reconstruction and Development could offer logistical and secretariat assistance to such a task force.
“In order to formally test the appetite of issuers for such an index and model, the task force should conduct an open public consultation process,” the report said. “In a positive outcome, the task force would provide guidance on the shape of the PPP model.”
CEPS’ report can be found here.
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