Tough times for the nanocap stock market

A joint review from Paginera AB and Scalania AG

Tough times for the nanocap stock market

Take-away message

  • In 2022, the market performance of the leading nanocap stock markets followed the trend of the main markets.
  • In 2022, 33 nanocap-IPOs (compared with 143 in 2021) were conducted in the Nordics.
  • In 2022, 170 Share issues were conducted by nanocap companies in the Nordics.
  • In 2022, 11 nanocap companies went bankrupt in the Nordics.
  • The Paginera index predicts a low willingness to invest for the upcoming months.
  • The IPOs of Lumenradio, Skolon and Clinis Fertilizer prove that even in tough times a good offer will be successful.

As we all know, 2022 has been a tough year for all markets, and of course also for the nanocap stock market in the Nordics. But, with ~1000 listed companies and ~1 M active investors the market is still the most active ecosystem for publicly traded nanocap companies.

In our definition, a nanocap company is defined by the following:

  • A valuation below 25 MEUR, and
  • Listed on Spotlight Stock Market, NASDAQ First North or NGM Nordic SME.

From 2018 to 2023, a normalized analysis that compares the development of the Spotlight Stock Market index, with the OMXS30, the index of the 30 most traded companies in Sweden, shows that in economically stable times the nanocap index shows far greater growth than the OMXS30, while in times of crisis the index is stable at the market average level. Thus, in the long term an investment in nanocap companies offers an exciting alternative to conventional investment opportunities.

Taking a closer look on the last two years, we see that 143 IPOs were carried out in 2021 while in 2022 that number decreased to only 33 IPOs. As a result, the overall number of listed nanocap companies remained stagnant in 2022.

However, the number of rights issues increased significantly. This indicates that the proportion of listed companies requiring new funding has risen. Additionally, many companies have resorted to short-term loans, which are often paid back with proceeds from a funding event such as a rights issue, further reducing the amount of funding that companies retain. Along with increased costs across most industries in the last year, these factors are driving companies to seek new funding from their shareholders and the public market more frequently. In other words, the ratio of listed companies which need to return to the market for new funding in relation to the total number of listed companies has shifted upwards.

The Swedish and Danish marketplaces’ rolling six-month accumulated number of rights issues for nanocap companies is presented in the diagram below. The highest number of accumulated rights issues, perhaps ever, was observed in January. Additionally, many companies have taken out short-term loans that are usually repaid through funding events, such as rights issues. This further reduces the amount of funding that the company can retain from the rights issues. These factors, combined with rising costs in almost all sectors over the past year, have forced companies to seek new funding from their shareholders and the public market at increasingly shorter intervals.

The increasing need for funding and the limited willingness to invest, also resulted in an increased number of bankruptcies, liquidations, and reorganizations.

In the past, bankruptcies, liquidations, and debt restructuring for listed nanocap companies were rare, as being listed was considered a guarantee of a company’s value. Even when a business failed, being listed on a public marketplace meant that the company still had value in the form of its shareholders. Typically, in a crisis, listed companies would acquire another business through an offset or non-cash issue to avoid total loss for existing owners.

However, recent trends show an increase in bankruptcies, liquidations, and debt restructuring for listed companies. This rise could be due to the difficulty of securing funding (described above) in a market with many listed companies and a low-risk appetite for investors.

We think these bankruptcies and liquidations could restore balance to the market and reverse the downward trend in valuations and IPOs.

The low-risk appetite of the investors can be underlined with the Paginera Index, measuring the investment incentive for nanocap companies in Scandinavia. The index is updated continuously and not only reflects the present market situation but also forecasts the investment willingness for the next 6-8 weeks. Today, the index indicates a further decrease in the investment incentive for the upcoming months.

So, the question is when we will reach the turning point on the investor side?

Nevertheless, during the last months we also saw that “good offers” as the quotient of potential vs. valuation still can result in successful IPOs which was shown by:

  1. Lumenradio.
    • Date of IPO: 2022-12-08.
    • Performance to date: 108%
  2. Skolon
    • Date of IPO: 2022-05-17.
    • Performance to date: 94%
  3. Clinis Fertilizer
    • Date of IPO: 2022-10-21
    • Performance to date: 69%

Of course, we will continue to closely monitor the nanocap market situation and share our insight.