How does the Amsterdam Stock Exchange contribute to the Dutch economy?

Research findings summary

FINANCIAL SERVICES June 2013

2013 KPMG Advisory N.V.

How the Amsterdam Stock Exchange contributes to the Dutch economy

Introduction
KPMG was asked by Stichting Capital Amsterdam to analyse the role of the Amsterdam Stock Exchange (NYSE Euronext Amsterdam). This study describes the history and current role of the Amsterdam Stock Exchange and analyses current trends around the exchange and listed companies and investors investors. Furthermore, this study presents the view of the stakeholders of the Amsterdam Stock Exchange and how they see the future role of the exchange. The most important findings and conclusions are summarised on the next page.

Note:

(a)

(b)

Stichting Capital Amsterdam (SCA) is a foundation established on the first of January 2013, which aims to promote and encourage the international and national importance of Amsterdam as a financial centre and the Amsterdam Stock Exchange in particular. Stichting Capital Amsterdam originates from the merger between Stichting Schadefonds Beleggers and Stichting Vereniging voor de Effectenhandel In this research summary the term Amsterdam Stock Exchange refers to the exchange in a broader sense, while NYSE Euronext Amsterdam refers to the organisation of the exchange in particular.

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How the Amsterdam Stock Exchange contributes to the Dutch economy

Key findings

Dutch businesses increasingly need external capital to finance future economic growth. NYSE Euronext Amsterdam must be proactive and undertake new initiatives and there is an increasing need for committed, local shareholders to meet the demand for capital. KPMG has performed an independent study and conducted interviews with 55 market participants who are closely involved with the Dutch capital market. The most important findings are summarised below.
1. In recent years, the role of the Amsterdam Stock Exchange in facilitating economic growth has been limited It was not attractive for entrepreneurs to raise capital through an IPO on the Amsterdam Stock Exchange; It has become more difficult for Dutch companies to attract investors because investors increasingly invest in indices and have an international focus: stock picking of Dutch equities has become less popular. 2. The Amsterdam Stock Exchange is considered to be highly important for the Dutch economy The exchange is a potential funding source for companies to diversify their financing structure; The Amsterdam Stock Exchange provides employment to a broad range of high skilled professionals; The exchange contributes to the international position and reputation of the Netherlands. 4. The Amsterdam Stock Exchange does have potential, but action is required. NYSE Euronext Amsterdam should have more autonomy to: Be able to proactively stimulate contact between companies and investors; Visit companies and attract them to the stock market; Collaborate with market participants to develop attractive investment products.

5. Committed local investments for the longer term should become more attractive Stakeholders should proactively participate in discussions on regulatory reforms to increase long term provision of g growth capital; p ; investment and the p Research should be conducted into the social impact and the differences in return between internal versus local investment.

3. Especially in the near future, the importance of a well functioning capital market will increase The availability of capital at banks to finance future growth in companies has decreased; Retail investors are increasingly responsible for funding their own retirement schemes.

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How the Amsterdam Stock Exchange contributes to the Dutch economy

Summary
I Europe In E in i particular, ti l th the prevailing ili b business i model d l of f stock t k exchanges has recently come under pressure due to the internationalisation of capital flows, increasing regulatory requirements, limited confidence in the economy and the need for significant investments in IT. This has raised questions about the need to have a local exchange in the Netherlands and how the existing exchange contributes to the Dutch economy. KPMG has researched the contribution of the Amsterdam Stock Exchange to the Dutch economy by analysing the changing role of the exchange and conducting interviews with 55 stakeholders. The main findings are summarised below.

1.1 Introduction
The core function of an exchange is to provide access to capital markets to corporates and investors. An exchange provides a platform for both the issuance of and trading in securities. By offering a neutral and efficient trading platform, an exchange contributes to the transparent pricing and liquidity of high-quality financial products. Furthermore, the exchange plays a central role in the chain from order initiation by the investor to the execution, settlement and monitoring of a securities transaction. Lastly, by imposing certain requirements on corporates applying for listing, the exchange strengthens the corporate governance of Dutch enterprises while at the same time

increasing investor protection. The Amsterdam Stock Exchange was the worlds first stock exchange, founded in 1611. Since then, it has played an important role in the Dutch financial infrastructure and the development of a number of new trading initiatives. An example is the creation of the Amsterdam Options Exchange set up in 1978, which now has a solid base of private investors. investors In 1997, the Amsterdam Stock Exchange demutualised. In 2001 an IPO took place. This caused a shift in its policy, with the exchange becoming more focused on profit generation. After the IPO the Amsterdam Stock Exchange in several stages became an integrated part of the international exchange NYSE Euronext.

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How the Amsterdam Stock Exchange contributes to the Dutch economy

1.2 Conclusions
The Amsterdam Stock Exchange is seen as an important part of the Dutch financial infrastructure
Practically P ti ll all ll i interviewees t i b believe li th that t the Amsterdam Stock Exchange is key element of the Dutch financial infrastructure. The most frequently cited arguments were that: The exchange provides access to capital markets and hence diversification of funding (both growth and crisis financing), for mid sized companies in particular; It maintains a well-functioning ecosystem around the exchange, which provides employment to several thousand specialists; It contributes to both the reputation of the Dutch financial infrastructure and the Dutch business climate.

Listing has been valuable to corporates in crisis situations

On the other hand, during the ongoing financial crisis, the Amsterdam Stock Exchange has played a crucial role for a number of companies which needed to strengthen their balance sheet positions. Since 2009 approximately 16 billion has been raised by 35 Dutch companies in secondary placements. This amount includes 7.6 billion raised by ING to repay the Dutch government. Local, committed shareholders often played a crucial role in these events.

both domestic and foreign investors. Listing on a foreign exchange would only be an option for a few Dutch companies that operate globally. Bank financing is currently the main source of funding for Dutch companies (80%) ( ) but this will diminish in the future, which will increase the need for alternative sources of funding. This represents an opportunity for the Amsterdam Stock Exchange as, at present, only 3 billion to 4 billion per annum on average is raised on the capital market.

There is market potential for the Amsterdam Stock Exchange

The reduced confidence in the economy and the fact that a proportion of share trading volumes has been transferred f d from f the h Amsterdam A d exchange to other platforms (fragmentation) has led to a 55% decrease in trading volumes since 2006. In the same period, the market capitalisation of the Amsterdam exchange decreased by 16% due to the limited number of new listings g and a reduction in share prices. The fact that currently only 77 of the 2,900 companies with more than 250 employees are publicly listed indicates that there is certainly potential for the Amsterdam Stock Exchange in the Dutch market. As such, the exchange has the opportunity to play an important role in financing future economic growth in the Netherlands. The economic crisis has put significant pressure on profit generation by businesses and has also limited the amount of funding available from banks and private equity. The exchange can play an important role in meeting the continuous demand for capital by providing companies with access to a broad investor base of

The exchange itself should take the lead

Although the importance of the Amsterdam Stock Exchange is stressed by the majority of its stakeholders, it appears that none of them intends to take the lead to in initiating concerted action. The ecosystem around the exchange consists of a large number of stakeholders, each with their own interests, and few stakeholders seem willing to play a leading role in supporting the exchange with improving its position. Despite the fact that, particularly among banks and advisors, there is a sense of urgency, many of the interviewees see the exchange itself and the Dutch state as the appropriate parties to take the lead. Market participants ti i t expect t NYSE Euronext E t Amsterdam to formulate a clear and unambiguous strategy, which is supported by the Dutch government and industry regulators. Market participants also commented that a certain share of the profits generated by y NYSE Euronext Amsterdam should be available for local investments in new product and market development rather than being used for international investments by the Euronext Group.

The role of the exchange to facilitate growth has been limited by the fact that equity is currently less attractive to investors
In recent years, the role of the exchange to facilitate the growth of the Dutch economy has been limited. This is the result of various developments that have reduced the attractiveness t investors to i t of f providing idi capital it l t to Dutch companies. These developments have reduced access to the Dutch equity capital market, particularly for small and mid sized enterprises. As a result, only 20 billion of equity capital has been raised on the Amsterdam exchange by corporates and funds between 2002 and 2013, only 6 billion of which was raised by Dutch companies.

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How the Amsterdam Stock Exchange contributes to the Dutch economy

The Amsterdam Stock Exchange must have autonomy

There appear to be various scenarios in which the Amsterdam Stock Exchange can fulfil a vital role in the Dutch economy economy, but obtaining more autonomy seems to be crucial to the success of any and all of these. Although many of the past benefits of consolidation have diminished, most interviewees consider it practical for the Amsterdam Stock Exchange to remain part of a larger organisation of exchanges, as this structure has the following advantages: Greater visibility regarding larger foreign institutional investors; Easy access to the exchange for clearing members and professional market participants.

neighbouring countries, investment capital is limited, while these investors in particular are interested in investing in mid sized companies, which is the segment that is expected to drive future economic growth.

introducing new indices (e.g. sector indices); 3. Investigating changes in the market structure that could increase the liquidity in shares of mid sized companies (similar to the NASDAQ market quality program). Liquidity could possibly be enhanced by introducing a sector focus, in line with the top sectors identified by the Dutch government, or by the introduction of relevant new indices, potentially established in cooperation with other capital markets.

Maintain a positive reputation

It is crucial for the Amsterdam Stock Exchange to maintain its current high international standing. The reputation of the Amsterdam Stock Exchange (and the Dutch financial infrastructure) should be safeguarded g by y ensuring g there is a reliable and efficient trading platform (which reduces operational risks), a solid corporate governance framework for listed companies, quotations of a number of renowned international companies and sufficient liquidity in a broad range of i F Furthermore, th the th companies. demands of the companies that are currently listed should be monitored continuously.

Increase collaboration with other market participants

The Amsterdam Stock Exchange requires sufficient autonomy to be able to stimulate innovation in collaboration with other market participants. The exchange and its stakeholders can increase the attractiveness of the capital market by improving cooperation between the various market participants. While doing this, the exchange should also focus on its role as a hub in the ecosystem and be willing to reinvest a share of its profits in the development of the local market and new products. By increasing collaboration with market participants, the exchange y create a breeding gg ground would ideally for ideas to improve the functioning of the market and for the joint development of new products that meet the demands of local investors.

On the other hand, most interviewees consider it crucial for the exchange to increase its focus on the development of the local market. A number of recommendations to this effect are outlined below.

Create greater visibility for mid sized companies

Liquidity increases the attractiveness of a capital market, therefore the Amsterdam Stock Exchange should investigate ways to increase liquidity. The exchange and its stakeholders could attempt to do this by: 1. Proactively approaching both companies and investors in order to enhance the visibility of each group to the other; 2. Investigating whether liquidity could possibly be increased by

1.3 Recommendations Become more attractive to committed, local investors

Committed, local investors who provide corporates with long-term a c gp play ay a an important po ta t role o e as financing shareholders. They provide the company in question with a solid, steady investor base which can challenge managements decisions. In the Netherlands, unlike in some
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How the Amsterdam Stock Exchange contributes to the Dutch economy

Articulate the positive role shareholders can play in the development of a company
A number of environmental factors have a negative impact on how the Amsterdam Stock Exchange functions functions. Firstly, a change in the attitude of entrepreneurs would benefit the exchange. Sharing ownership can accelerate company growth and expand the opportunities to attract funding. But entrepreneurs must in turn be willing to allow third parties to have access to their companies and provide insight into how they operate. Furthermore, the public needs to become aware of its increasing responsibility to achieve sufficient returns to fund its own retirement schemes.

Increase the attractiveness for local, involved investors

The size of the assets fund managers with a specific focus on Dutch enterprises have available is an important determinant of the accessibility of the capital market for (mid sized) companies. The amount of investable assets at such investors in the Netherlands is decreasing. It is therefore important for its future role that the Amsterdam Stock Exchange takes steps to increase the attractiveness of the Dutch capital market for these investors. Specialist fund managers also appear to play an important role in attracting foreign investors to Dutch companies. A crucial factor in investments by this group is the 5%d l deelnemingsvrijstelling, i ij t lli an advantageous tax regime for investors who hold at least 5% of a Dutch company. A reduction in the threshold from 5% to 3% could increase the liquidity of Dutch small and mid sized companies.

investors such as pension funds. The internationalisation is partly attributable to the increased regulatory pressure to reduce concentration risks. It may well be that the long-term risk:return ratio is not negatively impacted by a more local investment focus. The negative impact of the reduced availability of capital for Dutch businesses should be taken into account in this analysis.

Legislation should allow for risk taking in a responsible way

There are several laws and regulations which together have had a negative impact on the attractiveness of investing in listed equities and on the role of various ario s market participants in equities trading. Both the Dutch and international regulator needs to realise that it is essential to increase the attractiveness for investors to invest in shares (equities) against reasonable returns in a responsible way, because these investments are vital to support future economic growth.

Further F th investigate i ti t the th effects ff t of an increase in international investment by long-term investors

Finally, the findings of this study show the need for an investigation into the social impact of the increased international focus of long-term

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How the Amsterdam Stock Exchange contributes to the Dutch economy

Contact details

KPMG contact regarding this report:

Age Lindenbergh Partner, Amsterdam, KPMG Advisory NV Global Head, Exchanges & Financial Market Infrastructure Telephone: +31 20 656 7965 Lindenbergh.age@kpmg.nl

2013 KPMG Advisory N.V.

The work was performed and this report was released on the basis of agreed terms of engagement engagement. The report is not prepared for, and should not be considered to be suitable for any other purpose than the purpose as defined in the report and/or the terms of engagement. This study was commissioned by Stichting Capital Amsterdam. KPMG accepts no liability towards any other party than Stichting Capital Amsterdam for this work and the report. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2013 KPMG Advisory N.V., N V registered with the trade register in the Netherlands under number 33263682 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the Netherlands. The KPMG name, logo and cutting through complexity are registered trademarks of KPMG International.

2013 KPMG Advisory N.V.