Fixing the funding ladder
Commentary by Emma Marcegaglia, President of BUSINESSEUROPE
The importance of high-growth businesses to Europe, in terms of both the economy and job creation, makes it vital that all forms of funding are available to them.
High-growth firms (HGFs) play a vital role in economic growth and job creation. Fixing the ‘funding ladder’ for these firms is therefore of crucial importance for prosperity in Europe.
The OECD defines HGFs as companies with an average annual growth of 20% per year over a three-year period. For example, the fastest growing mid-size businesses (around 3,000 companies) contributed an additional £59bn to the UK economy over 2010–2013. During this period, the UK economy only grew by £40bn. Without the contribution of these firms, therefore, the country would have been pulled back into recession.
Futhermore, while HGFs represent between 3 and 5% of companies in most continental EU countries, their share of job creation is around 40%.
Opening new markets is important for HGFs to thrive. That’s why improving the European single market is essential, as is pursuing ambitious international trade negotiations between the EU and key trading partners.
"The development of HGFs depends on policies facilitating access to finance, developing skills and promoting vibrant entrepreneurial ecosystems"
At the same time, the development of HGFs also depends on policies facilitating access to finance, developing skills, and promoting vibrant entrepreneurial ecosystems.
HGFs will naturally turn initially to banks for debt financing. So prudential rules for banks should properly reflect the riskiness of assets, with governments, including the EU through the European Investment Bank, having a role to play in guaranteeing part of the banks’ lending. Still, bank lending will be under pressure in the coming years, so it is important to develop alternative financing routes.
A significant barrier to firms accessing capital markets is culture and awareness. Equity, for example, is under-utilised as a source of financing due to a lack of equity culture and misperceptions as to how equity can work for businesses. Education on the options available is key.
In many European countries, HGFs encounter great difficulties in getting access to equity finance. We see missing steps in the funding ladder – typically between €5m and €15m for equity finance. Ad hoc national solutions are needed to overcome access to finance bottlenecks. Equity-financed investment decisions may also be hampered by a corporate income tax system that presents a bias towards debt over equity.
Putting in place a genuine Capital Markets Union is of crucial importance. EU rules, particularly in relation to longer-term investors such as insurance companies, must not unduly discourage investment in assets that are essential for the growth of SMEs. Further action is required to create an integrated EU venture capital market, including further support from the EIB. And we also need to streamline the EU Prospectus Directive, in order to lower the cost of public offerings.
40% – The share of job creation credited to HGFs across most EU companies
A proactive agenda at national and EU level is needed to unleash the growth and job creation potential of HGFs and mid-size businesses. I congratulate the London Stock Exchange Group for its 1000 Companies to Inspire Europe report. BUSINESSEUROPE fully shares the aim it pursues: to help direct more attention to this strategic issue.