About the report
Xavier Role KBE, CEO, London Stock Exchange Group
“Independent studies have shown that a 1% increase in the amount of high growth companies in an economy would add 2% to the GDP of that economy”
I am delighted to welcome you to the 2017 edition of London Stock Exchange Group’s 1000 Companies to Inspire Europe report, which identifies Europe’s most dynamic and fast-growing small and medium-sized businesses.
This report is more than just a celebration of these extremely successful companies. It continues to demonstrate what we instinctively know to be true – that these companies are the best hope for future European economic growth and job creation. Never have their prospects been so vital to the future of the post-Brexit European economy.
While EU GDP has rebounded recently, moving back towards pre-crisis levels, there remain some serious underlying structural problems in European economies.
Youth unemployment in the EU is around 20 per cent and traditional sources of European job creation have dried up. Public sector monoliths can no longer be relied on to create jobs, while big blue chips have not directly created net new jobs for a decade now.
By contrast, the growth companies in this report boast a two-year job creation rate of 43 per cent and an incredibly impressive average three-year average annual compound growth rate of over 100 per cent. Our selection criteria (more details on p115) also require these companies to have outperformed their sector peers. The largest sector represented is Manufacturing and Engineering (at 20 per cent) followed by Food and Drink (at 11 per cent), pointing to a rich and varied community of SMEs throughout Europe.
These companies clearly highlight the potential of European SMEs to drive European economic recovery post-Brexit. With around 23 million SMEs – and around 19 million unemployed – in Europe, if we were to realise the potential of high-growth SMEs like these to create real jobs, the effect would be transforma-tional.
So why are the companies highlighted in this report the exception, not the norm? Why do 60 per cent of the world’s most valuable companies come from America and less than 15 per cent from Europe (down from over 30 per cent a decade ago)? How can we take these dynamic companies ‘from start-up to star-dom’ and address the fact that – even among these thousand standout firms – the majority have revenues of less than €50m, while less than one per cent have revenues of over €250m.
“If, post-Brexit, Europe is to have a sustainable economic future, it must support new companies, new ideas, new jobs and a new funding model”
The answer is recognising that the funding system is biased against these companies and towards big, es-tablished companies. Large companies mainly rely on debt to manage and refinance their obligations. Last year, European Government spent €570bn of taxpayers’ money subsidising this corporate debt through tax deductibility.
But while debt may be a suitable funding tool for big, established firms, it is ill-suited to help SMEs and high-growth potential companies. Small companies in receipt of a bank loan must prioritise managing that debt or risk default, instead of using all their financial and human capital to innovate and grow.
They need long-term patient capital, like equity, where companies at different stages of development seek investment to grow their business either through individual investors and capital markets, or crowdfunding and peer-to-peer platforms. They need capital to flow directly from investors to entrepreneurs and small business owners, in addition to the efficient bank lending engine already supporting larger companies. Fi-nance must come from the bottom up, not the top down.
But this bias persists because, while debt remains tax-deductible, equity is often and punitively taxed – in some cases up to four times.
Equity finance is the answer
Policy-makers need to address a situation where 80 per cent of SME lending comes in the form of debt. Because if the potential of high growth companies is clear, the potential of equity finance to take them to the next level is even more so.
In the years following the financial crisis, when banks were struggling to lend and governments were cut-ting public spending, 67 companies from countries hardest hit by the financial crisis – Portugal, Ireland, Greece and Spain – raised over €30bn in equity finance to invest, grow and create jobs, demonstrating the resilience of capital markets.
AIM is the world’s most successful capital market designed specifically for high growth companies. It has raised €114bn for more than 3,700 companies around the world in the last two decades. When the British Government made shares on this market eligible for ISA (a UK tax-free savings account), £4 billion flowed into these companies overnight, helping them to grow and invest further.
And because these companies are highly innovative (the companies in our report lay claim to nearly 8,000 patents and trademarks between them – twice as many as in last year’s edition), the jobs they create tend to be high quality and well paid, helping to boost productivity.
Finally, innovative equity-funded firms can demonstrably help the European economy to achieve post-Brexit success through exports: companies quoted on AIM are five times more likely to export than the na-tional average. No wonder independent studies have shown that a one per cent increase in the amount of high growth companies in an economy would add two per cent to the GDP of that economy.
- 23m - The number of small to medium-sized enterprises in Europe
This is why we at London Stock Exchange Group wholeheartedly agree with European Commission Vice-President Valdis Dombrovskis, who has said that Europe as a whole needs a wider range of funding sources to cater to different needs and to complement bank lending. His plan for a Capital Markets Union (CMU) throughout Europe is vital. Fragmentation of capital markets means less liquidity, not only making it harder for companies to scale up, but also making the wider European economy less globally competitive. CMU will break down the barriers and simplify access to multiple sources of finance throughout the EU, includ-ing making it easier to access finance from other countries both within and outside the EU.
The CMU’s plans to reform the prospectus directive, which governs how investors acquire a stake in a business, will make it less expensive and less burdensome for SMEs to raise capital. And as access to finance becomes more diverse, it will drive competition and reduce the cost of finance for growing companies. By encouraging more investment through equity, the CMU will also make the European economy more resilient by being less reliant on debt, and give people more of a share in that economy. If, post-Brexit, Europe is to have a sustainable economic future, it must support new companies, new ideas, new jobs and a new funding model.
A thank you
London Stock Exchange Group stands ready to do its part, partnering with you. Our capital markets – the deepest and most liquid in the world – efficiently pump billions of pounds of capital into European economies. Last year, 76 per cent of capital raised across European growth markets was on AIM.
Our pan-European growth company support and capital-raising initiative, ELITE, is supporting a community of over 1000 high growth companies, advisers and investors. Vice-President Dombrovskis was clear that Europe needs programs like ELITE. It is in all of our interests that this financial ecosystem that does so much to raise vital patient capital for SMEs is maintained and nurtured, not fragmented. Putting up barriers to capital just increases the cost of capital. As globalisation continues apace, the EU (and the UK) can ill afford to become less competitive.
I would like to thank our sponsors, AFME and IBM, whose support has made this report possible. Their work on behalf of and with SMEs to develop sustainable and effective European financial markets is a key driver of jobs and growth.
Our thanks go to expert contributors from the European Banking Federation, Invest Europe and the Centre for European Policy Studies, whose insight and ongoing support for the SME community is much valued.
Finally, I would like to extend my personal gratitude to the Commissioners and senior policy-makers who have supported this report: Valdis Dombrovskis, Toomas Tõniste, Roberto Gualtieri MEP, Markus Ferber MEP, Kay Swinburne MEP, Ramon Tremosa MEP, Sirpa Pietikainen MEP, Othmar Karas MEP, Cora van Nieuwenhuizen MEP and Jonas Fernandez MEP, whose contribution to this report is testament to their un-derstanding of and tireless commitment to the ambitious growth firms of the future.