About the report
Nikhil Rathi, CEO, London Stock Exchange plc and Director of International Development, LSEG
Welcome to the third annual 1000 Companies to Inspire Europe report. In this pioneering report, London Stock Exchange Group (LSEG) is proud to identify the most dynamic and fastest-growing, high-growth potential firms throughout Europe. We offer our congratulations to them all.
With an exceptional 24% three-year average compound annual growth rate (with the top 10% growing at an amazing 102% on average), it is no surprise they boast average two-year job creation rates of 37%. The largest sector featured is Manufacturing & Engineering, followed by Food & Drink, painting a diverse and encouraging picture of the potential of the future EU economy.
Romania and Hungary lay claim to the fastest-growing companies on average, while German firms hold the most patents and trademarks, unsurprising perhaps given Germany tops the G7 productivity league. In fact, the firms in this report can lay claim to almost 10,000 trademarks and patents between them, meaning the jobs which they create are usually higher skilled and higher paid, thus aiding productivity.
With youth unemployment currently running at over 15% across the EU as a whole, the potential of companies like these to help transform the European economy and give the next generation of young people the future they deserve is clear. The question is: will we realise that potential?
Despite their obvious high-growth potential, the majority of firms in this report have annual revenues of under €75m.
Supporting SME growth
A decade after the financial crisis, a new policy prescription is needed to give dynamic, innovative small and medium-sized enterprises (SMEs), like the ones we identify today, access to the patient capital they need to grow and become the major European job providers of tomorrow.
While there are more SMEs in Europe than unemployed youth, Europe’s track record at developing them into the global corporations of tomorrow is comparatively weak. Of the 500 biggest companies in the world, the biggest proportion are in the US while the European cohort is shrinking.
There is a vast amount of patient capital, like equity, available throughout Europe but, for growing companies, there are too many barriers to access it. Even though Europe invests more capital in its SMEs than the US, 80% of it is via debt.
Debt, however, is not the most efficient mechanism to help innovative companies which need all their capital to innovate and grow, instead of servicing a conditional loan every month. It is designed to deliver a guaranteed rate of return rather than giving companies the space to scaleup.
Studies show over-reliance on debt means entrepreneurs are having to scale back their ambition instead of scaling up their business as too many of these businesses either run into onerous collateral requirements or are unable to obtain funding for the duration they require. Debt bias persists because it is tax-deductible, while equity finance in Europe is taxed up to four times.
A new type of funding system
We must recalibrate away from this fiscal bias and unleash the power of long-term patient capital. This includes capital markets, crowdfunding and peer-to-peer platforms. Because if the growth potential of SMEs is clear, the potential of patient capital is even clearer. At LSEG, we work in partnership with our customers to make long-term patient capital more readily available. We are proud that last year Funding Circle – the leading peer-to-peer lender – raised £150m on our markets to support SMEs, while Crowdcube, the leading UK crowdfunding site, is part of ELITE – our global business support and capital raising programme for high-growth companies.
Earlier this year ASA International – a Dutch microfinance company that lends to low-income, financially under-served, predominantly female micro-entrepreneurs, as well as small business owners throughout Asia and Africa – listed on our markets.
Our global capital market for high-growth companies, AIM, has raised €114bn for nearly 4,000 companies in two decades. When the UK government made shares in European growth markets, including AIM, eligible for inclusion in tax-free savings accounts, nearly €5bn extra capital flowed into AIM companies, practically overnight, helping them to invest, innovate and grow further. Innovative firms listed on AIM are five times more likely to export than the national average.
In Italy, AIM Italia raised over €1.4bn in the first half of this year for high-growth companies – an eight-fold increase on the same period last year. In fact, two-thirds of growth market finance raised throughout the EU comes from AIM markets in London and Milan.
As we seek to make Capital Markets Union a reality, it is in everyone’s interest that the European funding ecosystem is maintained and enhanced, not fragmented. Research shows that a 1% increase in the number of high-growth businesses can add 2% gross domestic product.
Healthy companies support the wider economy and society, and good politics follows good economics. Amid global political debate about the shape and structure of our economies and international trade
flows, getting more capital flowing bottom up from investors to innovators and small businesses would be a welcome illustration of capital markets working throughout Europe.
Finally, let us not forget the role that leverage in the financial system played in the financial crisis. The International Monetary Fund has since been clear that tax provisions favouring debt over equity finance are widely recognised as a risk to financial stability. Reducing reliance on debt would also underpin global systemic resilience.
For all these reasons we must build an economic model that supports the companies of tomorrow, which in turn provides jobs and supports economic growth. New companies and new jobs require new ideas.
A thank you
I would like to thank our sponsor, Association for Financial Markets in Europe (AFME), whose support has made this report possible. Their unfailing work for, and with, SMEs to develop sustainable, effective European financial markets is crucial to jobs and growth.
Our thanks go to expert contributors the European Banking Federation, Centre for European Policy Studies and EuropeanIssuers for their invaluable insight.
Finally, I would like to extend my personal gratitude to the commissioners, senior policy-makers and MEPs who have supported this report: Valdis Dombrovskis, Markus Ferber MEP, Jonás Fernández MEP, Anne Sander MEP, Ramon Tremosa MEP, Brian Hayes MEP, Eva Kaili MEP and Danuta Hübner MEP. Their unflinching efforts to design and implement a policy framework to support high-growth companies are absolutely fundamental to a prosperous future for the European economy.