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Even after accounting for the fact that venture capital makes businesses bankable and thus mobilises other sources of finance, there is simply not enough equity investment taking place. However, while debt and equity finance are not substitutes, at a time when credit is constrained and the European financial system is deleveraging, the under-utilisation of equity is not sustainable. There is an urgent need to encourage both external equity provided by major investors, but also the reinvestment of funds into the business as well as small-scale investment
—Robin Jarvis, special adviser, ACCA

Equity financing and venture capital are important sources of SME’s financing, and well placed to support European policies on growth and innovation. They can also help leverage the resources of the rest of the financial industry. Still, equity financing suffers from significant drawbacks that lead to its under-utilisation by SMEs- were the main conclusions of a roundtable recently organised at the European Parliament

Facilitating access to equity finance - from trusted advisers to active intermediaries

Equity finance is still underutilised by small and medium sized businesses across Europe. With the bank lending environment being tightened and the reliance of the European economic recovery on innovative, high growth firms; improving the SME access to equity finance will be crucial in ensuring European long-term competitiveness. 

The SME Union recently co-organised with ACCA (the Association of Chartered Certified Accountants), UEAPME (the European Association of Craft, Small and Medium- sized Enterprises ) and EFAA (the European Federation of Accountants and Auditors for small businesses) a roundtable called 'Facilitating access to equity finance – from trusted advisers to active intermediaries'- at the European Parliament in Brussels. 

Through two expert panel discussions moderated by Robin Jarvis, ACCA’s special adviser and member of the consumer group of the European Banking Authority, the event aimed to open up the dialogue between the investors, SMEs, accounting and other professionals to explore the current state of play of private equity finance in Europe.

Facilitating access to equity finance - from trusted advisers to active intermediaries

It also discussed the potential of practical multi-disciplinary approaches with the support of the intermediaries to improve SMEs’ awareness of, readiness for and access to equity finance, and the scope for future development.

Panellists included Roger Havenith, Head of the Unit Financing of innovation competitiveness and employment policies at DG ECFIN; Prof. Anna Gervasoni and Dr. Gabriele Cappellini from the Fondo Italiano; John Holloway, Director at the European Investment Fund (EIF), James Burnham, Head of External Relations of the European Private Equity and Venture Capital Association (EVCA), Giorgio Giorgi and Stefano Lunardi from the Advisory Network Team (ANT), Gerhard Huemer, Economy policy Director at UEAPME,  Jean-Charles Boucher from the Autorite des Normes Comptables (ANC) and the Compagnie Nationale des Commissaires aux Comptes (CNCC), Per-Ove Engelbrecht, Head of Unit Finance Innovation and SMEs at DG ENTR and Federico Diomeda, CEO of EFAA.

Robin Jarvis, chair of the event said: 'Our discussions showed that equity finance currently does not provide a great part of the finance used by SMEs around Europe. Even after accounting for the fact that venture capital makes businesses bankable and thus mobilises other sources of finance, there is simply not enough equity investment taking place. However, while debt and equity finance are not substitutes, at a time when credit is constrained and the European financial system is deleveraging, the under-utilisation of equity is not sustainable. There is an urgent need to encourage both external equity provided by major investors, but also the reinvestment of funds into the business as well as small-scale investment.'

Facilitating access to equity finance - from trusted advisers to active intermediaries

All participants agreed that support for venture capital (VC) and equity investment can, due to their targeted nature, be an effective and efficient means of achieving European policies on growth and innovation. VC-funded funded firms have, for example, been better job creators during both boom times and the recent recession. 

However, the industry suffers from significant drawbacks too. These range from market fragmentation, low performance, the limited size of EU funds in comparison to Japan and USA, and the fact that equity investment is a risky business and median returns are negative. The industry has been shrinking consistently from 2000 onwards due to the lack of fundraising from private investors who left the market; in 2011 more than half of all VC investment (57%) was reliant on public funding, up from 10% in 2007. Only 1% of the European SMEs are acquiring funds by issuing shares on capital markets or by calling on investors. For external equity, the average SME is too small to be 'investable' - i.e. have the human capital required to attract equity investors - and to be of interest for most existing instruments. In addition, the socio-cultural factor should not be neglected: small companies, especially family businesses are rather reluctant to call on external capital and share decisional power.

Gerhard Huemer, Director of Economy Policy at UEAPME added: 'Equity is important for SMEs’ financial stability, both to survive the current crisis and to finance riskier-than-usual business activities. However, it remains more expensive and less attractive than loans to entrepreneurs. Accountants and advisers have therefore a key role to play to help companies to manage their financial resources and find the right balance between debt and equity. When it comes to external equity, the average SME is too small to be of interest for most existing instruments. That is why special instruments targeting the needs of SMEs are needed, and why the upcoming EU programmes for 2014-2020 such as COSME must support 'mezzanine finance'tools. 

The roundtable also clearly highlighted the key role of 'trust' and 'networks', as well as the necessary early stage involvement of all actors. It was stressed that venture capital companies generally invest for the long-term and mainly in companies they have already known for a long time, usually via well established networks or advisers/sponsors or advice from trusted third party influencers.

Federico Diomeda, CEO of EFAA concluded: 'The roundtable showed that equity finance for SMEs is a very wide topic that also reflects the huge dimension of the market. We need to consider the financial needs of SMEs in the right way and avoid confusion between growth and recovery - although the latter may imply the first. The difficult categorisation of private equity operations in the SME market implies a sort of 'bottom up' approach when looking for SMEs needing access to private equity and then assisting them in actually getting this finance. The concrete examples offered during the debate of how intermediaries can help SMEs showed that this exercise may be done efficiently and at little cost: small practitioners know the territory. I invite all participants to meet again in one year's time to assess achievements towards a concrete and pragmatic approach to this complicated issue.'   

 

  1. To read the full report of the event, click on the PDF in the 'Related Documents' section at the bottom of this article.