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“Facilitating access to equity finance – from trusted advisers to active intermediaries”

Date

02 May 2012

Sections

Euro & Finance

-  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

Equity finance is still underutilised by small and medium sized businesses across Europe. Considering the tightening bank lending environment 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.

In this context , 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 Advisor 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.

It also discussed the potential of practical multidisciplinary 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 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”.

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 he 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 advisors 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 advisors/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 reflects also 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 categorization of private equity operations in the SME market implies a sort of bottom up approach when looking for SMEs deserving 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 time to assess achievements towards a concrete and pragmatic approach to this complicated issue”.

-ends-

For more information, please contact:

Cecile Bonino

+32 (0) 2 286 11 37

cecile.bonino@accaglobal.com

Notes to Editors

1. ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management.

2. We support our 147,000 members and 424,000 students in 170 countries, helping them to develop successful careers in accounting and business, with the skills required by employers. We work through a network of over 80 offices and centres and more than 8,500 Approved Employers worldwide, who provide high standards of employee learning and development. Through our public interest remit, we promote appropriate regulation of accounting and conduct relevant research to ensure accountancy continues to grow in reputation and influence.

3. Founded in 1904, ACCA has consistently held unique core values: opportunity, diversity, innovation, integrity and accountability. We believe that accountants bring value to economies in all stages of development and seek to develop capacity in the profession and encourage the adoption of global standards. Our values are aligned to the needs of employers in all sectors and we ensure that through our qualifications, we prepare accountants for business. We seek to open up the profession to people of all backgrounds and remove artificial barriers, innovating our qualifications and delivery to meet the diverse needs of trainee professionals and their employers. 

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