KfW-Research. Economic Observer. Nr. 8, September 2005.

Transcription

1 KfW-Research. Economic Observer. Nr. 8, September 2005.

2 CONTENTS. INFLUENCING FACTORS FOR THE BUSINESS CLIMATE IN THE GERMAN PRIVATE EQUITY MARKET. The economic importance of private equity. 3 Factors determining the business climate: empirical findings. 4 The central influencing factors for the business climate. 6 Conclusion. 8 SECURITISATION AND ACCESS TO FINANCE FOR EUROPEAN SMES. Introduction. 9 Securitisation and its impact on SME lending. 10 Obstacles to SME securitisation. 12 The role of public support. 13 Summary. 15 2

3 INFLUENCING FACTORS FOR THE BUSINESS CLIMATE BETEILIGUNGSKAPITAL IN DEUTSCHLAND. IN THE GERMAN PRIVATE EQUITY MARKET. THE ECONOMIC IMPORTANCE OF PRIVATE EQUITY. Well-developed financial markets for equity play a decisive role for economic growth, welfare and employment. As regards the dynamism and regenerative power of an economy it is not only the organised and standardised segment of the equity market which is of utmost importance but especially those segments of the equity market which do not allow for standardised trading due to the particularities of the businesses to which the investments are committed. These segments of the equity market are usually paraphrased as private equity and venture capital and are the most important sources of funds for start-ups. Lamentably, policy-maker interest for private equity markets in Germany remains largely unsatisfied because so far little descriptive data exists. Since the private equity market is characterised by informal structures, qualitative aspects play a greater role here than elsewhere. As a whole, these informal structures reflect the business climate and thus mirror major market developments. To bridge this perceived lack of information KfW and the German Association of Venture Capitalists (Bundesverband Deutscher Kapitalbeteiligungsgesellschaften - BVK) have jointly developed a business climate indicator for the German private equity market. The results of the German Private Equity Barometer (GPEB) have been published quarterly since In order to assess the relevance and importance of the factors influencing the GPEB quantitatively, KfW carried out an empirical investigation 1). 1) Cf. Zimmermann/Karle (2005): Das Geschäftsklima im Deutschen Beteiligungsmarkt. Entwicklungen und Einflussfaktoren. 3

4 FACTORS DETERMINING THE BUSINESS CLIMATE: EMPIRICAL FINDINGS. Public discussion about the factors impacting the business climate in the German private equity market suggests that an abundance of such factors exists. Due to this, KfW s GPEB takes into account a broad set of selected influencing factors of both microeconomic and macroeconomic origin to assess the market sentiment (see Figure 1 for the 14 influencing factors taken into account). In the following the key determinants of the business climate in the German private equity market throughout the years 2003 and 2004 are presented. The thrust and force of the causal effect of the factors were estimated by a regression analysis. Since the GPEB is a poll, it inevitably represents subjective assessments by the companies surveyed. But deviations from the "objective situation associated with a survey are by no means undesired because they capture the market sentiment realistically. The empirical evidence shows that the picture conveyed by the public discussion on factors determining the business climate in the private equity market has to be revised at least that of the self-perceived business situation of the industry. Merely a few factors are relevant to the assessment of the business situation. Somewhat surprisingly, these relevant factors correspond only in part to those considered as important in the public discussion. Conversely, some other factors, which are largely absent in the public discussion, proved to be of influence according to the study undertaken by KfW. Figure 1 gives an overview of the strength of the influencing factors 2). 2) The length of the bars represents the regression coefficients estimated. Thus they show the weight of an influencing factor for the assessment of the actual business situation. A reading example: The magnitude of for the strength of the factor Fund Raising implies that a onepoint improvement of the assessment of fund raising possibilities increases the business climate by points. 4

5 Figure 1: Strength of the influencing factors of the business climate Fund Raising Innovative activity of firms Availability of public funding Availability of employees Quality of investment proposals Company bankruptcies Exit possibilities * Stock market performance Write offs Business cycle situation Capital market interest rate level Demand for equity capital Entrepreneurship activity * * * * * Fiscal framework * not significantly different from zero Early Stage Later Stage Total maket Five dominant determinants of the business climate of the private equity industry can be highlighted. The importance of these main influencing factors varies only slightly between the two segments early and later stage. Surprisingly, most other potential influencing factors are of little relevance. 5

6 THE CENTRAL INFLUENCING FACTORS FOR THE BUSINESS CLIMATE. The most important influencing factor for the overall business climate in the market is fund raising. The prominent position of this influencing factor is mainly driven by its great importance in the later stage. Nonetheless, propensity to invest also plays an important role in the later stage segment. The importance of fund raising for the business climate is not very surprising because venture capital investment activity has been highly correlated with the injection of funds into the asset-class private equity in the past. The different magnitudes of the two investment phases can be explained by the higher volatility of cash inflows in the early stage segment. Innovative activity of firms also positively impacts the assessment of the business situation. This can be ascribed to the fact that innovative companies exhibit higher growth potential and are thus more attractive investment targets because higher growth potential implies higher returns. Since the German private equity market is still young it comes as no surprise that the availability of public funding is only marginally less important for the business climate than the innovative activity of firms. Availability of public funding programs is thus the third most important factor for the business climate in the private equity market. Last but not least the shake-out after the bursting of the IT bubble made investors more cautious and increased their demand for public support. Only barely less important is the availability of fund managers as the fourth most important influencing factor for the business climate. The 6

7 impact of this special aspect of the labour market also originates in the emergent nature of the German private equity market. The comparatively young market has so far produced only a small pool of experienced investment professionals. The success of a private equity firm depends crucially on the attractiveness of its deals. It is thus hardly surprising that the quality of the incoming investment proposals positively influences the business climate of the industry. On the face of it, it seems unusual that this factor is only the fifth most important. But a second glance puts this first impression into perspective. Firstly, the quality of the investment proposals is the second most important factor in the early stage segment. Secondly, the magnitude of the estimated regression coefficients differs only slightly for the five central influencing factors. Three factors can be identified that are only relevant to one of the two segments: the evolution of company bankruptcies, write-offs and stock market performance. The magnitude of company bankruptcies is the third most important factor for the later stage but is not relevant for the early stage. The reason for the varying importance of company bankruptcies between the two segments can be explained by the fact that insolvencies are nothing exceptional in early stage financing, whereas later stage financiers expect that a far smaller share of their portfolios will have to be written off. In the early stage, two other factors do play a certain albeit minor role: stock market performance and write-offs. This finding is surprising 7

8 because congested exit channels and high failure rates are often cited as major obstacles for the development of private equity in Germany. An explanation as to why stock markets and write-offs hardly contribute to the business climate is that after the turn of the millennium shake-out, input-side factors like fund raising and investment proposal quality have become increasingly important. This points towards a consolidation of the German private equity market. CONCLUSION. After two years of shake-out the German private equity market has started to grow vigorously. Consequently, and also due to its high economic importance, private equity has again been focused on by economic policy debate. Together with BVK, KfW has developed Germany s first representative business climate indicator for the private equity market: the German Private Equity Barometer (GPEB). An empirical investigation of the influencing factors surveyed in the GPEB yielded some surprising results. Conversely to public debate, not a plethora of factors but rather only very few factors are relevant for the business climate. During the period investigated ( ) these were, in particular, fund raising opportunities, the quality of the investment proposals and the innovative activity of the firms. In contrast, macroeconomic indicators such as capital market interest rates or business cycle conditions were only of minor relevance. Author: Nick Ehrhart 8

9 SECURITISATION AND ACCESS TO FINANCE FOR EUROPEAN SMES. INTRODUCTION. SMEs are a key element for more employment, innovation and competitiveness in Europe. Meeting the goals of the renewed Lisbon Agenda will therefore require a substantial increase in investments by European SMEs. To innovate and expand, SMEs depend on reliable access to finance. Assuring that there is an efficient intermediation of funds to SMEs is thus an important policy objective. Improved internal rating tools and risk management processes have increased the risk awareness of financial institutions towards SME loans. The implementation of Basel II will reinforce this development. Furthermore a growing number of banks become reluctant to take loans on balance and hold them until maturity. Instead, they tend to underwrite loans only if they can sell the credit risk subsequently. Modern and innovative instruments are needed to secure the financing for SMEs in this changing banking environment. One such instrument is the securitisation of SME loans. From this perspective it makes perfect sense that the Commission takes first steps to utilise securitisation for promotional purposes and plans to introduce a securitisation financial instrument within the Competitiveness and Innovation Programme (CIP) proposed in April. In order to distinguish the key characteristics of the European SME securitisation market and to encourage discussion about the effectiveness of securitisation in improving access to finance for SMEs, KfW Banken- 9

10 gruppe and European Investment Fund (EIF) jointly organised and hosted a conference entitled Securitisation and Access to Finance for European SMEs: too small a market? The conference provided a forum for representatives from commercial banks, the European Commission, the European Parliament, investment banks, financial consultants and the business community to examine a range of issues current in the European securitisation market. The event also provided the opportunity to present the findings of an independent study on SME securitisation and its impact on the availability of credit for SMEs that was commissioned by DG Enterprise and carried out by GBRW Ltd. SECURITISATION AND ITS IMPACT ON SME LENDING. Securitisation is a flexible financing technique that creates a secondary market for SME loans: a bank (the originator ) extends loans to its SME customers ( primary market ), bundles them in a pool, and sells the loan pool ( portfolio ) to capital market investors. These investors usually buy a piece of the portfolio (a tranche ). They can hold the tranche until maturity or sell it to other investors on the secondary market. For those involved, securitisation has many advantages: - Securitisation is an alternative funding source - both for banks that sell their loan portfolios and for SMEs who will ultimately benefit from the more favourable funding; 10

11 - Securitisation may provide club funding for smaller banks which have no access to the capital market themselves: they can pool their respective portfolios and attain capital market funding at competitive rates; - Securitisation introduces liquidity to the SME sector SME loans become a tradable product, and banks can start to buy or sell SME credit risk to diversify their loan portfolios. This in turn will expand their capacity in underwriting new SME loans. - Securitisation helps to diversify the investor base for SME loans. New investors such as insurance companies or pension funds worldwide can invest in SME loans, thus providing SME financing via the capital market. - Securitisation is a very useful tool for risk management. Securitisation is an efficient way for banks to manage their loan exposures so as to release economic and regulatory capital. In turn this enables them to grow their SME lending without increasing their capital base. How does this help SMEs? The fact that the loan to a particular SME has been securitised, may but does not necessarily, improve access to finance for that same SME. However, at the portfolio level, the situation is quite different. Because of the benefits of securitisation to banks, they are 11

12 able to extend more new loans and to expand their lending to the SME market as whole. Additionally, SME borrowers will over time benefit from reduced processing costs (induced by standardisation) and improved transparency ( pricing feedback from the capital markets). Securitisation is an important ingredient of a well functioning SME credit market and has a positive impact on the overall availability of finance for SMEs. Therefore, securitisation of SME loans needs to be further developed and enhanced to at least ensure that SME loans as an asset class do not become less attractive to banks than other assets that are easier to securitise. OBSTACLES TO SME SECURITISATION. SME loans have proven to be more difficult to securitise than other assets such as prime mortgages or credit card receivables. The relatively small secondary market for SME risk mainly results from the high degree of uncertainty associated with SME loans: SME loans are not homogenous (very different sizes, legal forms, diverse collateral), underwriting is relationship-based and less standardised, and there is still a lack of data on loan performance. For these reasons, SME loans are still an underdeveloped asset class. The European securitisation markets are dominated by Residential Mortgage Backed Securities (RMBS) that account for more than 50% of the 12

13 total market. Only about five percent of the European securitisation volumes are backed by SME loans. The GBRW study estimates that only one or two percent of securitisable SME claims on bank balance sheets have actually been securitised. Therefore it is fair to conclude that the European SME securitisation market is still too small, and SMEs do not fully benefit from the many and lasting advantages which the access to the capital markets via securitisation offers. THE ROLE OF PUBLIC SUPPORT. The GBRW Study considers several measures that would have a positive impact on the development of the SME securitisation market and its potential to improve access to finance for SMEs: - First, banks should ensure that the credit facilities made available to SMEs are better suited for securitisation (e.g., by standardisation). - Second, SME associations should support such banking sector initiatives and encourage greater financial transparency of SMEs, thereby enabling banks to standardise their SME portfolios to facilitate securitisation. - Third, governments and regulatory authorities should ensure standardised international and domestic accounting standards and consistent bank regulatory rules governing securitisation. 13

14 Moreover, the public sector should continue to play an active role in supporting SME securitisation. There are a number of publicly led initiatives to encourage more SME securitisation activities, not only in Europe, but also in the United States and in Japan, where the Small Business Administration (SBA) resp. the Japanese Association of Small and Medium Size Enterprises (JASME) have introduced schemes to support the development of a more liquid secondary market for SME loans. In Europe, KfW and EIF play vital roles as market catalysts, standard setters and investors. Although they have been very effective so far in jump starting SME securitisations, GBRW recommends that they further strengthen their promotional activities and support the SME securitisation market by buying riskier mezzanine tranches from SME transactions. Resources for these risk positions should come from specifically allocated public sector budgets. Such investments would not differ materially in risk content from existing loan guarantee programmes, but they provide a unique feature: investing in a small mezzanine tranche of a SME securitisation transaction facilitates the securitisation of a multiple amount of SME loans ( leverage effect ). Therefore, mezzanine investments are a very efficient way to deploy public resources. They would complement existing programmes to provide a powerful package to encourage the securitisation of the SME loans and to improve SMEs access to finance. 14

15 More information can be found in the documentation of the conference that is available at SUMMARY. Public support of SME securitisation is a timely response to a changing banking and capital market environment. It is vital in order to improve access to finance for SMEs. The instruments to be used are highly costefficient. Public support should be allocated towards these instruments and encourage SME securitisation in Europe. Author: Dr. Omar Ranné 15

16 KfW Bankengruppe Economic Department Palmengartenstraße 5 9, Frankfurt am Main Phone , Fax Infocenter KfW Förderbank Phone , Fax infocenter@kfw.de Infocenter KfW Mittelstandsbank Phone , Fax infocenter@kfw.de