"The Capital Markets Union must focus on helping medium-sized firms to access the finance they need to achieve their growth ambitions and create jobs"

Transcription

1 The business vision for a Capital Markets Union in Europe CONNECTING CAPITAL "The Capital Markets Union must focus on helping medium-sized firms to access the finance they need to achieve their growth ambitions and create jobs" Growth in Europe will come from unlocking the potential of our medium-sized businesses. The Capital Markets Union should enable businesses to connect to capital markets, helping them achieve their growth ambitions and create jobs. Medium-sized businesses need to be the focal point of the Capital Markets Union. Growth in Europe will come from unlocking the potential of these firms. In the UK they represent less than 2% of firms but account for nearly a quarter of all economic revenue. But businesses face barriers to further success 35% of UK medium-sized firms cited access to long-term capital as their main barrier to growth. And the picture is similar across Europe. The difference will be made if we can find more ways to connect capital to European business ambition. We need the Capital Markets Union to: 1. Back business-led initiatives that increase firms financing options; 2. Attract investors by showing that European business is a great choice for investment; 3. Connect medium-sized businesses to the capital that can fuel their growth ambitions. Broadly, the Commission s approach in the Green Paper is the right one supporting solutions that markets and businesses are creating themselves and only using regulation where it will really make a difference. British business sees this as a welcome new approach a sign that the EU is changing for the better by putting business at the heart of its drive for jobs and growth. Following this through in practice will now be important. European medium-sized businesses want the EU to focus on delivering quick wins, connecting capital to business ambition to fuel growth today, rather than getting side-tracked by longerterm, more intractable challenges. The CBI s action plan for connecting capital to business ambition is aimed at helping the Commission deliver these progrowth wins for business.

2 THE BIG PICTURE Medium-sized businesses must be the focal point of the Capital Markets Union Medium-sized businesses can drive growth and job creation in Europe Europe's priority is growth and jobs. The key to achieving this will be unlocking the potential of medium-sized companies as an engine of growth across Europe. Their potential has been demonstrated. The German mighty Mittelstand accounts for 37% of total corporate turnover and employs more than 15 million people 1. We need to replicate this across Europe, where these firms are often under-valued, rarely recognised for their contribution to the economy, and their needs not catered for. With the right tools and support, these firms can play a leading role in supporting growth and job creation. In the UK, for example, businesses turning over between 10m and 100m represent less than 2% of firms but account for 23% private sector revenue and 16% of total employment 2. In 2011, a CBI report found that scaling-up medium-sized firms could inject as much as 20bn into the UK economy by And ambition is there too in a 2014 survey, three quarters of UK medium-sized firms had confidence in growth over the next five years 4. But firms face barriers accessing the long-term finance they need In order to scale up, firms need access to a diverse range of funding sources to match their varied growth ambitions. But at the moment, Europe remains far too dependent on bank lending compared to the US medium-sized companies in the US have roughly five times as much funding from capital markets as those in the EU 5. This dependency has become a barrier to growth across Europe as banks deleverage their balance sheets. Although the supply of alternative sources to finance has increased since the crisis, a gap remains, particularly for much needed long-term growth capital. In the UK, 35% of small and medium-sized firms cited access to long-term capital as their number one barrier to growth 6. This gap will only get bigger as recovery in Europe picks up, and companies look to increase investment in the UK, the Office for Budget Responsibility predicts business investment to grow at over 8.5% between 2014 and Our research shows that barriers to capital market financing can exist for a number of reasons, as illustrated in Exhibit 1. Broadly, these fall into three categories: 1. Too few long-term financing options exist for medium-sized businesses; 2. An investment environment that does not encourage the supply of long-term capital to businesses; 3. A disconnect between businesses and the capital they need due to poor awareness of the options available. Exhibit 1: Common barriers faced by European businesses seeking financing for growth Bank lending does not match current needs or is declined. The business is not given guidance on alternative options. Businesses lack the capability to explore financing options information is hard to find and inconsistent. The business does not consider seeking financing options across the EU, outside its own Member State. Financing options do not meet their needs for diversification and longterm finance. The firm wishes to use equity financing but is unable to find an investor willing to take a minority stake. Investors cannot access reliable and up-to-date information on the business, so are unable to accurately assess the risks. Limited inward global investment to Europe means the overall pool of finance available for businesses is reduced. The regulatory environment makes longterm investment an unattractive prospect for investors. Alignment to our three action areas: 1. Back business-led initiatives that increase firms financing options; 2. Attract more investors by showing that European business is a great choice for investment; 3. Connect medium-sized businesses to the capital that can fuel their growth ambitions. 2

3 We need to unlock capital markets for medium-sized businesses We want a Europe where, as in Exhibit 2, the journey for a business seeking the long-term finance they need is much more straightforward and barriers are minimal. The Capital Markets Union can make a difference here, but the solution to this structural challenge is complex and won t be solved by any one action alone. To achieve this vision we need the Capital Markets Union to: 1. Back business-led initiatives that increase firms financing options; 2. Attract more investors by showing that European business is a great choice for investment; 3. Connect medium-sized businesses to the capital that can fuel their growth ambitions. Exhibit 2: A potential growing business experience within successfully connected European capital markets 1. A European mediumsized business seeks capital to support its ambitious growth plans 2. The business knows where to go for clear, straightforward information on financing options across the EU 3. There are a range of long-term financing options available that meet their needs 4. The competitiveness of the market attracts inward investment to the EU, increasing funding options for the businesses 5. The marketplace allows the business and potential investors to easily connect 6. Potential investors have all information they need to appropriately assess the risk 7. As the regulatory environment supports long-term investment, investors are keen to provide the financing 8. Having received the financing they need, the business grows, creating job opportunities across the EU Alignment to our three action areas: 1. Back business-led initiatives that increase firms financing options; 2. Attract more investors by showing that European business is a great choice for investment; 3. Connect medium-sized businesses to the capital that can fuel their growth ambitions. The EU s role needs to be one of facilitation to achieve this vision Businesses want the EU to be evaluated not on the number of pieces of legislation that are passed but on the outcomes delivered and the growth and jobs created as a result. The Capital Markets Union Green Paper marks a welcome change in approach with the Commission supporting market-driven solutions when they are likely to be effective, and regulatory changes only when necessary. The EU needs to deliver quick wins and not get bogged-down by longer-term debates around insolvency, tax and corporate law areas where Member States are better suited to act at the expense of concrete progress in areas of immediate benefit to businesses. And early progress is essential to break down barriers for our medium-sized businesses and supply them with much-needed investment to fuel growth today. The CBI s action plan to connect capital to business ambition sets out where the Commission has a role to play and where it should support market-led initiatives which can deliver the best solution to boost growth and jobs. 3

4 THE ACTION PLAN 1. Back business-led initiatives that increase firms financing options Publically support and promote the ICMA guide to encourage the uptake of private placements across Europe and use of the best practice framework. Ensure Solvency II risk calibrations incentivise insurers to invest in private placements. Promote the UK s Business Growth Fund as an example of an industry initiative that provides firms with equity growth capital. Member States / businesses should be left to: Consider exempting private placements from Withholding Tax, thereby removing an administrative barrier and incentivising investors. Consider reviews into the use of equity finance and the role the tax system might play in boosting it. Help raise awareness and understanding of equity financing amongst the wider business community, sharing other businesses experiences. 2. Attract more investors by showing that European business is a great choice for investment Help signpost Member State and industry-led initiatives for potential investors across Europe. Provide, as non-legislative guidance, best practice for the quality and sharing of credit information. Conduct a full assessment of all EU legislation to ensure objectives of the Capital Markets Union are supported, in particular the FTT regulation, Banking Structural Reform and MiFID. Make increasing attractiveness of EU markets and attracting inward investment a key objective of the Capital Markets Union. Ensure equivalence regimes are appropriately designed to avoid creating barriers to global markets. Member States / businesses should be left to: Prioritise the development of solutions to increase the availability of credit information on medium-sized businesses to investors. Explore business-led initiatives to provide a voluntary credit scoring system for medium-sized firms that are considering external finance. Ensure national rules enable investment into new longterm investment products such as European Long Term Investment Funds (ELTIFs) and European Venture Capital Funds (EuVECAs) 3. Connect medium-sized businesses to the capital that can fuel their growth ambitions Encourage industry initiatives that raise awareness of alternative sources of finance and facilitate the sharing of information for businesses. Consider, as part of the Prospectus Directive review, simplified disclosure requirements for secondary issuance, while ensuring investors have access to all relevant information. Member States / businesses should be left to: Increase business awareness of capital market financing options through initiatives such as industry guides and knowledge sharing events. Create Member State level one stop shops as a central source of information on government support schemes for medium-sized businesses looking for finance. 4

5 1. Back business-led initiatives that increase firms financing options European medium-sized firms need long-term growth capital to support their growth ambitions. But businesses do not always have access to the longterm financing they need and this gap is expected to widen as the recovery picks-up and business investment increases. The solution is to make sure European firms have access to a wider range of capital market financing options, from debt to equity. Market-led initiatives are underway to address this the EU and Member States must get behind these in order to unlock long-term growth capital. European private placement markets lag behind the US but could offer a real solution for mediumsized businesses Well-established private placement markets can directly connect firms and investors. With maturities of between 5 and 12 years, these markets can provide the financing to underpin businesses longterm growth objectives and help them diversify their sources of debt finance. But EU markets lag behind the US in this form of funding. While the US market raises around $45bn annually 7 the EU market remains both smaller and fragmented. Around 9bn a year is raised via the German Schuldschein market 8, 4bn via the UK market 9 and 3bn via the French Euro-Private Placement market 10 but the combined total is still far smaller than in the US and many Member States are yet to develop a market at all. There is potential to grow though, with the 2012 Breedon Review estimating that in the UK alone an extra 15bn of long-term growth capital could be unlocked. Developing private placement markets in Europe could provide a means to channel available long-term capital directly into larger medium-sized businesses. To date, the market across Europe has been held back by a lack of standardised documentation; poor knowledge and awareness of this financing source; and a regulatory environment that hasn t done enough to incentivise investors. But now things are starting to progress. A market-led working group, coordinated by the International Capital Market Association (ICMA) published a guide in February 2015, which outlines a voluntary framework for common market standards and best practice 11. In line with the Commission s desire for nonlegislative solutions where possible, the EU s role should be, firstly and most importantly, to support the standards set out in the market guide and to promote the long-term benefits that private placements can have in public speeches, media interventions and online EU material. Raising awareness of the guide amongst both investors, companies and advisors will help boost demand. Secondly, how Solvency II is calibrated and implemented will also affect the market as insurers are an important potential investor into private placements. The Commission should make sure that EU insurers face similar incentives to invest in private placements as their US counterparts and other EU investors. This can be achieved by ensuring a level playing field for investors and considering revision to final calibrations for insurers of the spread risk capital weightings, accounting for the fact that assets are held to maturity. To further incentivise private placement investment, Member States could consider exempting private placements from Withholding Tax, as recently announced in the UK, removing an administrative barrier for investors. Businesses with experience of equity financing have positive messages to tell, yet equity remains underutilised in Europe Business leaders with experience of using equity are clear about the positive impact it has had on their business opening up new avenues for other finance and increasing their access to outside advice and skills. In the UK, 81% of small and medium-sized businesses (SMEs) with direct experience of it would recommend equity to another business 12. However, the perception remains one of caution. Only 3% of SMEs across the EU used equity finance between April and September Concerns about losing ownership or decision-making abilities are significant barriers to the take-up of equity financing, despite the fact that there are many equity finance providers who are willing to take a minority stake. Businesses have told us they want long-term equity financing options that allow them to accelerate growth, manage the risks, keep control and work in partnership with an investor to build shareholder value. While our research suggests a significant barrier to equity financing is culture, which is hard to tackle, another barrier is availability of equity providers that can take a minority stake to fit firms wishes to keep control of the business. We have seen some market-led progress in this area. A successful example of an industry-driven solution is the Business Growth Fund (BGF) in the UK, set up in 5

6 July The BGF typically takes a minority stake in businesses (10%-40%) and a seat on the board. With financial backing of the UK s five main banks, the BGF 14 : Provides capital of 2-10m for a minority equity stake to established medium-sized firms; Has invested nearly 500m in over 80 companies; Is already the largest single growth capital investor in SMEs in the UK 15. The long-term partnership approach offered by BGF is what businesses are looking for. A role for the Commission could be to help facilitate best practice sharing between Member States, using the BGF model as a working example of an initiative that successfully channels equity growth capital into medium-sized firms. An area where Member States can play a role is by analysing the impact of the tax treatment of equity versus debt as a barrier to businesses taking up equity finance. In the UK, CBI has been calling for a cross-departmental review to look at boosting the use of equity finance to see whether or not there is a role that the tax system can further play to achieve this. Taxation remains an area where Member States are best placed to make changes, so it is therefore important any reviews are left to the discretion of Member States. The EU can play a role in highlighting tax incentives across Member States to facilitate information sharing. Corporate bonds are a source of financing that can be tailored to suit business needs The ability to tailor financing options to suit their needs is important for firms. While standardisation of the corporate bond market could be of benefit to investors by increasing secondary liquidity, it would not necessarily be in the best interests of businesses. Any action taken should first address whether barriers to issuance exist, and be market-led, with issuers and investors working together to ensure the needs of both parties are satisfied. Recommendations Publically support and promote the ICMA guide to encourage the uptake of private placements across Europe and use of the best practice framework. Ensure Solvency II risk calibrations incentivise insurers to invest in private placements. Promote the UK s Business Growth Fund as an example of an industry initiative that provides firms with equity growth capital. Member states / businesses should be left to: Consider exempting private placements from Withholding Tax, thereby removing an administrative barrier and incentivising investors. Consider reviews into the use of equity finance and the role the tax system might play in boosting it. Help raise awareness and understanding of equity financing amongst the wider business community, sharing other businesses experiences. 2. Attract more investors by showing that European business is a great choice for investment Capital is available across Europe and beyond, and investors are signalling an appetite for investing into companies. We must make sure these are European companies. We need to boost investor confidence and encourage long-term investment to channel growth capital into European medium-sized businesses. Identifying barriers that exist for investors and breaking these down should be a key element of the Capital Markets Union. Without reliable information on businesses, investors cannot assess potential risks of an investment A major barrier for investors looking to invest in medium-sized businesses is the availability of reliable credit information. Feedback to a 2014 Bank of England discussion paper found incomplete access to the information needed to assess a prospective borrower to be the main constraint in the UK SME market 16. Information asymmetry in the lending market further limits the ability of those outside the banking sector to analyse the risk of direct investment into companies. Measures to improve access to credit data across Member States will help facilitate better decisions by providers and boost investment into firms. It could also support wider EU initiatives aimed at improving 6

7 the supply of finance to businesses, such as the development of the EU s securitisation market. The good news is that there are already initiatives underway across Europe, with 16 of the 28 Member States having, or in the process of developing, a Central Credit Register 17. Some are choosing publicly supported systems, such as in France where the Central Bank captures all available financial information on individual businesses and providing a score for a fee through its FIBEN service. Others are encouraging market-based initiatives. To address information asymmetry, the UK s Small Business, Enterprise and Employment Act 2015 imposes a duty on designated banks to provide information about SME customers to designated private credit data platforms who must fulfil a set of criteria, including to ensure data privacy. Subject to customer consent, the platforms then pass it on to finance providers. Independent benchmarks for midmarket companies' creditworthiness are also in the process of being developed by credit rating agencies, to increase transparency and comparability of businesses for potential investors. This market-led approach is the right one, allowing the market to adapt on existing infrastructure and avoiding disruption to market participants. The Commission should not stifle market-led approaches, and an EU-wide solution would not be flexible enough to cater for the nature of various Member State markets. Rather, we welcome the Commission s plans to hold workshops to develop recommendations on SME credit information, bringing together key stakeholders, and finding a solution that suits all parties. The Commission s role can also be to help signpost new initiatives for investors across Europe, for instance by using existing EU infrastructure including SME networks and contact points can help get this information out to investors. The Commission could consider providing a non-legislative guide of best practice standards for credit information, that Member States and businesses can use to ensure high quality information and that the appropriate infrastructure is in place to allow data to be shared. A potential market solution that businesses could explore would be the establishment of a voluntary credit scoring system for medium-sized firms that are considering external finance, bringing together investors, advisors and medium-sized businesses to agree on a set of key principles. Similar to the ICMA guide to private placements, this would give firms looking for finance a baseline they know investors have confidence in. The regulatory environment must encourage long-term investment and support the Commission s growth objective Following the financial crisis more than 40 regulations were passed by the last Commission to ensure the stability of our financial sector. With the Capital Markets Union a key objective for this Commission, it is important we now look at whether previous reforms help or hinder capital market financing. A review should carefully analyse rules that have already been implemented as well as considering rules that are currently under discussion. The focus should be on assessing the impact on capital market financing for medium-sized firms, of both individual pieces of regulations as well as their cumulative impact. Specific areas that should be addressed are: The Financial Transaction Tax (FTT) has the potential to harm growth, jobs and investment across Europe and more specifically risk harming liquidity in secondary markets. EU Banking Structural Reform must not damage the ability of medium-sized businesses to access more sophisticated financing options that can support their growth. MiFID discussions should take heed of concerns regarding possible impacts on market making and secondary market activity which are critical to European businesses. Europe must remain competitive and attractive to inward investment Data from the International Monetary Fund (IMF) shows there is considerable potential for attracting further equity and debt investment into Europe 18, which would increase the pool of finance available for businesses. This must be a priority. The Capital Markets Union needs to take into account the wider global context and in breaking down internal barriers, it should not build up external barriers to international investment. So we welcome the Commission s recognition of the importance of the EU s competitiveness as a place for 7

8 financial services. If inappropriately designed, third country equivalence regimes can hinder global markets and prevent inward investment. To work effectively, equivalence tests should focus on desired outcomes and be proportionate to the risks posed. The EU must also be outward-looking, opening up new trade opportunities for business and continuing to pursue bilateral trade deals such as the Transatlantic Trade and Investment Partnership (TTIP). Products that encourage long-term, crossborder investment should be promoted End investors should be able to easily access new fund products designed to increase longterm, cross-border investment into companies and projects that need it, such as European Long- Term Investment Funds (ELTIFs). It is important that banks, insurers and pension funds are incentivised to invest in ELTIFs and business would support Member States looking into whether the incentive structures are right, including on taxation. Another source of growth capital is venture capital. European Venture Capital Funds (EuVECAs) provide a framework to deliver this patient capital directly to businesses but have so far seen limited uptake. There should be an assessment of whether there is an overlap of disclosure requirements between the EuVECA regulation and the Prospectus Directive. If so, disclosure requirements should be eased, as a reduction of administrative costs could help boost uptake by investors, in turn providing more funds for businesses. Recommendations Help signpost Member State and industry-led initiatives for potential investors across Europe. Provide, as non-legislative guidance, best practice for the quality and sharing of credit information. Conduct a full assessment of all EU legislation to ensure objectives of the Capital Markets Union are supported, in particular the FTT regulation, Banking Structural Reform and MiFID. Make increasing attractiveness of EU markets and attracting inward investment a key objective of the Capital Markets Union. Ensure equivalence regimes are appropriately designed to avoid creating barriers to global markets. Member states / businesses should be left to: Prioritise the development of solutions to increase the availability of credit information on medium-sized businesses to investors. Explore business-led initiatives to provide a voluntary credit scoring system for mediumsized firms that are considering external finance. Ensure national rules enable investment into new long-term investment products such as ELTIFs and EuVECAs. 3. Connect medium-sized businesses to the capital that can fuel their growth ambitions The biggest barrier to increasing capital market financing is businesses awareness and capability to access the right sources of long-term finance to support their growth ambitions. The EU s role in supporting firms is one of enabling, helping make sure information exists and is readily available to businesses, and optimising information requirements for firms wanting to raise capital market finance. To make use of capital market financing, businesses need to be aware of the options that exist Culture and awareness rank highly as barriers to finance. Businesses often don t want to opt for alternative finance or aren t aware of the options available. Only 16% of EU SMEs would currently consider equity financing relevant for their business, and only 4% for debt financing. And the number actually using these sources is even lower only 3% used equity and 1% used debt between April and September In the UK, only around a third of SMEs are aware of alternative funding sources such as business angels, peer-to-peer lending and crowdfunding, and awareness of who provides these types of funding is even lower; for some funding sources only just over two out of ten know where to go 20. One solution is enabling businesses to get advice from existing financing channels. In the UK, 8

9 legislative change made in early 2015 will introduce a referral process whereby banks will refer customers who are declined to other financing options, helping to provide the information they need. This solution is a good example of a Member State tackling challenges in a way that fits their national circumstances. We do not believe we need EU legislation in this area, but it can act as an enabler by sharing best practice. Other business-led solutions are knowledge sharing workshops or events to help connect medium-sized businesses with potential investors. These have been mentioned as useful ways to increase business awareness and understanding. The CBI has led a series of successful roundtables bringing together medium-sized businesses to discuss, amongst other issues, access to alternative sources of finance. We would be happy to involve the Commission in one of these to help their work as they build the Capital Markets Union. Culture change must come bottom up from businesses themselves, but the Commission can help encourage and facilitate the sharing of information for businesses across Member States, making use of existing EU communication channels, to increase awareness of the capital market financing options available to them. We should optimise information requirements for medium-sized firms trying to access capital markets High quality information is essential for those looking to invest in a business and a prospectus is a key source of this information. It is important however that the administrative and time costs incurred by companies do not act as a barrier to issuing bonds or shares. Requirements for the prospectus should strike a careful balance between providing investors with the information they need and avoiding unnecessary burdens on the issuer. In the UK, issuers have commented that the time to approve prospectuses can be extensive, making the listing process unpredictable and more costly. When businesses need to raise additional finance and face the choice between a secondary issue (with associated prospectus costs) or a loan facility through an existing banking relationship, they could be likely to opt for the latter reducing the diversity of finance. The Commission should therefore look into differentiating requirements for initial offerings and secondary issues. Once a company has publicly issued bonds or shares, rigorous disclosure and governance requirements apply such as the Market Abuse Directive, Transparency Directive and Shareholders Rights Directive. If more securities of the same type are issued, investors can already access a lot of information through these disclosures, as well as the original prospectus and the value of the existing securities. A simplified prospectus approach would be a significant step to reducing the barriers to issuance and increasing use of capital markets. A simplified disclosure approach would need to make sure that significant information about the issuer has been made available to the public, and to avoid any potential abuse of the rules. A threshold may be needed, for example, defining maximum relative size of the secondary compared to the initial issue and to the current share capital of the issuer, as well as a limit on the maximum time between issuances. Suggestions for a common EU SME accounting standard are also put forward in the Green Paper, with an aim of increasing cross-border comparability of companies. We believe this risks being an overly burdensome and costly process for firms and we are not convinced the main barriers to investment lies in standardisation of accounting and therefore do not believe this should be a priority. Recommendations Encourage industry initiatives that raise awareness of alternative sources of finance and facilitate the sharing of information for businesses. Consider, as part of the Prospectus Directive review, simplified disclosure requirements for secondary issuance, while ensuring investors have access to all relevant information. Member states / businesses should be left to: Increase business awareness of capital market financing options through initiatives such as industry guides and knowledge sharing events. Create Member State level one stop shops as a central source of information on government support schemes for medium-sized businesses looking for finance. 9

10 References 1 Federal Ministry for Economic Affairs and Energy, The German Mittelstand: driving the economy, October ONS, CBI analysis, CBI, Future Champions, CBI Mid-Markets Survey, Millward Brown, European Commission, Capital Markets Union Green Paper, CBI, Slice of the Pie, HIMCO, Private Placement Debt: diversification, yield potential in a complementary IG asset, Euractiv, 9 Standard & Poor s, Mid-Market Funding in Europe is Making Strides, But Has Far To Go, April Euro PP, 11 ICMA, The Pan-European Corporate Private Placement Market Guide, Feb CBI, Slice of the Pie, European Commission, Survey on the Access to Finance of Enterprises, Nov Business Growth Fund, 15 Barclays and BGF, Entrepreneurs Index, Nov Bank of England, Summary of feedback received on the BoE May 2014 Discussion Paper on UK credit data, Nov Bank of England, Discussion Paper: Should the availability of UK credit data be improved?, May European Commission, Capital Markets Union Green Paper, European Commission, Survey on the Access to Finance of Enterprises, Nov British Business Bank, Small Business Finance, 2014 For further information or a copy in large text format, please contact: Rachel Bentley, Special projects manager, CBI Copyright CBI 2015 The content may not be copied, distributed, reported or dealt with in whole or in part without prior consent of the CBI. T: E: rachel.bentley@cbi.org.uk linkedin.com/company/cbi 10