A report published by the City of London Corporation examining the role and contribution of public equity markets in providing funding for small to medium-sized businesses (SMEs) based in the UK has highlighted the important contribution made by SMEs to the UK economy, as well as the benefits, shortcomings and efficacy of the UK’s two main growth markets (AIM and PLUS) in supporting their access to equity finance.
The report, ‘The City’s Role in Providing for the Public Equity Financing Needs of UK SMEs’, states that of the estimated 4.8 million enterprises in the UK at the start of 2008, 99.4% were classed as medium sized or smaller (less than 250 employees). Between them, these businesses accounted for 59.4% of total private sector employment and generated 50.1% of private sector turnover.
Stuart Fraser, chairman of the policy and resources committee at the City of London Corporation, said: “Small and medium-sized enterprises will be vital drivers of the UK economy as we look to move towards a sustainable, long-term recovery, not only in terms of job creation and growth but also through their flexibility, capacity for innovation and geographical spread. If they are to succeed in this task, the City has an important role to play by providing the finance new businesses require to survive and to grow.
“However, providing funding for SMEs poses specific challenges and, at a time when lending institutions are being told that they must act in a more prudent manner and hold even greater amounts of capital on their balance sheets, many small businesses are finding it hard to obtain finance through the traditional means. That is why this report into the role that public equity markets play in providing funding for SMEs is so important,” he added. “A healthy and growing smaller business sector is not a luxury but a necessity in these challenging economic circumstances.”
In addition to the difficulties directly attributable to the economic downturn, the report also highlights a number of specific reasons why SMEs are struggling to raise external finance:
- A reduction in the supply of early stage venture capital finds (£2m to £10m) has led to SMEs becoming more reliant on business angels to meet their equity finance needs.
- The investment relationship between business angels and venture capitals has become increasingly disconnected and business angels are now tending to fund SMEs for an exit rather than seeking ongoing investment or a market listing.
- The Initial Public Offering (IPO) market is depressed and both business angels and venture capital funds are finding it difficult to exit from investments in order to raise capital.
The report identifies the role of the AIM and PLUS growth markets in providing a platform for investing in SMEs and suggests that 2010 will bring new opportunities for both AIM and PLUS to support high growth SMEs in accessing equity finance.
PLUS Markets Group supports the findings of the report, noting that the report provides a good starting point, and encourages the discussion about funding for SMEs in the UK to be widened much further.
PLUS chief executive officer (CEO) Cyril Theret said: “The City of London report correctly identifies that there is a break in the funding escalator at the point where SMEs should switch from private capital to public equity. At this point we see too many companies opting for a trade sale rather than seeking to list on a public market.
“To ensure that we halt this trend, we believe the discussion about funding for SMEs needs to be widened to cover a number of additional areas. First, it is important to consider the current fiscal framework and remove any distortions that exist. The Government needs to look at this and reform the system to remove any anomalies. Second, retail investors provide much needed support to the smaller quoted companies sector. The existence of a vibrant and liquid secondary market, such as that provided by PLUS, on which retail investors can trade is key to the long-term health of SMEs,” he added.
The report also calls for enhanced government support for the business angel market by increasing financial input and tax incentives and amending the Enterprise Investment Scheme rules so as to address the investment disconnect between business angels and venture capital firms.
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