Midsized companies have limited access to bank finance, as bank lending volumes in the Eurozone have been falling since the policy response to the financial crisis triggered tighter capital requirements for banks. Nevertheless, midsized European companies will need to raise more than 2.4 trillion in debt funding by 2018, according to Standard & Poors estimates. Bond issuance is the typical alternative, but many SMEs are not willing or able to go to the expense of securing credit ratings needed to issue publicly traded debt. Private placements are potentially more attractive. They consist of the direct sale of securities to a select group of investors in the form of medium to long term senior debt obligations, either in the form of a note or a loan. They can offer a middle ground, with strong, stable cash flows and covenant protections similar to a loan. With many European companies choosing to access the more developed US market, and accounting for about a third of that market, Europe is now working on the development of a pan-European private placement market to improve the financing opportunities available to SMEs on this side of the Atlantic.
Marte Borhaug, Head of Group Financial Services and Corporate Governance at the CBI Confederation of British Industry, discusses with Euromoney Conferences Giada Vercelli the path to a pan-European private placement market.
EC: Why do we need to develop private placement markets in Europe?
MB: Access to the right types of finance is vital to a business success. But while large companies are well-served by financial markets, there are challenges for our medium-sized gazelle firms. To compete and grow, these businesses need better access to long-term growth capital.
Well-established private placement markets can help to directly connect firms with investors, helping companies to diversify their sources of finance towards capital markets. And private placements typically provide funding over a long period, typically for 5-12 years.
The 2012 Breedon Review estimated that an extra £15bn of long-term growth capital could be unlocked by developing the private placement market here in the UK.
EC: Why does a third of the US market consist of placings for European companies?
MB: The US has already developed a successful private placement market, which attracts European firms.
A major challenge in the UK has been a lack of standardised documentation giving certainty to investors and issuers that the legal set-up here is right. We are pleased to see that this is now being addressed through market-led approaches, such as the Pan-European Corporate Private Placement Market Guide.
In Europe we also have a regulatory environment that hasnt done enough to incentivise investors, with the capital requirements in Europe - although not excessive - set far higher than in the US.
The demand from European firms tells us that there is real potential to develop deeper private placement markets here in Europe, which would really help smaller medium-sized firms for whom the US would never be an option.
EC: For most SMEs the cost of obtaining a credit rating is prohibitive, which means they are dependent on bank lending for finance. Should the rating business be revised?
MB: A key barrier for investors looking to invest in medium-sized businesses is the availability of reliable credit information, including a credit rating. However, encouragingly a number of market-led solutions are emerging to address this. They include enabling better sharing of existing credit data amongst finance providers as well as bespoke credit ratings for medium-sized companies. Supporting industry-led solutions will help break down this barrier.
From an SME perspective, we find that the main barrier to increasing capital market financing is not so much about the cost of a credit rating, but about business awareness and capability to access the right sources of long-term finance to support their growth ambitions. 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. 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.
EC: Some rating agencies have opened their services to mid-sized companies, yet they find it hard to change the corporate culture. What is the CBI doing to raise awareness on financing opportunities?
MB: To help raise awareness about alternative sources of finance, the CBI has organised a series of events around the country as part of our campaign to promote medium-sized businesses. The events, called M-clubs, enable firms to meet and discuss their experiences with various finance options. We have also launched the CBIs Find my Finance, an online toolkit that can guide a business through various financing options.
We also need the government to start promoting the long-term benefits that private placements can have for UK companies simply talking about it in the media can help boost awareness and demand.
EC: Are you coordinating your efforts with your fellow business organisations in Germany, Italy, France, where a national private placement market is already active? What is the utility of a PPEP for them?
MB: Even though some countries have private placement markets in operation, the EU markets lag behind the US. While the US private placement market raises around $45bn annually, the EU market remains both smaller and fragmented. Around 9bn a year is raised via the German Schuldschein market; £4bn via the UK market; and 3bn via the French Euro-private placement market but the combined total is still far smaller than in the US and many Member States are yet to develop a market at all. We are working closely with business federations across Europe to discuss how our national markets are developing and what national governments are doing to support the development of private placements. In particular, we are in close conversation with countries such as France and Italy where the governments have taken clear steps to support the development of these markets.
EC: Will a coordinated effort raise the standards in corporate governance across Europe?
MB: Encouraging companies to take time to think about how they run their business to achieve their growth ambition is important. But we believe that efforts to improve governance should be led by businesses themselves, not by a top-down approach. Corporate governance is not about adopting a set of burdensome rules or processes, nor about setting out a one size fits all approach.
A medium-sized business with the ambition to list, for example, will have to focus on different things than a family-owned medium-sized business. Corporate governance should be about identifying what will be most appropriate for each individual business and thinking about how addressing these matters can help the business achieve its growth ambitions. The CBI is trying to help this and has created a guide to long-term success, filled with case studies to help businesses think about their corporate governance.
EC: What would the CBI like to see in the upcoming Capital Markets Union?
MB: Boosting the availability of capital financing for firms will help propel growth across Europe. Focusing on the type of firms that really need to leverage capital markets the fast growing medium-sized companies would be a good place to start with this important project. The CBI has clear priorities for the CMU. First, backing business-led initiatives that increase firms financing options, such as private placements and equity finance. Second, attracting investors by showing that European business is a great choice for investment, including by improving credit data on companies to give investors confidence. Finally, connecting medium-sized businesses to the capital that can fuel their growth ambitions, by raising awareness of alternatives and reducing the burden of prospectus directives on firms seeking capital. The EU seems to have the right approach with the Capital Markets Union initiative. British businesses are pleased to see the Commission recognising that less regulation is more. Its now important that this approach becomes the reality - the CMU should be primarily about fostering cooperation among businesses and Members States.
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