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Developing equity financing in the EU - Financing of the EU economy
Capital Markets Union (CMU): Boosting the demand and the supply for corporate equity
By Merlin Martin - Director, Financial Markets, DG for Financial Stability, Financial Services and Capital Markets Union, European Commission
One of the main challenges that European companies are facing to grow their business is the lack of equity financing. The most recent SAFE survey suggests that the number of firms raising equity is low and declining (from 1.7% in H2 2014 to 1.4% in H2 2015). The preference of company owners for debt over equity – to avoid dilution of shareholding – is understandable on one level. However, it is short-sighted as equity can serve companies as an important loss absorber in difficult times.
At the heart of the CMU project is the objective of broadening access to finance for innovative companies that tend to be less profitable in the short term and are natural beneficiaries of equity finance. However, volumes of business angel activity and venture capital (VC) investment remain low in many EU jurisdictions. The European Commission (EC) is taking forward a comprehensive package of legislative and non-legislative measures to scale up the supply of VC financing in Europe, including the creation of a VC fund-of-funds supported by the EU budget and the review of regulation on European Venture Capital and European Social Entrepreneurship funds. Looking at large SMEs, the EC is concerned that the proportion of small IPOs has dropped in the aftermath of the crisis. To help fast-growing companies go public, the EC wants to make a success of the “SME growth market” concept that will be given form by MiFID 2. It will therefore work with the established SME-oriented Multilateral Trading Facilities (MTF) to “grow” this regulatory franchise across the EU. The proposal for a Prospectus Regulation will also make it cheaper for issuers of all sizes to access equity financing while simplifying secondary issuances for firms which are already quoted.
On the supply side, the EC is seeking to widen the pool of equity investors. The Solvency II Delegated Regulation grants equities traded on MTFs and equities held through European Long Term Investment Funds the same capital charge as equities traded on regulated markets. In the tax area, the EC aims to address the preferential treatment of debt over equity in its proposal for a Directive on a Common Consolidated Corporate Tax Base in late 2016. This will make it easier to attract equity investors and reinforce companies’ capital structure. In addition, as tax measures can stimulate equity investment, in particular for innovative companies and start-ups, the EC will study the existing national tax incentives for VC and business angels and disseminate best practices.
In conclusion, one of the litmus tests of CMU in the long run is whether it succeeds in shifting the EU economy towards a better balance between debt and equity finance.