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Developing equity financing in the EU - Financing of the EU economy
Growth capital for Europe
By Chew James - Global Head of Regulatory Policy, HSBC Holdings plc
Debt dominates business finance across all of Europe. Funding is mainly provided by banks, few countries have developed public equity markets, and private equity and venture capital provision is patchy at best. Firms have also been reluctant to accept outside ownership, preferring to keep control of a business within a tight circle.
But companies in Europe need more equity to invest and take risks; developing new products, opening new markets, providing new services requires capital, and the debt finance which banks can offer is limited. Collateral is important when banks decide to make loans but companies have only so much security to offer, particularly in the growing European service sector where the assets are often intangible, in intellectual property, software, technology or brands.
In the UK, five of the largest banks have tackled the gap in equity finance by establishing BGF (Business Growth Fund), a new institutional investor providing long-term equity to ambitious UK companies. Operating independently of its shareholders but with their support, from eight offices across the UK, BGF has now invested more than £750m in over 110 firms, typically in tranches of between £2m and £10m.
Companies in Europe need more equity to invest and take risks.
BGF is different from traditional private equity and attractive to companies. It only takes minority positions so entrepreneurs remain in charge. It invests from its own balance sheet so it cannot force owners to sell. And with a £2.5bn balance sheet, it can follow successful investments with more money and has often done so. This is expanding the capital market in the UK and making a difference for companies and people. Businesses in which the BGF has invested have increased employees by over 3,500 since receiving their funding.
This model can make growth capital more accessible across Europe if it has high level political and business support. It needs banks and other firms to come together to deliver the scale of impact which is crucial. And even where countries have similar institutions already, more capacity is better. We need to make it more likely that entrepreneurs will find a source of capital which suits them and their needs.