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Developing equity financing in the EU - Financing of the EU economy

Revitalising equity financing – what drivers should we seek to work on: demand or supply?

By De Juvigny Benoît - Secretary General, Autorité des Marchés Financiers (AMF)

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Since the onset of the financial crisis in 2007, corporate financing in Europe has changed significantly. In a context of weak growth, non-financial companies have first lowered their financing needs. Their reliance on bank finance has also been reduced (except for SMEs), through increased use of the bond and – to a lesser extent – equity markets.

The diversification of funding sources has also been sustained by cyclical factors, most notably the low interest rate environment, as well as structural factors, such as the impact of regulations on the banks’ and insurance companies’ ability to finance the economy. The trend is nevertheless limited by investors’ greater caution as regards risk-taking in the wake of the financial crisis. In France, this is reflected by the decrease in households’ equity holdings from 12.3 % of main net outstanding financial investments in 2007 to 10.3% in 2014.

The lack of appetite for equity however, does not conceal an inadequate supply of equity and investment vehicles. On the contrary, many tools are or will soon be available through recently enacted reforms and on-going regulatory actions, namely under the CMU action plan. To name a few but key measures: MIFID II provisions that aim at improving price formation and transparency; the recently launched EuVECA funds, which can allow venture capital professionals to market their funds to investors across the EU through a voluntary EU-wide passport; the ELTIF label, which can be used to develop the distribution of various funds including private equity. Local initiatives also exist, such as the French-style “limited partnership” – “Société de Libre Partenariat” – a new category of funds benefiting both from management flexibility and tax attractiveness, to better meet the needs of international institutional clients.

It is not so much on supply that we need to act but on demand.

All these tools only need to be promoted so that they are used by investors in the objective of long term investment and thus, the financing of the economy and growth. Hence, it is not so much on supply that we need to act but on demand. For institutional investors, this means that due care be paid to the prudential requirements, accounting standards and specific requirements in terms of investment policy that are applicable to them so that these constraints are compatible with the objective of encouraging the financing of long term projects, SMEs and innovation. For retail investors, we need to re-introduce a culture of “measured and proportionate risk”, including by developing financial education. Access to high quality advice, without additional fees, are necessary to encourage equities and long term products investments. Improving and simplifying information provided to retail investors is also clearly a priority, while taking into account the specificities of corporates of small and intermediate size. Finally, there would be merit in strengthening a single market in pension provision bearing in mind that this requires addressing substantial differences in national tax and retirement regimes. More broadly, taxation is a key driver to channeling savings to the financing of the economy and Member States should seek to ensure their national tax systems are properly aligned with this objective.