Solbes calls for action on funding for small firms

Date: 14/10/1999

By Renée Cordes

EU GOVERNMENTS are making some headway in ensuring that companies across Europe have vital access to equity to finance expansion, according to a European Commission report to be published next week.

But it warns that member states need to do more to meet the specific financing needs of small and medium-sized enterprises (SMEs) so that they can, in turn, create jobs.

The report drawn up by Economic and Monetary Affairs Commissioner Pedro Solbes, which is set to be adopted by the full Commission next Wednesday (20 October), will point out that although SMEs are considered one of the main engines for economic growth and employment creation in Europe, they need different kinds of funding at different stages of development in order to fulfil this potential.

These include seed capital funds, which provide money for start-ups, venture capital funds which generally come on board one to two years after a company is founded, and public share sales.

For smaller firms, it is often cheaper and more efficient to raise money through venture capital firms or the stock market than to get bank loans or buy governments debt. Although stock markets are often riskier, they can offer a far better return. They are also more liquid, since investors do not get tied into long-term financial commitments.

But so far, opportunities for seeking alternative financing have been limited. European stock markets have traditionally been more focused on low-risk investments, although this is slowly starting to change.

"Businesses are increasingly looking to alternative methods of financing," said Garry Parker, a spokesman for UEAPME, the lobby group for SMEs. "There is a need for more coordination of venture capital and other schemes at the European level."

Solbes' move to maintain the momentum behind efforts to make more risk capital available follows a pledge by the Commission earlier this year to help companies raise funds in a large transparent and liquid European market. The plan fits into the Commission's grand scheme for setting up a single financial services market to help firms take advantage of the euro.

"The smooth introduction of the single currency is a promising sign for our financial markets, including those specialised in SMEs," former Internal Market Commissioner Mario Monti said earlier this year, calling for an integrated capital market. "Our markets should profit from the new situation in order to realise their full potential."

In the five-year action plan for financial services he unveiled this spring, Monti called for a series of sweeping reforms to bolster the regulatory environment for Europe's capital markets. Plans include updating EU directives on reporting requirements and prospectuses for stock exchange listings, moving towards a single set of financial statements for listed companies and improving market supervision.

"The current situation in Europe is not ideal," said Monti. "Existing sources of finance should transform and improve themselves in order to lower the cost of capital for SMEs."

In the past few years, smaller stock markets targeting high-tech growth stocks such as Germany's Neuer Markt and EASDAQ - the Brussels-based pan-European market for high-tech growth stocks which is meant to be Europe's answer to NASDAQ - have started to really take off.

However, the markets have often been very volatile, with large swings in share prices from one day to the next as retail investors pull out quickly after making a profit. As a result, say financial experts, there is still a long way to go before Europe develops a full-fledged equity culture which even begins to come close to that in the US.

"There is still very much the mentality of take the money and run," said Karel Lannoo, a financial services expert at the Centre for European Policy Studies. "This is not just a matter of improving the regulatory environment but also of increasing awareness."

The European Venture Capital Association argues that the Commission should make this a priority. The organisation's president Emile Van Der Burg is urging the Commission to help entrepreneurs by, for example, clarifying the licensing requirements for intellectual property.