Financing A Private Sector Recovery: Reviving The Equity Market For Smallcaps

10th Aug '10 by Dave Brickell

6 comments 3577 reads

The Coalition has recently issued a green paper ‘Financing a private sector recovery’ asking for views on how SMEs can access “sustainable finance”.

"The Government recognises that access to finance is critical for businesses to survive and grow and that small and medium-sized companies face particular challenges. The current system is not adequately delivering finance to small, growing businesses that are vital to the future of the economy. The Business Secretary and the Chancellor want to work with business and the financial community to ensure that access to finance is not a barrier for companies looking to invest and boost the growth of the economy".

This provides a welcome opportunity for smallcap investors to bring to the Government’s attention issues which are negatively impacting the UK capital market for SMEs. The deadline for submissions is September 20th and we plan to make a submission on behalf of Stockopedia users. Your help is appreciated! To get the ball rolling, here's an extract of an excellent reply by the City Grump of Real Business:

So how can your bright young things make a permanent contribution to plugging that pesky old “equity gap”? The good news is just two things are required. Firstly, order the FSA to change their attitude to the small-cap investment community. Time and again, I hear from private client fund managers, brokers and others that the FSA is keen to remind them of the dangers of recommending that their clients invest in small listed companies. Your green paperr says you are “interested in hearing views on any regulatory obligations that may disproportionately deter SMEs from listing on exchange-regulated markets such as AIM and PLUS Quoted”... [Secondly], recognise that investors need long-term, consistent encouragement (as your predecessors did under Ken Clarke). They have been conditioned by all and sundry to accept that investing in Sovereign Debt, BP, GEC, Turner & Newall, Woolworths, etc, etc, is safe and profitable whereas all small company investment is the equivalent of having a bet on the 2.30 at Haydock Park. This attitude is so ingrained that, like it or not, you need to put in place a long-term, easily understood fiscal incentive".

On this note, we had an interesting session organised by CityZone discussing the current market structure last week with some other participants - the notes of that…

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marben100

12th Aug '10

Hi Dave,

I applaud you and Stockopedia for launching this initiative.

I am disappointed by the lack of response so far. If you, the reader, are responding directly to the consultation, please do indicate on this thread, so we know whether PIs' predicament is due to apathy - and we get what we deserve - or whether people are paying attention.

COME ON PEOPLE: GET OFF YOUR BACKSIDES. THIS IS A RARE CHANCE FOR YOU TO MAKE A DIFFERENCE AND IS IMPORTANT.

There are often whines about the lack of consideration for PIs in corporate governance, market regulation. and related matters The govt is thinking about actually DOING something. Let's try and steer them in the right direction. You must first read the material Dave has linked to.

Right, having got that off my chest, here are my thoughts:

The thrust of the Green Paper is that the public and private sector has been overreliant on debt. Agreed. Clearly making equity funding more accessible can be part of the solution.
It makes a lot of sense for small but sophisticated investors to invest in smaller businesses. As the paper points out, the costs of due diligence are too high for larger financiers relative to the sums involved - but this is not so for smaller investors.
I agree with all the suggestions you've highlighted from the CityZone session

There is one other issue which I feel strongly about, though, that hasn't been addressed and that is corporate governance. Unless corporate governance is improved, small investors will (continue to) be deterred and access to finance/investment will remain limited, because the risk of being "ripped off" is too high. At present it is far too easy for directors to make misleading statements, without being held to account. I can cite numerous examples (as I'm sure many of us can) where this has happened.

I can cite the specific example of Mxxxx, where I have clear evidence of directors having misled investors, shortly after which the company went into administration. In the two years prior to that event, those directors paid themselves massive bonuses. Yet there is no current mechanism I have been able to find for me to present my evidence so that, at the very least, a case for director disqualification can be considered.

Whilst dishonest company directors can get away with such reprehensible behaviour, they will continue to do so and investors will be deterred from investing in small businesses.

I note that the government is proposing to abolish the FSA. Whilst the FSA has proved ineffective, my view is that rather than abolishing it, it should be reformed, refocussed & given real teeth to clamp down on such behaviour (and any other forms of market abuse). It could even be self-financing from fines it levies for abusive behaviour (though there is the potential for it to lose revenue if it does a really good job!).

There needs to be a "whistle blowing hotline", for investors to bring their concerns/evidence to the attention of a regulatory body.

My next message may be unpopular with some here and with large parts of the current government but I strongly feel it is true.

A further area for related reform is the operation of remuneration committees. Over the last 30 years the gap between rich and poor has been widening continuously. This has very serious consequences throughout the whole of our society. A significant part of the blame for this can, IMO, be laid at the door of self-serving remuneration committees. Ordinary workers' salaries being frozen or cut, whilst top executives enjoy lavish bonuses & lifestyles is a recipe for de-motivation and social unrest.

Sorry I haven't yet come up with sensible ideas to deal with this but will try to do so and post more in due course.

I hope that Stockopedia will publish its proposed submission before it is submitted and perhaps can back it up with signatures from Stockopedia users that are in agreement?

I would also suggest that Stockopedia users draw this thread to the attention of their investing friends, so that as much comment and support for sensible proposals as possible can be obtained.

WE ONLY HAVE A FEW MORE WEEKS TO RESPOND - over to you...

Regards,

Mark

PS: make sure you rec the thread if you haven't already done so, so it gets more attention.

Dave Brickell

13th Aug '10

Thanks, Mark. Very helpful comments - I am hoping that is the start of a flood of feedback and ideas :-)

Good thinking to publish the proposed submission on the site - we will do that once it's ready (September, probably) but I welcome as much input as possible before then to make the submission as compelling as possible.

if anyone would rather not comment publicly, please do feel free to send ideas by email to admin@stockopedia.co.uk). Anonymity will be preserved etc.

Now's the chance to get those gripes about regulation, tax, access and other aspects of smallcap investing off your chests - let's hear them!

16th Aug '10

And, for those that can't face the prospect of going through the whole Paper (http://www.bis.gov.uk/assets/biscore/corporate/docs/f/10-1081-financing-private-sector-recovery.pdf), here are the key questions on which the Government is consulting:

General Evidence Base

1. Do you agree with the evidence base as set out in this paper? Are there any additional issues that should be considered?

Certainty Over Frameworks

2.Do you think greater certainty over future tax and regulation would have a significant impact on current demand for or supply of business finance?

Equity Markets

3.Are there any regulatory obligations that may disproportionately deter SMEs from listing on exchange-regulated markets such as AIM and Plus Quoted? What can be done to address this?

4.Are there any additional barriers to corporates (of any size) accessing equity markets and how could these be addressed?

5.How can Government ensure that the best small businesses in all parts of the UK are visible to publicly backed venture capital funds? Should Government intervention to address the equity gap focus on the best firms regardless of geography, or seek explicitly to address regional economic disparities? The Government would be particularly interested in views on regional stock exchanges.

6.How can publicly-backed equity schemes and the Growth Capital Fund make more use of private capital in future? How could the scale and reach of publicly backed funds be improved? Are there any gaps within the portfolio? Does the potential model for the Growth Capital Fund meet the objective of filling a gap in the availability of funding for growth companies? Are there ways in which the potential model could be developed to improve its appeal to investors or its ability to make a material contribution to the funding of growth companies?

7.How could more high-net-worth individuals be encouraged to become Business Angels and participate in larger deals through syndicates? Are there specific issues impeding business angel activity that the Government should address, such as investor readiness or the structure of publicly-backed venture capital funds?

8.How can eligible businesses help themselves to become ‘investment ready’ for equity finance? Where should this be done by private sector, market-led solutions? What role is there for Government in supporting this, and should intensive Government support be focussed on businesses high growth potential?

9.How effective are current tax incentives for equity investment in small businesses, such as the Enterprise Investment Scheme or Venture Capital Trusts?

Debt Capital Markets

10. Are there any steps that industry, financial institutions or government could take to promote access to debt capital markets for a greater number of UK businesses?

Competition

11. What more could be done to promote greater competition in the provision of business finance?

12. What other actions could be taken to help businesses (of all sizes) access a wider range of different finance options?

Addressing Future Risks

13. Looking ahead, what are your views on future risks to the provision of business finance, in particular bank lending? If you have concerns, do these reflect transitional factors in the wake of the financial crisis, or structural factors? Are there steps that the banking sector, regulators or policy makers should be taking to mitigate these risks?

Banking Sector Environment

14. What steps can banks, industry or Government take to strengthen bank's relationships with their customers and ensure businesses are not discouraged from seeking finance? What steps can the banking sector and others take to improve the financial readiness of business?

15. What options might Government consider to support increased lending to business (including possible expansion of the EFG or of payments to part of the supply chain)? How effective is the EFG in increasing access to debt finance for small businesses? What could be done to improve it and can more cost be borne by users?

16. What steps would be beneficial in making securitisation more attractive to investors and a stable form of funding for lenders? Are there particular sectors or products that this should be focused on?

International Trade

17. Are there significant constraints on access to trade finance for UK exporters? What measures could banks, industry or the government take to increase the availability of trade finance?

Questions 2 to 10 are the most relevant but thoughts or comments (either here or by email) on any of these questions very welcome, so we can make the submission as comprehensive as possible.

Thanks,

Dave

15th Sep '10

Hi All, we are just putting the finishing touches on this submission so any more input would be welcome either here (or by email to admin @ stockopedia.co.uk). We will summarise the key recommendations but, for those that would like to comment on the paper itself, feel free to email us and we will send you a copy for your review.

Many thanks, Dave

Jackalope

21st Sep '10

laudable effort all at stockopedia. strongly agree with a number of the points raised above. Why should small-cap stocks be precluded from ISA's - I find this attitude completely patronising towards individual investors and must additionally skewer some investment away from smallcaps (albeit probably only marginally). I can't believe I'm alone in having been prevented on a number of occasions from investing in a small or mid-cap due to these restrictions. But hand in hand with trying to open up smallcaps to a broader range of investors is the point eloquently made by Marben above re corporate governance and transparency. Who can forget the shenanigans at the likes of Sibir Energy and RCG over the last couple of years?

Financing a private sector recovery: Reviving the equity market for smallcaps

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Dave Brickell

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