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Can a Capital Markets Union help Europe’s MSBs?

Our response to the European Commission's capital market proposals

The European Commission (EC) recently announced plans to explore creating more integrated and deeper capital markets across its 28 Member States. Targeting a 2019 launch, the Capital Markets Union (CMU) aims to streamline financial markets and allow businesses access to more diverse financing sources, regardless of geographic location within the EU. Grant Thornton recently submitted recommendations to the EC on those efforts we believe can most help mid-sized businesses (MSBs) benefit from the proposal (read the full response [PDF - 227KB]). 

An action plan to benefit growing businesses

As an organisation focused on helping dynamic companies unlock their potential for growth, Grant Thornton is familiar with the challenges facing growing businesses.  With more than 50,000 member firm clients operating across more than 130 markets, Grant Thornton member firms are addressing issues which impact clients’ growth. Access to finance remains one of the core challenges for these companies, regardless of where our firms and their clients do business.  

According to recent World Bank data, more than 225,000 mid-sized businesses (MSBs) operate in the European Union, generally employing between 50 and 250 people.  Grant Thornton is familiar with the challenges these companies face, challenges which reflect the dual track recovery across Europe. Specifically, we have observed:

  • lending conditions in Germany, the UK, and France are still tough but appear less stringent than those facing growing companies in Greece, Spain, and Italy  
  • larger businesses generally find it easier to access finance than smaller MSBs
  • companies operating as part of an established supply chain find it easier to secure capital.

The most striking of these challenges, particularly for growing MSBs who are regularly engaged in exporting goods or services, is that similarly positioned businesses in Germany, France and Sweden are far more likely to obtain capital than their equivalents in Spain, Italy and Greece.  In a recent Grant Thornton International Business Report survey, 35% of southern European businesses cited access to finance as a growth constraint, compared to just 22% across the EU as a whole (and just 14% in North America). 

This is not primarily due to a higher risk thresholds at the banks, but rather that there is limited lending capital in these markets.   In the wider view, the challenge for MSBs is that even when bank capital is readily available, access to the equity capital markets is not a feasible option. 

There is limited data on the impact of these MSBs to the European economy[1]; yet we know that MSBs are critical to the health of any economy because they are trading, expanding, hiring, and developing new products.  To mobilise substantial funding across Europe in to both the MSBs and SME market requires fresh thinking and a capital market that:

  • delivers what finance providers state they need to make informed decisions
  • is clearly recognised and understood by those seeking capital 
  • is structured to allow bundling, securitisation, secondary markets to deliver efficient investment flows.

Delivering information providers need to expand access to finance

CMU represents a critical opportunity to expand access to finance to the MSB market segment. However, the needs of MSBs differ significantly from those of the micro and small businesses although they are frequently pooled together.  Conversely, information needs from providers do not currently align with information made available from the MSB segment.

We recommend that the Commission consider a study to assess the specific needs of dynamic MSBs, because these companies will be the primary drivers of Europe's growth.    

Further, we recommend that the accountancy profession leverage its unique insight into the mid-sized market and support the provision of an aggregate view of financial and non-financial characteristics of successful mid-sized businesses across Europe, using its combined data and analytics power to support risk and credit insights for this market.  

Creating an environment for growth

Grant Thornton UK’s work with the Growth Accelerator business support programme has shown us that high growth companies succeed when they work closely with business advisors and consult with experts to understand and access the best finance options. 

Success is also more likely when growing businesses access government-backed programmes dedicated to these businesses – however, there is low awareness of these programmes generally, including current programmes in place across Europe. We recommend the Commission consider such programmes as an important part of the execution of any capital markets strategy with small and mid-sized businesses as beneficiaries.

Further, we recommend that the Commission focus on awareness building of existing programmes as an immediate priority to help support the growth of these businesses while the CMU is in development.

Simple and consistent tax incentives and tax treatment

Finally, we recommend simple and consistent tax incentives and tax treatments be made available across Europe, as investors will have an important role to play in the success of the CMU. 

The Capital Markets Union is a programme with significant potential to benefit small and mid-sized businesses throughout Europe. As the major capital markets continue to improve, it is possible to envision capital again flowing freely to large corporates, with small and mid-sized businesses left without access. We encourage the Commission to hold to its vision for the long term structure and intent of the programme, and deliver a CMU that will support Europe’s growth for the future.

For more information about the consultation, contact your local Grant Thornton office.

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[1] Most available analysis merges the impact of micro, small and medium sized businesses; a notable exception is the recently released report “Hidden Impact: The Vital Role of Mid-Market Enterprises”  HSBC Bank Plc, March 2015.