As we leave the EU we must continue to collaborate and build bridges. London Stock Exchange Group was proud last month to launch the 2018 edition of our pioneering 1000 Companies to Inspire Europe report, highlighting 1000 of the fastest growing small and medium sized businesses (SMEs) across Europe.
These companies are the backbone of the European economy. With exceptional three-year compound annual growth rates of 24 per cent and average two-year job creation rates of 37 per cent, it is no surprise they have the capacity to tackle unemployment across the continent.
The economic potential of these companies is clear. The problem we need to solve is how we ensure these companies continue to realise their full potential. Access to growth capital is vital but European central bank studies cite there are too many barriers to accessing it for SMEs.
Much of the corporate finance in Europe comes in the form of debt, primarily from banks, which is tax deductible. This is fine for larger established companies to manage their obligations but does little to support dynamic companies. They need to dedicate all their economic capital to investing, innovating and growing, rather than servicing a repayment plan every 30 days.
In the current macroeconomic climate, further barriers would compound this and lead to fragmentation, illiquidity and inefficiency. Not only would this make it harder for companies to scale- up but it would make Europe less competitive as a whole.
Policy makers must put entrepreneurs at the heart of our economic model. We must give our fledgling growth companies access to long-term Patient Capital, like equity, where people seek investment to grow their business either through individual investors, on capital markets, or through crowdfunding and peer to peer platforms.
At London Stock Exchange Group, we work in partnership with our global customers to make long-term patient capital more readily available.
We are proud to have welcomed Funding Circle, the global small business loans platform, to our markets this month. The company raised £300 million to support SMEs, while Crowdcube, the UK crowdfunding site, is part of ELITE, our global business support and capital raising programme, ELITE.
Because just as the economic potential of the fastest growing SMEs is clear so too is the potential of equity finance.
Our global capital market for high-growth companies, AIM, has raised over £110bn for nearly 4000 companies in over two decades. When the UK Government made shares in European growth markets, including AIM, eligible for inclusion in ISA accounts, nearly £4bn of extra capital flowed into AIM companies, practically overnight, helping them to invest, innovate and grow further.
Their exceptional level of innovation is evident too, companies in this year’s 1000 Companies to Inspire Europe report count an astonishing 10,000 patents and registered trademarks between them.
In Italy, AIM Italia, part of London Stock Exchange Group, has raised over €1.4bn in the first half of this year for high-growth companies, an eight-fold increase on the same period last year. In fact, two thirds of growth market finance raised across Europe in the first half of this year has come from AIM markets in London and Milan.
So, we continue to seek to make the European Union’s Capital Markets Union project a reality. It is vital to break down barriers and simplify access to multiple sources of finance for companies, including making it easier to access finance from other countries both within and outside the EU.
It is in everyone’s interest that the European funding ecosystem is maintained and enhanced, not fragmented. Research shows that a one per cent increase in the number of high-growth businesses can add two per cent gross domestic product.
Amid the global political debate about the shape and structure of our future economies and international trade flows, getting more capital flowing bottom up from investors to innovators and small businesses, would be a welcome illustration of the capital markets working efficiently throughout Europe.
And ten years on from the financial crisis, let’s not forget the role over leverage played. Recalibrating the economy away from debt to equity will make our economies more resilient.
Healthy companies support the wider economy and society, and good politics follows good economics.
Nikhil Rathi is CEO of London Stock Exchange