Debt Shouldn’t Be the Only Tool to Get Businesses Through Covid-19
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Getting money to businesses is today’s challenge, both to fill their cash flow shortfall through the coronavirus crisis and to strengthen the economic recovery to follow.
Much of the debate revolves around financing businesses through loans and other debt. European governments and regulators should also act urgently to ensure that companies have easy access to equity financing and that stock markets are strong enough to support the European economy.
Debt is effective because it reaches businesses quickly and efficiently, but it cannot be the only tool. This could have side effects: more indebtedness means a deterioration in the credit rating of companies, and over time, it will affect their ability to obtain new financing. Once the crisis is over, indebted companies should take stock.
Businesses need patient capital to start planning for the future without the burden of too much leverage. The solution is fairness. From the smallest boutique to the largest listed companies, raising equity is the right tool to help them get through the crisis without impacting their ability to finance themselves in the future.
This is why it is essential that well-coordinated measures are adopted in a simple and fast way, in order to allow more deals to be concluded in time for European companies to start planning their future investments.
We must make it easier for businesses to access this financing. National laws should provide that all companies can raise up to 20 percent of their capital without needing the approval of the shareholders’ meeting and regardless of what is included in their articles of association.
For companies listed on regulated markets, no prospectus should be necessary. Information regarding the raising of capital should be made available through well-structured press releases. Listing rules and review procedures should be harmonized, streamlined and made mandatory at European level. No regulatory arbitrage should be possible.
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We must also promote the development of investors in small businesses through specifically allocated European funding and by allowing tax advantages at country level. The concept of State aid should be amended so that it does not apply to investments in private or listed companies with a market value of less than € 1 billion.
People should be encouraged to invest in long-term equity funds in all possible ways. The European Investment Fund, which channels funding to small companies, should streamline its procedures, speed up its approval process and devote resources not only to private companies but also to securities issued by listed small and mid-cap companies.
Some regulations and taxes that have been damaging to the market should be removed, including parts of Europe Mifid II regulatory regime, such as the infamous and unnecessary unbundling of research. We should eliminate the need for tedious consultations and damaging taxes such as those on financial operations, which have only been implemented in two countries.
We need to protect and help European stock markets and their main players, including active investors who traditionally also focus on small businesses. Specific initiatives could include tax benefits on research relating to small and mid caps, both for the broker and the issuer in the case of research paid for by the company.
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Mifid II should be simplified for small active investors with less than € 5 billion in assets under management. Large passive managers should contribute to the cost of producing research from which they indirectly benefit.
We must also change places. European stock exchanges should implement inter-market trading suspensions similar to those in place in the United States, in order to protect investors during sharp declines in the market. The almost monopolistic cost of data charged by the stock exchanges should be regulated; pricing behavior of market players that favors large investors and businesses should be prohibited; and some of the regulations that have made stock sales and trading unprofitable for most brokers should be reviewed.
We need to design ways for public entities to act as investors in business capital increases, with instruments such as repayable equity, which can be repaid by the business or the entrepreneur when appropriate. possible over a long period.
Some of these initiatives can be taken quickly at the national level. Some of them require a bold approach from the European Commission, such as revoking the recently implemented research unbundling, and some of them will require more time.
There isn’t much time to chat. It stands to reason that the need for equity will increase rapidly and that the current market infrastructure is too fragile to support companies when they really need it.
Andrea Vismara is Managing Director of Equita Group, an independent Italian investment bank. He wrote this article in collaboration with Stefano Caselli, Vice-Rector for International Affairs at Bocconi University