The Confederation of British Industry today published its report “Future champions” (the Report), containing proposals designed to help the growth of medium-sized businesses (MSBs). The Report published ahead of – and designed to influence – the Chancellor’s Autumn Statement on 29 November 2011.
The CBI defines MSBs as companies with a turnover of between £10m to £100m, or with 50 to 499 employees. These firms represent less than 1% of firms, but account for 22% of economic revenue and 16% of total employment. The CBI believes that MSBs are overlooked in public debate: “MSBs are effectively in a public policy gap – too large to benefit from policies tailored to small business, but too small to win the attention that FTSE firms command”.
The Report looks at why MSBs are underperforming – largely defining underperformance by comparison to the successful Mittelstand companies in Germany – and how their potential to grow might be “unlocked”. The CBI believes that for MSBs to grow, they need to make three strategic changes:
- Develop a much greater sense of ambition and greater confidence in their ability to design growth strategies.
- Build up their skills and competencies that will ensure they can implement successful growth strategies.
- Be able to access development capital that will help makes those strategies a reality.
The Report makes recommendations on each of these three changes. Of particular interest are the proposals on accessing capital.
Accessing development capital
- Argues that the AIM market as a viable option for “IP-rich innovative firms that can’t source next stage venture capital”.
- Approves of the establishment of the Business Growth Fund – which we discuss in this post.
- Suggests that another potential source of equity for MSBs is direct investment by larger firms – corporate venturing.
Debt capital: With regard to removing barriers to the debt capital markets, the Report suggests that forms of debt finance other than bank lending should be considered by MSBs and encouraged by policy makers – in particular, bonds or private placements. The Report describes the problems that stops MSBs accessing this type of capital:
- The market for MSB bonds is far less developed than in Germany or in the US;
- The minimum issuance size in the UK corporate bond market is around £100m, far too big for MSBs;
- The cost of raising finance is means it is not a viable option for MSBs; and
- There is a lack of demand, as MSB bonds would not rated in investment grade.
The Report describes how medium-sized businesses in Germany are taking advantage of the Stuttgart Stock Exchange’s Bondm initiative, which attracts bond issuance from companies with a turnover as low as Euro 50m. The CBI suggests that to emulate this success in establishing debt capital markets that can meet the financing needs of MSBs, the Government should bring industry together to:
“…set up the processes for a mid-sized bond market; the infrastructure to attract bond issues, assess risk, offer affordable credit ratings to MSBs and develop a process of securitisation….government could also help stimulate the market by purchasing MSBs’ bonds…through an independent body [that] could also establish a way of packaging up MSB bonds to produce securities that have the right risk profile for institutional investors”.
In this, the CBI is very much pushing at an open door, as the Chancellor announced in his speech to the 2011 Tory party conference that he was looking at ways to enable the Government to purchase debt issued by companies.
Finally, the Report suggest that the government could also help generate retail interest in MSB bonds by setting up tax-free savings. The London Stock Exchange’s ORB market would provide a platform for MSBs to issue bonds to the retail market. We discuss the ORB market in this post.
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