Stricter than the EU? Surely that’s not necessary?

How do unlisted companies – starters and rapidly growing businesses – finance their growth? How are their potential transfers or buyouts financed? And what impact do financing choices have on their continued development? At the request of the Belgian Federal Science Policy Office, a team of researchers from a number of different universities has been examining these questions. Professor Sophie Manigart was the project leader. Below, she comments on the key results that emerged from the study.

Entrepreneurs, do your homework!

In terms of drawing conclusions for entrepreneurs, she does not beat about the bush: ‘Look beyond the obvious. Over the past few years, there has been a demonstrable improvement, and yet we have to conclude that entrepreneurs do not fully exploit their companies’ growth potential, because they are unaware of or rule out from the outset certain financing options, such as private equity or venture capital. And all too often, those who do make the leap to external financing limit themselves to the well-known financiers from their own network, while they would be well advised to take a detailed look at which external party would be the best fit for their ambitions and needs. Venture capital can vary greatly, and not every private investor is a good match.’

A stable institutional context is crucial

As the research was commissioned by the government, it is the conclusions for policymakers that Sophie Manigart finds especially important. ‘Belgian businesses operate in a specific institutional context which differs from that in other countries. Our research has highlighted the importance of a stable institutional context. In countries with good investor protection and, equally if not more important, legal certainty, there is not only more financing available for both fledgling companies and buyouts, but it is also cheaper. In this type of context, companies will also be able to attract more foreign funding.’

So, is there a lack of legal certainty in Belgium? ‘This is something that we still have to work on. There is a need for a long-term vision. A whole variety of short-term initiatives are taken, and I’ve got absolutely nothing against them, provided that the long-term development and the institutional framework are also considered.’ Manigart regrets that little progress has been made in this area thus far, even though she does concede: ‘I am happy with the initiatives that Minister of Justice Koen Geens recently announced to simplify corporate law. Let’s hope that this is a prelude to more structural interventions.’

Opposing forces at work

How are things at a European level? ‘The European Commission is acutely aware of the importance of the institutional context. This is why it is trying to create a unified financial market, but we haven’t arrived at that point yet. For example, it still extremely difficult for our companies to obtain a stock exchange listing in other countries, because they then have to comply with a vast number of local rules that differ from those in Belgium. Our study confirms that a unified, regulated market would simplify access to financing for a large number of European businesses, which in turn would stimulate entrepreneurship. More companies will be started up, and above all, companies with more ambitious growth plans.’

Likewise, Manigart finds it incomprehensible that with Basel III and Solvency II, the very same European Commission is imposing such strict restrictions on the financial players – banks and insurers – when they invest in fledgling companies. ‘In the late 1970s in the US, they made it difficult for pension funds to invest a greater proportion of their assets in non-listed companies. Everyone is convinced that this is the measure that gave the strongest boost to the development of the venture capital market. Basel III and Solvency II make the financing of new companies virtually impossible, or extremely expensive, for institutional players. These kinds of measures are inconsistent with initiatives that are directed at simplifying access to financing. The problem has been recognised. But in practice, it is proving difficult to overcome this contradiction.’

Belgium, the most diligent student in the class?

However, even more incomprehensible to Manigart is the highly restrictive way that these guidelines are being interpreted in Belgium. ‘Basel III and Solvency II determine minimum rules to which financial institutions must comply, and some countries interpret these more flexibly than others. It has been made even more difficult for our banks and insurers to finance fledgling companies. Understandably, the financial crisis has fuelled our financial regulators’ risk aversion. They want to minimise the risk, but in so doing, they are crippling entrepreneurship.’

Stimulate foreign capital

What does she think Belgian policymakers can still do to boost access to finance? ‘There should be greater stimulation of foreign investments. In the past, government programmes were constructed too narrowly: investors were required to be present in Flanders or Belgium. Recently, non-Belgian investors have been permitted, in some cases by turning a blind eye, but more is needed. I’ll give an example: the new part of the ARKimedes Fund now makes it possible to finance larger amounts, which is extremely positive. We could go a step further by, for example, insisting that at least x% of the portfolio be financed in collaboration with international investors.’

A lack of awareness leads to underuse

Steps should also be taken to ensure that good measures are more widely known, Manigart believes: ‘Instead of launching yet another new initiative, it would be better to ensure that existing measures are applied as efficiently and as widely as possible. Take Minister of Development Cooperation Alexander De Croo’s Start-Up Plan, for example. By means of a tax shelter for start-ups, fiscal incentives for crowdfunding and lower salary costs, the plan is designed to make financing for start-ups easier. Since its launch just after summer, I have been talking to pretty much every possible business angel and entrepreneur about it, but virtually no one is aware of it.’ And she continues: ‘With the Win-win Loan, A Flemish Government initiative, individuals can lend money to SMEs in a financially advantageous way. This formula has been in existence since 2006 and was originally only intended for starters, but established companies have been able to make use of it since 2011 as well. This too is a good measure, and I believe that it is underused because too many people are unaware of it.’

In conclusion

What is her key advice for policy makers? ‘Our study suggests that government measures should not be limited to specific fiscal stimuli, or the setting up of investment funds. It is essential to get the institutional context right, but this type of work takes time and its results will only be visible in the longer term’, says Manigart. ‘As regards the short term, I would urge our regulators not to interpret European guidelines too restrictively. It would be wrong to do less than they ask, but to be stricter is downright harmful to our businesses.’

The SMEPEFI project ran from 2011 to 2014 and was financed by the Belgian Science Policy Office, BELSPO. The compilation of research results produced by Vlerick Business School, Ghent University, the University of Liège and Imperial College London resulted in three doctorates, as well as a number of different academic publications, presentations and workshops. The final report ‘Access to finance of SMEs: young growth oriented companies and company transfers’ was penned in 2015.

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