Europe’s SMEs need more equity capital and courage to take a risk

 

There is more than one reason why Europe’s recovery from the financial crisis has lagged so far behind the US — but at the heart of the European malaise is a shortage of equity capital for small and medium-sized enterprises (SMEs).

 

Small businesses play a vital part in Europe’s economy. They employ 88m people across the 28 European Union states, more than 65pc of the workforce. Yet compared with the US, there are relatively few small companies that make it to become big businesses. Without greater access to risk capital this is unlikely to change, as only equity funding is suited to the risks of backing fast-growing, young businesses and supporting them to the next level.

 

For example, Europe has only three-quarters as much equity capital — €10  trillion versus €19 trillion in the US. The structure and sources of finance are also different. In Europe, regulated insurers and banks are the main suppliers of funding, whereas in the US funding sources are more diverse. Private pension funds and fund managers play a bigger role in the US and their risk appetite is greater. US pension funds and fund managers typically invest more than half their assets — 53pc — in equity, versus 37pc in Europe.

 

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