Breaking the Equity Finance Glass Ceiling
In Feb 2014 the CBI report, ‘Slice of the Pie' was published highlighting the UK’s overreliance on traditional debt finance and the serious under-utilisation of equity finance.
Half of all small and medium-sized firms (SMEs) rely on bank loans, while 36% use overdrafts. By comparison just 3% use equity finance - this lags behind the European average of 7%.
We know the situation in Northern Ireland is even worse with an even greater reliance on traditional bank finance (at around 93%).
And looking forward the new regulations impacting on banks implies that the quantity of bank credit available in the future is likely to be curtailed.
So it is critical that we encourage greater levels of awareness and increase our understanding of how equity finance and other alternative financing methods) can be used to help support the growth of local companies.
The majority of growing businesses which have used equity finance report that it had a positive impact on their company (66%), and 4 out of 5 saying that they would use it again to fund business growth. 81% would recommend equity finance to other companies.
We need to shatter the equity finance glass ceiling and encourage growing firms across Northern Ireland to consider this largely untapped resource.
It’s a myth that using it results in loss of control and decision making. And in many cases equity finance helps attract other sources of finance.
Equity finance is one of the most effective ways for small and medium-sized firms to access capital for investment and there are plenty of investors who take a minority stake.
We have already seen the success of the Growth Loan Fund in Northern Ireland which acts a kind of bridge between debt and equity.
The main concern that businesses have over using equity finance is a fear of losing ownership (46%). A quarter of respondents said that they were concerned about a loss of decision making power.
These worries are tied to a lack of awareness of the various different types of equity finance - while small and medium-sized firms are aware of venture capital and private equity, just half said that they were aware of equity raised from the public markets.
We lag massively behind in this particular area with only two Northern Ireland based companies listed on the London Stock Exchange.
Many growing businesses also lack the capabilities to engage with equity providers because the negotiation of terms can be considerably more complicated than with debt finance, requiring relevant expertise.
That’s particularly problematic considering that only a quarter of them have a qualified financial manager and the vast majority (84%) do not consult external advisers before making finance decisions.
Across the UK, and particularly in Northern Ireland, the equity market is underdeveloped – CBI’s report has put forward a series of recommendations to help address this, and hopefully contribute to a more informed debate.