More support for equity finance and business angels needed
Equity, not debt, holds the key to financing the future of the UK’s small business sector, according to ACCA’s (the Association of Chartered Certified Accountants) Small and Medium Sized Enterprises (SME) Committee.
In the latest of its quarterly policy briefings, called “Improving SME access to equity finance”, ACCA’s Committee believes that the economic recovery could prove to be business angel's shining moment.
Professor Robin Jarvis, Head of SME Affairs at ACCA, explains: "For years, individual equity investors have been out of the limelight, first hit by the dotcoms bust, then crowded-out by easy credit and now discouraged by the economic climate."
Like the SME Committee, the Government knows that the UK will now have to build new industries without the benefit of easy credit. The Department for Business, Innovation and Skills (BIS) recently finished collecting evidence for the Rowlands review of growth finance, which was launched in June. But the SME Committee says this is unlikely to go far enough.
Professor Robin Jarvis adds:
“The Rowlands Review is looking into ways of supporting established, cash-positive businesses with solid growth potential. There may well be a case for that, but that’s not the kind of businesses that new, innovative industries are built on.”
Instead, the Committee has called for more support for equity finance in general and particularly business angels – the wealthy investors and business mentors popularised by Dragons’ Den. The Committee’s latest paper suggests four priority areas where the government and accountants can make a difference:
• Tax incentives. The Government’s Enterprise Investment Scheme (EIS) is helpful, but still limited in its potential. The Committee cites France’s solidarity tax exemption as an example of providing tax incentives without falling foul of EU State Aid rules.
• Support for networks. – Networks can help business angels identify investment-ready businesses and leverage the experience and capital of their peers. Subsidising the gate-keeping function of angels is one easy way for Government to make a real difference without spending much.
• Developing investment-readiness – Angel investors are constrained by a lack of opportunities rather than by a lack of funds – the Committee noted that accountants need to build demand for equity finance by helping SMEs understand the benefits of equity and signal their value to potential investors.
• Developing exit routes. – Equity investors don’t make any money from their investment unless a business is sold or goes public. Exits could become more attractive and more numerous if businesses were able to achieve fairer valuations (for instance, by better valuing intangible assets) and investors could be lured with lower levels of capital gains tax.
The Committee, however acknowledges that interventions into the angel investment market are no simple matter. Professor Jarvis adds: “The Committee is concerned that the government does not have enough information on Business Angels to inform policy in this area, so we’re working with BIS to correct that. Our members facilitate a great deal of this type of investment so if anyone knows how that market works, they do.”
Courtesy By ACCA
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