The Small and Medium-sized Enterprises (SME) Week 2014 has ended and it is now time for the Maltese business community to reflect on one of the outcomes discussed – the need to create appropriate ‘ecosystems’ for the smoother operations of SMEs which account for about 99 per cent of all local firms.
Doing so will enable sustainable growth, and assist in bringing new concepts, products and companies to market and thus create jobs and wealth for the Maltese population.
The debates highlighted a number of challenges faced by these enterprises. One such challenge is the ‘funding gap’ problem, which features as an issue year after year.
SMEs and start-ups find great difficulty in raising equity. There are often a number of contributory factors, including their small size, inexperience, lack of collateral as well as involvement in innovative markets; these factors make these SMEs high risk and often un-bankable.
Financial institutions either provide this risk capital at extremely high interest rates that SMEs cannot afford or refuse to provide it altogether. Hence ‘family, friends and fools’ remain the only sources of funds for such firms. Unfortunately, this funding alone is often insufficient to fully finance a start-up or innovative project, which hampers growth and halts the next generation of entrepreneurs from entering the market.
So if we truly want to encourage innovation and small enterprises there must be a shift from the traditional bank lending to new funding techniques and structures which aid firms in their initial and growth stages, allowing them to cross the ‘valley of death’ of financing.
If we want to encourage innovation and small enterprises there must be a shift from the traditional bank lending to new funding techniques
A variety of options are available. Venture capital transforms investors’ money into seed capital for start-up firms. Alternatively, business angels, being experienced entrepreneurs seeking to invest, can help firms kick-off by injecting both capital and expertise.
Established firms seeking to expand or make new investments might also use other forms of private equity (PE). With this mechanism, funds put in by investors are injected in the business as equity while the fund manager exerts a degree of control, usually by obtaining a position on the board of directors.
Locally, there have been numerous attempts to launch such financial instruments. Yet these were unsuccessful for a variety of reasons. SMEs were reluctant to share control, their expectations of entrepreneurs were too high, the local market was considered too small and the history of failed mergers deterred investment. Yet, despite these failed attempts, there is a renewed interest in these finance vehicles as SMEs search for new ways to fulfil their funding needs. Promisingly, the European Investment Bank supports member states using such instruments. Additionally, the European programme Horizon 2020 also has specific initiatives to help firms get funding both through debt as well as equity instruments.
Locally, the Malta Investment Management Company Ltd (MIMCOL) is, jointly with EY, studying the challenges and opportunities to create a local PE fund which would invest in domestic firms, and the role of government in the process. Consultations are currently under way with a number of relevant stakeholders, including fund managers, financial institutions and government representatives.
Interested readers are encouraged to contribute to the study by contacting the EY Malta asset management advisory leader on e-mail karl.mercieca@mt.ey.com, or the EY Malta economic advisory leader on e-mail chris.meilak@mt.ey.com.