This report assesses the contribution made by the City (UK financial services) in meeting the equity finance needs of small and medium-size enterprises (SMEs) in the UK. The study seeks to explore the role of public equity markets in the SME funding ladder. While primarily equity focused, the research also considers the provision of other forms of financing, such as business angels and venture capitalist financing. The research is being carried out by URS, Bourse Consult and Strathclyde University
TABLE OF CONTENTS
FOREWORD.....................................................................................................................1
EXECUTIVE SUMMARY....................................................................................................3
1. INTRODUCTION ..................................................................................................6
1.1. Research Brief....................................................................................................6
1.2. Background.......................................................................................................6
1.3. Methodology.....................................................................................................7
1.4. Report Structure ................................................................................................9
2. IMPORTANCE OF SMES TO THE UK ECONOMY ..............................................10
2.1. Introduction .....................................................................................................10
2.2. The Revival of the SME Sector........................................................................10
2.3. Economic Significance: Number, Location and Sector.............................12
2.4. Benefits of SMEs to UK Economy....................................................................15
2.4.1 Job Creation....................................................................................................15
2.4.2 Quality of Jobs.................................................................................................16
2.4.3 Innovation........................................................................................................17
2.4.4 Entrepreneurship and Economic Growth.....................................................18
2.4.5 Societal Contribution......................................................................................18
2.5. Government and the SME Sector .................................................................18
2.6. Summary ..........................................................................................................20
3. THE SME FUNDING ESCALATOR.......................................................................21
3.1. Introduction .....................................................................................................21
3.2. Sources of Finance Used by SMEs: an Overview.........................................21
3.3. Sources of Equity Finance for High Growth Firms ........................................27
3.4. Summary ..........................................................................................................35
4. EQUITY GAPS....................................................................................................36
4.1. Introduction .....................................................................................................36
4.2. Lack of Seed Capital......................................................................................36
4.3. Decline in the Supply of Early Stage Venture Capital ................................38
4.4. Business Angels – Venture Capital Disconnect............................................50
4.5. ‘Closed’ IPO Markets and Trade Sales .........................................................52
4.6. Summary ..........................................................................................................56
5. THE ROLE AND EFFECTIVENESS OF PUBLIC MARKETS.....................................58
5.1. Introduction .....................................................................................................58
5.2. Market Characteristics ...................................................................................58
5.2.1 Geographical Reach of AIM.........................................................................58
5.2.2 Sector Distribution of AIM...............................................................................59
5.2.3 Market Size.......................................................................................................61
5.2.4 Fundraising.......................................................................................................62
TABLE OF CONTENTS
5.2.5 Leavers .............................................................................................................68
5.2.6 Impact of the Economic Downturn..............................................................71
5.3. Attributes of a Successful Market ..................................................................71
5.4. Liquidity ............................................................................................................73
5.4.1 Challenges in Liquidity Provision for Small Cap Stocks ...............................74
5.4.2 Differentiation between Small and Micro Cap Stocks ...............................79
5.5. Regulation........................................................................................................80
5.5.1 Investor Protection and Regulation ..............................................................81
5.5.2 Regulation of Companies on AIM by Nomads ...........................................82
5.5.3 EU Listing Directive: Premium/Standard Listings...........................................85
5.5.4 EU Legislation...................................................................................................86
5.6. Markets Support Other Financial and Business Services .............................86
5.7. Summary ..........................................................................................................88
6. CONCLUSIONS.................................................................................................90
6.1. Introduction .....................................................................................................90
6.2. Conclusions......................................................................................................90
6.3. Key Research Messages.................................................................................92
7. RECOMMENDATIONS ......................................................................................95
7.1. Introduction .....................................................................................................95
7.2. Recommendations: The Pre-Market Funding Escalator .............................95
7.2.1 Seed Capital ...................................................................................................95
7.2.2 The Business Angel Market .............................................................................96
7.2.3 The Business Angel-Venture Capital Disconnect.........................................97
7.2.4 The Pre-Market Funding Escalator.................................................................98
7.2.5 Trade Sales Amongst Growing SMEs.............................................................99
7.3. Recommendations: Operation of Growth Markets ..................................100
7.3.1 Responsibilities of a Company Quoted on the Public Markets ...............100
7.3.2 Improving Daily Liquidity ..............................................................................100
7.3.3 Improving Further the Quality of Nomads..................................................101
7.3.4 Potential Impact of UK and EU Legislation.................................................101
7.4. Recommendations: Understanding SME Funding Issues ..........................103
7.4.1 SME Funding Needs ......................................................................................103
ACRONYMS................................................................................................................104
BIBILIOGRAPHY ..........................................................................................................105