Private equity can rebuild the economy and its reputation

by Chris Papadopoullos

 
Public policy can guide private equity investment

 
Equity, not debt, will be key to pump-priming British economy and revitalising businesses. This lesson was learned by the Industrial and Commercial Finance Corporation, established after the second world war to kickstart the economy and fill the ‘Macmillan gap’ – the lack of financing options for smaller businesses.

Large businesses can issue bonds and stocks, an expensive process out of reach for small firms. Small firms also struggle to borrow from banks, which want security and reliable cash flows.

What small firms need is equity. Equity investments require a careful analysis of a firm’s prospects, its management team and technical industry knowledge, all beyond the remit of traditional lenders. Credit flows between banks and small businesses tend to be lacklustre. Tighter risk standards, introduced after the 2008 financial crisis, made lending to small businesses even harder for banks. Data from the Bank of England show that lending to SMEs was stagnant over the last decade.

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Πηγή: omfif.org