European Small Business Finance Outlook
Working Paper 2019/57
European Small Business Finance Outlook
Helmut Kraemer-Eis Antonia Botsari
Salome Gvetadze Frank Lang
Wouter Torfs
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Helmut Kraemer-Eis heads EIF's Research & Market Analysis division. Contact: h.kraemer-eis@ Tel.: +352 248581 394
Antonia Botsari is Research Officer in EIF's Research & Market Analysis division. Contact: a.botsari@ Tel.: +352 248581 546
Salome Gvetadze is Research Officer in EIF's Research & Market Analysis division. Contact: s.gvetadze@ Tel.: +352 248581 360
Frank Lang is Senior Manager in EIF's Research & Market Analysis division. Contact: f.lang@ Tel.: +352 248581 278
Wouter Torfs is Research Officer in EIF's Research & Market Analysis division. Contact: w.torfs@ Tel.: +352 248581 752
Editor: Helmut Kraemer-Eis, Head of EIF's Research & Market Analysis, Chief Economist
Contact: European Investment Fund 37B, avenue J.F. Kennedy, L-2968 Luxembourg Tel.: +352 248581 394 Luxembourg, June 2019
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Disclaimer: This Working Paper should not be referred to as representing the views of the European Investment Fund (EIF) or of the European Investment Bank Group (EIB Group). Any views expressed herein, including interpretation(s) of regulations, reflect the current views of the author(s), which do not necessarily correspond to the views of EIF or of the EIB Group. Views expressed herein may differ from views set out in other documents, including similar research papers, published by EIF or by the EIB Group. Contents of this Working Paper, including views expressed, are current at the date of publication set out above, and may change without notice. No representation or warranty, express or implied, is or will be made and no liability or responsibility is or will be accepted by EIF or by the EIB Group in respect of the accuracy or completeness of the information contained herein and any such liability is expressly disclaimed. Nothing in this Working Paper constitutes investment, legal, or tax advice, nor shall be relied upon as such advice. Specific professional advice should always be sought separately before taking any action based on this Working Paper. Reproduction, publication and reprint are subject to prior written authorisation.
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Executive summary1
This European Small Business Finance Outlook (ESBFO) provides an overview of the main markets relevant to EIF (equity, guarantees, securitisation, microfinance)2. It is an update of the June 2018 ESBFO edition.
We start by discussing the general market environment, then look at the main aspects of equity finance and guarantees/SME Securitisation (SMESec). Finally, before we conclude, we briefly highlight some important aspects of microfinance and Fintech in Europe.
Economic outlook and SME business environment:
Global economic growth has slumped significantly during the second half of 2018 and the IMF revised global growth forecasts for 2019 downwards from 3.7% to 3.3%.
Also the EU is facing new economic challenges, rooted in external factors, such as the ongoing US-China trade dispute which has negatively affected external demand for EU goods from emerging Asia; or the uncertainty of a potential no-deal Brexit which continues to weigh on EU firms' investment decisions.
Reduced inflation forecasts decrease the likelihood that the ECB will reverse course on its current monetary policy. Key interest rates are expected to remain at their current levels for the foreseeable future.
This continues to result in low borrowing costs for SMEs, although large country-level differences within the EU persist.
The low cost of borrowing has led NFCs in the Euro area to increase leverage, as outstanding loans continued to increase between October 2018 and April 2019.
The ECB's bank lending survey shows that banks report the Euro area SME financing gap to have grown in all but 5 countries.
One in four SMEs still report severe difficulties in accessing finance. This points to significant structural credit market failures which prevents market supply from satisfying SMEs' financing demands.
Insufficient public support for external financing markets continues to worry European SMEs.
Private equity:
Over the past 20 years, the European PE activity exhibited booms and busts. The most famous peak periods were observed in 2000 and 2006. However, both booms were followed by significant downturns, i.e. the "dotcom crisis" in the early noughties and the
1 This paper benefited from comments and inputs by many EIF colleagues, for which we are very grateful; we would like to express particular thanks to Francesco Battazzi, Alicia Boudeau, Julien Brault, Georgiana Buturoiu, Andrea Crisanti, Stephanie Descoub?s, Per-Erik Eriksson, Gerard Escriba, Oscar Farres, Lauren Fradgley, Giovanni Inglisa, Carsten Just, Kristian Pal, Simone Signore, Arnaud Vanbellingen, Virginie Varga and Will Vizard. We would also like to thank colleagues from AECM, AFME, ECB, EMN, Euler Hermes, GEM, the Invest Europe research team, the UEAPME (now SMEunited) study unit for their support. All errors are of the authors. 2 We are using the term "equity finance" to combine semantically the areas of Venture Capital and Private Equity. However, if we refer here to equity activities, we mainly consider those of EIF's investment focus, which excludes Leveraged Buyouts (LBOs) and Public Equity. The term SME Securitisation (SMESec) comprises transactions backed by SME loans, leases, etc. The reader is also referred to the respective market glossaries in Annex 1 and Annex 2 in Kraemer-Eis et al. (2018c).
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financial and economic crisis from 2007 onwards. The severe crash of the European PE activity in 2008-2009 was followed by a rebound, and fundraising and investment have almost reached new record levels.
In 2018, the PE investments in portfolio companies based in Europe increased by 7% to EUR 80.6bn. This development was mainly driven by a surge in investments in the buyout segment (+10% to EUR 58.8bn) of the PE market, but a modest increase was also recorded for growth capital (+0.4% to EUR 11.9bn). Venture capital (VC) investments, which are of particular importance for the financing of young innovative companies with high growth potential, jumped by 13% to EUR 8.2bn. Results from the EIF VC Survey indicate an ongoing high market activity. Business Angel investments provided additional equity capital for ventures.
Total amounts raised by PE funds in Europe increased by 1% to EUR 97.3bn in 2018. At the same time, VC fundraising increased by 11% to EUR 11.4bn, which constitutes the third record year in a row. During and after the crisis, the European VC ecosystem benefitted substantially from market-stabilising public intervention. Since 2012, a normalisation set in, although public support still plays an important role for further market development.
In 2018, the exit market for PE-backed enterprises suffered a sharp setback, which followed on several remarkably strong years. The decrease in the total PE divestment amount (?28% to EUR 31.9bn) was mainly due to substantially lower activity in the buyout (?34% to EUR 22.4bn) segment of the market, but also divestments in the venture (? 5% to EUR 2.0bn) and growth (?15% to EUR 5.8bn) capital segments decreased.
According to the EIF VC Survey 2019, European fund managers stated the exit environment, fundraising, high investee company valuations and the number of high quality entrepreneurs to be the biggest challenges in the VC business.
SME guarantees:
Credit guarantees "remain the most wide-spread instrument in use across countries" to ease SMEs' access to finance (OECD, 2018b), and are particularly relevant "in those countries where a network of local or sectoral guarantee institutions is well established" (OECD, 2013).
AECM statistics show that Turkey, Italy and France are the top three countries in terms of both the volume and the number of outstanding SME guarantees.
Relative to GDP, Turkey, Hungary, Italy and Portugal have the largest markets.
In the full-year 2018, despite a significant heterogeneity across countries, AECM members report on average a decrease in outstanding guarantees in portfolio and in new guarantee issuance in particular. However, this trend is largely driven by a significant decrease in the guarantee activity of one Turkish AECM member.
Indeed, following an unprecedented increase in its guarantee activity during 2017, the guarantee activity in Turkey is now much lower than before, but it still represents the highest share of total AECM outstanding guarantees.
In the full-year 2018, the growth in newly-granted guarantees was particularly strong in Greece, Luxembourg and Bosnia-Herzegovina. By contrast, new guarantee activity decreased the most in Turkey, Ireland and Slovenia.
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