布鲁盖尔-Equity-finance-and-capital-market-integration-in-Europe_13页_538kb

Summary of "Equity Finance and Capital Market Integration in Europe"

Core Content

This document explores the role and challenges of equity finance in the European Union, with a focus on how it can be better integrated into the capital markets union (CMU) agenda. The authors, Inês Gonçalves Raposo and Alexander Lehmann, highlight the importance of equity finance for European companies, especially in light of the ongoing debt vulnerabilities and the limited access to external equity.

Main Points

• Equity Finance Importance: The European Union aims to improve corporate financing through external equity, as European companies remain highly indebted and reliant on bank finance, which leads to cyclical capital expenditures. Equity investors can also bring operational and governance reforms, enhancing firm productivity.

• Trends in Equity Financing:

  • Public Equity: The share of listed equity in the total balance sheets of EU non-financial companies has increased, but mainly in the core euro area and among large firms. Net issuance of listed equity has declined, while share buybacks have risen significantly.
  • Private Equity: Private equity has experienced rapid growth, returning to pre-crisis levels. It is particularly important for smaller firms, with over 90% of private equity investments going to SMEs. However, private equity remains concentrated in a few countries, notably the UK and Ireland, and is still limited in many EU11 countries.

• Corporate Sector Vulnerabilities:

  • Corporate debt ratios have not declined significantly since 2008, and have even increased in core euro-area countries.
  • Companies with higher leverage are more vulnerable to economic downturns, and those with shallow equity bases were more severely impacted during the financial crisis.

• Firm-Level Data:

  • The proportion of firms using external equity has decreased since the crisis, despite improved overall financing conditions.
  • SMEs perceive a larger gap between their financing needs and availability, even though they are more likely to prefer equity over debt.

Key Policy Challenges

• Regulatory Framework:

  • EU regulation of private equity reflects post-crisis concerns about financial stability, but these concerns are largely unfounded given the industry's long-term investment model.
  • The Alternative Investment Fund Managers Directive (AIFMD) imposes strict capital coverage and distribution limits, which are not always necessary for private equity, especially for SMEs.

• Home Bias:

  • Private equity firms remain heavily reliant on domestic investors, with only a small portion of funds raised from outside their home country.
  • The share of foreign divestment is low, particularly in the EU11 countries, where local capital markets are shallow and less developed.

• Supervision and Integration:

  • Supervision of private equity is fragmented across EU member states, leading to duplication of reporting and regulatory compliance.
  • The UK, which hosts nearly half of the European investor base, is exiting the EU, which could disrupt cross-border equity flows and worsen the fragmentation of the EU private equity market.

Recommendations

• Harmonisation of Regulations: The EU should consider more harmonised capital requirements and greater risk tolerance to support equity finance.
• Improving Investor Protection and Governance: Enhancing corporate governance standards and minority shareholder rights could help attract more private equity investment.
• Strengthening Local Capital Markets: EU countries need to develop more sophisticated and liquid capital markets to reduce home bias and support broader equity access.
• Addressing Brexit Impact: The EU should swiftly develop a "third country passport" regime to mitigate the disruption caused by the UK's exit, as the UK plays a central role in EU private equity investment.

Conclusion

Despite the growth of private equity and some improvements in public equity markets, equity finance remains underdeveloped in the EU, especially for SMEs. The document argues that regulatory reforms, market integration, and improved governance practices are essential to enhance the availability and accessibility of equity finance across the EU. The exit of the UK from the EU adds urgency to these efforts, as it threatens to further fragment the European private equity market.