AFME/PwC report an equity shortfall of up to €600bn threatens Europe’s economic recovery despite the significant public support measures and private capital made available across Europe to support economies during the pandemic. AFME calls for measures to bolster Europe’s equity and hybrid markets..
In a report published today (19th) in partnership with PwC, AFME warns that Europe needs to bridge a gap of €450-600bn[1]
in equity needed to prevent widespread business defaults and job losses
as COVID-19 state support measures are gradually reduced. The report Recapitalising EU businesses post COVID-19 reveals
that despite the support provided by governments and the private sector
since the start of the pandemic, 10% of European companies have cash
reserves to only last six months. The pan-European trade association is
calling on authorities to explore and develop further short-term
measures to support Europe’s equity and hybrid markets and accelerate
the Capital Markets Union to help fund the recovery. Unless urgent
action is taken, a spike in insolvencies could start as early as this
month and threaten the EU’s recovery prospects, AFME warns.
The report presents insights from interviews with businesses and
private sector investors from across the continent to propose solutions
to Europe’s emerging funding gap. The findings reveal that many mid-size
and SME corporates do not wish to give up control of their business but
are willing to pay a premium not to dilute their voting rights, as well
as are willing to distribute a share of profits to investors. Hybrid
instruments are ideally suited to address these needs. In order to
bolster capital markets to support businesses in the recovery phase,
AFME is outlining the following recommendations:
- Proposing a new EU-wide hybrid instrument designed specifically for
the corporate sector. This could be in the form of a new preferred
shared instrument, which is state-aid compliant, to build scale and
liquidity, and which ideally could be developed to comply with social
investment objectives to attract maximum investor interest.
- Scaling up existing EU-wide recovery support schemes such as the
EIF European Guarantee Fund tailored to the needs of SMEs, particularly
the smallest companies.
- Replicating existing member state best practices on hybrid
instruments, as well as raising awareness of the range of capital
markets instruments available to mid-caps and SMEs who may be unaware
such options exist
- Exploring further use of innovative instruments, such as dual class
shares to address the control concerns of companies as well as debt for
equity swaps to reduce leverage.
- Recalibrating state aid rules for a systemic crisis.
- Accelerating equity investment measures under the Capital Markets Union project.
Adam Farkas, AFME’s Chief Executive Officer, said:
“While additional debt and state support have provided the short-term
rescue to businesses across Europe, we now need to move beyond the
short-term bridge finance and to focus on long-term repair and recovery.
“As European businesses strive to recover from the economic crisis,
alternative types and sources of funding will be required to help
mitigate their mounting debt burden while also allowing them to invest
in their future. This is where hybrid and equity markets can play a key
role in supporting Europe’s recovery.
“The size of the challenge calls for urgent action. With a shortfall
of up to €600bn threatening Europe’s recovery, we are calling on
policymakers to work with the private sector at the national and EU
levels to implement solutions to ensure midcaps and SMEs in particular
have the resources they need to recover post-COVID-19.”
Nick Forrest, leader of PwC’s economics consulting practice, said:
“The Covid-19 crisis risks leaving a long-term scarring effect on the
economies of Europe. This means restoring the equity capital base of
European corporates is essential for them to drive investment,
innovation and growth.”
“The unwinding of Government support and anticipated release from
Covid lockdown measures with a successful vaccination programme means
that now is the time to put in place the equity and hybrid financial
capacity, and infrastructure to drive recovery of the European economy.”
AFME
© AFME
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