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Business Matters: A rare commodity

As raising equity capital becomes cheaper, debt finance looks to become a rarer commodity

ON THE equity front, we have some very good news: the Quoted Companies Alliance has urged HM Treasury to speed up the introduction of parts of the new Prospectus Directive. It’s not often that we welcome the arrival of a new European directive.

From 31 July 2011, UK companies will be able to raise money from the public without a prospectus for offers that are raising up to €5m (previously €2.5m) or are offered to up to 150 persons (previously 100 persons). The UK government implemented these key changes to the Prospectus Directive in six months, rather than the 18 months allowed by Brussels.

Most boards do not have a great depth of experience when it comes to raising capital in the public markets. So it’s good to see advice from the Institutional Investor Committee, which has issued Best Practice Guidance for Issuers when raising Equity Capital.

This paper covers such sensitive matters as selecting advisers, fees and issue structures. It sets out the sort of questions that all boards should be discussing before, during and after any capital raising. So this guidance is very timely and welcome as the Prospectus Directive provides a cheaper way to raise money.

However, raising debt finance is, if anything, getting harder while the bar is lowered for growth companies seeking equity funding.

In July, the Association of Chartered Certified Accountants published a discussion paper to consider how an impact assessment could be designed to assess the potential impact on lending to SMEs of Basel III, the new global regulatory standard on bank capital adequacy and liquidity.

It is assumed – correctly, I believe – that the proposed provisions will have a disproportionately negative impact on lending to SMEs. Little has been done, says the ACCA report, to consider whether Basel III represents “a good trade-off between growth and job creation on the one hand, and financial stability on the other”. Wise words.

Clearly, growing companies need adequate finance if they are to create employment and wealth. So it looks like there could well be a further seismic shift from bank debt towards companies issuing equity to finance their growth plans. Let’s hope, for the sake of economic growth in the UK and Europe, that the equity markets, investors and intermediaries are up to the challenge.

Tim Ward is chief executive of the Quoted Companies Alliance (QCA), the membership organisation of the small and mid-cap quoted sector working in the UK and Europe. His past roles have included head of issuer services and head of marketing at the London Stock Exchange and finance director at FTSE, the index company.

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