CM Partners (CMP), an Auckland based boutique corporate and capital markets advisory firm, says the Government needs to take a leadership role in helping to make growth capital more readily available for small to medium sized New Zealand enterprises (SMEs) rather than looking to allocate more money into start-ups.
In a joint statement from CM Partners, principals Sean Joyce and Tim Preston believe the Government should follow offshore leads to ensure that our SMEs, which make up a large percentage of all enterprises in New Zealand, can more easily access the necessary capital they need to fund their growth.
CMP says it is very hard for many of our good SMEs to access new equity and/or debt to fund and sustain growth because the current market structure is flawed and the options available to those seeking growth capital is too limited. Joyce and Preston believe there needs to be a collaborative approach to addressing the issue led by the Government and the New Zealand Superannuation Fund, and including regulators, banks and other funding sources to ensure there is much wider availability of more accessible and affordable growth funding options for our SME’s.
CMP recently established the CMP Growth Capital Fund aimed at helping SMEs seeking additional debt or equity to fund growth and take advantage of expansion opportunities. Joyce and Preston say they have been surprised by the large number of enquiries from enterprises seeking growth funding, which clearly demonstrates there is a significant demand in the market that is not being met under the current structure.
CMP also believes the Government is putting too much focus on funding start-ups and early stage companies at the expense of the tens of thousands of established SMEs who have proven tracks records, are profitable, and contribute to the New Zealand economy by providing employment and generating tax revenues. They are often a far less risky investment proposition than an early stage start up with no proven record and a much higher likelihood of failure.
While CMP acknowledges there is a place for Government investment and support in the early stage start up environment, Joyce and Preston believe this investment and focus is often to the detriment of the SME sector which in many cases, is likely to produce far better investment outcomes and results than an investment in a speculative early stage start up.
A recent report by the Australian Government and Australian Small Business and Family Enterprise Ombudsman highlighted that across the Tasman, 67% of SMEs rely on finance to start, operate and grow their businesses. And the reduction in risk appetite of lenders following the global financial crisis seems to have had a more significant and persistent effect on the cost and availability of finance for small businesses than for larger businesses.
Among the recommendations to come out of the report was the establishment of a Business Growth Fund focussed on long term funding and equity solutions for SMEs and a Government Guarantee Scheme where member banks can draw on the guarantee to increase lending to SMEs with a viable business model.
This follows similar models established in the likes of the UK where the British Growth Fund (BGF) was established in 2011 to provide SMEs with long term financial investment. The BGF has a balance sheet of £2.5 billion and to date has invested £1.4 billion across 220 SMEs. And a fund has recently been established in Canada with initial funding of C$545m.
China is also looking at how it can help its SMEs. Chinese President Xi, and several important economic bodies have recently reiterated the importance of supporting SMEs, and several policies have been introduced in recent weeks.
China’s Vice Premier Liu He recently noted that the private sector contributed to more than 50 percent of taxes, more than 60 percent of the GDP, more than 70 percent of technical innovation, more than 80 percent of urban employment as well as at least 90 percent newly added jobs and businesses. China’s PBOC governor recently pledged an array of policies to widen financing channels for the private sector.
CMP believes that the Government, in conjunction with the New Zealand Superannuation Fund and other stakeholders in the market, need to take a leadership role in driving the establishment of a similar fund in New Zealand as well as exploring other options such as a Government Guaranteed Debt Funding Schemes to help fund the growth of our SMEs.
Joyce and Preston say the future growth of the New Zealand economy will be driven by SME’s expanding their existing operations and growing offshore markets to increase their revenue footprint and in doing so, generating more off shore earnings for New Zealand.
“Large commercial enterprises aren’t born that way – the vast majority of them are spawned from humble beginnings. The potential of New Zealand’s SMEs can only be unlocked with the introduction of appropriate growth capital funding structures and the receipt of more readily accessible funding options.”