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Per  Strömberg  

2013-­‐09-­‐12  

Sustainable  financial  system:    Is  there  an  ”  equity  gap”?  

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BANK  LENDING  DURING  THE  CRISIS  

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Tables and Figures

Figure 1 Syndicated loan market: Total global issuance

Notes: The chart depicts total syndicated lending during 1992–2010. The blue line is based on almost 40,000 syndicated loans extended between Jan 2005 and Dec 2010, from Loan Analytics. The red line, for comparison, shows data from the BIS Quarterly Review March 2012, Table 10 representing “Signed international syndicated credit facilities (with  maturity  less  than  3  months)”  and available on http://www.bis.org/statistics/secstats.htm. The difference between the two lines reflects the exclusion by the BIS of loans with maturity greater than 3 months. Data sources: Loan Analytics, BIS.

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1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

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New syndicated loans to all countries (Loan Analytics)

New syndicated loans to all countries (BIS)

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•  In  the  crisis,  saw  a  simultaneous  reducRon  in  lending  and  investment  

•  But  is  it  supply-­‐  or  demand-­‐driven?  

•  SubstanRal  evidence  that  weak  bank  balance  sheets  caused  a  decrease  in  lending  to  firms  during  the  crisis  -  Ivashina  &  Scharfstein  (2010),  CorneY  et  al  (2011),  Jimenez  et  

al  (2012),  Kapan  &  Minoiu  (2013)  

   

REAL  EFFECTS  OF  FINANCIAL  CRISES:  METHODOLOGICAL  PROBLEMS  

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•  Even  if  crisis  caused  weak  banks  to  lend  less,  not  clear  what  net  effects  on  firms  are  -  Did  stronger  banks  ”pick  up  the  slack”?  

•  Some  evidence  on  real  economic  effects  of  reducRon  in  lending  on  large  public  firms  -  Almeida  et  al  (2013),  Becker  and  Ivashina  (2013)  

•  Suggest  that  effects  on  investment  of  large  public  corporaRons  was  relaRvely  small  -  Access  to  bond  and  equity  markets  

o  Public  markets  recovered  much  quicker  than  banks  -  Strong  bank  relaRonships  

REAL  EFFECTS  OF  THE  FINANCIAL  CRISIS  

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•  Small,  private  firms,  where  bank  financing  is  only  alternaRve  -  Caveat:  not  much  solid  crisis  evidence,  due  to  lack  of  data  -  Previous  evidence  on  bank  lending  channel  suggests  that  small  

firms  more  affected  (e.g.  Kashyap  et  al,  1994)  

•  Even  for  newly  started,  entrepreneurial  firms,  bank  debt  much  more  important  than  equity    -  Robb  and  Robinson  (2012)  

o  Debt  51%  o  Entrepreneur’s  own  equity  31%  o  Outside  equity  17%  

§  VC  5%  

THE  REAL  VICTIMS:  SMALL  FIRMS  (?)  

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EXAMPLE:  LENDING  TO  UK  SMALL  BUSINESSES  

The impact of the financial crisis on SME lending

Since 2008 banks have reduced their lending to small & medium-sized firms (SMEs)

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E uro zone UK US

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Average2002-2007

2008 2009 2010

Bank Lending Capacity Growth (%)

A Guide to the European Loan Market, March 2011.

Bank Lending to UK Small Business (%)

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•  Bank  lending  have  not  fully  recovered  -  Need  for  recapitalizaRon  -  Effects  of  Basel  III  on  SME  lending?  

•  Small  firms  cannot  access  tradiRonal  bond  markets  •  Will  ”shadow  banking”  system  take  care  of  it?  

-  Factoring,  leasing,  trade  credit  –  important,  but  only  suitable  for  some  types  of  investment  o  And  dependent  on  bank  credit  supply  as  well  

•  Micro-­‐bonds?  -  Listed  or  unlisted  issues  of  <  €50  M;  ”light-­‐touch”  regulaRon  -  Investors  are  individuals,  typically  located  in  vicinity  of  firms  

WILL  ALTERNATIVES  TO  BANK  DEBT  EMERGE?  

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EXAMPLE:  GERMAN  MICRO-­‐BOND  ISSUES   German issuers

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≈150 German issuers have raised ≈ €8 billion with ≈ 200 listed and unlisted bond issues

From: Wardrop, “From bank financing to bond financing: financial exchanges and the SME micro bond market” (2013)

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•  Is  there  an  ”equity  gap”  for  companies  

•  In  the  aggregate,  external  equity  is  of  relaRvely  minor  importance  for  firms  relaRve  to  retained  earnings  and  debt  -  External  equity  is  costly    -  Asymmetric  informaRon  and  moral  hazard  problems  

WHAT  ABOUT  EQUITY  FINANCING?  

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AGGREGATE  SOURCES  OF  FUNDING  FOR  CAPITAL  EXPENDITURES,  U.S.  CORPORATIONS  

Source: Federal Reserve Flow of Funds; Berk & DeMarzo.

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•  External  financing  is  parRcular  problem  for  early  stage  firms:  -  Low  profits  à  debt  capacity  limited  -  Extreme  adverse  selecRon  and  moral  hazard  problems  

•  ExternaliRes  of  entrepreneurship  and  innovaRon  -  Benefits  from  entrepreneurial  firms  to  the  economy  are  larger  than  the  

monetary  returns  to  investors  -  E.g.  R&D,  spillovers  

•  Case  for  government  intervenRon  in  entrepreneurial  finance  -  High  on  the  policy  agenda,  e.g.  Government  sponsored  VC  funds  

•  As  seen  earlier,  however,  most  important  equity  is  inside  equity  -  Personal  savings  and  retained  earnings  -  ”Agency-­‐free”  funding  

•  Clear  policy  implicaRon:  improve  supply  of  inside  equity    -  Corporate  and  personal  taxes  

EQUITY  FINANCING  FOR  SMALL  FIRMS  

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•  Venture  capital  -  Professional  funds  raising  insRtuRonal  capital  to  invest  in  early-­‐stage  firms  -  10-­‐year  funds  à  limited  holding  period  à  invest  in  extremely  fast-­‐

growing  ”gazelle  firms”  -  30%+  return  requirements  for  investments  

•  Hence,  only  suitable  for  small  subset  of  growth  ventures  -  SRll  very  important  for  economy:  most  ”new”  important  firms  iniRally  VC  

financed  -  Apple,  Microsos,  Google,  Facebook,  Genentech,  Amazon,  SpoRfy,  etc.  

•  Common  view  that  entrepreneurship  in  Europe  suffering  from  lack  of  VC  -  Some  truth  to  this,  but  problem  even  in  the  US.  -  Not  a  result  of  the  crisis,  but  more  structural  

PRIVATE  EQUITY  I:  VENTURE  CAPITAL  

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VC FUNDRAISING (U.S.) AS % OF MARKET CAP

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•  Problem  with  (not  only)  European  VC  -  Suffering  from  mediocre  returns  post-­‐2000,  especially  in  Europe  -  Lack  of  scalability  in  VC  

o  Problem  for  fund  managers  o  Problem  for  insRtuRonal  investors  

-  Limited  investment  horizon  à  have  to  be  able  to  exit  within  5-­‐6  years  -  à  Less  interest  in  VC,  funds  moving  to  later-­‐stage  investments,  less  

capital  intensive  investments  •  Leads  to  a  ”financing  gap”  for  early  stage  financing.  •  Some  government  policies  work  beYer  than  others    

-  Brander  et  al  (2010)  -  Indirect  rather  than  direct  

o  Fund-­‐of-­‐funds  and  subsidies  rather  than  government  VC  funds  -  Broad  rather  than  narrow  

o  Avoid  directed  support  to  certain  industries  /  geographies  

CASE  FOR  GOVERNMENT  SUPPORT  OF  VC?  

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•  Later-­‐stage  private  equity  –  buyout,  infrastructure,  real  estate  funds  –  flourishing  in  Europe  -  SRll  substanRal  capital,  despite  financial  crisis  -  PE-­‐backed  companies  did  surprisingly  well  during  crisis  (e.g.  Hotchkiss,  

Smith,  Strömberg,  2013)  

•  Governance  rather  than  investment  capital  -  SRll,  very  important  for  restructuring  and  structural  change  -  E.g.  Turnaround  funds  focusing  on  Southern  Europe  

•  IndicaRons  that  PE  funds  try  to  fill  debt  financing  gap  -  Increasing  interest  in  raising  debt  funds  and  mezzanine  funds  replacing  

bank  financing  

PRIVATE  EQUITY  II:  BUYOUT  FUNDS  

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•  Corporate  lending  market  sRll  suffering  from  bank  balance  sheet  contracRon  

•  Effect  strongest  on  small,  private  firms  -  Some  evidence  that  ”shadow  banking”  market  is  responding  -  Bond  markets,  micro  bonds,  PE  debt  funds  

•  Likely  that  exists  ”equity  gap”  for  small,  private  firms  -  Possibly  calls  for  government  intervenRon  -  Should  be  indirect  rather  than  direct:  

o  Tax  reducRons  to  sRmulate  inside  equity  financing  o  Government  FoF  for  early-­‐stage  VC  funds  

CONCLUSION  

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