More opportunities to invest directly in small and medium-sized firms must be created to reduce their reliance on struggling banks, according to the chief executive of the London Stock Exchange.
Xavier Rolet said SMEs were the key to solving the UK’s unemployment problems but were being stifled by over-reliance on banks that are still hoarding liquidity.
He is calling for a raft of changes to the LSE’s junior exchange – the Alternative Investment Market (AIM) – to help funding flow into growing companies.
In recent months the number of companies leaving AIM has soared – largely fuelled by a spate of acquisitions – but Mr Rolet believes it is crucial to give firms on the market more opportunities to source capital.
He said: “In the coming years the only way to create new jobs is going to be the SME sector. Blue chips aren’t going to create new jobs and the Government isn’t either.
“The question is ‘what is the best way for SMEs to create new jobs and how do they access capital?’”
“We all know that the public sector isn’t going to create jobs for the time being. Even in times of growth blue chips – not just here but the CAC in France and the DAX in Germany – are not always the drivers of job growth.
“In fact, for 05/06 their net job creation was minus 0.4 per cent, so during the best of times blue chips at best maintained employment.
“Obviously in tough times it is time to cut back, with international competition and the ability to relocate globally.”
Mr Rolet, who was in Birmingham for the Conservative Party Conference, said in terms of funding across the European Union, approximately 75 per cent of all investment and capital spending in the corporate sector comes from bank lending.
In the US, by comparison, the ratio is 25 per cent bank lending and 75 per cent from the markets.
Mr Rolet believes a ratio closer to 50:50 in the UK would be more progressive, and would help SMEs to drive employment up.
He said: “There are 4.8 million SMEs in the UK. If each one created just one new job then you would have solved your unemployment problem.
“It is a lot easier for 4.8 million companies to each add one job than for 100 FTSE 100 companies to each add 48,000. This is where job growth is going to come from.
“We already operate the most successful junior market in the European Union, called AIM, and seven months ago we launched a corporate retail bond market in the UK designed to help SMEs to raise debt in small to medium-sized tranches specifically from the retail market.
“SMEs are not important, they are critical to the recovery of the UK economy. We need to move towards a more US-style capital model where funding is less reliant on bank finance – rebalancing away from traditional bank-financing and reducing exposure,” he added.
While bank lending remains a problem for SMEs, Mr Rolet believes the Government has acted correctly by allowing banks to shore up balance sheets, and believes that this has created a platform for growth for the UK compared to other European economies.
“I am reasonably optimistic because the UK Government has cleaned up the banks’ balance sheets,” he said.
“It requires real leadership and focus and difficult decisions to improve the public finances.
“The truth is today that the UK is growing above the EU average.
“It is growing faster than France, its AAA credit rating has been maintained and more importantly the balance sheets of the UK’s banks are clean. That is not the case with some of our European neighbours.
“Over the next two or three years the UK is going to grow much faster than our European neighbours because the banking industry is in a better state.”
However, Mr Rolet said that while banks have recently kept reserves of around two per cent, that is expected to increase to seven per cent and new regulation will make it harder for banks to lend.
The LSE has outlined five proposals to kickstart funding for SMEs, including a more favourable capital gains tax regime for investment in quoted companies, allowing more investment from venture capital trusts and ISAs and abolishing stamp duty over five years.
Mr Rolet believes the regulatory hindrances for maintaining a stock market listing are overly onerous for SMEs.
He said the minimum cost of maintaining a place on the stock market is between £150,000 and £200,000 a year and as part of plans to free up capital that needs to be examined.
He said: “We need to lower the cost of listings, particularly for the SME sector.
“We also need to seek ways to boost the capital available to the SME sector, for example, through venture capital trust investments. Loosening the restrictions around venture capital trusts, and allowing them to invest in the secondary market, would also help.”
He added: “When banks are properly leveraged then bank lending is the quickest way for businesses to access finance.
“Unfortunately, some banks have leveraged their balance sheets extensively, requiring a bail out and at the moment they are looking to hoard liquidity.
“They are being forced to take cash out of the economy, at best temporarily.
“We are suggesting two things – one; promoting new ways for SMEs to tap into capital for short-term relief, like the corporate retail bonds we have launched, and also leveraging equity.”