Cre­at­ing an ef­fec­tive mar­ket for the pro­vi­sion of cap­i­tal

Irish Examiner - Supplement - - PENSIONS - David O’Shea

In the vac­uum cre­ated by the lack of cap­i­tal an ef­fec­tive black mar­ket for cap­i­tal ex­ists which is ‘un­reg­u­lated’

Lack of ac­cess to cap­i­tal is reg­u­larly cited by com­pa­nies as the sin­gle largest ob­sta­cle to start­ing and de­vel­op­ing new busi­ness.

Prior to the fi­nan­cial cri­sis in 2007, com­pa­nies, en­trepreneurs, and great ideas typ­i­cally be­gan and ended the search for cap­i­tal with a bank man­ager.

This is not new.

For cen­turies, banks have con­trolled cap­i­tal by col­lect­ing the sav­ings of small in­vestors’ cap­i­tal and then lend­ing sav­ings into var­i­ous projects.

While banks were, and re­main, ex­cel­lent frame­works to ag­gre­gate cap­i­tal, they were, and re­main, ille­quipped to deal with as­sess­ing how to al­lo­cate that cap­i­tal. Al­lo­cat­ing cap­i­tal is not, and should not be, the sole pre­serve of banks.

One of the few pos­i­tives emerg­ing in the af­ter­math of the fi­nan­cial cri­sis in Ire­land was the emer­gence of al­ter­na­tive fi­nance as valid points of ac­cess to cap­i­tal for the ideas of ex­ist­ing and new firms.

This emer­gence in­cluded peer-to-peer lend­ing such as crowd fi­nanc­ing, govern­ment-backed in­cen­tives such as the En­ter­prise& In­vest­ment In­cen­tive Scheme (EIIS), and the is­suance of se­cu­ri­ties ded­i­cated to the SME mar­ket back­ing as­set pur­chase or ex­pan­sion.

The emer­gence of al­ter­na­tive fi­nance in Ire­land, how­ever, is nar­row-based and sim­ply does not have the scale to re­place the bank­ing model and sup­port the great ideas that emerge ev­ery day from en­trepreneurs and busi­ness own­ers. More wor­ry­ingly, in the vac­uum cre­ated by the lack of cap­i­tal an ef­fec­tive black mar­ket for cap­i­tal ex­ists which is ‘un­reg­u­lated’.

This means the pro­vi­sion of cap­i­tal can be opaque, un­der­pinned by poor gov­er­nance and re­sult in un­fair fees and com­mis­sions.

To cre­ate an ef­fec­tive mar­ket for the pro­vi­sion of cap­i­tal there needs to be con­certed ac­tion by the govern­ment, reg­u­la­tors, and in­vestors to em­brace a new frame­work that al­lows cap­i­tal to flow freely to its best pos­si­ble use, and within a frame­work that pro­tects both bor­rower sand lenders.

Firstly, the Govern­ment needs to foster an en­vi­ron­ment that is reg­u­lated, trans­par­ent, and un­der­pinned by good gov­er­nance. While many may ar­gue that govern­ment in­ter­ven­tion is at odds with cap­i­tal pro­vi­sion, govern­ment in­volve­ment is needed to achieve the scale that is re­quired to re­place the bank­ing model, and in the short­est pos­si­ble time.

This sup­port also needs to broaden the fo­cus away from solely sup­port­ing ex­port­ing com­pa­nies and in­stead re­alis et he im­por­tance of in­dige­nous ori­en­tated firms.

Se­condly, reg­u­la­tors must com­mit to polic­ing the pro­vi­sion of cap­i­tal in the Ir­ish mar­ket.

While Ir­ish reg­u­la­tors have made moves ear­lier this year to reg­u­late crowd­fund­ing, for ex­am­ple, they sig­nif­i­cantly lag their Euro­pean coun­ter­parts in pro­vid­ing a reg­u­la­tory frame­work for all providers of cap­i­tal. EIIS and Loan Notes, for ex­am­ple, are broadly reg­u­lated in other Euro­pean ju­ris­dic­tions though re­main un­reg­u­lated in Ire­land.

The im­por­tance of a fully reg­u­lated frame­work should not be un­der­es­ti­mated. It pro­vides for trans­parency, ac­count­abil­ity, and ul ti­mately al­lows for con­fi­dence to be es­tab­lished by both bor­row­ers and lenders of cap­i­tal. Ef­fec­tive flow of cap­i­tal is al­ways as­sisted by good reg­u­la­tion.

Third ly, in­vestors and their ad­vis­ers need to em­brace the ad­di­tion of cap­i­tal lend­ing into their port­fo­lios. In a world of low yields and lack of real al­ter­na­tives, the pro­vi­sion of cap­i­tal to as­sets, com­pa­nies, and ideas is a sig­nif­i­cant source of port­fo­lio di­ver­si­fi­ca­tion and re­turn. Prop­erly struc­tured cap­i­tal lend­ing should be con­sid­ered in terms of a new as­set class by in­vestors.

A prop­erly func­tion­ing cap­i­tal mar­ket is in the in­ter­ests of ev­ery­one. While al­ter­na­tive fi­nanc­ing is in­creas­ing, it re­mains in its in­fancy and in­signif­i­cant when com­pared to the bank­ing model it seeks to repli­cate. Strong and de­ci­sive ac­tion is re­quired to de­liver the cap­i­tal mar­ket that Ire­land de­serves, where the great ideas of en­trepreneurs are al­lowed to take flight.

For fur­ther in­for­ma­tion as re­gards al­ter­na­tive in­vest­ing con­tact Black­Bee In­vest­ments on 021 2061710; email in­vest@black­bee.ie; or visit black­bee.ie.

To cre­ate an ef­fec­tive mar­ket for the pro­vi­sion of cap­i­tal re­quires a con­certed ac­tion by the Govern­ment, reg­u­la­tors, and in­vestors to em­brace a new frame­work for cap­i­tal to flow freely to its best pos­si­ble use.

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