Creating an effective market for the provision of capital
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 firstname.lastname@example.org; 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.