Per Strömberg: "How can the financial system support the real economy?"

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A presentation held by professor Per Strömberg, Swedish House of Finanice, at the high level seminar "Towards a sustainable financial system" hosted by the Stockholm based think tank Global Challenge …

A presentation held by professor Per Strömberg, Swedish House of Finanice, at the high level seminar "Towards a sustainable financial system" hosted by the Stockholm based think tank Global Challenge in cooperation with London School of Economics and The Swedish House of Finance on September 12th 2013.

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  • 1. 1   Per  Strömberg   2013-­‐09-­‐12   Sustainable  financial  system:     Is  there  an  ”  equity  gap”?  
  • 2. 2   BANK  LENDING  DURING  THE  CRISIS   23 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. 0 10 20 30 40 50 60 70 80 90 100 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 USdbillion Share of total volume to advanced economies (right-axis), % New syndicated loans to all countries (Loan Analytics) New syndicated loans to all countries (BIS)
  • 3. 3   •  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  
  • 4. 4   •  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  
  • 5. 5   •  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  (?)  
  • 6. 6   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) 6 -10 -5 0 5 10 15 Year E urozone UK US +++ Average 2002-2007 2008 2009 2010 Bank Lending Capacity Growth (%) A Guide to the European Loan Market, March 2011. Bank Lending to UK Small Business (%)
  • 7. 7   •  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?  
  • 8. 8   EXAMPLE:  GERMAN  MICRO-­‐BOND  ISSUES   German issuers 10 ≈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)
  • 9. 9   •  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?  
  • 10. 10   AGGREGATE  SOURCES  OF  FUNDING  FOR  CAPITAL   EXPENDITURES,  U.S.  CORPORATIONS   Source: Federal Reserve Flow of Funds; Berk & DeMarzo.
  • 11. 11   •  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  
  • 12. 12   •  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  
  • 13. 13   VC FUNDRAISING (U.S.) AS % OF MARKET CAP
  • 14. 14   •  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?  
  • 15. 15   •  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  
  • 16. 16   •  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  
  • 17. 17   Visit us at www.houseoffinance.se