As they reach the stage when they’re approaching profitability, fast-growth companies have a choice: they can either focus on profits - or on market share and scale. Our preference is that they continue to focus on growth. Although this, in turn, stimulates economic activity and employment in the wider economy, that’s not the main reason we favour this route. We simply think it’s good business to build markets and market share rather than focus on profitability, which can be delayed and deferred.
In our portfolio alone, there are at least twenty European-born companies, who are building significant businesses. Last year, these companies had combined 2011 revenues of €1.3bn and grew by around 75% on average, year on year. But in order to continue that momentum, particularly if companies are not maintaining enough internally-generated cash flow, then they need to raise capital in order to continue growing.
However, it’s well-documented that loan capital is difficult for fast growth yet pre-profit companies to obtain, which is why such businesses are caught in a dilemma: they either have to slow down their growth and double-down on generating cash, or they’ve got to find another means with which to raise capital.
We would argue that given the nature of theirgrowth patterns and ambitions, the best later-stage companies should be raising long term equity capital, by tapping institutional finance and look at listing themselves on public markets which now may include the new High Growth Segment on the London Stock Exchange, or on AIM.
Highly effective, if somewhat elaborate, constructs have been created by Government to address the difficulties fast-growth companies face when seeking to obtain equity capital - these include EIS and SEIS. However, we think more can be done to increase participation in the growth economy.
Indeed, we know of at least 20-30 IPO-ready European tech companies today, like Wonga, Zoopla, JustEat and Mimecast, that are poised to capitalize on the global Internet economy and perhaps enter the pantheon of great public companies.
That’s why, as George Osborne fine-tunes his Budget, we are supportive of others including the CBI, Tech City, NESTA, City of London - calling for the abolition of stamp duty on investments in shares in this particular sector as a straightforward and low-cost way of encouraging more capital to these companies.
In addition to the removal of stamp duty from AIM (where it accounts for just 3% - or £72m - of total revenues collected by this tax), the London Stock Exchange is arguing for it not to be applied to the High Growth Segment, when it comes on stream. This tax represents 65% of the cost of trading and increases the cost of public equity capital by 15%. It is, of course, highly significant that stamp duty is an anomaly in the public markets. For example while the French Government recently introduced a Financial Transaction Tax, it exempted businesses with a market cap of under €1bn.
Stamp duty has become almost totemic among taxes, but were the Treasury to waive it, it would boost focus on thesector, which will re-energise the investment pool for high-growth companies and SMEs and, in turn, help stimulate the very growth that the Chancellor craves. After all, according to NESTA, high growth firms make up just 7% of all UK firms, but generate more than half of all new jobs and are particularly resilient in a recession.
Now that the IPO market is experiencing an uptick and stocks have reached five year highs, this Budget offers a unique opportunity to open up UK equity markets that the Government should seize.