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United Nations Economic and Social Commission for Western Asia Dubai International Conference on Innovative Sources to Finance SMEs Dubai InterContinental Hotel

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Title: United Nations Economic and Social Commission for Western Asia Dubai International Conference on Innovative Sources to Finance SMEs Dubai InterContinental Hotel


1
United Nations Economic and Social Commission
for Western Asia Dubai International Conference
on Innovative Sources to Finance SMEs Dubai
InterContinental Hotel February 16-17,
2010 INNOVATIVE FINANCING OF SMEs THE
ITALIAN EXPERIENCE
  • SALVATORE ZECCHINI
  • Institute for Industrial Promotion
  • Rome Italy

2
  • SMEs are a diverse group of firms.
  • Micro firms financial problems differ from those
    of small firms, that are in turn at variance with
    those of medium-sized firms.
  • Need to look at the countrys enterprise
    structure to see where most financial woes lie
    and what action should be taken first.

3
Italy - Value added by sectors and enterprise
size class 2005
  Micro (1-9) Small (10-49) Medium (50-249) SME (1-249) Large (gt 250) Total
Value added (mln euro) Value added (mln euro) Value added (mln euro) Value added (mln euro) Value added (mln euro) Value added (mln euro)
Industry 30.601 61.879 56.047 148.527 86.709 235.235
Construction 30.965 18.506 5.748 55.219 2.734 57.953
Services 146.227 62.831 40.340 249.398 91.271 340.668
Total 207.793 143.215 102.135 453.143 180.713 633.856
Percentage distribution Percentage distribution Percentage distribution Percentage distribution Percentage distribution Percentage distribution
Industry 13,0 26,3 23,8 63,1 36,9 100,0
Construction 53,4 31,9 9,9 95,3 4,7 100,0
Services 42,9 18,4 11,8 73,2 26,8 100,0
Total 32,8 22,6 16,1 71,5 28,5 100,0
Source IPI on ISTAT statistics Source IPI on ISTAT statistics Source IPI on ISTAT statistics
4
Italy - Employment by sectors and enterprise size
class - 2005
  Micro (1-9) Small (10-49) Medium (50-249) SME (1-249) Large (gt 250) Total
Number of employed Number of employed Number of employed Number of employed Number of employed Number of employed
Industry 1.199.280 1.465.161 993.982 3.658.423 1.112.343 4.770.766
Construction 1.165.265 472.835 122.538 1.760.638 49.196 1.809.834
Services 5.467.045 1.523.854 936.702 7.927.601 1.821.499 9.749.100
Total 7.831.590 3.461.850 2.053.222 13.346.662 2.983.038 16.329.700
Percentage distribution Percentage distribution Percentage distribution Percentage distribution Percentage distribution Percentage distribution
Industry 25,1 30,7 20,8 76,7 23,3 100,0
Construction 64,4 26,1 6,8 97,3 2,7 100,0
Services 56,1 15,6 9,6 81,3 18,7 100,0
Total 48,0 21,2 12,6 81,7 18,3 100,0
Source IPI on ISTAT statistics
5
SMEs and MICRO ENTERPRISES IN ITALY AND OTHER
MAJOR EU COUNTRIES (Number of firms, employment
and value added in and average )
6
In the EU and in Italy in particular, SMEs have
been the most dynamic component of the economic
system, especially in terms of employment
creation, in the current decade.
7
Enterprise demography in Italy
  Births Deaths Turnover Growth rate
2003 389.342 304.728 84.614 1,45
2004 425.510 320.536 104.974 1,78
2005 421.291 324.603 96.688 1,61
2006 423.571 350.238 73.333 1,21
2007 436.025 390.209 45.816 0,75
2008 410.666 374.262 36.404 0,59
Source Unioncamere-InfoCamere, Movimprese
8
BALANCE SHEETS OF ITALIAN MANUFACTURING FIRMS
(BACH)
ALL FIRMS ALL FIRMS ALL FIRMS SMALL FIRMS (lt10MEUR) SMALL FIRMS (lt10MEUR) SMALL FIRMS (lt10MEUR) MEDIUM FIRMS (10-50 MEUR) MEDIUM FIRMS (10-50 MEUR) MEDIUM FIRMS (10-50 MEUR)
Year 2000 2004 2007 2000 2004 2007 2000 2004 2007
Debt lt1year 50.2 48.3 49.5 55.4 53.2 52.9 55.3 52 53.2
Debt gt1year 11.7 12.5 11.4 10.8 11.9 13 10.6 11.4 11.8
Provisions 6.8 7 6.5 6.2 6.7 6.4 5.7 6.1 5.6
Accruals 0.8 1 0.9 1.1 1.2 1.2 0.9 1.1 0.9
Capitalreser. 30.6 31.3 31.7 26.5 27 26.5 27.5 29.4 28.6
Tot.liabilities 100 100 100 100 100 100 100 100 100
9
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10
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11
SMEs bank debt as a ratio to sales
turnover (Year 2009 - Percentages)
12
The Italian SMEs financial pattern before the
global financial crisis
  • Thin capitalization
  • Heavy reliance on bank debt, trade credit and
    self-financing
  • Dependency on short-term bank debt
  • Little recourse to financial markets
  • Result
  • Severe difficulty to fund investment and
    innovation projects

13
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14
SMEs Financing Pattern before 2008 (million euros) SMEs Financing Pattern before 2008 (million euros) SMEs Financing Pattern before 2008 (million euros) SMEs Financing Pattern before 2008 (million euros) SMEs Financing Pattern before 2008 (million euros) SMEs Financing Pattern before 2008 (million euros) SMEs Financing Pattern before 2008 (million euros) SMEs Financing Pattern before 2008 (million euros)
Private funding tools Maturity 2000   2004 change 2004/2000 2008 change 2008/2004
Bank loans lt 1 year 251.823,23   262.119,67 4,1 348.862,37 33,1
Bank loans              
Bank loans 1-5 years 98.801,90   131.795,28 33,4 158.987,00 20,6
Bank loans              
Bank loans gt 5 years 130.485,17   215.503,18 65,2 361.858,35 67,9
Subsidized loans to SMEs in Industry 5.752,01   4.420,02 -23,2 2.388,56 -46,0
Subsidized loans              
Subsidized loans to other firms in Industry 1.970,16   1.433,32 -27,2 975,06 -32,0
Subsidized loans              
Subsidized loans to firms in Trade and Services 1.259,54   1.631,38 29,5 934,16 -42,7
Subsidized loans              
Subsidized loans to firms in Crafts 3.164,45   2.316,19 -26,8 2.638,14 13,9
Leasing   41.815,00   80.924,00 93,5 121.859,00 50,6
Factoring   ------   3.757,00 ------ 2.900,00 -22,8
Mezzanine Debt   ------   310,00 ------ 355,80 14,8
Venture Capital Private Equity   2.968,59   1.480,00 -50,1 5.458,00 268,8
Source Banca d'Italia, relativamente ai dati riferiti alle voci Prestiti bancari, Finanziamento agevolato, Leasing, Factoring Source Banca d'Italia, relativamente ai dati riferiti alle voci Prestiti bancari, Finanziamento agevolato, Leasing, Factoring Source Banca d'Italia, relativamente ai dati riferiti alle voci Prestiti bancari, Finanziamento agevolato, Leasing, Factoring Source Banca d'Italia, relativamente ai dati riferiti alle voci Prestiti bancari, Finanziamento agevolato, Leasing, Factoring Source Banca d'Italia, relativamente ai dati riferiti alle voci Prestiti bancari, Finanziamento agevolato, Leasing, Factoring Source Banca d'Italia, relativamente ai dati riferiti alle voci Prestiti bancari, Finanziamento agevolato, Leasing, Factoring Source Banca d'Italia, relativamente ai dati riferiti alle voci Prestiti bancari, Finanziamento agevolato, Leasing, Factoring Source Banca d'Italia, relativamente ai dati riferiti alle voci Prestiti bancari, Finanziamento agevolato, Leasing, Factoring
Osservatorio permanente sull'utilizzo del Mezzanine Finance in Italia, relativamente ai dati riferiti alla voce Finanziamento mezzanino Osservatorio permanente sull'utilizzo del Mezzanine Finance in Italia, relativamente ai dati riferiti alla voce Finanziamento mezzanino Osservatorio permanente sull'utilizzo del Mezzanine Finance in Italia, relativamente ai dati riferiti alla voce Finanziamento mezzanino Osservatorio permanente sull'utilizzo del Mezzanine Finance in Italia, relativamente ai dati riferiti alla voce Finanziamento mezzanino Osservatorio permanente sull'utilizzo del Mezzanine Finance in Italia, relativamente ai dati riferiti alla voce Finanziamento mezzanino Osservatorio permanente sull'utilizzo del Mezzanine Finance in Italia, relativamente ai dati riferiti alla voce Finanziamento mezzanino Osservatorio permanente sull'utilizzo del Mezzanine Finance in Italia, relativamente ai dati riferiti alla voce Finanziamento mezzanino Osservatorio permanente sull'utilizzo del Mezzanine Finance in Italia, relativamente ai dati riferiti alla voce Finanziamento mezzanino
AIFI, relativamente ai dati sul Private Equity e il Venture Capital AIFI, relativamente ai dati sul Private Equity e il Venture Capital AIFI, relativamente ai dati sul Private Equity e il Venture Capital AIFI, relativamente ai dati sul Private Equity e il Venture Capital AIFI, relativamente ai dati sul Private Equity e il Venture Capital AIFI, relativamente ai dati sul Private Equity e il Venture Capital AIFI, relativamente ai dati sul Private Equity e il Venture Capital AIFI, relativamente ai dati sul Private Equity e il Venture Capital
15
  • It is not clear whether such financing pattern is
    the consequence of SMEs attitude (demand side),
    more than financiers risk aversion or the
    characteristics of financial system (supply
    side).
  • Contributing factors
  • Information opacity
  • Bank-centered financial system
  • Minor role of institutional investors, such as
    pension funds
  • Family-based capitalism

16
Financing need of Italian Enterprises
----------- Self-financing -- ---- -- -
EBIT ________ Investment expenditure ------------
Net financial charges
Source Bank of Italy, Annual report, May 2009.
17
Self-financing ability of Italian Enterprises
Cash flow / Investments ()
Source Bank of Italy, Annual report, May 2009.
18
Bank Loans to Italian Enterprises (percentage
change on yearly basis)
------------ all enterprises, ---------- medium
and large firms ----------- small firms
Source Bank of Italy, Annual report, May 2009.
19
Firms under Financial Stress (March 2009 by
turnover size in thousand euros)
Source Unicredit Data
Dark gray Firms under stress Light Gray Firms
with no stress
20
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21
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22
Aims of new financing pattern
  • Reopen the bank lending channel
  • Ease the liquidity squeeze
  • Build up equity base
  • Promote investment in RD and new technologies
  • Boost Mutual Credit Guarantee Schemes
  • Spur SME aggregation

23
SMEs Financing Pattern before 2008 SMEs Financing Pattern before 2008 SMEs Financing Pattern before 2008 SMEs Financing Pattern before 2008 SMEs Financing Pattern before 2008 SMEs Financing Pattern before 2008 SMEs Financing Pattern before 2008
             
Public financing tools 2000   2004 change 2004/2008 2008 change 2008/2004
    Million Euros        
Equity Grants 1.485,58   2.513,74 69,2 238,11 -90,5
             
Interest Subsidies 373,70   223,31 -40,2 398,25 78,3
             
Aid 16,83   37,57 123,2 45,63 21,5
             
Tax Credit ------   957,33 ------ 5.235,20 446,9
             
Equity Participation ------     ------ 17,75 ------
             
Guarantees 72,47   664,22 816,5 1.162,79 75,1
             
Subsidized Loans 178,69   220,99 23,7 83,35 -62,3
             
Mixed Financing 1.874,66   2.501,26 33,4 2.434,03 -2,7
SourceMinistero dello sviluppo economico, Relazione sugli interventi di sostegno alle attività economiche e produttive SourceMinistero dello sviluppo economico, Relazione sugli interventi di sostegno alle attività economiche e produttive SourceMinistero dello sviluppo economico, Relazione sugli interventi di sostegno alle attività economiche e produttive SourceMinistero dello sviluppo economico, Relazione sugli interventi di sostegno alle attività economiche e produttive SourceMinistero dello sviluppo economico, Relazione sugli interventi di sostegno alle attività economiche e produttive SourceMinistero dello sviluppo economico, Relazione sugli interventi di sostegno alle attività economiche e produttive SourceMinistero dello sviluppo economico, Relazione sugli interventi di sostegno alle attività economiche e produttive
June 2008 June 2008 June 2008 June 2008 June 2008 June 2008 June 2008
24
SMEs Financing Pattern after 2008 (million euros) SMEs Financing Pattern after 2008 (million euros) SMEs Financing Pattern after 2008 (million euros) SMEs Financing Pattern after 2008 (million euros) SMEs Financing Pattern after 2008 (million euros) SMEs Financing Pattern after 2008 (million euros)
           
New Funding Tools 2000 2004 change 2004/2000 2008 change 2008/2004
           
           
Investment Fund of Funds          
Public-Private Investment Fund        
Private Equity VC          
Business Angels ------ 1,30   31,00 2284,6
Public Credit Guarantees          
Equity Participation Guarantees       35,53  
Partecipatory Loans          
Mezzanine Debt     ------    
Clusters Bond     ------    
Tranched Cover     ------    
On-lending          
Tax Credit for Recap Aggreg          
Tax Credit for Innovation          
Factoring          
         
Source IBAN, relativamente ai dati relativi alla operatività in Italia dei Business Angels Source IBAN, relativamente ai dati relativi alla operatività in Italia dei Business Angels Source IBAN, relativamente ai dati relativi alla operatività in Italia dei Business Angels Source IBAN, relativamente ai dati relativi alla operatività in Italia dei Business Angels Source IBAN, relativamente ai dati relativi alla operatività in Italia dei Business Angels Source IBAN, relativamente ai dati relativi alla operatività in Italia dei Business Angels
MedioCredito Centrale S.p.A., relativamente ai dati sulle garanzie rilasciate a fronte di partecipazioni al capitale di PMI MedioCredito Centrale S.p.A., relativamente ai dati sulle garanzie rilasciate a fronte di partecipazioni al capitale di PMI MedioCredito Centrale S.p.A., relativamente ai dati sulle garanzie rilasciate a fronte di partecipazioni al capitale di PMI MedioCredito Centrale S.p.A., relativamente ai dati sulle garanzie rilasciate a fronte di partecipazioni al capitale di PMI MedioCredito Centrale S.p.A., relativamente ai dati sulle garanzie rilasciate a fronte di partecipazioni al capitale di PMI MedioCredito Centrale S.p.A., relativamente ai dati sulle garanzie rilasciate a fronte di partecipazioni al capitale di PMI
25
MUTUAL CREDIT GUARANTEE SCHEMES
Source Federconfidi, Statistiche AECM, EU
Finance Day for SMEs, Roma, 2008
26
Mutual Credit Guarantee Schemes
Source Fedart Fidi
27
Most effective financial tools after the crisis
  • Public guarantees to Mutual Credit Guarantee
    Schemes
  • On-lending of public funds to SMEs through banks
  • Extraordinary public support to bank
    recapitalization

28
Comparison of Financial Impact Credit multipliers
of various Gvt tools
  • Guarantee by State Fund to MCGS with State
    endorsement 45.3 times x 1 euro
  • Public purchased of participatory bonds issued by
    MCGS 44.4 times
  • Guarantee by Regional government
  • 29.3 times
  • Tranched cover 14.9 times
  • Capped guarantee by State Fund to MCGS
  • Source L. Gai and F. Rossi, in Bancaria 2009

29
  • The most innovative financial instruments are
    less used by SMEs because of SMEs relatively low
    financial skills and limited offer by financial
    industry

30
Mezzanine debt
Firms with less than 50 million euros turnover
were 17 and received 129.6 million euros of
mezzanine debt.
31
Mezzanine debt (values in million euros)
32
Venture capital and private equity
33
Venture capital and private equity
34
Venture capital and private equity
35
Venture capital and private equity
36
Critical issues
  • Too many Gvt incentives lead small firms to
    remain small
  • Excessive transfer of financial risk to the
    public sector may lead to moral hazard
  • Undercapitalization of SMEs is benefiting from
    Gvt support
  • Basel 2 goes against SMEs excessive reliance on
    short-term debt
  • Lack of SME access to financial markets

37
Conclusions
  • Thin equity base and high dependency on bank
    lending are the weakest points in EU and Italys
    SME financing.
  • Innovative financial instruments have fuelled a
    significant expansion of SMEs in the EU before
    2008, but are unable to shield them in current
    economic crisis.
  • Financial innovation has been of little help in
    overcoming SME undercapitalization.
  • Convergence needed between Gvt support and
    private capital to channel more funds to SMEs.
  • Gvt intervention is essential as performer of
    financial risk transformation, provider of
    guarantees, rule maker
  • Most finance needed for equity base, RD,
    innovation, SME aggregation

38
  • Need to develop equity markets for small firms
    it requires development of institutional
    investors, like pension funds.
  • Most effective financing tools are public credit
    guarantees, mutual credit guarantee schemes,
    on-lending of public funds.
  • Relationship banking is more suitable for
    financing small firms, as compared to parametric
    banking.
  • SMES have to show more transparency on their
    conditions, a commitment to raise equity base,
    and operate in a network fashion.
  • Overall, need for a better risk sharing between
    SMEs, lenders and public sector in advancing in
    innovative financing.
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