Difficulties In Accessing Equity Finance By Businesses In Wales

Abstract

Access to finance for small and medium-sized enterprises (SMEs) is important for the growth of the firm and regional economic development in Wales. However, there currently exists an equity gap in Wales.

A possible explanation for an equity gap may be that Welsh businesses experience difficulties in accessing equity finance. This study aims to contribute to the knowledge of the factors that impact on access to equity finance for businesses in Wales, with the emphasis on the Development Bank of Wales which was established to finance SMEs in Wales.

Through the analysis of data gathered from questionnaires (sent to businesses that have sought equity finance from the Development Bank of Wales) the research will determine the difficulties faced in accessing equity and identify potential strategies to increase the levels of equity investments across Wales.

Background

The Development Bank of Wales was established by the Welsh Government to invest finance in SMEs across Wales (DBW, 2019). However, it is clear from a glance at the Development Bank of Wales’ equity investment portfolio that very few equity investments are made in businesses within any regions of Wales, apart from Cardiff.

The development issue for Wales is not related to the presence of an equity cluster in Cardiff, but rather improving general conditions around equity supply and demand in various regions of Wales (Kapitsinis et al., 2019).

Problem Statement

There currently exists a lack of awareness of the difficulties faced by businesses in Wales in accessing equity finance. The increase in awareness of the difficulties faced by businesses seeking to secure equity finance will enable investors, such as the Development Bank of Wales, to offer additional advice and, in some cases, tailor investment criteria to increase equity investment in businesses across Wales. The motivation of this exploratory research is to determine the factors that impact the access of equity finance in businesses across Wales, and identify approaches that could be taken by investors to increase the levels of equity investment.

More specifically, the following research questions should be addressed:

1. Which factors influence a business’s access to equity finance in Wales?
2. How can the Development Bank of Wales increase the levels of equity investment in businesses across Wales?

Objectives

The objective of this study is to identify the difficulties businesses in Wales face in accessing equity finance, to increase the opportunity for successful equity investment, thus reducing the equity gap that exists in Wales.

The long-term objective of this research is to facilitate the formulation of strategies to overcome difficulties faced by businesses in Wales in accessing equity finance, thus increasing the level of equity invested in Wales.

To summarise, the aim of the current study is to provide an insight into the factors that influence the levels of equity invested across Wales by the Development Bank of Wales. Particularly, the study has the following sub-objectives:

1. To identify the demographic of businesses seeking equity investment in Wales
2. To identify problems experienced by businesses in the process of obtaining equity finance in Wales
3. To identify possible areas of improvement to increase the investment levels of equity finance across Wales

The results of this research will increase the awareness of relationship between the characteristics of businesses seeking equity finance and their experiences in securing equity finance. The results will be of benefit for the Development Bank of Wales, in terms of implementing increased equity investment, and the information may also have relevance to other investors of equity finance in Wales.

Preliminary Literature Review

The UK’s core-periphery economic divide is widening (Financial Times, 2015). Evidence shows that secondary cities, particularly Wales, performed worse during the recession than London and are still lagging behind in terms of job creation during economic recovery (Townsend and Champion, 2013). Statistics show that SMEs provide 62% of private sector employment in Wales (FSB, 2017). Consequently, to create economic growth and jobs in Wales, it is important to support the growth and innovation of SMEs (European Commission, 2019).

Firms receiving equity funding are found to demonstrate faster turnover and employment growth, and to have stronger routes to innovation processes (Kapitsinis et al., 2019). Equity is the finance that a company gets from selling shares rather than borrowing money (Cambridge Dictionary, 2019). The funding and expertise that equity investors bring can fuel rapid growth when companies are starting up, expanding, diversifying or entering new markets (BBB, 2017).

Whilst the number of equity investments in the UK is increasing each year, equity deals tend to be grouped into geographic clusters where innovative companies, skilled labour and equity investors locate close together. Cardiff is identified as one of the top 25 regions for deal activity in the UK (BBB, 2017), however, there is evidence to suggest that there currently exists an equity gap in Wales (CRMC, 2019).

A preliminary literature review shows that, whilst regional equity clustering is a fairly unexplored topic in research literature (Kapitsinis et al., 2019), various supply and demand factors that influence regional access to finance are identified. Supply side factors include the availability of local funds, investors and intermediaries (Martin et al., 2005). Whilst demand side factors include the investment-readiness of businesses and their aware of opportunities (Mason and Harrison, 2002). Many of these factors reinforce the geographical concentration of equity investing in particular regions (Mason, 2007). This study will explore the applicability of such factors to Welsh businesses that have sought equity finance from the Development Bank of Wales.

Previous research has considered only location and sector as factors to explain the geographical disparities in equity finance (BBB, 2017; Kapitsinis et al., 2019). Therefore, this study will aim to develop further upon the existing research and explore the relationship between a range of firm characteristics, the type of equity sought and the difficulties faced in securing investment.

Additionally, the availability of information on the geographical distribution of equity investing is limited, with much being in the form of highly aggregated statistics produced annually by national venture capital associations. This records the location of investments, but offers limited information on the types of regional investment (Mason, 2007). Therefore, this study aims to contribute to filling the gap in disaggregated data available.

Methodology

This research will be conducted according to a project schedule (Appendix A) and will take a triangulation approach. A web-based survey will be conducted to gather both quantitative and qualitative data in order to test the applicability of the supply and demand variables identified in the literature, and to identify additional variables perhaps not recognised in the literature. A range of questions will be included to provide some background to the businesses, their owners and the type of equity sought. Additional questions will seek to determine the difficulties faces by businesses in seeking and securing equity finance in Wales.

The sample will be formed of businesses that have sought equity finance from the Development Bank of Wales, whether successful or unsuccessful in their applications. In order to test the suitability of the questions, the survey will be shared with investment executives experienced in investing equity and communicating with businesses seeking equity finance. Due to the time constraints, it is deemed that questionnaires will be the best way to gather the relevant data on the issue. If the timeframe were longer it would have been useful to conduct customer interviews to gain more in-depth opinions and experiences on the matter. This is, therefore, an area of recommended further research.

There are unlikely to be any ethical issues with this method of research as all participants will be professional business owners, over the age of 18. Therefore, there is no doubt of the participants’ ability to provide consent. All participants in this research will have applied for equity finance from the Development Bank of Wales, therefore, there may be an existing relationship with the researcher. To overcome this issue, the purpose and scope of the research will be communicated in an email before the questionnaires are completed, in order to inform the respondents what is required of them and the intended use of the research.

The data collected will not be shared outside of the Development Bank and the University of South Wales consortium. There will be no personal data collected from participants, instead they will be identified as numbered respondents. All data provided will, therefore, remain anonymous and risks associated with GDPR non-compliance are limited.

The results of this research will be presented, in an executive summary format, to the Business Development and Investment teams at the Development Bank of Wales. This will increase investor awareness of the factors that influence access to equity finance, and therefore strategies to increase the investment of equity across Wales can be developed.

Conclusion

To conclude, existing literature identifies supply and demand factors that impacts the levels of regional equity investment. This research will aim to determine which factors impact the ability of businesses in Wales to access equity finance. This study will also develop further upon the existing research to explore the relationship between the characteristics of businesses seeking equity finance in Wales and their access to equity finance.

Quantitative and qualitative data, gathered from a web-based survey sent to businesses that have sought equity finance from the Development Bank of Wales, will be analysed. This will enable the identification of the factors that impact access to equity finance for businesses in Wales, and the exploration of the relationship between difficulties faced and firms’ characteristics.

An increased awareness of the difficulties faced by businesses in Wales in accessing equity finance will enable strategies to be developed by investors to overcome such difficulties, thus increasing the level of equity invested in Wales and contributing to closing the equity gap.