1. 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. 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 country’s enterprise structure to see where most financial woes lie and what action should be taken first.

3. 3 Italy - Value added by sectors and enterprise size class 2005 Italy - Value added by sectors and enterprise size class 2005 Micro (1-9) Small (10-49) Medium (50-249) SME (1-249) Large (> 250)Total Value added (mln euro) Industry30.60161.87956.047148.52786.709235.235 Construction30.96518.5065.74855.2192.73457.953 Services 146.22762.83140.340249.39891.271340.668 Total207.793143.215102.135453.143180.713633.856 Percentage distribution Industry13,026,323,863,136,9100,0 Construction53,431,99,995,34,7100,0 Services42,918,411,873,226,8100,0 Total32,822,616,171,528,5100,0 Source: IPI on ISTAT statistics

4. 4 Italy - Employment by sectors and enterprise size class - 2005 Micro (1-9) Small (10-49) Medium (50-249) SME (1-249) Large (> 250)Total Number of employed Industry1.199.2801.465.161993.9823.658.4231.112.3434.770.766 Construction1.165.265472.835122.5381.760.63849.1961.809.834 Services 5.467.0451.523.854936.7027.927.6011.821.4999.749.100 Total7.831.5903.461.8502.053.22213.346.6622.983.03816.329.700 Percentage distribution Industry25,130,720,876,723,3100,0 Construction64,426,16,897,32,7100,0 Services56,115,69,681,318,7100,0 Total48,021,212,681,718,3100,0 Source: IPI on ISTAT statistics

5. 5 SMEs and MICRO ENTERPRISES IN ITALY AND OTHER MAJOR EU COUNTRIES (Number of firms, employment and value added in % and average %)

6. 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. 7 BirthsDeathsTurnoverGrowth rate 2003389.342304.72884.6141,45% 2004425.510320.536104.9741,78% 2005421.291324.60396.6881,61% 2006423.571350.23873.3331,21% 2007436.025390.20945.8160,75% 2008410.666374.26236.4040,59% Enterprise demography in Italy Source: Unioncamere-InfoCamere, Movimprese

8. 8 BALANCE SHEETS OF ITALIAN MANUFACTURING FIRMS (BACH) ALL FIRMS SMALL FIRMS (<10MEUR) MEDIUM FIRMS (10-50 MEUR) Year200020042007200020042007200020042007 Debt <1year 50.248.349.555.453.252.955.35253.2 Debt >1year 11.712.511.410.811.91310.611.411.8 Provisi ons 6.876.56.26.76.45.76.15.6 Accrua ls 0.810.91.11.2 0.91.10.9 Capital +reser. 30.631.331.726.52726.527.529.428.6 Tot.lia bilities 100

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10. 10

11. 11 SMEs’ bank debt as a ratio to sales turnover (Year 2009 - Percentages)

12. 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. 13

14. 14 SMEs Financing Pattern before 2008 (million euros) Private funding toolsMaturity2000 2004 % change 2004/2000 2008 % change 2008/2004 Bank loans < 1 year251.823,23 262.119,674,1%348.862,3733,1% 1-5 years98.801,90 131.795,2833,4%158.987,0020,6% > 5 years130.485,17 215.503,1865,2%361.858,3567,9% Subsidized loans to SMEs in Industry5.752,01 4.420,02-23,2%2.388,56-46,0% to other firms in Industry1.970,16 1.433,32-27,2%975,06-32,0% to firms in Trade and Services 1.259,54 1.631,3829,5%934,16-42,7% to firms in Crafts3.164,45 2.316,19-26,8%2.638,1413,9% Leasing 41.815,00 80.924,0093,5%121.859,0050,6% Factoring ------ 3.757,00------2.900,00-22,8% Mezzanine Debt ------ 310,00------355,8014,8% Venture Capital & Private Equity 2.968,59 1.480,00-50,1%5.458,00268,8% 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; AIFI, relativamente ai dati sul Private Equity e il Venture Capital;

15. 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. 16 Financing need of Italian Enterprises ----------- Self-financing -- ---- -- - EBIT ________ Investment expenditure ------------ Net financial charges Source: Bank of Italy, Annual report, May 2009.

17. 17 Self-financing ability of Italian Enterprises Source: Bank of Italy, Annual report, May 2009. Cash flow / Investments (%)

18. 18 Bank Loans to Italian Enterprises (percentage change on yearly basis) Source: Bank of Italy, Annual report, May 2009. ------------ all enterprises, ---------- medium and large firms ----------- small firms

19. 19 Source: Unicredit Data Dark gray: Firms under stress Light Gray: Firms with no stress Firms under Financial Stress (March 2009 – by turnover size in thousand euros)

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22. 22 Aims of new financing pattern Reopen the bank lending channel Ease the liquidity squeeze Build up equity base Promote investment in R&D and new technologies Boost Mutual Credit Guarantee Schemes Spur SME aggregation

23. 23 SMEs Financing Pattern before 2008 Public financing tools2000 2004 % change 2004/2008 2008 % change 2008/2004 Million Euros Equity Grants1.485,58 2.513,74 69,2% 238,11-90,5% Interest Subsidies373,70 223,31 -40,2% 398,2578,3% Aid16,83 37,57 123,2% 45,6321,5% Tax Credit------ 957,33 ------ 5.235,20446,9% Equity Participation------ 17,75------ Guarantees72,47 664,22 816,5% 1.162,7975,1% Subsidized Loans178,69 220,99 23,7% 83,35-62,3% Mixed Financing1.874,66 2.501,26 33,4% 2.434,03-2,7% Source:Ministero dello sviluppo economico, Relazione sugli interventi di sostegno alle attività economiche e produttive June 2008

24. 24 SMEs Financing Pattern after 2008 (million euros) New Funding Tools20002004 % change 2004/2000 2008 % change 2008/2004 Investment Fund of Funds Public-Private Investment Fund Private Equity & VC Business Angels------1,30 31,002284,6% 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 MedioCredito Centrale S.p.A., relativamente ai dati sulle garanzie rilasciate a fronte di partecipazioni al capitale di PMI

25. 25 Source: Federconfidi, Statistiche AECM, EU Finance Day for SMEs, Roma, 2008 MUTUAL CREDIT GUARANTEE SCHEMES

26. 26 Mutual Credit Guarantee Schemes Source: Fedart Fidi

27. 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. 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. 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. 30 Firms with less than 50 million euros turnover were 17 and received 129.6 million euros of mezzanine debt. Mezzanine debt

31. 31 Mezzanine debt (values in million euros)

32. 32 Venture capital and private equity

33. 33 Venture capital and private equity

34. 34 Venture capital and private equity

35. 35 Venture capital and private equity

36. 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. 37 Conclusions Thin equity base and high dependency on bank lending are the weakest points in EU and Italy’s 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, R&D, innovation, SME aggregation

38. 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.