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Change & Recovery: Raising capital in a changing world

Opportunities not to be missed

Failing to see the wood for the trees in 2021 and therefore missing investment opportunities due to fear of the unknown may prove costly for investors and entrepreneurs. Economic forecasts are now negatively (and possibly inaccurately) skewed downwards by the uncertain nature of the pandemic and the current surge of cases despite signs of economic growth at the end of 2020. Taken together, this creates a cocktail of ups and downs with implications for raising capital and fostering the appetite to invest.

The New Reality of Raising Capital

Investors and entrepreneurs are incentivised to invest

The overall growth trends in 2020 provided both investors and entrepreneurs with a supporting wind in picking up economic activities that were affected by the pandemic (e.g. services sector activity which has been severely affected by the lockdown measures). However, the first quarter of 2021 skewed these indicators due to the new wave of lockdowns in Europe coupled with the slow roll out of the vaccination programmes across CEE/SEE.

According to a bank lending survey carried out in January 2021 by the European Central Bank in the euro area, in Q4 2020 there was a tightening of credit standards applicable to loans granted by banks to corporates. This is a reflection of heightened risk perceptions resulting from the uncertainty around the economic recovery and concerns about borrowers’ creditworthiness in the context of renewed coronavirus-related restrictions.

Against this background, raising capital now sees a new dawn where entrepreneurs lean to a heavier extent on alternative sources of funding such as bonds, private equity, alternative lending and crowdfunding. On the other end of the spectrum, investors now tend to be more cautious in their decisions to place funds due to the uncertainty of the economic effects that will unfold.

However, because the costs of sitting on cash are high on both ends of the spectrum, both investors and entrepreneurs are to a certain extent incentivised to invest and raise capital, respectively. The key in this case is not short-term predictability, but rather the soundness of the investments and the long-term strategy of entrepreneurs.

How Can Capital Be Raised in This New Environment?

In January 2020, the European Securities and Markets Authority published its second statistical report on European Union (EU) Alternative Investment Funds (AIF) where they found that “the EU AIF sector in 2018, as measured by Net Asset Value (NAV), amounted to €5.8tn or nearly 40% of the total EU fund industry” out of which Real Estate (RE) funds represented 12%, Hedge Funds 6%, Private Equity (PE) funds 6% and Other AIFs 61%. On the other hand, it is expected that the crowdfunding market will grow by USD 124.35 bn during 2020-2024.

With banks tightening their crediting policies, lending AIFs, crowdfunding, private placements, attracting PE funds and funding via capital markets are opportunities to grow or simply morph a business or a project. Each of these alternatives presents pros and cons. There is no one-size-fits-all approach and each entrepreneur must explore which option fits best for the level of growth, long-term strategy, industry and purpose of its business.

Focusing on the positive side of the spectrum, there are numerous options to draw capital both within the EU and outside of it due to the options created by online platforms, and there is enough liquidity on the markets to meet such a demand for capital.

What Is the Medium to Long-Term Outlook?

While there are plenty of unknown factors amidst a backdrop of high volatility, it is expected that growth patterns across sectors and countries will differ. The roll-out of vaccination programmes offers a glimpse of confidence in terms of dealing with the health crisis. However, there still seems to be a long road until widespread immunity is achieved, and further adverse developments related to the pandemic are to be expected.

Amid this new environment, raising capital via capital markets instruments or by approaching PE funds or other AIFs or via crowdfunding are increasingly the “go to” options for entrepreneurs while investors keep on exploring new types of funding options such as the use of SPACs. These options for raising capital make demand and supply meet in an environment characterised by lockdowns amid a health crisis with a global reach.

In the interim, across CEE/SEE, there are numerous fiscal stimulus packages being implemented either at the national or EU level aimed at supporting businesses and offering relief until the uncertainty recedes. In the long run, businesses that continue to invest and carry on their projects in line with the new economic realities will reap the benefits and thrive.