Give Me a (Fiscal) Lever, and I'll ReCapitalize BusinessesTHE ROLE OF THE STATE TO SAVE THE ECONOMIC SYSTEM MUST BE ALWAYS DRIVEN BY MARKET CRITERIA
The relaunching of Italian companies must go through a decisive and widespread capitalization action. More equity allows both to have liquidity for immediate survival, but above all to have the robustness to plan the relaunch and growth, with lower risks. Furthermore, the more the equity is, the higher the creditworthiness becomes, and thus the ability to obtain financing from the banking system. Taking full advantage of the guarantee given by the state within the recovery actions organized in the last few months.
How to capitalize businesses at large? A single recipe is not possible. Companies have different sizes, operate in different sectors and one cannot think of a generalized intervention of private equity, up to the financial markets or to the direct European intervention. Conversely, the urgency of capitalization needs to distinguish a series of successive layers, which start from a common base and which gradually concentrate on a smaller number of companies of larger size or potential. The recent Report by the High Level Forum on the Capital Market Union offers very clear insights into this.
The common basis, which involves outfits from the smallest business to the large company, is the fiscal lever. The “Relaunch Decree” only partially addresses this aspect and it is appropriate that in the coming weeks it takes up this solicitation, taking into account the recommendations of the “Colao Commission” on this front. The fiscal lever must not only equalize the difference between debt and equity, but must encourage virtuous behavior, so that capital strengthening a recurring choice. The tax lever must act on two sides, i.e. on the company and on the shareholder. In the first case, our country has repeatedly seen an attempt to insert incentives in this direction (from the Prodi to the Monti Government, with “DIT – Dual Income Taxation” and the “ACE – Aid for Growth”) without, however, making the mechanism structural. A consolidation of ACE at an attractive rate (well above the current modest 1.3%) and calculated no longer on the variation of equity, but on the entire amount of equity, would make the issue of capitalization much more serious. In the second case, the shareholders must have an incentive to transfer part of their wealth to their company. A reduction (elimination?) of the taxation on dividends for those who hold the capital over a certain period of time and, much more courageously, a reduction in the IRES or IRPPEF rate for those who invest in an equity increase, would be a terrific turning point.
For larger companies and those with the highest development potential, in addition to the common base, the use of the financial market and investor intervention (private equity, venture capital, ELTIF) should be promoted. The relevant issue today is how to reconcile this need with the equally important need for the use of public resources, both national and European, i.e. through the Recovery Fund. The risk to be avoided is that of a nationalization of the intervention in equity and a crowding-out of the market. The right road, on the other hand, is to find the conditions so that the intervention of the State is fully exploited and follows the rationale of private capital.
There are three fundamental guidelines for State intervention. First, the use of the capital market is decisive, as the known advantages (visibility, access to additional resources, growth) are even more important in a crisis phase. Here, it would make a lot of sense to play the card of an additional prize on both ACE and shareholders. Secondly, investors in equity, both listed and unlisted (i.e. venture capital, private equity, ELTIF) must be valued with a clear incentive on capital gain, which is the real element that creates the market and attracts investors by generating liquidity. Thirdly, State intervention must take place either with a clear and autonomous market rationale or through the necessary support for private investors. A mechanism in this case of public-private partnership would in fact give a shock force - the presence of the state – combined with agility and orientation towards profit typical of the private sector. This last point is the real challenge: in a phase of crisis, the State is central and must design the right incentives and fiscal mechanisms. But for the revival of the economy, the presence of the state must not be confused with the use of State logic. This would mean abdicating the role to relaunch our country and a net loss for taxpayers.
by Stefano Caselli, Algebris Chair in Long Term Investment and Absolute Return