One of the major challenges facing Australia today is the lack of a well developed financial system to support the next wave of economic growth.
Australians gamble more on the Melbourne Cup ($200 million, $9 per capita) than the entire venture capital industry invests in startups in a year ($100m, $4.55 per capita).
In Australia, the amount of capital invested by superannuation funds into the private equity industry equates to an estimated 1% of the total current superannuation savings pool of $1.8 trillion. Venture Capital and Private Equity are valuable alternative channels of equity financing, but their sources of funding are becoming increasingly constrained.
SMEs are critically important to our economy, particularly given the fact that Australia’s two million SMEs employ around 70% of the workforce – which is large by international standards – and account for over half of private sector output. Small businesses are also an important source of innovation across the economy, comprising almost 90% of all businesses engaging in innovative activity.
73% of a nation’s future wealth can be predicted by its Economic Complexity Index (ECI) – a measure of a nation’s ability to produce a range of goods varying in complexity from extracting and selling unprocessed natural resources to building and selling complex industrial products/services. Australia has “an amazingly primitive export basket”, according to Harvard economist Ricardo Hausmann, which means unless we start driving more innovation, we would predict low future GDP growth.
Recent research by PricewaterhouseCoopers indicated that 75% of the fastest growing occupations now require STEM skills. However, enrolments and completions in university STEM courses have remained flat over the period 2001 to 2013, while non-STEM courses have grown steadily. There is an increasing gap in the skills we need and the type of workforce Australia is producing.
For SMEs that increasingly operating in the digital economy with operations that do not fit neatly into traditional credit risk models, difficulties in accessing debt financing can become even more acute.
Over the last 3 years to June 2016, our banks have increased their housing related mortgage books from $1,178 billion to $1,472 billion according to the RBA and APRA. That's another $294 billion dropped into non-productive, dead assets.
Meanwhile, small business lending has increased by a miserable $26 billion, an annual rate of just 3.4%, to $269 billion over the same 3 year period. Since 2013, only 11% of new business lending has gone to small businesses. Most of the $900 billion of loans outstanding to businesses goes to the big end of town.
SMEs looking to access bank funding need to have property to offer as collateral. This is a huge constraint on business growth.
Our economy needs finance to grow. Alternative finance is working hard to fill the very large gap but needs much more tangible support to fix the problem. There is much to do to raise awareness but also to establish standards to ensure fairness and transparency.