A thoughtful approach toward the 'capital conundrum' | Business Roundtable


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A thoughtful approach toward the 'capital conundrum'

Aug 21, 2012

As an association of CEOs of America's large companies, Business Roundtable is keenly concerned about the success of businesses of all sizes. After all, small-and-medium enterprises (SMEs) purchase products and services and form an essential part of the supply chain. For the U.S. economy to do well, SMEs must do well.

Now a recently released study by the TechAmerica Foundation proposes a new way of supporting these companies, especially a category of them responsible for much of the nation's job creation. The study, supported by SAP*, the global business software company, states the challenge in its title, "Fueling Rapid Growth Enterprises -- Job Creation and Access to Credit in the United States for Small and Medium-Sized Business that are Rich in Intangible Assets." (news release)

Written by well-known business writer, professor and partner at Jones Day, Andrew J. Sherman, the study first summarizes the attributes of these companies (abbreviated to RGEs):

[There] is a unique breed of enterprises that account for nearly all net new jobs. Specifically, the US Small Business Administration (SBA) has defined Rapid Growth Enterprises (RGEs) as businesses “whose sales have at least doubled over a four-­‐year period and which have an employment growth quantifier of two or more over the same period.” RGEs on average are younger and more efficient than their counterparts. The vast majority have fewer than 20 employees, and collectively they represent 6.3 percent of the US economy.

The study provides much more analysis of these companies and their ability to rapidly create jobs, putting their activity in the context of the still slow economic growth and lack of hiring.

The trouble faced by these RGEs, which are often high-tech innovators, is what Sherman terms the "credit conundrum." In the wake of the financial struggles in 2008 and 2009, the RGEs are still finding it difficult to get credit in the private markets. Private equity for funding and the venture capital industry are just not as willing to invest as in years past. When it comes to the debt markets, banks are more reluctant to make loans and standards tightened. Public sector options -- think SBA -- fall short.

The conundrum is that the companies' assets quite often come in the form of intangible assets, which may not show up on the books. The report relates an informative perspective from James Edwards, vice president of finance for Universal Understanding, a technology services company and Cisco-reseller:

Our biggest assets are our sales force and client relationships that are salespeople have developed; our internal processes, procedures and tools; and our engineering credentials and OEM certifications that we have obtained at significant expense. These assets form the heart of our business 'machine," and if our businesses was sold they'd factor into goodwill. As CFO of our 50-person company, I can tell you that if we were somehow able to capitalize on these intangible assets or borrow against them, we be able to grow much faster than if we had to fund our growth organically through earnings.

So what's the one possible solution?

TechAmerica cites the model of Private Employment Partners Program (PEPP), founded by a small group of investors "to provide loan guarantees to RGEs rich in intangible assets and to develop standard methodologies and ranking systems for intangible assets of RGEs."

The study proposes that industry -- now with perhaps $2 trillion in cash reserves -- and private-sector lenders would back these loan guarantees, closing the gap for RGEs and improving their access to private capital.  "This model gives industry leaders a new way to improve the success and growth of RGEs and improve their own business prospects in the process. Through their support of RGEs, industry leaders will be responsible for meaningful ob creation, demand stimulatoin, innovation and the harvesting of ripe intangible asset," the study concludes.

The TechAmerica Foundation has certainly produced a paper with thoughtful findings and a proposal meant to address a real problem in the business world.

* From the acknowledgements: "In April 2012, SAP convened an expert roundtable in Washington, D.C., including the US Small Business Administration, SCORE, the Small Busness Development Center Network, and others to discuss ways to help companies grow and thrive." Business Roundtable President John Engler participated in the discussions.