Rolet's equity-led rebound is good, but borrowing has worked for Germany

Outlook

The London Stock Exchange’s French chief executive couldn’t have given a more upbeat assessment of the British economy.

The best performer in the G7, Xavier Rolet gushed as he presented his half-year results, painting a rosy picture of “equity driving growth” with small and medium-sized enterprises (SMEs) powering ahead by going to the exchange for the financing that banks are no longer providing.

It makes for an attractive canvas, and Mr Rolet is not alone in hanging it on his wall. BDO, the accountancy firm and consultant, has laid out a similar vision. Earlier this year it produced a report on the “Brittelstand”, suggesting that British SMEs have started to outstrip their Teutonic counterparts, at least in terms of sales.

These sort of studies have to be viewed with a degree of caution: much depends on the parameters used. However, its conclusions will be music to the ears of a government that likes to play up its economic record, and many others besides.

What is less commonly debated is whether the Brittelstand – and the British economy – will benefit from its larger members knocking on the City of London’s doors.

Most of their German counterparts, who like to keep things in the family, wouldn’t dream of it. They have preferred financing steady growth via borrowing from their banks. Not all borrowing is bad, particularly when it is managed effectively and with a degree of conservatism, as the Mittelstand’s leading lights have largely done.

They do face challenges: owners can’t always find suitable candidates from the next generation who want to join family businesses. This has led them to seek to sell. EY, another consultant, last year pointed to their popularity with Chinese buyers.

Nonetheless, the sector will continue to serve as a source of strength to Germany in the years to come.

I am not trying to argue that an equity-led Brittelstand can’t serve as a similar source of strength. It’s a different model, but that isn’t to say that it can’t be effective.

BDO points out that joining the equity market can offer benefits beyond financing – such as the imposition of discipline that comes with regular reporting, together with enhanced visibility and credibility with customers and partners.

Of course, BDO has built up a good business through advising on these things. And while LSE the company is far more diverse than just the equity market it is named for, it still likes the fees that flotations generate.

However, short-term reporting cycles can lead to damaging short-termism. It is also true that brief periods of vulnerability that private companies are able to ride through can encourage speculative attacks on small public companies, to the detriment of the economy if they spirit away innovative businesses.

The rosy vision of an equity led Brittelstand presented by the likes of BDO and Mr Rolet could yet be derailed by the City of London’s thorns.