1. The end of COVID-19 and the economic recovery
At the end of 2021, Spain is getting ready to leave COVID-19 behind, with the end of the last restrictions. This pandemic, which has wreaked havoc at every level, seems to be fading further into the past and, this time, for good. This paints a hopeful outlook for the economy and for the prospects of small and medium-sized companies in our country.
The reopening of businesses, the end of limits on opening hours and capacity, and the recovery of the tourism and leisure industry are key factors that, in the coming months, will provide a crucial boost to the economy in general, and to SMEs in particular, after a period as dark as the one that began in March of last year.
The leading economic institutions at the global, European, and national levels forecast strong macroeconomic growth in Spain this year and next (above 5% in both cases). This will mean a recovery in demand, and consequently in corporate profits, as well as a revival of the economy as a whole.
In a country where SMEs account for 99.8% of all companies and generate just over 62% of gross value added, and where they have been the hardest hit by the social and economic impact of COVID-19 and the restrictions, these forecasts point to a very favorable landscape for investment.
2. Digitalization
Another impact of COVID, and one that also presents an opportunity, is that it has forced many companies to reinvent themselves: the growing digitalization of the business landscape.
From remote work and virtual communications to the acceleration of trends that had been under way for years, as well as new ways of interacting with customers or suppliers and of carrying out all kinds of transactions (including buying and selling businesses or finding partners). New times bring new challenges, but also new possibilities, in every sense and, in particular, in terms of efficiency and costs.
These lie in the fact that many small and medium-sized enterprises are using the many tools that modern technology offers us to face their realities, in order to survive and grow.
Investments are needed to streamline internal processes and relationships with third parties, as well as to provide transparency, offer innovative products and services, and, in general, take on market competition. At the same time, this enables better adaptation to the customer, opening new markets, or offering new products; in short, new business opportunities and, consequently, investment opportunities.
3. European funds: €1 billion to rescue SMEs, €3.5 billion to digitalize them
On the one hand, plans are already being rolled out to inject European funds into the Spanish economy and use this boost to modernize many companies. Among the range of plans aimed at reviving and modernizing the Spanish economy after the crisis caused by the pandemic, there are some aimed specifically at SMEs. The idea is for these funds to start being disbursed from 2022, and for most applications to start being processed this year.
The plan is to allocate around €3.5 billion to support digitalization and the adoption of cutting-edge technology solutions, such as artificial intelligence tools, in small and medium-sized companies. This can be a great opportunity to improve a company's efficiency and support its recovery or expansion.
Another area of the Government's Recovery Plan, in coordination with the European Commission, is a plan to recapitalize SMEs. The goal is to inject public money into companies that are viable but struggling to survive because of the pandemic, in order to get them back on their feet. The firepower to do it? €1 billion.
There is still €770 million left to allocate under the plan managed by the Compañía Española de Financiación del Desarrollo (Cofides, the Spanish development finance company), which can be applied for as aid until December 31, although Brussels is considering extending it by another six months.
This is a good reason to invest in the Spanish business landscape, which, like the European one, is made up mostly of SMEs: if the plan achieves its goals, even partially, it will keep a considerable number of companies afloat.
This outcome is not only positive for these companies, but for all those around them, in a kind of “domino effect” at the macroeconomic level (an effect similar to the so-called “Keynesian multiplier”).
The reason is that they will continue to buy from other SMEs, hire their services, and undertake joint projects and, if they recover their activity and growth to “pre-COVID” levels, they are likely to become customers of new companies and start needing other services, and so on. The result of all this? Attractive new investment opportunities.
4. Potential
A key reason in favor of investing in small and medium-sized companies is that they have much greater growth potential than large companies.
Investing in companies listed on the IBEX 35 is much easier and more accessible than investing in, for example, a midsize company in the agri-food industry.
This is due to the difficulty of obtaining information, the lack of access to and knowledge of the parties involved, the opacity of the market for investing in this type of company, the high fragmentation of players for these investments, and a number of other problems that make it more costly and slower.
Despite these drawbacks, which we at Deale aim to solve, there is a major advantage: exponential growth and high returns are much more common (in ROI, ROE, and other financial indicators) in SMEs than in large, already established companies, which find it much harder to grow, precisely because of their size.
