Peter Harrison: UK business needs a £30bn equity injection
The winning companies of tomorrow need help to survive today. This is how we, and the government, could help.
The full economic impact of the Covid-19 crisis is now beginning to be felt as each day brings fresh news of job losses. It will get worse.
There is a chance to mitigate this - to support tomorrow’s winning companies that are struggling today. Encouraging companies to load up on more debt is not the answer. The solution lies in equity markets.
We have recommended that the government create a patient capital fund, worth £20 billion to £30 billion, to support the growth ambitions of both public and private companies. Businesses will then be able to afford to protect jobs and keep up their investment plans.
The chancellor has not taken the opportunity of his fiscal statement to do this. Given the severity of the situation, we hope he will consider such a scheme in the months ahead. For our part, we are currently considering the launch of our own investment trust.
This is the time to act. New measures unveiled on 8 July - designed to mitigate the expiration of the furlough scheme - should be welcomed. However, they won’t prevent widespread job losses.
Various loan programmes had already been made available, and companies had been allowed to defer some taxes and other payments. These moves undoubtedly saved businesses and jobs. But the scale of the crisis is such that more needs to be done. Further loans are not the answer. What companies need is equity, not more debt.
The stock market may hold the solution, and has certainly demonstrated its worth in the crisis so far. Our analysis shows nearly £14 billion has been raised by 300 companies on the London Stock Exchange in the first six months of 2020, more than in any year since companies scrambled to repair their balance sheets during the financial crisis of 2008 and 2009.
Investors have also been sympathetic to the need to cut dividends to protect capital. We called for such pragmatism in March.
The private equity industry is also working hard and investing to support companies that require assistance during this crisis. Again, firepower across the industry may be insufficient to continue this support indefinitely or to the extent required.
We think much more equity will be needed for both private and public companies and it could prove increasingly hard to come by.
So far, it’s been surprisingly easy for companies to raise money with demand buoyed by a resurgence in stock markets. But if markets become less resilient, or if a second wave of Covid-19 comes, companies will struggle to raise additional funds in flat or falling markets.
There is a particular need to support companies in the small to mid-cap bracket. These firms are too large to be the focus of the government’s initiatives, but are not “mega caps” able to wield their clout with banks or credit markets.
These small and mid-sized companies, with market caps in the £50 million-£2 billion range, comprise 69 of the 300 public equity placings seen so far. Through these, they’ve raised around £3.8 billion. Our fear is that this could prove a drop in the ocean compared to what is needed.
For our part, our UK smaller companies investment team increasingly feels that it has insufficient funds to support all the rights issues that are required to protect quality UK companies. Across the industry, £150 million has seeped out of small cap UK equity funds so far this year. Put simply, there isn’t enough money to go around for this part of the market. And if you look at the detail, the money raised by companies isn’t from fresh investment, it has been recycled from other UK equities or from existing fund cash balances. This obviously can’t continue.
Bold action is needed now to bring new money into the market. That is why we have suggested the creation of a government patient capital fund. It would support businesses but also make the British public stakeholders in companies with the potential to thrive. Other countries have been very successful in building sovereign wealth funds; the UK has long needed a framework to help small companies scale up.
The fiscal statement aside, now is the time for legislators and regulators to deal with other long-standing issues. We would like to see more flexible regulation for workplace defined contribution saving that facilitates a long-term investing horizon and encourages this pool of savers to participate in the compounding of their savings from sustainable and patient equity investing. This would support the pool of capital available to invest in growth in the UK.
In addition, investments designed for the very long term require appropriate fund structures. Fund platforms must be instructed to allow non-daily dealing funds. Only then can an important pool of patient capital emerge from retirement savings. Prevarication on this issue has gone on too long.
Asset managers like ourselves have an important part to play too. We are currently assessing the launch of an investment trust which would provide fresh equity to both public and private markets. It would seek to identify the highest quality sustainable businesses that have strong growth opportunities ahead, if they can just survive the present.
Clearly, we have a responsibility to our clients in terms of investment returns. Our industry also has a responsibility to the country to help protect jobs and ensure that the companies that will drive future economic growth remain solvent.
Everybody has a part to play in this crisis. For our industry, it’s ensuring capital markets work when British companies – and their employees – need them most. Our investment trust would be only the start of what is needed. We ask the government, and our investment industry peers, to play their role in the great recapitalisation of companies.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.