Vince Cable MP, the UK Business Secretary has announced the
establishment of a new Government funded wholesale bank to help
small and medium sized UK businesses. It is intended that the
new Government funded bank will also attract private sector funding
and, upon becoming fully operational, support up to £10
billion in new and additional business lending.
At the current time, details of the proposals remain
patchy. However, the new lending will be applied to a broach
range of borrowers including manufacturers, exporters and growth
companies. Accordingly, the lending criteria will need to be
sufficiently flexible to accommodate the wide divergences between
these different types of companies and their corporate
cycles.
Whilst £10 billion is welcome there is no indication as to
the terms of any investment and the ability for funds to be
recycled. To keep this fund of £10 billion constantly feeding
back into the economy will be key.
The new bank (if it is a bank at all) will not have a retail
presence but will operate through the wholesale markets.
Is it a bank?
Business lending through non-conventional routes represents a
growing theme following the credit crisis. We have seen an
increasing number of investments being made without recourse to
conventional secured senior debt from a bank and are currently
working with clients to either establish or borrow from non-bank
lending businesses.
As already noted, the details of the proposal are yet to be
published. Whilst Vince Cable has made it clear that the
Government is to establish this new lending venture as a bank, the
nature of the proposals seem to indicate that it would not be
necessary for the structure of a regulated bank to be established
and that the new lending could be delivered through an unregulated
fund structure, thus reducing the need for capital adequacy and
reducing borrowing costs.
The problem
There are a lot of banks in the UK. Indeed, there are many
UK banks in which the UK Government holds a significant
stake. Whilst there remain significant issues regarding the
willingness and ability of lending institutions to advance funding
to growth businesses and the eagerness of companies to borrow, we
are unconvinced that the creation of a further Government backed
lending institution will plug the funding gap currently being
experienced by companies.
The Government needs to be a little more canny and make mezzanine
funding or equity investments in order to give growth businesses
for whom bank debt is unlikely to be appropriate or available in
any significant volumes the resources to step up to the plate and
deliver the new growth required to finally work the UK out of the
economic downturn. Subject to appropriate state aid approvals,
targeted and sensible application of funds (whether or not arising
from tax revenues) could be used to make equity investments
directly into new growth businesses in order to encourage them to
reach the next level in their development thus creating new jobs
and increasing corporation and payroll tax takes and, in time, upon
business success, deliver a healthy investment return. The
Government is in the process of establishing the National
Employment Savings Trust (NEST) as a manager of
auto-enrolment pension schemes. Might there be an opportunity
for some of the monies so managed to be applied into a growth fund
to seek to support the development of the UK's new business of
the future?
The lack of equity fundraising is a theme which has also been
touched upon by Professor John Kay in his recent review on the role
and effectiveness of equity markets: Professor Kay's analysis
concludes that the primary role of such markets is no longer to
raise funds for businesses. (See further
Corporate Governance update).
The opportunity
We are eager to see further details, in particular the investment criteria. We hope that the Government will seize the opportunity to deliver innovative and flexible new funding in a manner that has been so absent in recent years, thus helping to bridge the funding gap and assist the development of the new and vibrant businesses for the years ahead. Clearly it is necessary for funding support to be provided on an objective arms' length basis and not to represent a "back door" subsidy. However, in appropriate cases rather than simply competing for senior debt mandates, the Government should establish this new arms' length bank to take higher levels of risk (including mezzanine funding and equity stakes) which will earn a corresponding higher investment return.
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