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.
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).
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.