What’s going on?In this ‘Alice Through The Looking Glass’ financial world you don’t need to be ‘The Mad Hatter’ to realise that financing companies through cheap debt is vastly preferable to issuing equity, which, in FTSE 100 companies case is currently costing those companies an average of 4% per annum to service. Why even our current Chancellor of the Exchequer has woken up to the fact that he can borrow 30-year money at a servicing cost of tuppence ha’penny so let’s spend, spend, spend. Oh, I almost forgot to mention, of course, if you do find yourself having to pay any interest on your debt then that interest is tax allowable, unlike the cost of servicing equity.
The borrowing cultureThe inevitable consequence of all this is those bright lads and lassies in venture capital houses have gone whoopee we can borrow loads of money to buy up tons of companies here, there and everywhere and then we can add even more debt into the capital structure of those companies while we suck out the realisable assets into our own pockets. And can you blame them for playing this game? Sometimes they screw up of course.
The WeWork exampleThe latest most spectacular example of such is WeWork where its backers woke up to the fact that $22bn of long term liabilities was only sustainable if they injected some good old fashioned equity into the beast through an IPO. Unfortunately for them, too many saw through their smoke and mirrors, causing a collapse in the IPO process and an ensuing emergency funding to keep it alive. So does anyone in authority care that equity funding is showing signs of going the way of the Dodo? Recent developments are not encouraging.
The upcoming General ElectionIn the current General Election fight, if finance gets a look in at all outside the Brexit machinations, we find the two main parties are simply locked in a discussion about how much debt they can take on before the system blows up completely. Yes, there is the usual blather from the Tories about what wonderful entrepreneurs we have and the need to support new technology and anything that might be described as green (not including vegetables). Meanwhile, the neo –Marxist Labour Party is hell-bent in relieving everyone of equity whether it is their scheme to dispossess equity owners of 10% of their shareholdings and/or also nationalise everything in sight.
The London Stock ExchangeYou might think that venerable bastion of all things equity, the London Stock Exchange (LSE), would really care. Wrong. The LSE has announced it wishes to buy Refinitiv (it used to be called Reuters), the market data company, for $27bn as against its own market of £24bn thus almost doubling its size. Who wants to concentrate on a boring old shrinking cash equity markets when you can chase the great Gods of data and derivatives? Evidently not the LSE. And what of plucky little AIM as post the Refinitiv mega-merger, it becomes a financial speck of dust on the LSE’s armour? Well, something with the Orwellian sounding name of The Office of Tax Simplification back in the Summer reported to the Government that they thought it was high time Inheritance tax exemption was taken away from investors in AIM equity stocks. Luckily so far the Treasury seems persuaded not to follow this advice.
Looking aheadSadly I can’t see the LSE’s finest minds putting their shoulder to the wheel on this when they have vastly bigger fish to fry. Should our future and existing wealth-creating entrepreneurs be concerned with what is shaping up to be no more than an actors’ trade union? As I have pointed out in other City Grump articles there is a massively important distinction to be made between the holders of equity and debt. The equity investor has the natural capability of being in a long term constructive relationship with the company he/she is investing in whereas all that interests (sic) the debt investor is will he get his money back on time? If equity continues to be relatively unattractive for all the reasons gone into here then I suggest wealth creation will ultimately fade away as no one will be left in a position to think and act for the long term. This state of affairs needs to be addressed.
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