Despite all the hoopla about naughty banks not providing enough loans to small companies, the Financing a Private Sector Recovery paper does actually recognise that the era of bank handouts is over. I quote: “the ready availability of cheap credit before the crises in part reflected a mispricing of risk. This is not a situation the UK should return to… “
However, it goes on to say that the government is “determined that viable businesses should have access to affordable finance for working capital and profitable investment opportunities.”
Is this all the usual platitudinous hot air” Well, it could be, dear reader, unless you shake off that natural British reticence and use this green paper to get out there and make yourself heard. Welcome to the Big Society! My contribution will be along the following lines.
Good to see your chaps at the Treasury recognise that bank lending to the SMEs will inexorably decline. I have never thought debt was the elixir of life and, more often than not, it ends up poisoning the small company recipient. Of course banks do have their part to play but this may well be largely confined to the well-established area of debt finance. You correctly point out that equity finance has fallen down a hole somewhere and that there is an “equity gap for the majority of SMEs seeking equity finance in the range of £250,000 to £5m”. You say “recent research has identified this”. I think you’ll find that if you get one of your youngsters in Whitehall to blow the dust off some old Treasury files, the self same was identified back in the nineties, the eighties and so on.
So how can your bright young things make a permanent contribution to plugging that pesky old “equity gap”” The good news is just two things are required. Firstly, order the FSA to change their attitude to the small-cap investment community. Time and again, I hear from private client fund managers, brokers and others that the FSA is keen to remind them of the dangers of recommending that their clients invest in small listed companies. Your green paperr says you are “interested in hearing views on any regulatory obligations that may disproportionately deter SMEs from listing on exchange-regulated markets such as AIM and PLUS Quoted”. If the FSA is allowed to continue with rule by fear in this area, you cannot expect SMEs to do other than take the line of least resistance and thus avoid equity markets altogether.
Secondly, recognise that investors need long-term, consistent encouragement (as your predecessors did under Ken Clarke). They have been conditioned by all and sundry to accept that investing in Sovereign Debt, BP, GEC, Turner & Newall, Woolworths, etc, etc, is safe and profitable whereas all small company investment is the equivalent of having a bet on the 2.30 at Haydock Park. This attitude is so ingrained that, like it or not, you need to put in place a long-term, easily understood fiscal incentive. I think you will find that a CGT regime, which sets a tax rate of ten per cent on gains made on investing in companies with a market capitalisation of less than, say £20m, at the point of investment, will rapidly open the gates to that long term affordable finance your green paper seeks.
Yours, in hope and anticipation, The City Grump