Richard Lambert, CBI director general, has called on government to consider funding an investment corporation like the Industrial and Commercial Finance Corporation (ICFC) created in 1945, to provide finance to small and medium-sized companies.
A modern-day ICFC could provide similar financial encouragement, Lambert said in a speech to the British Venture Capital Association, the private-equity industry body, on Tuesday.
He said that similar ideas aimed at providing finance to companies were being discussed by ministers in Whitehall, and that the skills of private-equity investors could play a valuable role. He also highlighted a fund being raised by Prudential to lend money to larger firms, saying that such funds could potentially be used to invest government money and assist the economy.
ICFC was created as a partnership between major banks and the Bank of England to provide SMEs with a mix of long-term debt and equity. In its first 50 years it provided investment capital to about 11,000 companies. The banks later sold their stakes, and the organisation became the listed private-equity group 3i.
Lambert said: “In the UK, as in a number of other big economies, the government now has a significant direct shareholding in the banking sector – and one which, with the best will in the world, is likely to stay in public hands for some time to come.
“It seems to me, therefore, that we badly need to find ways of injecting new private capital and competition into the banking market, in order to get the recovery juices flowing and to keep the state-influenced behemoths on their toes. And now would be a pretty good time for a newcomer to get going.”
He added: “In the new and more volatile environment of 2009, one obvious question is: why not reinvent the old ICFC? It’s clear that growing numbers of SMEs are going to be in need of the blend of equity and long term capital that it used to provide – a role that turned out to be especially valuable during the turbulent times of the 1970s, thanks to the long-term stability of its portfolio, good marketing, and sound investment management.
“The funding gap will widen as the economy starts to recover, and firms need more finance to rebuild their working capital and purchase new plant and equipment. Wouldn’t it be great to have an ICFC-like institution in place for when that time comes?
“The good news is that a number of Government ministers are already thinking along exactly these lines.
“One idea being booted around in Whitehall right now is that the Government’s different enterprise funding schemes might be put into a central pot alongside core equity capital from the private sector, and used to kick start a new public/private venture.
“Prime Minister Gordon Brown hinted as much when he wrote in the Observer a week ago that ‘We need new institutions to support British start-ups, particularly those with innovative, high-growth potential.
“But actually ICFC’s real strength was not in high tech start-ups. Although it had some great winners to its name – Oxford Instruments is one example – it often found early stage finance to be a difficult area, as most other institutions always have in the UK. Instead, its main value was in providing young but established businesses with a leg-up to growth.
“Why not come up with something much more ambitious than is currently being brooded about in Government? How about a public/private partnership on a scale to match ICFC’s 1945 launch capital in today’s money [around £1.5bn] with the aim of providing equity and long-term loans to established SMEs that can present a good growth story?
“Again, this could be exactly the right stage in the business and economic cycle to launch a profit making enterprise in this area. And private equity managers have the talent and the experience that would be required to make it work.”
Lambert also pointed to an investment fund being raised by Prudential as also offering a source of finance to firms. “The Prudential has begun raising money for what it calls a UK Companies Financing Fund, aimed at lending money to UK mid-cap companies in the FTSE 50 to 350 range. The idea is to produce a high and safe return for investors, and to support viable companies through difficult times.
“Sizeable companies which are not investment grade are finding life especially difficult right now. If an accident of timing or a downturn in business conditions requires them to turn to the banks for a refinancing exercise, they are finding that there are just far fewer willing lenders ready to sit around the table.
“If the Pru scheme takes off, lending is likely to be through senior unsecured bonds or loans with meaningful covenants, with an equity kicker that will help to make the loan coupon more affordable, and to ensure a long-term alignment of interest between borrower and lender.
“The Pru and its subsidiary M&G have plenty of experience in the private placement market, and so already have the in-house credit, personnel and legal expertise to make these kinds of loans.
“It intends to put £500m of its own investors’ money into the fund, and commitments from other long term investors have taken the pot up to around £1bn. The Pru want to get up to a fund of at least £2bn in order to have enough scale for a prudent level of diversification. And it would welcome government investment to help get it up to a level that would offer certainty to potential borrowers that the finance they need will be available.
“The attraction for the Government would be that by investing alongside private capital, it could be confident that finance would be flowing to those parts of the economy that both needed and deserved it, and that due diligence had been done on the credit terms. That sounds like a worthwhile proposition.
“Old timers like me remember that it was bold investment from a group led by the Pru that turned round the bear market at the end of 1974. After touching a 20-year low on January 6 1975, the old FT 30 Share Index rallied by no less than 64 per cent in the next 15 trading days.
“Who knows whether the Pru’s latest venture is going to succeed? I certainly don’t. But I do find it exciting that the private sector is already onto the case and coming up with innovative ideas for new approaches to tackle the very different financing problems of 2009.”
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