Richard Lambert, director-general of UK employers’ group CBI, has called on the government to consider funding an investment corporation like the Industrial and Commercial Finance Corpo
Richard Lambert, director-general of UK employers’ group CBI, has called on the government to consider funding an investment corporation like the Industrial and Commercial Finance Corporation 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.
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.
The 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.’
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.’
