A UK market for private placed debt could unlock £15 billion
The CBI is urging the next government to 'mind the gap' in the financial services sector's ability to help unleash new long-term growth capital to support dynamic medium-sized businesses.
After the financial crisis, the UK has rebalanced away from traditional bank debt because of balance sheet restructuring and regulatory change. Despite the encouraging increase in short-term alternative finance, the lack of long-term growth capital, and difficulties in accessing trade finance, are impacting on medium-sized businesses' ability to grow.
In addition, the shortage of capital investment in infrastructure is holding back growth in the wider economy.
To boost the availability of long-term growth capital, a new CBI report, Financing our Future Economy, calls on the next government to promote a market for privately placed debt, which the Breedon Review (1) estimates could unlock up to £15 billion.
High-growth countries now account for the majority of world growth but two thirds of global trade finance providers (69%) said complex anti-money laundering (AML) regulation and 'know your customer' requirements are acting as a major barrier to firms getting the trade finance (2). That's why the CBI is calling on the Treasury and Department for Business to launch a review of the impact of these measures.
John Cridland, CBI Director-General, said:
"The UK is still missing a trick on long-term growth capital. The next government needs to mind this financial gap otherwise our medium-sized firms – the job creating dynamos of the economy – will suffer.
"In the same way that the profile of alternative finance has increased, we want to see politicians getting behind a UK market for privately placed debt and backing the use of equity finance, to stimulate investment and long-term business growth.
"If firms can't get the trade finance they need to explore new markets, the UK has no way of meeting its ambitious exports target of £1 trillion by 2020.
"Of course we must have robust anti-money laundering regulations but the detailed application can be cumbersome and complex and is acting as a brake for businesses wanting to sell their products and services around the world."
The report also highlights that the majority of the £466 billion investment needed by 2020 to keep UK infrastructure up-to-date needs to come from the private sector. But investors are being held back by uncertainty over the future pipeline of projects. It's time for, the government to establish an independent infrastructure body to determine future investment needs and look at innovative solutions, like 'bundling' smaller projects together, to create an attractive proposition for institutional investors.
Commenting on this, Mr Cridland said:
"Infrastructure, like transport, energy and broadband, is the hard-wiring of our economy but we're still not investing enough to support the UK's growth ambitions.
"We need to take the politics out of infrastructure with an independent infrastructure body. And we also need to look at innovative ways to attract investment from pension funds and insurers into our infrastructure."
The CBI report, Financing our Future Economy, calls on the new government to:
Kick-start a private placement market in the UK
• Promote the long-term benefits that private placements can have for UK companies to boost awareness and demand
• Build on the withholding tax exemption announced in the Autumn Statement by lowering the minimum issuance size to £5 million, and clarifying that it will apply to loans as well as bonds
• Fast-track industry efforts to standardise market documentation.
Put promoting equity finance at the heart of its plan for increasing access to growth capital
• Launch a cross-department, HMT, HMRC & BIS, review on boosting the use of equity finance by growing businesses and the role the tax system can play in achieving this
• Ministers should publically promote equity finance as a valuable source of long-term growth capital to boost awareness and demand in the market
• The UK Listing Authority, as the gateway to the UK's capital markets, should be given clearer objectives for competitiveness and growth
• The British Business Bank should offer a public facing 'one stop shop' to help businesses navigate different financing options.
Examine the impact of Anti-Money Laundering requirements and financial sanctions on the ability of UK businesses to export
• Launch a joint HM Treasury/BIS review of the impact of anti-money laundering requirements and financial sanctions on the ability of businesses to export.
Broaden the support offered by UK Export Finance
• Allocate a portion of UKEF's Direct Lending Facility to fund working capital for general pre-shipment expenditure for smaller businesses
• Explore the introduction of a 'Tender to Contract Cover' (TTC) insurance product for small and medium sized businesses.
Make the government offer to infrastructure investors the best in the world by focusing on the project pipeline
• Establish an independent body to determine future infrastructure investment needs and how they should be met, without delaying projects already underway
• Review ways to promote innovative deal structures to boost private sector investment in infrastructure, for example the use of 'bundling' of smaller projects to create an attractive proposition for larger investors
• Ensure that government measures designed to support private investment do not end up 'crowding out' investors in the field, focusing instead on areas of infrastructure where the risks are too large or complex to be tackled solely by the private sector.
Implement Solvency II in a way that encourages insurers to invest in infrastructure assets
• Encourage the Prudential Regulatory Authority to take a proportional and pragmatic approach to internal ratings models, especially when dealing with newer asset classes where experience data may be more restricted
• Help issuers understand asset eligibility requirements for insurers, without which insurers are not able to invest (e.g. Spens clause requirements)
• Promote an international regulatory approach to 'systemically important' insurers that recognises their need to take appropriate risks and make investments into infrastructure.