UK big corporations are losing confidence
Confidence is in short supply among the UK’s big corporates
With cash to invest, Britain’s largest companies are crucial to getting the UK economy growing. But unless banks and policymakers work together to provide incentives for them to invest, recovery will be a slow process.
Clare Francis By Clare Francis6:51PM BST 26 Aug 2013CommentsComments
Large corporates, namely companies with more than 250 employees, are a core part of the UK economy and key to driving growth.
While SMEs are vitally important, benefiting both the national economy and their local areas, the significance of larger companies is often overlooked in discussions about what needs to be done to support economic growth. This needs to change.
The economic importance of the UK’s larger companies is clear: they contribute more than 50pc of private sector Gross Value Added (GVA). This is the biggest proportional contribution to GVA of any EU nation.
Larger companies are important, not only as a direct source of growth, but also because they drive and support the growth of other companies, particularly SMEs, through the requirements of their supply chains.
The range of products, services and components that larger companies source from SMEs means that a strong and thriving larger company sector helps drive growth in the SME sector.
This often symbiotic relationship means that policymakers and the banking industry need to be mindful of the needs of larger companies, alongside those of SMEs.
A recent report by the Association for Financial Markets in Europe (AFME), which analysed the availability of financing and investment for growth, highlighted the concerns of corporates across Europe.
The report surveyed borrowers and investors across all business sectors, examining the challenges these companies have in accessing finance and concluded with some interesting solutions to driving investment and growth. The two main barriers to growth cited by corporates were macro-economic uncertainty and regulatory uncertainty.
While the most recent UK economic data has started to show some positive signs of life, the lack of confidence of large companies to invest for growth is highlighted by the record cash holdings (approximately £600bn) held on corporate balance sheets. Corporates have the cash – what they lack is the certainty and confidence to invest it.
AFME’s report found that most large corporates had excellent access to financing via both capital markets and banks. However, many raised concerns that financial market reforms will have unintended consequences: for example, increased charges on products for hedging borrowing costs and their reduced availability.
While larger companies, in the main, had ample access to finance, two specific sectors – commercial real estate and infrastructure (both characterised by being asset-heavy and having long-dated financing needs), face significant challenges.
Take the infrastructure sector, so crucial to the UK’s economy, where macro-prudential bank regulatory changes are already leading to a general reduction in availability of long-term bank funding.
Additionally, as both borrowers and investors in this sector specifically made clear, political and project risk associated with potential regulatory and tariff changes and the uncertainty over the planning process for many infrastructure projects further complicates and reduces financing availability.
So what does the banking industry need to do to help solve these problems? At an overall level the industry needs to play its part in improving general confidence to invest and more specifically to develop new and alternative financing models to provide access to long-term capital for the challenged sectors.
Banks must continue to evolve towards acting as both provider and conduit in arranging financing solutions to bridge borrower demand and investor supply. This involves developing access to alternative sources of long-term capital from investors who have the potential appetite to meet these long-term funding needs.
Pension funds and insurance companies with long-dated liabilities are natural takers of the extended cashflows that infrastructure and commercial real estate assets provide. Although many already invest in these sectors, much more can be done, given the scale of investable cash and the potential demand.
Infrastructure and real estate financing is usually very complex and project-specific, with multiple stages of development requiring discrete forms of financing, some of which are not suited to pension and insurance investors.
The financing will often need to be structured so that banks provide first-stage funding, taking the shorter term revolving construction risk, and then package and deliver appropriately tailored long-term assets fitting the needs of different investors.
A further challenge for many investors, emphasised in the AFME research, is that they do not have sufficient in-house knowledge in these sectors. Banks must consider providing more direct and on-going access to their credit expertise to help investors understand and analyse the risks.
On top of that, the uncertain and lengthy process around planning for many infrastructure projects leaves many unable to commit to building the necessary teams. Banks can fill this gap.
This could lead to the creation of more partnerships with investors, potentially within a programme whereby investors allocate a given amount of funding to projects which meet agreed characteristics, thereby providing investors with more certainty for the future.
Measures such as these will help in matching the needs of the UK’s pension funds and insurance companies with the specific demands of the borrowers.
To reach this point, the industry will also need the support of policymakers. The AFME study includes proposed solutions for financing the infrastructure sector, such as establishing guidelines to increase transparency on planning stages and timelines for infrastructure projects to reduce uncertainty, as well as potential government or EU-level guarantees on certain infrastructure risks.
Today’s SMEs can become tomorrow’s larger companies, so supporting them to grow is vital, but once they become larger companies, they continue to need support. The UK has world-beating large companies.
Many of the world’s most famous companies and iconic brands are British. Of the 500 largest publicly listed companies across all of Europe, 148 are listed in London. As a nation, we should be proud of our large companies, but we must do more to help them.
Banks, by partnering with government, regulators and long-term investors, can help ensure the UK continues to offer large corporates a supportive environment and provide companies of all sizes the springboard to help Britain prosper.