UK businesses will emerge from economic hibernation shortly, but the landscape will not be a green and pleasant one. Extraordinary government financial initiatives have shielded companies from the true economic deterioration caused by the coronavirus pandemic so far, but reality is soon to set in and the implications for the job market could be devastating.
We believe there is an opportunity for the investment community to provide a lifeline to viable, profitable companies that are currently struggling. Supporting such businesses could protect them from collapse, help accelerate their return to growth, and ultimately, lead to some much-needed job creation. Moreover, such initiatives have responsible investing at their core.
High debt burden for businesses
The government’s furlough scheme, which has protected jobs and prevented the unemployment rate from sky-rocketing, is being wound down from the autumn. The removal of this vital support will prompt companies to make difficult decisions about staffing levels that have been deferred since March. Sadly, but inevitably, the unemployment rate is set to surge from near historic lows of 3.9%¹ to an estimated 10-11%² by year end.
In addition, many companies have been compelled to take on considerable debt to ensure their survival through the COVID-19 crisis. Again, much of this debt has come through government lending schemes – such as the Business Interruption Loan Scheme (CBILS), the Large Business Interruption Loan Scheme (CLBILS) and the Bounce Back Loan Scheme (BBLS). Current Treasury figures suggest more than £50 billion has been borrowed by close to 1.2 million businesses³. Although these loans are partly or fully guaranteed by the government, businesses will ultimately have to repay them, placing a further burden on their ability to survive. The office for Budget Responsibility currently estimates that up to 40% could default⁴.
Potential for job creation stifled
Clearly companies have done what they’ve needed to do to survive during this challenging period. However, acquiring further debt is not necessarily the best answer for many companies, especially smaller, less established businesses. Companies that have too much debt are often forced to focus almost exclusively on generating enough cash to service that debt. This drives short-termism – meaning they are less likely to invest in new ideas, technology and talent. Another factor that could stifle job creation at a time when it’s much needed.
The Future Fund – another initiative from the Treasury aimed at lending to start-ups – has offered a more flexible method of borrowing, where the government debt can be converted into an equity stake, meaning these fledgling businesses can focus on growth rather than survival.
Private capital needed to protect and support small UK businesses
As one of Europe’s biggest venture capital investors, we know how vital private capital can be to help start-up businesses achieve their potential. But in this current environment, we believe that private capital can play a wider role in helping UK businesses recover and start to grow once more.
This is not about propping up zombie companies, which would arguably have failed in the long term without the accelerating effect of COVID-19. This is about supporting those pioneering businesses that have the potential to change the world and provide some much-needed growth and job creation along the way.
There are many small businesses in the UK with the potential for high levels of growth. And the survival of such businesses will be critical for the UK’s future. These companies are incredibly diverse, covering a range of sectors from technology and financial services, to manufacturing, construction and food and drink. Importantly, they also exist in all regions of the UK, so have the potential to ensure economic prosperity is spread across the entire country rather than being city-centric. These companies also tend to be innovative, knowledge-intensive businesses proven to make a huge contribution to job creation.
Enhancing impact credentials
But in order to survive, grow and generate these much-needed jobs, these companies need access to growth capital. This needs to be long-term patient capital, that allows time for businesses to mature and deliver returns. Investors of this type typically come from the institutional world, for example pension funds, and an initiative to support business could help these investors meet their goals too.
The search for attractive return sources has become increasingly challenging for investors and given the ongoing environment of ultra-low interest rates worldwide, this is unlikely to change any time soon. Providing support to help businesses recover could provide a welcome revenue stream for such investors over the long term.
But more immediately, such investments could also help institutional investors meet the growing requirement to strengthen their impact agenda. Job creation is one of the United Nation’s Sustainable Development Goals (Goal 8), which highlights the need to promote sustained, inclusive and sustainable economic growth, as well as full and productive employment and decent work for all. Historically, you would expect such impact investment initiatives to be centred on the developing world. However, we believe there is now a need to deploy some of this capital closer to home.
The UK has traditionally been a great place to start a new business, but it hasn’t always done enough to support business growth. This needs to change.
Supporting the businesses of the future
At Octopus, our smaller company investment teams are seeing a growing pipeline of investment opportunities into strong companies that have been impacted by COVID-19. These companies desperately require recapitalisation to help return them to their pre-crisis growth trajectories. We believe these are good, solid businesses, with strong management teams and solid track records. Most importantly, they had strong underlying profitability before the crisis stuck. They want to protect their current employees and be ready to grow their teams when the time is right.
We are proposing to create a fund that can deliver a flexible debt and equity package to a portfolio of small, high growth businesses that we believe should have a positive future. Businesses with the potential to grow, create new jobs and drive much-needed economic growth right across the UK. While you may not recognise their names now, we think these will be the business of the future. And we recognise that in them because we were once one of them too.
As I’m sure you’ll understand, investing in small businesses is not without its risks, and that could cause losses as well as gains. We know this will not be a quick fix, the road to recovery might be slow, with bumps along the way. However, the provision of funds is required quickly. We want to help be part of the change and we want to bring institutional investors with us on this critical venture. Please join with us to act now.
[1] Source: Office for National Statistics, data for Mar-May 2020 https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment
[2] Source: Bank of England poll; National Institute of Economic and Social Research
[3] Source: Financial Times
[4] Source: Financial Times
