Private investment is the answer


Our team: Jeremy Whiteson


First the bad news. We stand at the beginning of a brutal economic crisis of truly historical proportions. Many businesses will fail and employees lose their jobs. Economic, social and quality of life issues loom. Much of this pain may be unavoidable.

But do not despair. There is a solution. There is a lot more that government and the business community can do to ease the pain. Investors have capital they are willing to invest in the SME space.

The problem which needs to be solved

It seems to us that the fundamental problem facing businesses over the period of the pandemic, is that their debts have continued to build up while their income has vastly diminished. To make matters worse, the recovery is likely to be slow while social distancing inhibits movement.

The government has made some brave attempts to soften the worst effects of this downturn. Temporary restrictions on winding up and commercial evictions are a significant departure from our free market traditions. And the furlough scheme (and subsequent job support scheme), CBILs, Eat out to Help Out, Future Fund show, sectoral reduction of VAT and the host of similar schemes, represent a massive shift of priorities to spend our way out of trouble. But it seems to us that this will not nearly be enough.

So how can we plug the gap of the missing capital? Repeating the spoiler in the title, private investment is the answer.

What should be done to help?

We believe that this is the time to break through the barriers inhibiting private investment in distressed businesses to help rebuild our business community.

How can government achieve this?

We suggest a number of measures. Here are a few:

  • Tax incentives: For many years governments have given substantial tax incentives for equity investments into a growing business in EIS, SEIS, VCT and similar schemes. Now is the time to prioritise our distressed businesses and offer similar support.
  • Risk sharing: Even if government cannot pay to support the business in need they can underwrite loans – at least in part. The approach introduced in the CBILS loan scheme and related initiatives needs massive extension to help the many businesses who have fallen through the cracks in the architecture of these initiatives.
  • Introductions: Help is needed to introduce troubled businesses to investors before these businesses are irreparably damaged. Grants to businesses for early advice, a government run investment exchange, and re-visiting financial promotion rules could all help.
  • Cutting the regulatory burden: Businesses and investors have been swamped in a mountain of expensive regulation which can kill a rescue- GDPR, commercial agents regulations and TUPE transfers on purchases from administrations should all be re-visited.

It’s not just our opinion

Fladgate has run a survey of SMEs and investors. It confirms our assumptions in staggering clarity.

SMEs see the depth of the precipice being approached as worse than we had pictured.

However, investors’ robust health and appetite for distressed investment also exceeded our expectations.

And there was broad support for our policy suggestions to help the flow of funds from investors to the troubled SMEs.

Our full report will be available in early October which will be available for download from our website at www.fladgate.com.

Join the debate

Fladgate have launched our Restart Capital initiative to spearhead our support for private investment into distressed businesses.

We would love to hear your views and experiences.

As a community of businesses, investors and advisers we can use our mass of collective experience to be a force for good.

Let’s get investment flowing to restart our businesses and chart our path to recovery.

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