How Corporate Finance Is Being Refuelled by Global Economic Changes

Economists and businessmen appear to be united when it comes to the invigoration and detoxification effects which always seem to result from a good old fashioned recession. Poorly performing, inefficient firms go to the wall and resources are thereby freed up to help more successful businesses expand and prosper. Free market mechanisms adapt to wind down declining sectors and build up expanding ones. The labour force is purged of unproductive, inefficient jobs and repositioned to fuel the growth of more dynamic enterprises.

For its part, the rarified world of corporate finance has also undergone major changes following the banking crisis and subsequent mega-recession. Bank debt has proved a difficult, declining market as companies rein in their appetite for borrowing and banks are having their loan portfolios clipped by regulatory demands for higher capital reserve ratios.

Conversely, borrowing via the corporate bond market has enjoyed buoyant conditions with investors seeking higher yields in a low interest rate environment and companies selling long term fixed interest bonds with coupons that compare favorably to interest rates on bank loans.

Elsewhere in markets, private equity deals and new flotations have been very thin on the ground reflecting higher risk aversion while merger and acquisition activity has also bumped along at very subdued levels.

The two areas that appear to be in the ascendant have tended to be in the smaller, SME end of the market. First of all, the AIM market would appear to be reviving, partly on the back of demand from overseas companies and partly because of its new found legitimacy as being eligible for ISAs, the UK’s tax free accounts for cash and equity investments. Smaller companies in countries from as far away as India and Malaysia have elected to apply for a quotation on London’s junior market in preference to other more heavily regulated and expensive options. Investor interest in the Alternative Investment Market is bound to grow sharply now that it’s shares can be bought for tax free investment accounts in the UK.

The second area of activity that is starting to enjoy almost boom-like conditions is peer to peer lending and equity investment. It seems that Internet entrepreneurs come up with new ways of using the web every day and, where there is an obvious gap in the market, a solution magically appears overnight.

So, when traditional sources of debt and equity finance for smaller companies started to seize up, the digital highway came to the rescue by introducing such novel ideas as crowd funding sites where thousands of amateur investors can subscribe relatively small amounts to either invest in or lend to approved businesses.

The largest such crowd funder, fundingcircle.com, claims that there are already over 50,000 investors who have so far pitched in over £142 million. A somewhat more sophisticated operation is Rockpool.uk.com which is the brainchild of serial City investor, Nicola Horlick. This claims to have some 500 higher net worth investors who subscribe for much higher value projects.

It seems likely that these crowd funding sites will soon be brought under the regulatory umbrella of the FCA and, when they are, it will be interesting to see how far up the value chain the concept can go.

There’s little doubt that the banking crisis has changed the corporate finance landscape forever at least where smaller companies are concerned.

Economists and businessmen appear to be united when it comes to the invigoration and detoxification effects which always seem to result from a good old fashioned recession. Poorly performing, inefficient firms go to the wall and resources are thereby freed up to help more successful businesses expand and prosper. Free market mechanisms adapt to wind down declining sectors and build up expanding ones. The labour force is purged of unproductive, inefficient jobs and repositioned to fuel the growth of more dynamic enterprises.

For its part, the rarified world of corporate finance has also undergone major changes following the banking crisis and subsequent mega-recession. Bank debt has proved a difficult, declining market as companies rein in their appetite for borrowing and banks are having their loan portfolios clipped by regulatory demands for higher capital reserve ratios.

Conversely, borrowing via the corporate bond market has enjoyed buoyant conditions with investors seeking higher yields in a low interest rate environment and companies selling long term fixed interest bonds with coupons that compare favorably to interest rates on bank loans.

Elsewhere in markets, private equity deals and new flotations have been very thin on the ground reflecting higher risk aversion while merger and acquisition activity has also bumped along at very subdued levels.

The two areas that appear to be in the ascendant have tended to be in the smaller, SME end of the market. First of all, the AIM market would appear to be reviving, partly on the back of demand from overseas companies and partly because of its new found legitimacy as being eligible for ISAs, the UK’s tax free accounts for cash and equity investments. Smaller companies in countries from as far away as India and Malaysia have elected to apply for a quotation on London’s junior market in preference to other more heavily regulated and expensive options. Investor interest in the Alternative Investment Market is bound to grow sharply now that it’s shares can be bought for tax free investment accounts in the UK.

The second area of activity that is starting to enjoy almost boom-like conditions is peer to peer lending and equity investment. It seems that Internet entrepreneurs come up with new ways of using the web every day and, where there is an obvious gap in the market, a solution magically appears overnight.

So, when traditional sources of debt and equity finance for smaller companies started to seize up, the digital highway came to the rescue by introducing such novel ideas as crowd funding sites where thousands of amateur investors can subscribe relatively small amounts to either invest in or lend to approved businesses.

The largest such crowd funder, fundingcircle.com, claims that there are already over 50,000 investors who have so far pitched in over £142 million. A somewhat more sophisticated operation is Rockpool.uk.com which is the brainchild of serial City investor, Nicola Horlick. This claims to have some 500 higher net worth investors who subscribe for much higher value projects.

It seems likely that these crowd funding sites will soon be brought under the regulatory umbrella of the FCA and, when they are, it will be interesting to see how far up the value chain the concept can go.

There’s little doubt that the banking crisis has changed the corporate finance landscape forever at least where smaller companies are concerned.