Twenty years after then-Chancellor Gordon Brown vowed to eradicate boom and bust (unsuccessfully as it turned out), here we are again. Edge of precipice might be a fair way to describe the current economic outlook. Last Monday’s gilt run, sterling’s woes, threats to pensions and a clamour of other indicators, show the danger all too well. It’s not just the UK. But the Government’s job of balancing growth and financial stability in a post-Brexit Britain banking on growth, looks trickier than some.
Investment is vital, yet where does that come from with public debt high and a government aspiring to cut taxes? Private equity is one way to help get the UK economy flying.
The FCA launched a consultation on broadening retail access to its new fund regime for long-term assets like private equity, the Long-term Asset Fund (LTAF), in January. The consultation closes on Monday (10 October). An extension of LTAF would allow retail investors and pension funds access – with protective caveat emptors – to funds previously reserved for institutional investors.
Enlargement will be good for investors and also for business and jobs. Research by the British Private Equity and Venture Capital Association (BVCA) in summer 2022 found growth capital invested in UK companies amounted to £17.3bn. Two million people worked in companies backed by private capital, six per cent of all UK jobs. Of 1,320 businesses funded, nine in ten were SMEs, the majority outside London. Exactly the type of firm that might find it harder in a downturn to get funding from traditional banks yet without which the British economy can hardly hope to thrive.
The FCA introduced the LTAF in October 2021, embedding longer redemption periods, high levels of disclosure and strong liquidity management and governance designed to help create an environment where investors could invest in productive finance assets. It did so because, as well as yielding good outcomes, investment in long-term illiquid assets, it said, is important for growth and job creation.
A freedom of information request by this writer showed no single firm had applied to launch an LTAF six months after the new rules were introduced – not surprising, given limited access. It is therefore important the FCA seizes the moment to expand access to this asset class and provide new opportunities for companies to grow and investors to build wealth.
Private equity is one of the best growth engines we have and sits aside from the eternal politically charged tax and spend questions. Its experts understand how to spot opportunities better than most so why not put them to work for the British economy with additional capital?
Diversification and superior returns would provide more security and long-term growth to pension plans, teetering on the edge of disaster as we saw on Monday (26 September).
This does not mean we should ignore the risks and illiquid nature of private equity funds. Investors must be properly informed and protected with the necessary regulatory safeguards the FCA is proposing.
In expanding access to this asset class, we are already falling behind some of our friends in other western economies, the US and Canada in particular, who have been more aggressive. In May, for example, Canada’s Mackenzie Investments launched a private equity fund for individual investors to extend the reach into the retail investor market.
It’s important to remember London is home to some of the most successful and assertive private equity firms in the world. The returns generated and the successful companies they are accelerating needs to be expanded to push the UK forward. Analysis by KPMG in its UK Mid-market PE Review (February 2022) showed deal multiples rose in 2021 along with an increase in PE activity, from 8.7x earnings in 2020 to 9.6x in 2021.
For the economy’s sake, it is vital for the FCA to expand access to the LTAF. Consultations close on Monday, and action must be taken quickly.