A marriage made in heaven? – pension-led funding and intellectual property

At Clifton we have championed the use of pension-led funding for more than 20 years and (with a fair amount of own-trumpet-blowing) we have pioneered the understanding and use of intellectual property to facilitate this form of corporate finance.

For the past year or more the Government has slowly come to the realisation that the banking system, saved at great expense by the British taxpayer, has been failing the business sector in general and the SME sector in particular.

Dr Cable at the Department for Business, Innovation and Skills has been pushing several initiatives to get funding into British business and has so far met with patchy success. However, this push by the Government has revealed what we (more trumpets please) already know and have been banging on about for years – that much of the value in UK companies is simply hidden from view, as it lives in the intangible assets of the business, such as intellectual property.

And so the Intellectual Property Office, spurred on by the growing acceptance that this IP value is not being properly utilised, has published an extremely important piece of work Banking on IP? (The role of intellectual property and intangible assets in facilitating business finance).

(Trumpets out again) I was privileged to be consulted during the preparation of the report and was quoted with respect to the way that, uniquely in corporate funding, pension-led funding works extremely well with intellectual property.

As the report explains: “One company which has made considerable use of pension-led funding to finance businesses is Clifton Asset Management…”

We all understand that things take time in politics, but the good news for UK Business is that in this respect things do seem to be gaining momentum.

[custom_headline class=”man” level=”h3″ looks_like=”h4″]Key Recommendations[/custom_headline]
The key recommendations of the report include the design and assembly of a resource toolkit and supporting services. When integrated, these will:

  • help old and new economy businesses identify and communicate their IP and its relationship to cash flows
  • help companies and lenders understand the business value of IP
  • improve efficiency in due diligence on IP assets
  • improve practice in obtaining reasonable and effective charges over IP
  • make room for development of more effective IP markets, supported by a better information infrastructure
  • enable risk to be reduced through insurance and other mechanisms

All good stuff!

A muddled landscape

Spring was a busy time for Government initiatives trying to get funds into the hands of the UKs small and medium sized businesses.

In April the Business Bank opened its doors, making available the first £300m of a potential £1bn earmarked for investment in the SME sector.

Hot on its heals came the news that the Funding for Lending Scheme, meant to encourage banks to free up the flow of money into these same businesses, was faltering.

At the same time a survey from the Federation of Small Businesses revealed that there are no less than 800 grant schemes targeting small businesses at the local level throughout the country and 18 national grant schemes currently operating.

While I have long argued that it is not the job of government to try to run business, I would also argue that it is the job of our nation’s lawmakers to direct policy and to make sure that there is as little impediment as possible to discourage the entrepreneurial spirit that has made our economy so vibrant.

Both the Business Bank and the Funding for Lending Scheme have serious question marks hanging over them. Long term funding for the Business Bank is far from assured and high street banks have not yet been encouraged to pass on the cheap funds they have been drawing on.

The grant application process is complicated and time consuming and often perceived to be out of reach for many business owners.

Although Dr Cable has championed small business during his reign as Secretary of State for Business, Innovation and Skills, he seems unable to deliver a big, bold and broad template for UK business. In this fragile environment where recovery is far from guaranteed, big thinking is needed.

This does not mean that Dr Cable should adopt a “nationalise the lot of ‘em” approach to the funding community, rather he should try to unpick the muddled landscape of business finance and help businesses identify their options such as pension-led funding (and there are more options springing up all the time).

He needs to educate the business community by endorsing a joined-up approach which would give UK business owners comfort that the Government was committed to using their good offices to help business get back on its feet.

Funding for Lending – chickens and eggs

A recurring theme amongst lenders over the last few years has been the lack of suitable borrowers for their funds. It is worth picking this statement apart however, as there are two distinct components.

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[icon_list_item type=”arrow-right”]Lack of demand from small and medium sized businesses[/icon_list_item]
[icon_list_item type=”arrow-right”]Lack of credit-worthy business applying for funding[/icon_list_item
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The Government’s extension of the Funding for Lending scheme doesn’t deal with either of these pressing issues.

The first problem is a function of confidence. A prudent business owner will always have one eye on his forward order book. With a fragile global economy he understands that circumstances can change quickly. The primary driver of investment in any field is confidence and with daily headlines worrying about the Eurozone, sovereign debt levels, downgrades, job losses and the like, general business confidence is in short supply.

The second component, impaired credit from borrowers, is much more troubling. Lenders, bludgeoned by the public and by opportunistic politicians, are highly sensitive to accusations of reckless decision-making during the credit boom. Credit committees (acting on direct orders from on high) are in no mood to ignore the recent past.

Those business owners who have survived the last five years of the Great Recession are often nursing damaged balance sheets. The confluence of these two situations has given us an extraordinarily tangled and frustrating impasse. Many businesses that have traded profitably for years and years now find themselves in the naughty corner after a couple of years of losses. They are now perceived as credit risks.

This is a significant problem and one that, unfortunately, initiatives such as Funding for Lending do not address. The Government needs to attack this problem with vigour.

Creating an environment to restore confidence is not wholly in its power and this will have to mend with the general world situation, however working with lenders to re-define lending criteria is a real option.

One way to start this work is to encourage funding options that can be more flexible about the way that a business is viewed. Options including peer-to-peer lending and pension-led funding among others should be embraced and encouraged by Dr Cable and the current administration.