DEBATE: Should the government take equity stakes in struggling businesses to help support them?
Should the government take equity stakes in struggling businesses to help support them?
Leigh Webb, associate director and head of private equity sponsor coverage at finnCap Group, says YES.
While I agree that, on the whole, government ownership is far less effective than using equity or capital markets when bailing out companies, this is not always the case. In fact, there are situations where it is entirely sensible for the government to take a minority equity position in struggling businesses.
In scenarios where a company or set of companies collapsing risks significant economic damage, it would be appropriate for the government to take a sliver of equity in each business in return for the liquidity it provides them.
Government funds have been fundamental to saving the UK’s aviation industry, for example — a strategically important industry that would cripple the national economy if it were to go bust. Rather than simply giving the likes of British Airways and Easyjet money, it would be preferable for taxpayers to receive something in return for the critical financial support they supply.
Interestingly, this is exactly the line that the German government has taken with regard to bailing out its largest airline Lufthansa.
Allowing for the fact that the UK is economically distinct from Germany, there are still significant advantages to be had provided the government only takes a minority stake in companies for a short-term period and sells any equity it has back at a fixed price.
Indeed, as Andrew Bailey has already pointed out, the public sector providing equity capital to private businesses may be essential, as high levels of corporate debt continue to loom over hopes of a full economic recovery.
Bill Nixon, managing partner at Maven Capital Partners, says NO.
Given the scale of the current crisis, it’s understandable that thinking has turned to the government taking equity stakes in the UK’s businesses. It is not as simple as that, however.
Investing and managing investments, especially in smaller private companies, requires infrastructure and people with specialist knowledge and training in a number of areas. A better approach would be to harness the resources of the private sector, which has a pre-existing embedded skill base with experience of supporting businesses.
Private equity is certainly well-placed to help — it has access to the capital and, crucially, the know-how to not only bolster business funding but also to engage rapidly and help management teams that might need to refinance and restructure their businesses coming out of the pandemic.
A number of private equity firms manage venture capital trusts (VCTs), highly tax-efficient funding vehicles that are “oven-ready” (to use the words of the Prime Minister) and have been active in this area since they were first launched in 1995. The VCT industry (with several hundred experienced executives already actively managing investments in high growth firms) has raised over £9bn and currently manages investments in more than 1,000 portfolio companies across the UK. The companies backed by VCT managers are estimated to have created over 27,000 jobs in the process.
Rather than the government intervening directly, far better for it to ensure that private sources of capital, managed by expert teams with the appropriate track record and skill base, can deploy their funds to maximum effect to help the UK’s businesses drive an economic recovery.
Main image credit: Getty