Debt v Equity: it’s a no brainer

There has been no further announcement from PLUS Markets Group. Thus 145 companies remain in limbo as they wonder if Icap will complete the purchase of the PLUS stock exchange subject to Finance Services Authority (“FSA”) approval, the production of a circular to shareholders and a general meeting. With London slowing down for the Diamond Jubilee and then the Olympic Games, it could be a long, hot summer. There is absolutely no certainty that the matter will be resolved before the autumn. Meanwhile the recession continues and the holy grail of growth remains elusive.

Enterprising businesses are one of the main solutions but they require efficient financing options of which there are very few.

Debt v Equity

The Treasury believes that SME financing should be provided though funds.

They therefore must be uncomfortable after the latest problems being incurred by the Regional Growth Fund. This ludicrously expensive (i.e. vast overheads) venture has hit further difficulties. The Public Accounts Committee (“PAC”) recently summoned Sir Bob Kerslake, Permanent Secretary at the Department for Communities and Local Government and Martin Donnelly, his counterpart at the Department for Business, Innovation & Skills. This followed a hard hitting report into the administration of the fund by the National Audit Office. The chairman of the PAC Margaret Hodge told the civil servants that she did not believe their job creation claims. The two individuals were further criticised for being unable to provide spending details on the taxpayer-funded scheme.

The Audit Office believes that it is costing £33,000 for every job created which is £5,000 more than the comparable cost of Labour’s Regional Development Agencies which the fund replaced.

This is yet another example of why the Coalition Government is pursuing the wrong policies.

As a principle it is always better to fund early stage businesses through equity schemes because debt has to be repaid on an agreed schedule where the return on equities comes from dividends and increased share values.

A second principle is that equity is provided by market efficient methods. Financial advisers are paid on results whereas managers of debt are guaranteed salaries and generous terms regardless of the performance of their funds.

The Treasury and the FSA’s lack of decisive action over PLUS Markets suggests that they do not share this view on the debt v equity question.

The lack of growth in the British economy suggests they might rethink the issue.

 

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