It is absolutely baffling that the Treasury seem happy to let the flow of funds for Britain’s enterprising businesses, which used to come from the equity markets, virtually dry up.
The Alternative Investment Market (“AIM”) and PLUS Markets (now up for sale) are contributing virtually no new funding to SMEs. The small-cap brokerage community has been torn apart by the imposition of expensive and complex regulatory requirements.
The reason for the attitude of the Treasury is partly because their policy is to try to generate new finance through funds. Leaving aside the issue of liquidity (funds will often fail because they have no immediate method of creating additional finance), the real reason why the policy is deeply flawed is because of the cost structure.
With a standard fund-raising on an equity market the corporate finance house will be paid through a success fee structure.
When a fund is formed the overall costs are imposed from the beginning regardless of the performance of the fund managers.
A report from SCM Private, a multi-asset fund management group, lays bare the real truth about the cost of funds. SCM itself uses modern investment products, such as exchange traded funds, to hold down its fee structure. Their study includes the following facts:
- the UK has the fourth highest charges out of 19 countries surveyed.
- UK funds charge 79% more that US equivalents.
- Between 2001 – 2011 four out of five UK fund groups increased their charges despite the advancement in technological support systems.
A Financial Services Authority (“FSA”) report has revealed that only half the overall fees and costs are revealed. Dealing costs are often hidden.
The other main issue which concerns industry professionals is that of accountability. Fund manager performance is more often than not based on peer group measurement rather than on absolute returns. To win an industry award (and there are many of them) because your fund has lost less than its competitors seems a poor way of monitoring contribution.
The demise of the small-cap brokerage community is deeply concerning as is the lack of effectiveness from AIM and PLUS Markets. Britain needs the growth impetus of a thriving SME community. Highly paid fund managers taking six weeks holiday a year and residing in expensive offices is not the way to achieve it.
Can somebody please tell the Treasury – not that they’ll listen.