How investment banks can aid recovery

Following on from our blog series looking at ADS priorities for the restart and recovery of our sectors, it is worth exploring some of the previously used mechanisms that the UK could learn from to ensure finance reaches the SMEs who are in need as part of a longer-term support plan.

We have made the case for the importance of securing the future for UK SMEs in the aerospace and defence supply chains, but the way in which finance is unlocked is still to be determined and will require significant input from the UK Government.

The importance of actioning funding is a hot topic as of late, and the idea that short term credit needs to evolve into long term equity support is not a new one. This blog takes a look at some of the previous interventions and the lessons we can learn from previous industrial banks that were set up in the UK manufacturing sector and SME community.

Industrial and Commercial Finance Corporation (ICFC)

The ICFC was set up in 1945 and was founded to provide finance for small and medium sized firms. ICFC was focused on backing companies for the long term based on their sound business fundamentals. It proved to be a successful business model that paid off bridging a gap between the points where commercial banks stopped lending and then resumed again.

3i  

The ICFC evolved into Investors in Industry (3i) and the 1959 decision meant the 3i was able to raise as much capital as it wished on the open market, which equated to more investment opportunities and less reliance on banks. In 1987 3i became a private limited company focusing on buyouts, somewhat distanced from the original intention The success of 3i remains undeniable with it ultimately achieving what it was set out to do and helping small and medium sized companies’ grow invest and provide jobs to the UK economy following the post-war era.

British Business Bank (BBB)

BBB has previous experience with equity capital investment following recommendations from 2017 by an Industry panel to review Patient Capital in the UK. A £2.5 billion pilot programme was set up however, the scale and scope of the pilot fund is perceived to be inadequate to support recapitalisation of the UK manufacturing sector to deal with the aftermath of the current crisis.

The need for intervention, now

The COVID-19 crisis will have a lasting impact on our sectors. Supply chains need confidence and a means to invest, especially those in high value manufacturing where investment is typically more costly upfront with longer lead times.

A general industry bank, or capital market substation as 3i called it, would support promising businesses in our sectors and would be far more useful for the survival of UK industry as a means of offering long-term credit support.

Specific government backed equity-based funds will protect the critical UK aerospace and defence supply chains from overseas takeovers whilst offering trusted capital in the UK, securing critical UK national security and sovereign capabilities.