WHether banks are actually lending to SMEs or not is a matter of much debate. While the banks can produce a myriad of statistics to suggest they are lending as much as ever there are a number of contra indications.
Representative bodies for SMEs are still reporting difficulties being experienced by members and the Financial Regulator is clearly intent on getting banks to tidy up their lending practices, which in practice must mean stricter lending criteria. Talking to any individual who has recently tried to borrow, whether successfully or otherwise, they invariably describe a process which is much more fraught than was previously experienced.
Perhaps the greatest indication of what is happening in banking can be gleaned by looking elsewhere. Private pensions have not traditionally been a big source of finance for SMEs. However, in the last 12 months alone we have seen a surge of more than 100% in this source of funding for small to medium-sized business in Ireland. In total, we have been involved in structuring deals to a total value of €100m.
Based on the interest shown in this area from financial advisers and SME representatives, we now believe that we could see €100m being invested in Irish SMEs in 2010 and 2011.
In terms of new business activity by Small Self Administered Schemes (SSASs) we have seen investment in private business move from being less than 5% to more than 20% of all new equity investments currently.
With the right investment marriages, pension investment is a winning idea for all parties.
The business owners get access to capital that is critical to the survival and growth of their business. This is frequently provided on a more flexible basis than was ever available from banking.
In turn, the SSAS owner gets access to real investments with the potential to deliver double-digit returns. By creating a portfolio of such investments the SSAS owner's overall exposure to risk can be greatly reduced.
The third party to gain from all this is the state. We need to rejuvenate our economy to pay for the enormous damage caused by the collapse of the banking industry. It is ironic that, at a time when the country needs investment more than ever, official policy is draining funds from local business. This arises due to the increased regulation of banking referred to above. However, similar impacts are being experienced in the mainstream pension industry with ever-increasing amounts being invested overseas in order to reduce risks. This counter trend of investing in private business is therefore very much the preserve of the SSAS market.
We have a good handle on this market and we see three primary reasons as to why this type of funding has become more popular and is likely to thrive over the next couple of years. The first is that businesses are simply in need of working capital; secondly, banks have demonstrated a reluctance to lend and, lastly, pension investors want access to sound business investment opportunities.
From our own experience the range of businesses invested in is vast – from hair salons to hospitals, from electricity producers to light-bulb providers, from online networking to bar-stool providers.
The investment amounts vary from a typical investment of €50,000 to €100,000 for prearranged schemes to €1m plus for larger brought-to-market schemes. The mechanism is simple – individual pension investors acquire a stake in a collective investment structure and that structure, in turn, makes the investment in the target business or asset.
This type of investment in private business has a 'higher risk-higher reward' profile and therefore needs to be balanced with lower asset classes. Ensuring access to a tax break through pensions reduces the risk and enhances the reward. The way in which the investment is put together is critical to its success. It needs to provide for proper controls and exit strategy and ensure fair treatment for all investors. The regulatory status and requirements need to be identified from day one to avoid unnecessary cost and grief.
The total size of the funded pensions market is approximately €75bn. However, most of these funds are invested overseas. If only 5% of these funds could be invested in Irish SMEs it would create an economic boost of almost €4bn – a fraction of what the public has invested in Anglo with a much greater prospect of a decent return.
Aidan McLoughlin is managing director of the Independent Trustee Company