Less debt, more equity?

  • 17 September 2020
  • Blog | Leadership & Strategy | Blog

UK private sector debt could hit an unsustainable £100bn by early 2021, prompting a growing chorus of voices to call for an equity-driven solution. 


UK private sector debt could hit an unsustainable £100bn by early 2021, prompting a growing chorus of voices to call for an equity-driven solution. 

With Boris Johnson having dismissed Jeremy Corbyn’s nationalisation plans as a “crazed communist scheme” just last November, his government is likely to be extremely wary of being seen to take stakes in private companies. Yet in a less obvious way, government ownership of private firms is increasingly likely to become a reality.  

The Project Birch bailout plan authorised by Chancellor Rishi Sunak in late May is for the Government to act as a lender of last resort rather than becoming a stakeholder. However, with the pandemic having transformed the economic landscape almost overnight, influential figures from the world of finance are calling for long-term solutions which involve converting emergency loans into equity. 

Commenting after the publication of the Bank’s Monetary Policy Report in May, Bank of England Governor Andrew Bailey advised that businesses who were unable to access cheap government-guaranteed debt should be aiming to raise equity.  

“If you were over leveraged before COVID happened, the answer is not to take on more debt but to go into the equity markets,” Bailey commented.

At the Bank’s urging, the financial sector is discussing how firms struggling with unsustainable debt can be recapitalised. Industry advocacy group TheCityUK has convened a ‘Recapitalisation Group’ steered by UK Finance, London Stock Exchange Group, City of London Corporation and others, with the aim of bringing together capital from sources including private equity funds, insurers, pensions and other private investors.

Meanwhile, City veteran Lord O’Neill of Gatley proposes creating a £25bn ‘good bank’ to supplement the ‘bad bank’ created by Project Birch. This would effectively be a sovereign wealth fund, which would buy shares in key businesses with the aim of providing long-term returns for taxpayers. O’Neill cites the example of 3i, which was set up in 1945 by the Bank of England in conjunction with the big banks and is today a highly profitable FTSE 100 company. 

O’Neill is not the only prominent figure pushing equity as a solution to the growing mountain of company debt. Stephen Welton, chief executive of Business Growth Fund, is promoting a scheme for viable businesses which have borrowed from the Coronavirus Business Interruption Loan Scheme (CBILS) but who will struggle to repay their debts due to ongoing disruption. His proposal suggests a public-private model whereby the government will match private equity investment in companies.

In fact, the UK Government has already dipped its toe in the water with the Future Fund, a £250m British Business Bank scheme specifically targeted at start-ups who are unable to access government loan schemes in their early non-profit-making years. The Fund offers up to £5m in government loans to companies as long as the amount is matched by private sector investment. Loans can either be repaid or converted into equity at a discount.

Overall, while emergency loans may have been the life support necessary to keep UK plc breathing in the immediate aftermath of the crisis, the mantra going forward increasingly seems to be ‘less debt, more equity’.