Jack Rose, strategic sales director at Triple Point, considers how lending and leasing strategies can be a boost for investors and the economy.
Due to the unprecedented impact of Covid-19, many established income strategies have been disrupted, meaning the hunt for yield has become harder for investors. Equity markets were sent into freefall in March 2020, and many long-standing FTSE-100 and FTSE-250 dividend payers either cut, suspended, or cancelled their dividends worth, significantly restraining returns in income investors’ portfolios.
However, there remains significant opportunity for investors to gain income and repair their portfolios through financing SMEs. This is a sector of the UK economy which has found access to finance increasingly challenging since banks lowered the risk profiles of their lending books in the wake of the 2008 financial crisis, and of course, in the face of the pandemic. With people committed to driving the economy forward, to build our society back better, leasing and lending strategies can provide investors with direct exposure to SMEs, while targeting robust returns on their investment.
Covid-19: the end of secure dividends
Many individuals seeking to generate a stable income, such as those already at pension age, typically have high exposure to UK equities, yet a substantial number of businesses have sought to strengthen their cash positions to mitigate the impact of Covid-19. Some 445 London-listed companies, including 50 FTSE-100 and 108 FTSE-250 constituents, either cut or cancelled their dividend payments in 2020, severely impairing income-based returns from investors’ portfolios.
Dividends fell to their lowest levels since 2010 in the third quarter of the year – half as much as that paid out in the same period in 2019. In total, over £30-billion-worth of dividends were delayed or cut, leaving income investors with insufficient cash flowing in from their portfolios. Indeed, AJ Bell found that around 20% of investors focused on generating income saw their investment income fall by 50% or more after the market downturn in March and April.
With companies and markets continuing to struggle under pressure from another lockdown and increases in coronavirus cases, there seems to be little hope for dividend payments to resume fully in the near to medium term.
Direct lending can help close the SME funding gap
Alongside stalling dividend payments, Covid-19 has also exacerbated the challenges for SMEs in accessing the finance they need to grow – a topic which has been hotly discussed over the last decade or so. In the UK, the SME funding gap has been estimated at around £60bn.
Reinforcing this, international economic forecaster Oxford Economics has found that whilst new loans to large companies increased by 43% in the UK from 2015 to 2018, bank lending to high-growth businesses fell by 3%, meaning SME loans only accounted for around 2%, on average, of a bank’s total lending. This figure has almost certainly deteriorated since the start of the pandemic, as established lenders have sought to shore up balance sheets.
Of course, the UK Government has provided crucial support. Alongside implementing a furlough scheme, they also introduced emergency loan programmes specifically for SMEs – the Bounce Back Loan Scheme and Coronavirus Business Interruption Loan Scheme (BBLS and CBILS). Nonetheless, the fact remains that every pool of capital, public or private, needs to be utilised to address the SME funding gap, particularly since recent public borrowing has driven sovereign debt to its highest level since 1963, leaving the Government with far less scope to support business going forward.
Income investors should look to direct lending
Leasing and lending strategies are one important way in which private funds can be directed towards closing this critical gap. A vast range of organisations, especially those businesses which comprise the ‘missing middle’ – the portion that falls between receiving support from large banks on the one hand, and smaller, more specialist financial institutions on the other – have already benefited from pooled funds offered through direct lending.
However, individual investors could also do more and investing in direct lending, and other lending and leasing products, is a good option for investors, both to fund innovative and potentially market leading, high-growth companies and to strengthen their income portfolios.
By developing various products based on different lending and leasing strategies, asset managers have granted private investors access to the attractive, fixed rate interest-based returns derived from lending to high-growth businesses, which was largely the preserve of institutional investors prior to the 2008 crash.
With direct lending, for example, managers secure investments against a portfolio of thousands of carefully vetted businesses, offering investors a way to greatly diversify their portfolios and securely so.
Another benefit of investing in direct lending strategies is that it can also help clients looking to mitigate their inheritance tax (IHT) liability – an added bonus for many of those pension-age income investors still suffering financially from the impact of the crisis and significant dividend cuts on their savings and income.
Lending and leasing as a boost for investors income and the economy
In summary, lending and leasing strategies can help investors on two counts: it can enable portfolio diversification, as well as delivering secure, attractive fixed rate returns uncorrelated to stock market volatility. In doing so, it directs private capital towards supporting SMEs and enhances the UK’s chances of a faster economic recovery – a worthy cause that benefits us all.
