"Just in case" and the case for conditionality
For investment professionals only

Blog - 4 min read

By Anne Richards  
Chief Executive Officer  


We’re at a rare moment in history. Lots of companies, and even entire industries, are facing a very uncertain future, with their very survival hanging in the balance.

The crisis has laid bare the lack of resilience in our supply chains. It’s taught us that contingency planning is as important as risk mitigation and supply chain optimisation - and how we all need to focus much more on “just in case” and much less on “just in time”, as the FT so eloquently put it.

Yesterday, at a Cityweek panel debate in London, I discussed two sets of questions that will determine the future shape of our society: how can we recapitalise the economy, and what are the conditions that should be attached to that to create the economy that we will need for the recovery.

So far, the financial response has focused on providing emergency liquidity to businesses in the form of loans and guarantees. It’s an effective quick fix to the immediate liquidity problem that has resulted from the collapse of revenue due to the wholesale shutdown of large swathes of the economy.

It’s only a short-term fix though. Ultimately, excessive indebtedness will dampen future growth and productivity. We need only look at the experiences of the West following the 2008 and Japan in the 90s to understand that a heavy debt hangover can have real economic consequences, and non-financial debt in the UK was already high coming into the crisis.

There is a very real danger that most of these emergency loans will never be paid back and so a temporary liquidity problem changes into a permanent insolvency problem, as companies fail.

We need to consider what else we can do. And the asset management industry has an opportunity to help find a solution. Recapitalising the economy will require capital, and the choice of capital that you use may have very different outcomes. Government, individual savers, private capital, institutional capital such as pension funds and corporate balance sheets - all of these will have a role to play. 

For example, a Covid-19 retail equity investment product could put the UK’s collective savings to work, while at the same time increasing the participation of the wider public in the benefits of economic recovery - this could be an OEIC, or an investment trust, perhaps with tax incentives through ISAs.

Or we could imagine something bold and ambitious, such as a sovereign wealth fund or a new form of cooperative or mutual society.

The Covid-19 crisis has been likened to a war because of its destructive impact on human lives and economic production. And in an interesting example from history, in the wake of the World War II, the Bank of England set up the Industrial and Commercial Finance Corporation, which eventually evolved into 3i.

It invested in companies that had no access to long term equity capital and it did very well. That sort of multi-decade success offers a solid model for steering an economy through a period of devastation.

Learning from this example, a domestic sovereign wealth fund, backed by the weight of the Treasury, could take equity stakes in UK businesses deemed viable in normal economic conditions, but that are struggling in the current environment.

There are a number of other ways to shape the thinking around public/private partnerships, including some form of mutualisation. But I believe there is an appetite on both sides to explore imaginative ideas of this type.


Conditionality and renewal
Now of course, if the investments are to be made on behalf of society, to keep the economic system going, then the mandate needs to take into consideration the needs of society too.

What are some of the outcomes that society, as the client, would want from its investment? What kind of conditionality might be put around this support?

One example, might be around how larger companies use their supply chains, given their significant influence, for example, by bringing essential supply chains closer to home, to minimise the risk of disruption. Other ideas could be considered, such as encouraging them to use the supply chain to help put more working capital into the system by improving the credit terms offered to suppliers or paying them faster.

And elements of the “just in time” labour market, are also likely to come under greater scrutiny. Companies have been able to optimise their labour supply chains by subcontracting key parts of it and through the use of things such as zero-hour contracts. In doing so they have shifted the burden of financial uncertainty from the corporate balance sheet and P&L to some of the most vulnerable parts of society - parts which we’ve discovered in recent weeks are also among the most critical in our society - for example delivering food to vulnerable households.

We have a rare opportunity to use the need for recapitalisation to renew and refresh our economy and the social contract that underpins it.

The slow but steady economic recovery from the last financial crisis lulled many into thinking that cyclical peaks and troughs were a thing of the past. Many businesses were optimised on the assumption that that steady growth would continue indefinitely. Contingency planning, for many, fell by the wayside, because it seemed like a waste of resources.

The crisis has taught us (in truth, reminded us) that a resilient system of resource allocation must save some capacity to deal with the unknowable and unforeseeable. It’s also presented an opportunity to apply all of our financial tools, in innovative ways, to fix this system. 

We have an opportunity to create a more solid, more equitable, and ultimately more sustainable economy.