The asset management industry should create a "bold and ambitious" new product to help find a long-term, sustainable way of ensuring businesses survive once the coronavirus abates, according to Fidelity International CEO Anne Richards.
In a post on LinkedIn, Richards said the response so far to the crisis facing many businesses up and down the country, which has come in the form of emergency liquidity through loans and guarantees, was "an effective quick fix".
"It is only a short-term fix though. Ultimately, excessive indebtedness will dampen future growth and productivity," she countered.
"We need only look at the experiences of the West following 2008 and Japan in the 1990s 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 these emergency loans will never be paid back and so a temporary liquidity problem changes into a permanent insolvency problem, as companies fail."
Richards suggested more needed to be done further down the line, putting the onus on the asset management industry, which she said had "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," the CEO continued.
"Government, individual savers, private capital, institutional capital such as pension funds and corporate balance sheets - all of these will have a role to play."
Covid-19 investment fund
Richards said the solution could come in the form of "a Covid-19 retail equity investment product [that] 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, she suggested, could be an OEIC, or an investment trust, perhaps with tax incentives through ISAs.
A particularly "bold and ambitious" idea would be a sovereign wealth fund or a new form of co-operative or mutual society, Richards continued.
"The Covid-19 crisis has been likened to a war because of its destructive impact on human lives and economic production.
"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 [currently the largest investment trust in the UK].
"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."
Richards said that, should the industry decide to go down this route, any fund introduced, backed by 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," Richards said.
"But I believe there is an appetite on both sides to explore imaginative ideas of this type."
Richards continued, noting any investment-based product made on behalf of society to keep the economic system going must "take into consideration the needs of society, too".
Some of these needs might revolve around ensuring larger companies made their supply chains more ethical and bringing them closer to home.
Others might include rethinking the use of zero-hour contracts, which Richards said might "come under greater scrutiny" as 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".
Richards concluded: "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."
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