That Chancellor “Flash” Gordon Brown emerged triumphant from last week’s Budget seems to suggest that he is not missing the spinning skills of Charlie Whelan yet. Now that the (almost) universal applause has stopped ringing in his ears, I would just like to ask this question in a more measured and less hysterical atmosphere. Will his tax breaks and incentives for small companies encourage a renewed spirit of entrepreneurialism in Britain?
Of course they won’t. Wealth creators are driven by the health of the world and domestic economies. The number of budding entrepreneurs who are likely to say that corporation tax has now reached a satisfactorily low level to encourage them to leave their comfortable big company environment can be counted on the fingers of one knee.
The fact is that this kind of risk is undertaken for a variety of personal and professional reasons, and is only influenced by such macro factors as the state of export markets. What affects those are things such as the value of the pound, interest rates and, as I wrote last week, whether Britain is to be part of a single European currency.
Clearly, the Chancellor can have a bearing on how these matters impinge on our economy. In this context, it is worth reminding ourselves that, whatever the plaudits for last week’s generosity, Brown will have raised some 10bn more in taxes by the end of next year than he has this year.
So the overall tax burden in the UK is rising – not usually a factor that is conducive to business start-ups. Ranged against this central truth, initiatives such as research and development tax credits for smaller companies, lower corporation tax, incentives for larger companies to invest in smaller fry and enhanced share-option schemes for all workers are, while welcome, really only so many whistles and bells hung around the small company sector.
Enough, then, of last week and Flash Gordon. What is really to become of Britain’s smaller and fledgling companies? Those businesses which politicians are fond of reminding us are the engine-room of the economy’s future growth, or some such platitude.
The situation here is serious – and not only because of the near-recession of the past six months and our sitting out the euro waltz. Smaller companies – and by that I mean anything with a market capitalisation of under 400m – have been starved of investment by institutional models that favour large, publicly-listed companies simply because of their size.
Passive fund management and the so-called tracker funds – which invest in a basket of big stocks that comprise the market index – have much to answer for. They push up the value of large conglomerates’ shares by the sheer weight of their investments, then assume that the consequent value is a vindication of their policy and invest further. This is particularly true of today’s sexy growth areas, such as information technology, pharmaceuticals and financial services.
That plucky little engine room of future growth is therefore starved of investment. Smaller companies are faced with little option for growth other than to be acquired, on the cheap, by one of the bloated big boys looking for somewhere to deploy shareholders’ cash or to attract private equity and leave the market. In the case of the latter choice, the recent decision of investment house Nomura to sell William Hill to venture capitalists Cinven and CVC rather than float the business, is symptomatic of the opportunities presented in this scenario to private equity managers.
But Britain needs a prosperous and vibrant publicly-listed market in smaller companies. These are, after all, the kind of companies that should comprise the FT-SE 100 index of leading stocks in the future. This is not so much a defence of the late, unlamented Unlisted Securities Market – on which many an aspirant marketing services tycoon foundered – nor a defence, necessarily, of the Alternative Investment Market. Smaller companies don’t need protection from the pressures of the main market so much as liquidity in capital markets.
A working party in Brown’s very own Treasury recently concluded that “the loss of high-growth smaller companies to other markets could have significant longer-term implications for the competitiveness of the UK economy”. Hence, I suppose, some of last week’s gimmicky incentives.
I would add that smaller companies in growth sectors aren’t exactly holding out the begging bowl. If the obsession with size in investment markets can be addressed, then it’s perfectly possible that a portfolio of smaller companies’ shares could outperform index benchmarks by three per cent a year over the next ten years, as a result of a reversal of the current large-cap anomaly. As and when that reversal takes place, smaller companies will be enormously attractive investments.
That won’t come as much comfort to good little businesses that, in the meantime, have been forced into premature, inappropriate marriages with larger partners or into the hands of venture capitalists, when a continued public listing would have been more appropriate. But it does mean good investment sense must prevail at some stage, if only to take advantage of the value offered by this sector.
That good investment sense could, of course, be called greed, but the end result – returning liquidity to small, growing ventures – will be the same. And it will be a good result. Furthermore, it will have little or nothing to do with Chancellor Brown’s whistles and bells.