Investor Confidence & Debt – A Study in Trans-Atlantic Contrasts

Aug 1 2016, 2:56 AM5 min read

It’s a time of contrasting fortunes for trans-Atlantic businesses, as high investor confidence is matched by high debt.

Trans-atlantic businesses are always going to see some contrasting fortunes, given the diverse nature of the market environments. However, two new reports published this week suggest that these contrasting fortunes may have more impact than usual.

Despite a period of ongoing uncertainty in the UK, a new study has shown that investor confidence in UK SMEs remains high. Over 50 per cent of UK investors have stated they will support SMEs through private investment, even as confidence drops in shares, bonds and property.

However, in the US, another report suggests that companies are failing to maximise favourable conditions to lower their debt levels. A lack of improvement in supplier payments, and inventory management, has left overall working capital performance at its lowest level since 2008.

UK SME Investor Confidence

Despite the uncertainty surrounding financial markets and a variety of investment products, the majority of British investors are resoundingly confident in the country’s SMEs as an investment vehicle.

The research was commissioned by private equity house, IW Capital, and crowdfunding specialist Crowdfinders, and surveyed 1,000 UK investors. The survey revealed that over half (52 per cent) of investors said they would support the UK’s small and medium-sized enterprises through private investment channels in the wake of the referendum vote.

This equates to over 12.9 million potential investors for UK SMEs, and comes at a time where investor confidence in traditional assets, such as shares, Government bonds, and property, has dropped significantly.

The Lloyds Bank Investor Sentiment Index has helped to demonstrate the impact of the post-Brexit economic climate on investor confidence levels across the UK.

In mid-July 2016, the Index fell to its lowest level since it was launched in March 2013. Property (down by 35.3 per cent), government bonds (down 15.5 per cent) and UK shares (down 21.7 per cent) all experienced notable declines in investor sentiment.

Young Investors on the Rise

Encouragingly, 70 per cent of the younger age bracket of investors – 18-34 year olds – said they will consider investing in SMEs post Brexit.

Furthermore, the highest proportion of investors in a regional comparison who would back SMEs post Brexit was based in London. A significant 68 per cent of investors in the capital said they would support small businesses through private investment.

Luke Davis, CEO of IW Capital and Co-founder of Crowdfinders, commented on the report’s findings. “Following Brexit, Britain has been in a state of limbo, with consumers and investors unsure how the economic landscape will change over the coming months and years.

“What we can take from this research is that there is a silver lining from a business perspective as our nation’s investors are willing to support SMEs in the wake of Brexit, something that cannot be said for other investment classes.

“In times of economic uncertainty, ensuring support for the nation’s private sector – particularly the SMEs who make up 99.9% of all private businesses – is of paramount importance.”

US Companies Taking on Debt

Across the Atlantic, the situation was less positive. According to a survey from REL, a division of The Hackett Group, large US companies have increased debt levels, rather than improve working capital performance.

The survey looks at the performance of 1,000 of the largest public companies in the U.S. during 2015. It saw corporate debt rising significantly for the seventh consecutive year, as a result of low interest rates. Debt was up 9.3 per cent in 2015, the equivalent of $413 billion.

Since 2009, the total debt position of the companies in the survey has increased by over 58 per cent.

Working capital performance worsened, with a deterioration of 2.4 days or 7 percent in Cash Conversion Cycle (CCC). It is now at 35.6 days, the worst since before the 2008 financial crisis. These figures suggest major inefficiencies in managing their collections, payables, and inventory processes.

The working capital improvement opportunity of companies in the survey now stands at over $1 trillion, or 6 percent of the U.S. GDP. However, this can only be achieved by the companies equalling the performance of industry leaders.

Oil and Gas Performance

A significant factor in this year’s overall results were the continuing low oil prices. This caused oil and gas companies to increase reserves, dramatically worsening both inventory and overall working capital performance, and dragging down the performance of the entire survey group.

Commenting on the results, Hackett Group Senior Director Craig Bailey stated, “Once again, low interest rates gave companies a perfect excuse to ignore the hard work of optimising receivables, payables, and inventory. This leaves over a trillion dollars unnecessarily tied up in operations. Instead of doing the hard work of transformation, most simply leveraged their future with more loans.”

Hackett Group Director, Ben Michael, added, “Eventually, interest rates will rise again, and there are signs this may happen soon. Then many companies may find themselves in dire straits, after seven years of growing debt and worsening working capital performance. Smart companies are getting out ahead of the curve now, and starting making the changes they need to squeeze unnecessary cash out of these key areas.”

You can access the full report, and results analysis, plus findings for European companies, on The Hackett Group website.

Want to have your say on these reports? Let us know your thoughts on these two surveys by commenting below.

Away from the world of investor confidence and company debt, we’ve tracked down the key headlines in the procurement world.

NATO IT Division to “Splurge” on Defence Procurement

NATO’s Communication and Information Agency (NCI) has announced it will award €3 billion (US$3.3 billion) worth of cyber, air and missile defence contracts.
This is the first time since 2009 that NATO has increased expenditure.
Proposals include a €2.5 billion satellite communications contract, advanced software procurement, and further strengthening of NATO’s air defences.
The spending increase comes at a time of scrutiny into NATO finances.

Nuclear Supply Chain Collaboration

Nuclear supply chain organisations from the US and Canada have signed a memorandum of understanding on cooperation this week.
The MoU will help to facilitate collaboration and innovation among nuclear suppliers and research organisations in both countries.
Focus areas include the development and deployment of advanced reactors and small modular reactors, job-creation and combating climate change.
The agreement comes ahead of the major annual summit for utilities procurement professionals, who are due to gather in September for ISM’s UPMG2016 conference.

Aerospace Supply Chains Under Pressure

Boeing and Airbus supply chains were in the spotlight at the Farnborough air show, as pressure grows on both companies to deliver record numbers of aircraft.
This is putting increased pressure on already stretched suppliers, and is leading to concerns about supplier treatment.
Suppliers are expected to sign long-term supply agreements, promising both regular price reductions, and accepting unlimited liability should something go wrong, or face losing business.
It also comes at a time when Boeing have started delaying payments to some suppliers by up to a month.

New UK Nuclear Power Plant in Doubt

A project to build a new nuclear reactor at Hinkley Point has been put on hold by the UK Government.
Despite EDF directors voting to proceed, the Government has delayed a decision until a further review in the Autumn.
The project cost is estimated at £18 billion, but could rise to £30 billion when further subsidies are paid.
Much of the debate centres on the guaranteed price for electricity produced by the plant being over double of current electricity prices.