Institutional investors are told that diversifying their portfolios is the best way to manage the risks inherent in global financial markets, but when taking the next step to allocate their assets, many are not given the adequate tools to do so.
By sticking to listed equity markets and only buying into liquid corporate and government bonds, investors risk narrowing their opportunity set significantly. Only the largest companies are able to issue shares on the London, New York or European stock exchanges, due to the amount of regulatory due diligence and cost to get them there. Similarly, for companies to issue bonds to international investors via public markets takes time and money that most just do not have.
And while global stock markets are believed to track the health of a country’s economy, they are often not a true representation at all. In 2018, the London Stock Exchange said more than two thirds of the revenues earned by the companies listed on its FTSE100 came from overseas. Instead, some 99.9% of the 5.7 million companies operating in the UK are small to medium-sized, according to government figures. This means they give a more accurate picture of the country’s economy – and offer an investor a broader piece of the action. Additionally, as these companies are not held up as a representation of the UK’s economic daily or weekly economic strength, they are not at the mercy of the volatility that frequently moves global stock markets.
By picking companies to lend to on a case-by-case basis, investors are also able to cut out a lot of the noise from global bond markets and establish a fair rate for both sides of the deal. This means funding medium sized enterprise provides investors with predictable, stable and long-term cash-flows, away from erratic global shifts. And aside from shielding investor portfolios from volatility, SMEs also offer a much wider range of companies than listed equity and bond markets. SMEs account for at least 99.5% of the businesses in every main industry sector in the UK and are often in those where no major corporation operates.
These companies offer other diversification opportunities, too. Rather than being headquartered in London, SMEs are spread out across the whole UK. Some 10% of UK SMEs operate in the north west of the UK, 8.7% in the south west and almost 15% across the midlands. This geographical spread is not just important for the diversification of a portfolio – investing outside of the capital gives a boost to the real UK economy, too.
These 5.7 million companies that are dotted all around the country from Lands End to John O’Groats employ many more people in the UK than those listed on the London Stock Exchange, which derive so much of their revenues from overseas. Some 60% of the working UK population are employed by SMEs, which are responsible for 52% of the country’s annual turnover. By lending to these companies, investors can support the local, real economy all around the UK.
When considering diversification, along with all these other qualities the actual size of these companies is important, too. Many of the multi-billion-pound global giants issuing bonds to capital markets are looking to finance acquisitions, mergers or other corporate actions. They have often grown as far as they can organically, which is usually not the case with companies further down the scale. SMEs often borrow to fund expansion by upgrading machinery or hiring more staff, allowing investors to be part of a growth story that is pivotal to their future.
Of course, there is risk attached to investing at this end of the market – just like there is at the top. At BNP Paribas Asset Management, we are increasingly using big data to help us mitigate this risk and pick the right companies to fund and build their sustainable future. There is plenty of publicly available information about SMEs at Companies House or in carefully selected private databases, which allows us to take a systematic approach to consolidating and aggregating data. Once thoroughly cleansed and analysed, we put this data through our credit risk modelling processes and assess the likelihood of defaults. Our parent bank also offers us the infrastructure to streamline our lending process.
There are millions of companies that need investor capital to grow across the UK and millions in investor capital to help them, while producing a diversified return.
For more information you can visit www.smealternativefinancing.bnpparibas-am.com
Unless otherwise stated, all facts and figures come from the Department for Business, Energy & Industrial Strategy 2018 statistical release: Business population estimates for the UK and region
BNP PARIBAS ASSET MANAGEMENT UK Limited (“the investment company”), is authorised and regulated by the Financial Conduct Authority. Registered in England No: 02474627, registered office: 5 Aldermanbury Square, London, England, EC2V 7BP, United Kingdom.
This material is issued and has been prepared by the investment company. This material is produced for information purposes only and does not constitute:
1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or
2. investment advice.
This material is provided as an introduction to the investment company’s SME Advanced Solutions platform. The investment company does not offer or purport to offer any direct lending or credit facilities to UK borrowers in connection with the SME Advanced Solutions platform or otherwise. Non-consumer loans and similar credit facilities are not regulated investments under applicable UK law and non-consumer lending is not a regulated activity in the UK. Non-consumer loan agreements and lending activities are not covered by statutory restrictions on financial promotions and communications which invite or induce persons to enter into a loan agreement or to buy or sell rights under loan agreements will not be subject to the restrictions that may apply to promotional materials for other financial products or services.
Opinions included in this material constitute the judgment of the investment company at the time specified and may be subject to change without notice. The investment company is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio.
All information referred to in the present document is available on www.bnpparibas-am.com.
As at May 2019.