Pension funds and insurance companies need a very particular type of investment in order to run their businesses.
Their customers, those in receipt of pensions, require regular and set payments, so these institutions need assets that generate this sort of return – in other words, fixed-income investments such as the bonds issued by companies and governments.
In a low-interest-rate environment, however, traditional fixed-income investments haven’t been terribly attractive. The investment institutions are therefore looking further afield for bonds that pay more attractive returns and that may be to the benefit of smaller companies struggling to raise medium to long-term finance for business growth.
Legal & General, one of Britain’s biggest insurance businesses, has just announced plans to launch a new lending operation that will target the so-called private placements market. This is a way for smaller companies to issue bonds considered too small or risky for the public bond markets.
With loan sizes that start at around £20m, private placements don’t suit very small businesses, but for a sizeable number of medium-sized companies, this route to credit could become a really important alternative to bank debt. However, while private placements are big business in the US, the UK market is tiny, despite the obvious appeal to institutional investors that might be able to build diversified portfolios of loans that generate the high and consistent yields they desperately need.
Legal & General, which is hoping to have its lending unit up and running by the end of the year, will join Prudential’s fund management business M&G in the private placements market. It has invested £2bn in such bonds, including a debt issue by coffee chain Caffè Nero, for example, which underlines the potential for this market niche.
Will other investment institutions follow these trailblazers? Well, there are obstacles to overcome – not least that there is little experience of private placements in the UK.
Nevertheless, there is growing interest among insurers and pension funds in small and medium-sized enterprises.
From small businesses’ perspective, any new sources of funding will be welcomed – greater competition and choice will increase their options.
Successive governments have been working hard to encourage the growth of a public bond market that small and medium-sized businesses might be able to access.
For at least two years, the Government has been talking to corporate financiers about how to build an aggregation solution – a new agency that might work with banks to securitise loans to small businesses in order to extend the market. Progress has been slow, however. In the meantime, if the private sector can come up with its own solutions, such as Legal & General’s new venture, so much the better.
XL Media gambling focus looks a winner
Investments in gambling are not to everyone’s taste, but for those happy with exposure to the sector, XL Media, which will announce its IPO on the Alternative Investment Market today, may be one to watch.
XL describes itself as a “digital performance marketing company”, but its specialism lies in driving internet users to online gambling operators.
Its clients include the likes of Ladbrokes, Bet365 and 888.com.
This is a growth market and XL believes its technology has the potential to make it a leader in the sector, where it earns a crust from sharing revenues earned by the sites on traffic it sends their way. Revenues in 2012 totalled $26.1m (£15.7m), producing earnings before interest, tax, depreciation and amortisation of $12.5m.
The business says Ebitda grew at an annualised rate of 46 per cent between 2008 and 2012 and its strong cashflows give it the confidence to aim for dividend payouts as high as 50 per cent.
XL Media’s non-executive directors include Chris Bell, the former chief executive of Ladbrokes, and the company is the latest high-tech venture to come out of Israel’s highly regarded community of technology businesses.
Small companies ‘are set to flock to Aim’
The number of companies listed on the Alternative Investment Market could double in the coming years, according to new research by Close Brothers Asset Management.
Aim, which has been declining since reaching a high of 1,600 or so companies in 2006 – it now has around 1,000 companies – will benefit from small companies’ appetite for growth, Close said.
It surveyed more than 600 small companies for their views on Aim, including around 90 businesses listed on the market. Of those, nine in 10 said the listing had been positive for their organisations. A further 15 per cent of the companies said they planned to list on Aim as part of their growth strategy.
“Floating on Aim can provide a good platform to raise capital for investment,” said Patrick Haines, the regional head of advice at Close.
Small Business Man of the Week: Leon de Costa, chief executive, Judicium Education
“We stared out as a dotcom in the early 2000s – we were all barristers and our idea was to offer online procurement of legal services. We managed to attract some interest from investors, but eventually we realised we had to specialise and we began focusing on the education sector about seven years ago.
“We now offer legal and HR services to schools across the country – we’ve got more than 500 signed up from 60 different local authorities and we work with large chains of academies as well as small rural schools. Many of the schools have been rated as outstanding by Ofsted, which helps us with word of mouth about our services.
“Traditionally, schools got these services from local authorities, but they tend to be very cautious whereas we are much more commercial. We can compete with local authorities on price but our argument is that if we can, say, cut the cost of sickness absence, our services will pay for themselves.
“We offer a menu of services – everything up to full outsourcing – and the idea is to leave schools free to concentrate on education.
“It’s a valuable market: our margins are typically 10 to 15 per cent and we have been profitable since the start. Growth is now running at around 25 per cent a year. What we want to get to is a situation where a school never need go to a local authority except where they have a statutory duty to do so.”