“What I'm really calling for is a bigger public debate about the risks we take, and sometimes the risk of inaction or the hidden risk.”
Andrew Griffith, Economic Secretary to HM Treasury, speaking to The Sunday Times
Having quoted last week a particularly inappropriate answer from Andrew Griffith to a parliamentary question on Child Trust Funds, we're delighted to balance it with one of his more constructive quotations above. It's good to see a leading politician call for a debate on risk-taking which, as he says, is fundamental to innovation: “If you're trying to innovate, if you're trying to make change happen, by its nature that's a risky activity”.
This is a big issue for politics as well the investment markets he was addressing, because their horizon is similarly short-term in character. They also fail to see the real elephant in the room, in that you must balance the desire for short-term results with an assessment of the long-term damage you might be causing.
There are two prime examples of this in the financial world: the extent to which we have allowed debt to displace a sense of ownership and participation, thereby imposing a massive burden for future generations to bear, and the insidious leeching of equity stock-owning returns for the benefit of the private equity sector, thus denying long-term quoted stockmarkets the capacity to deliver results commensurate with the risks that investors take.
These are both issues driven predominantly by HM Treasury — Andrew Griffith’s own department. The United Kingdom has suffered particularly from a short-termist approach to investments for the past two decades and, as we commented on 9th May, we share the pain of excess public debt as part of democracy's struggle with the long term. It is of course a huge relief for markets to hear that U.S. politicians appear to have struck a deal on their debt ceiling, but the fact remains that the scale of ‘free world’ debt remains staggering: in the United States it represents $94,000 for every woman man and child: that’s more than double the UK per capita debt.
My financial career started in 1976 with market-maker Wedd Durlacher Mordaunt, a stockjobber which handled 40% of London Stock Exchange turnover in those days. In 1980 I was head of its gilt settlement and money department, and those early years of the Thatcher government were marked by colossal public debt inherited from the preceding Labour government and a financial crisis driven by the oil price shocks of the mid-1970s. There was a mass of government bond issues, and interest rates rose to a high of 15% in order to bring inflation under control.
Sounds familiar?
Fast forward to today, and government debt continues to cause major headaches. On Tuesday 23rd May there was a very interesting Treasury Select Committee hearing with Bank of England Governor Andrew Bailey to discuss the Government's indemnity for the Bank, as huge quantities of pandemic gilts bought at very high prices (i.e. low yields) under quantitative easing are now being sold off at much lower prices (i.e. high yields) under today's quantitative tightening.
It seems that innovation in monetary control has generated a risk for HM Treasury politicians which has not been adequately anticipated, and this may explain why the Government is content to see so many people sucked into higher tax rates by fiscal drag (see last week’s ‘This Is Money’ episode).
These are just some of the macroeconomic risks to which Andrew Griffith and his colleagues must find answers. The Conservative Government is between a rock and a hard place, because logic says that it is spending far too much in electoral bribes for wealthy old folk, particularly in the health service; but these are the very people on whom their electoral success (or otherwise) will depend in eighteen months’ time.
But debt is not the only creator of long-term risk conundrums. Over the past 20 years, far too much leeway has been given to private equity, which has enabled these exclusive companies to strip wealth creation out of so many business enterprises that should be on the quoted public market — and I include the fate of my own company, Share plc, in this respect.
The private equity time horizon is typically five years — ironically, the same as governments in the United Kingdom — and over that period they seek to maximise capital gain, often with significant borrowing at tax-subsidised interest rates. The end result is more often than not a trade sale; but, if the investment does return to the public market, you can be sure that its premium will be well reflected in its issue price.
This may suit the short-term, serial entrepreneur, but it doesn't build long-term businesses, which are what Britain needs.
Between 2017 and 2021 London’s share of international initial public offerings (IPOs) fell from 19.5% to 9.1%; but let's not blame the London market 's demise entirely on Brexit, because private equity wealth stripping must also take its significant share of the blame.
Again, short-term motives are creating long-term damage.
If you want a to see a full appreciation of long-term investment benefits you have to look across the Atlantic to Berkshire Hathaway, where Warren Buffett has been a shining example of an investment culture that Andrew Griffith says he wants to foster here in the United Kingdom.
And finally — what of the contrast between debt and equity as the driver for long-term innovation? The answer has to be to look for a better appreciation of fostering that sense of ownership and responsibility which is inherent to equity stock ownership, unburdened by debt or other forms of leverage. We need to recover an understanding that equity stock ownership — a part-share in a business — is the best surrogate for investing in human enterprise that we have, and we need to encourage those initiatives which aim to provide participation for all.
Gavin Oldham OBE
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