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The new finance: a Centrus report and route map

Phil Jenkins, Managing Director and Founding Partner, Centrus We’ve returned to a simpler funding model, with a virtuous and mutually beneficial circle of capital

Introduction

In the last five years we have seen powerful new shifts in the way companies and other organisations obtain finance.

These changes place more real money from savers and investors into real economy borrowers, such as universities and infrastructure projects.

Finance directors and corporate treasurers have never had so many funding options.

These changes follow a first phase of change when, after the financial crisis, banks retreated from lending to re-build their capital bases and work through problematic loan portfolios. Slowly but steadily, the management teams of mid-sized companies, utility firms, housing associations, universities and infrastructure projects identified a new group of finance providers.

But, from about 2013, markets started changing again, gravitating towards a simpler, lower risk and more transparent financing model where the users and providers of long-term capital interact more directly. This return to simplicity is creating a virtuous and mutually beneficial circle of capital. It is reminiscent of the nineteenth century building societies, mutuals and credit unions that provided so much of the finance required for housing and community infrastructure. Although today’s version includes sophisticated systems that manage data and reporting.

The modern funding model can also be characterised as finance with purpose. This is illustrated by UK pension funds and insurance companies generating stable and reliable returns by directly financing renewable energy, transport, power and water infrastructure or new affordable housing. In addition to direct, pension fund investment , the new finance features a rapidly growing direct lending market and new alternative income funds –  with issuers and borrowers often supported by the advice and technology of imaginative and independent corporate finance houses.

At the same time, and partly in response to these changes, banks have instituted fundamental changes to their lending focus, making fewer long-term loans and freeing up capital for short-term lending. They are also selling legacy long-term loan and swap exposures to those investors with a natural appetite for long-dated assets to match pension and insurance liabilities.

This report explains the main features of the new finance and maps them out graphically. We hope you and your colleagues find it helpful.