We celebrate 25 years of the Alternative Investment Market, or AIM, the London Stock Exchange’s market for smaller growth companies. Since 1995, over 3,865 businesses have raised more than £115bn, helping founders and entrepreneurs fulfil their growth ambitions and potential.
Today, it is home to around 850 businesses, providing these businesses with access to a wide range of institutional investors and a deep pool of capital. There is also the network of advisors and liquidity providers, like FXD Capital, who understand the needs of growing companies and who can support you on their journey as a public company.
With the coronavirus pandemic disrupting the finances of businesses across the UK, the challenges forced many businesses to review their balance sheets to survive the uncertainty and ultimately limit the financial fallout.
From 18 March to 9 April 2020, AIM businesses raised £450m through secondary raises alone, providing a crucial lifeline to those caught in the turmoil. When we look back at the three years that followed the financial crisis, AIM businesses raised more than £16bn. On the Main Market of the London Stock Exchange from March through to May 2020, issuers raised a staggering $13.3bn across 171 equity transactions and $184bn in debt capital. This does not consider the utilisation of revolving credit facilities.
Businesses have amassed a record amount of cash and as a market, where founders and management can run their business with the support of a wide range of investors and advisors, the CFO’s, Finance Directors and Treasurers have taken a closer look at cash management.
As a result of this, the global money market fund industry saw massive inflows and in March, they reached a high of $5.1tn in AUM. The next time chaos overwhelms financial markets, cash managers will do well to remember the performance of money market funds, both during the global financial crisis and the current pandemic.
Diversifying counterparty risk while achieving better returns and optimising liquidity has become a top priority for any business, particularly so with interest rates at an all-time low and now amid speculation of negative interest rates.
An effective cash management strategy should form part of a strategic and long-term approach to managing the cash more efficiently. In order of priority we have summarised the objectives as:
- Preservation of principal
- Maintenance of liquidity that is sufficient to meet cash needs
- Maximization of total return
To help your business better understand how cash management can play a strategic part of your business and navigate the uncertainty, you first need to consider your existing exposure, cash flow and investment horizon. Only then, by utilising the correct deposit products with carefully matched counterparties can you achieve better returns while not compromising on, and perhaps even enhancing the liquidity and credit quality of the counterparty you are placing funds with.
To understand how much your deposit rate is being discounted, you must obtain deposit rates for a comparable deposit and counterparty for the same duration. Only when you are comfortable with the counterparty, liquidity, and investment horizon, can we give you a better overall picture of where you could be putting cash to work most efficiently.
Investment strategies can be tailored to different categories of liquidity and ‘surplus’ cash, which are differentiated by investment horizon and volatility of cash flows.
| Primary Liquidity/ Short-Term Cash | Secondary Liquidity/ Medium Term Cash | Tertiary Liquidity/ Long-Term Cash | |
| Investment Horizon | 0-3 months | 3- 12 months or longer | Indefinite |
| Cash flow volatility | High | Low | Very low |
| Objective | Immediate Liquidity
|
Liquidity and Enhanced returns
|
Greater emphasis on maximising return utilising surplus cash |
| Strategy | Money Market Funds
Call Accounts Notice Accounts |
Ultra-Short Duration Funds
Notice Accounts Fixed Term Deposits |
Short Duration Funds
Broad Fixed Income Notice Accounts Fixed Term Deposits Structured Deposits |
This is for illustrative purposes only.
While a treasury policy is not a prerequisite for an AIM business, it is worthwhile putting one in place. A cash management and treasury policy will define your businesses appetite and response to financial risks as well as ensure a standardised approach to the considerations around this.
When assessing counterparty risk and the categorisation of your cash, there are the more obvious things to consider. Contrary to belief, bigger is not always better, particularly when the biggest lenders are setting aside billions of pounds to cover the expected surge in loan defaults. Therefore, there are other things your business should consider when assessing counterparty risk to ensure a carefully diversified exposure:
- There is what is defined by their treasury policy, such as the credit rating, or implied credit rating, as well as the maximum
duration of the deposit and counterparty limits - No or low gearing
- Comfort that the bank has put in place prudent measures to enforce sound lending practices and stable loan quality
- No, or low impairments, and if so, signs of problem loans declining
- Robust and diversified deposit base providing stable funding
- Strong capital adequacy and tier 1 ratio’s
- Expect to see broad-based, moderate or strong growth of the bank, with profitability and year on year increase in net income
- The performance of their CDS and share price
FXD Capital is on a mission to Redefine Money Broking, providing depositors of all size and sophistication with access to the same opportunities that the largest, most knowledge cash managers have come to expect. To learn more about how FXD Capital could help your business, please get in touch with the team at enquiries@fxdcapital.com or on 02039685150.
