Today, the public authorities are actively announcing various aid packages to support businesses. While most of these measures are actually well-intentioned, they may not be sufficient to address the long-term insolvency issues.
Solving liquidity problems with loans creates a higher debt burden for businesses, which will not just go away in the future. Therefore, such government measures push problems further into the future, but they do not actually solve those problems. In addition, many businesses face a real risk of bankruptcy as a result of the COVID-19 pandemic. Even though they might be eligible for an 80% state guarantee, they will remain a risk for credit institutions that will be reluctant to bear even a 20% risk of non-repayment. Therefore, such businesses will not receive any loans at all.
Last week, in response to the current situation, the Lithuanian Association of Investment Managers that is composed of 13 management companies operating in Lithuania, submitted a proposal to the Government of the Republic of Lithuania asking for additional support measures for those businesses at risk of insolvency due to COVID-19 (see the letter attached).
According to the association, the government must find ways to strengthen the capital base of companies that are experiencing solvency issues. Capital investments can improve the financial performance of these companies by enabling them to make settlements with existing creditors, receive additional loans while still using other state aid measures (guarantees, loans, etc.) and ensure their long-term viability.
We suggest that the state should invest in companies that are experiencing financial difficulties through special funds established for this particular purpose. The investment strategy would be to provide financial assistance by acquiring shares of a business that is facing an insolvency risk or other financial difficulties. The infrastructure in the financial market and the investment managers licensed by the Bank of Lithuania would allow them to operatively “inject” money into businesses that currently need capital. A state investment in such funds would also attract private investors, who could take part by contributing additional funds and in this way would help rescue businesses. In addition, professional managers could use their expertise and knowledge to help improve the management practices of the businesses receiving the investments, which would further improve their prospects and the economy of the country as a whole in the long run.
It should be noted that if such support measures were to be implemented, the state would actually benefit the most. It would recoup its investments not only in terms of securing jobs and business taxes, but also in terms of the return on investment generated by private equity funds that would sell the stock of the re-established companies at the market price.
Rational safeguards should be put in place for the implementation of such investments to ensure that they are directed only at companies with the right profile. For example, capital investments should be offered to companies that were already in financial trouble before COVID-19. In order to prevent any possible abuse by shareholders, it would be appropriate to impose certain restrictions on the distribution of dividends. To ensure competent management and independence, the management of the funds should be entrusted to professional managers and the remuneration of company managers should be subject to certain limitations, in order to avoid cases of personal gain.
If the additional capital could be properly prepared and quickly injected into struggling businesses, it would be possible not only to preserve, but also to strengthen the Lithuanian business community and improve its competitiveness in the international arena. Other EU members are already considering similar measures, while the US government has implemented such an investment strategy to save businesses more than once.