Low interest rates have all kinds of unintended consequences as we have found out over the last decade. They change investor behaviour and banks’ lending activities amongst other things. But there may even be a case to be made that low interest rates undermine market competition and lead to a rise in dominant companies in different industries.
Very good piece and well observed. From the perspective of someone who spends most of their time advising or investing in SME companies, access to capital especially as these businesses transition through the scaling challenges of No Mans Land, is a key determinant of success. As a consequence smaller companies have to rely more heavily on equity or equity like sources of capital and/or increase operational leverage throughout the P&L structure. This requires financial fluency - a rarer commodity at the lower end of the spectrum - which in turn skews the distribution of value created and retained to the top 10% of SMEs in each industry sector, which is where they start to become interesting for small cap PE and so on. It ends - or at least the reset button is pressed - when the b/s leverage which prolonged access to lower rates of borrowing always bring with them turns around and bites them. For many enterprise sized businesses the misallocation of capital at this point in the cycle will cause high levels of stress down the road, but that may not be of much comfort to the bulk of the SMEs…Great piece.
Very good piece and well observed. From the perspective of someone who spends most of their time advising or investing in SME companies, access to capital especially as these businesses transition through the scaling challenges of No Mans Land, is a key determinant of success. As a consequence smaller companies have to rely more heavily on equity or equity like sources of capital and/or increase operational leverage throughout the P&L structure. This requires financial fluency - a rarer commodity at the lower end of the spectrum - which in turn skews the distribution of value created and retained to the top 10% of SMEs in each industry sector, which is where they start to become interesting for small cap PE and so on. It ends - or at least the reset button is pressed - when the b/s leverage which prolonged access to lower rates of borrowing always bring with them turns around and bites them. For many enterprise sized businesses the misallocation of capital at this point in the cycle will cause high levels of stress down the road, but that may not be of much comfort to the bulk of the SMEs…Great piece.