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Finance

WHAT IS ROYALTY FINANCING?

Neil Johnson is the CEO and founder of London-listed Duke Royalty Limited

 

The odds are that if you live in the UK and rest of Europe you have never heard of royalty finance. However, more than a decade after the 2008 financial crisis and on the back of a recent sell-off in global equity markets, the word around royalty financing is inevitably spreading rapidly. This is helped by the fact that royalty finance represents a £50 billion market in North America, meaning that it is now well-recognised as a very viable way of funding growth across a range of sectors.

 

Royalty finance sees well-established small and medium-sized enterprises (SMEs) receive capital in return for a slice of their revenues. Models can vary, but typically royalty financing works as a type of ‘corporate mortgage’, where a business exchanges a small percentage of its revenues over a long period of time in exchange for capital today.

 

Neil Johnson

Royalty financing may be a new concept to the UK and Europe, but providers, such as London Stock Exchange-listed Duke Royalty, are now starting to gain traction. That is because the advantages are clear: unlike other options, royalty financing enables businesses to realise their long-term business goals without compromising owner control, diluting equity shares or adding debt to the business.

 

Since the royalty company is taking a slice of revenue from the business, it also means that the interest of the two partners are aligned (arguably, unlike other traditional finance methods), with the repayment percentage adjusted annually to reflect any movement in an investee’s revenues.

 

On top of that benefit, the company’s repayments cover the principle as well as the interest.

Many companies use the money to replace existing short-term debt to allow them to grow.  Royalty financing eliminates re-financing risk because it has a payback over decades, hence the analogy to a ‘corporate mortgage’.

 

Stock shock and nervous banks

 

There are, of course, other options for businesses to raise capital. They can float on a stock market, for instance. But given the global equity market sell-off, which saw some of the world’s leading indices and companies like Netflix and Alphabet take a dive, the landscape is looking unclear. That is without taking into consideration how much management and owner control is diluted.

 

Elsewhere, banks seem somewhat nervous to lend to SMEs. In May, the UK’s Federation of Small Business (FSB) reported that small credit business approvals had fallen to a 30-month low. With only 60% of small firms that applied for credit being successful. The worrying statistic reinforced a sentiment that is already widely known and reported on in the country, being the ‘SME funding gap’.

 

This gap is a major concern for the financial sector as SMEs employ 60% of the UK’s private sector workers. Despite this concern, in March 2018, pressure group the SME Alliance, which represents thousands of small businesses, told MPs on the House of Commons Treasury Select Committee that they are finding it more difficult than ever to take out loans with banks.

 

While a recent report from the Treasury Committee on SME Finance found that the percentage of SMEs using external finance has stalled in recent years, sitting at 38% in 2017, compared to 37% in 2014, 2015 and 2016.

 

While this stagnation in traditional banks’ lending to SMEs makes for concerning reading, it also highlights the opportunity for alternative finance solutions like Duke Royalty.

 

Although royalty financing may still be in its infancy the UK, as more SMEs are educated and learn about its benefits, it will continue to play an ever-growing role in lending to businesses that traditional banks are increasingly ignoring. Duke Royalty, for example, has deployed £43m in the last 18 months alone through five new investments, and three follow-on investments.

 

Amid a quickly changing finance environment among SMEs in particular, royalty financing is set to grow from strength the strength across the UK and Europe.

 

 

 

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Business

UNBANKED AND UNCONNECTED: SUPPORTING FINANCIAL INCLUSION BEYOND DIGITAL

Darren Capehorn, Director, Icon Solutions

 

Many of us take it for granted, but accessing basic financial services is fundamental to our economic and social development. It is hard to ‘get on’ if you are forced to hide life savings under the mattress, or rely on predatory loan sharks for credit.

Yet an estimated 1.5 billion adults around the world do not have a bank account or access to formal finance systems – making 40 percent of the global population ‘unbanked’. This limits opportunity and stifles potential. Indeed, research by EY has shown that financial inclusion could improve some countries’ GDP by up to 30 percent.

Given the transformative benefits (and yes, revenue opportunities), promoting financial inclusion has been a key priority for banks and fintechs over recent years and as a result, significant progress has been made. But with COVID-19 plunging the world into a period of unprecedented uncertainty, it is imperative that these gains are protected.

 

Banking on financial inclusion through technology

Undoubtedly, enabling financial inclusion has become significantly easier in the wake of technology-led innovation. Take increasing smartphone penetration, which has allowed banks, fintechs and telecom operators to offer highly accessible, low-cost digital financial services to previously underserved populations.

These initiatives have had a huge impact. Sub-Saharan Africa, for example, has become the global leader in mobile money, with competition between different providers driving rapid innovation and promoting financial inclusion at scale.

This success provides a blueprint for the power of technology. But despite the huge long-term potential, we must be realistic about the current limitations. Although mobile connectivity is increasing, over half the world’s population remains unconnected. To rely solely on digital interventions is to leave billions of people behind.

 

              Darren Capehorn

Beyond digital: Establishing community banking systems

Where there is no digital infrastructure, establishing safer financial systems is the first critical step to transitioning out of poverty. This is where organisations such as WeSeeHope, a charity committed to creating community-led change for vulnerable children in Southern and Eastern Africa, play a crucial role in laying the foundations for a sustainable future.

WeSeeHope’s Village Investors Programme (VIP), for example, has established a community banking system enabling parents and guardians of vulnerable children to access savings and loans. By providing training and tools, communities have been able to establish self-funded and self-regulated savings and loans groups, helping members to start and expand small businesses.

It may not be complicated, but this simple, sustainable and scalable approach delivers tangible benefits and supports a range of positive outcomes. Since the start of the programme, nearly 24,000 members have been trained as part of the VIP.

As a result, 67,000 children have directly benefitted from access to financial services, as their parents and guardians can afford school fees, improve their homes and invest in naturally reproducing assets to secure future income. This creates a virtuous circle, with economic prosperity driving better infrastructure to enable the delivery of more advanced financial services.

In 2018, I was fortunate enough to see these benefits first-hand in Malawi where, on average, members of VIP see their income rise from $1 to $3 a day. As you drive through this beautiful country, it is easy to spot a community where WeSeeHope has made a difference simply by counting how many homes have upgraded their traditional straw roofs with tin sheeting.  Literally a shining example of improved financial prosperity!

 

A call for global financial inclusion

Unfortunately, we are at risk of taking a significant step back. We have all been impacted by COVID-19 in some way, but the crisis is set to extend and exacerbate extreme poverty and financial insecurity for some of the world’s most vulnerable people.

As part of a global financial community, we must consider the long-term impact and see financial inclusion as a fundamental priority as we look to re-build a fairer, more sustainable world.

Technology will undoubtedly be integral to this effort, but as the International Monetary Fund notes, “to tap the high potential of digital financial services in the post-COVID era, many factors need to fall into place.” This will take time.

We must therefore take a holistic view and ensure that organisations like WeSeeHope, which are playing a crucial and immediate role in promoting basic financial literacy and service availability, do not slip through the cracks themselves. Immediate short-term funding and long-term income projections across the entire third sector have been decimated, putting vital initiatives at risk.

These are challenging times for everyone, but we must trust that in acting now the rewards will be worth it.

 

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Finance

TIME TO FOCUS ON YOUR ‘WEALTHBEING’

Tony Mudd, Divisional Director, Development & Technical Consultancy. St James’s Place

 

FIVE WAYS TO SAFEGUARD YOUR FINANCIAL FUTURE

The financial and economic impact of the coronavirus crisis has thrown up a host of issues for families to consider.

Above all, the experience has reinforced the importance of always being prepared.

The pandemic’s effect on jobs and incomes has underlined the value of having a robust financial safety net in place.  And it’s never too late to take control and start planning. It’s time to focus on your ‘wealthbeing’.

 

Here are some positive steps you can take to safeguard your financial future.

  1. Income security

With almost nine million UK employees of around one million businesses1 placed on furlough since the coronavirus crisis unfolded, there is potential for large numbers of redundancies as employers examine their reopening plans and contemplate the future of their business.

If you’re in employment and still being paid, look at how long that is likely to continue. As far as you are able, try to budget appropriately. Also look longer term at other sources of finance that you would be able to access if needed (such as savings, existing investments or, perhaps, borrowing), as well as the gaps that insurance policies could help fill.

If you are facing redundancy, make sure you understand what you can expect from your employer – your notice period, redundancy entitlement and statutory redundancy cover – as well as the government support that’s available.
Ask yourself – Where do I stand? What do I need? Can I continue to pay my bills? What are my responsibilities?If you do need to dip into your savings or investments, be careful about where you take it from – and when. The right choices here will help you preserve your capital by helping you minimise your tax, reduce charges and get the best from your assets.
If you don’t have savings or investments available, check whether you’re entitled to state support. The Money Advice Service website is a good source of information and guidance. If you’re struggling, or think you might soon be, don’t hesitate to seek free, impartial debt advice from the likes of StepChange and Citizens Advice.

 

  1. Create an insurance buffer

Do a risk audit on yourself. Ask what the financial implications would be – for you and your family – if you get sick or lose your job. Ascertain what potential risks you might face as a family and as an individual. It will be different for everyone, so it’s about considering your personal circumstances and those of the people who rely on you to work out what you need. There’s nothing to stop parents or grandparents from paying income protection premiums for a younger member of the family, particularly if they are renting or starting out on the property ladder and can’t afford them.

 

  1. Prepared for later-life care?

It may seem a long way off, but the Covid-19 outbreak has shown us all that our lives can change in an instant. A will is something that should be reviewed on a regular basis, as it sets out not only who your assets will go to, but also when. Power of attorney (POA) can be especially important, and it’s essential in long-term care. This is an area where financial advice is enormously valuable. Long-term care planning is difficult, and too often people ask for advice when they are already in or approaching a crisis, when it’s likely too late to make a significant difference.

 

  1. Avoiding gaps in inheritance and legacy plans 

Inheritance Tax legislation changes frequently, and because you don’t know when you are going to die, it can be difficult to cover every possible gap, even with a will in place and some form of legacy planning. The closest option is often ‘whole of life’ cover, which can pay out in trust as a legacy or help family cover any Inheritance Tax liabilities. One of the great things about protection policies is that they can be the solution to a range of different problems.

 

  1. Involve your partner and family

Many families remain reluctant to talk about money issues. Consider working with a financial advisor who can bring the family together to ensure that all the necessary issues are discussed among the people who need to be involved. An advisor can facilitate the discussions (without emotional involvement) and offer guidance.

 

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