It seems there's no business like show business

There follows a definition of debt “a sum of money that is owed or due”. The key word here, I think, is ‘due’. This means that a debt is a temporary contract where money is provided to one person (an individual or a company) in the expectation that it will be repaid by a certain date.

If you search the word ‘equity’ there are no advertisements, only two definitions: “the quality of being fair and impartial” and “the value of the shares issued by a company”.

Out of the next five entries, four relate to the actors’ trade union also called Equity. There is very little about the nature of shares and there is little or no evidence that investing in shares or using the issue of shares to raise money is at the forefront of thinking in the UK. The UK seems to be more interested in show business.

I think this shows a stark difference in the way society looks at debt and equity. Debt is temporary, it needs to be repaid. Equity is permanent; a company is not required to pay back the money it raises. It also has the advantage of being more easily transferred from one person to another. This enables a company to live longer as its owners can pass on their shares to their successors.

And too much debt has caused much of the problems arising from the financial crisis and beyond. It has been too readily available and too freely issued to many banks, companies and individuals who do not have the wherewithal to repay it.

When I used to visit the USA, I was often asked what I did for a living. At the time I worked for the London Stock Exchange. On a fairly regular basis taxi drivers would ask me “what has happened to the Dow Index today?” This is the index which reflects the share price movements on the stock market of the largest US companies. Each taxi driver and many Americans have a deep and vested interest in the performance of the stock market as their own money is invested in a product called a 401K which is effectively their own self-managed pension fund.

At another time I remember the CEO of a US stock exchange saying that when they researched which was the best known exchange in the USA, the answer was not the New York Stock Exchange or the NASDAQ but “the Dow”. (It seems that no one really cares where a stock is traded, only how it is doing.)

In the UK we have moved to a place where every company has to offer a new kind of pension. It is now compulsory for employers to offer eligible workers a workplace pension. Employees are automatically enrolled in a workplace scheme. Automatic enrolment is a Government initiative to help more people save for later life through a pension scheme at work.

Young people involved in these pensions are not going to get the sort of increase in value from their contributions unless the pension managers invest in products that grow in value over time. Debt instruments may do that in the short term, but they get repaid and disappear on a regular basis. Equity is a long term product which when established in a portfolio to give a good mix of companies, large and small, across many sectors, some well-established and some starting out, provides an opportunity for a pension to grow and provide a decent income in retirement. And we all need that!

So it might be that, through this change in pensions, we start to see more people taking an interest in equity. We might see more companies becoming aware that there are more funds available to be invested in companies like theirs when they issue equity shares. They will be more aware of the permanent nature of equity. There could be a general acceptance of the opportunity that is available to grow companies and shareholder value based on raising permanent equity capital.

And we might see the Google page for equity become less Thespian and more weighted towards this great way to help companies raise money and then grow, create jobs and provide good returns for investors.