The horizon of the players who make up the strength of our economy goes well beyond an economic cycle and spans generations. Finance must help companies through these cycles to ensure their sustainability and sustainable growth. By Fanny Letier and François Rivolier, co-founders of Geneo Capital Entrepreneur.
As the school year approaches, financial markets are feverish and volatility is raging. Trade war between the United States and China, the breakdown of German growth, delays over Brexit, political tensions in Hong Kong, the reversal of the yield curve... there are many sources of uncertainty.
Is the current economic cycle coming to an end? The 12 phases of expansion since the Second World War have lasted an average of 61 months. The current cycle, with a slower growth rate (22% in 10 years compared to 45% in the previous decade), has lasted for more than 10 years.
Political leaders mobilized in the middle of the summer to try to reassure
everyone. Donald Trump says that negotiations with China are "moving forward". The Chinese government's planning organization is announcing measures to support consumption. Angela Merkel, faced with the latest German GDP figures (-0.1% in the second quarter), breaks the taboo of a balanced budget ("schwarze null") and says she is ready for an economic recovery through debt.
In this uncertain world, large listed companies are beginning to ease the pressure on investments. ArcelorMittal, the world's leading steelmaker, has just lowered its forecast for world steel demand on August 1. How can we avoid the self-realization effect of this type of reasoning?
Refuse to accept the dictatorship of the business cycle
Except for market arbitrage specialists, comments on current events and market developments, and the anxiety they generate, are not good guides for action. To build over time, to live with optimism, to dare to be ambitious, to think hard and far, we need long-term anchors.
The horizon of the actors who make up the solidity of our economy, who build for the future, goes well beyond a cycle and crosses generations. Being aware of a possible cycle reversal is of course important. But freezing any decision pending the outcome of these uncertain phenomena or deciding on the basis of economic or financial cycles is an economic nonsense, and only leads to poor performance.
Family businesses have understood this, which, in all weathers, remain constant in their investments. They are thus the most resilient in times of crisis (see Bpifrance "Opening up your capital to last: family SMEs and TWAs in the face of opening up capital", p.16).
The responsibility of political leaders is not only to push back the end of the cycle further and further. It is also to set these long-term targets, to allow these anchorages and projections. Where will we be in 20 years? What education for our children? Which health system? What ambition for the industry? What energy mix?
And how can we organize ourselves to achieve these goals? How can we lay a stone in this direction every year? Whatever the economic cycle, these are the societal choices that the collective needs to move forward. This will give everyone back their energy and optimism, and the strength to weather the storms when they happen.
Reinventing finance around the business cycle
The disconnection between finance and the real economy has become problematic: it aggravates the intensity of crises and, worse, diverts companies from their long-term objectives. Short-term optimization distracts from medium- and long-term performance and harms employment. Choices based on tax reasons or the exploitation of volatile financial phenomena are putting a strain on productive investments for the future.
Finance must be able to adapt to the natural cycles of the company: its long cycle,
the vision that will ensure its sustainability and sustainable growth; its average cycle, which results from its market, contracts and investments; and its short cycle, that of its cash flow. Each company has its own cycle times and must therefore be treated on a tailor-made basis.
Finance must help companies through cycles, and to do so, it must provide
flexibility and patience if the cycle lasts, and on the other hand a great reactivity if opportunities arise, whatever the time, because in the global competition, the dishes do not repeat twice.
This "evergreen" finance exists: it is that of family offices, which continue to invest regularly and in all weathers, it is that of pension funds, which are thinking for future generations. It has a proven track record in terms of performance (Bain & Company, Global Private Equity Report 2018). It is still underdeveloped, particularly in France.
Evergreen" finance is positive finance, the finance of the future.
The one that will give all building leaders the means to achieve their ambitions.
The one that will adapt not to economic cycles but to the natural cycle of the company.
The one that will free the Building Leaders from any excitement to give them the confidence they need to realize their entrepreneurial dream.
The one that will allow our SMEs to invest to dare to grow, innovate and
international and create the jobs of the future.
The one that will help them superimpose times to reconcile vision and achievement, performance and agility, with confidence and at the right pace.
And therefore the one that will actually generate the best levels of performance in the long term.
Source: La Tribune (02/09/19)