In a white paper entitled, “Fueling Rapid Growth Enterprises”, Andrew J. Sherman, a partner at Jones Day law firm, has a proposal for large U.S. companies: loan a modest percentage of your $2 trillion in cash to high growth small and mid-size businesses. We asked him for the low down on how this idea could create jobs, innovation, and economic growth.
SAP.info: The title of this white paper is very corporate ‘business speak.’ In your own words, what’s this about?
Andrew J. Sherman: The typical small or mid-size business now has 85 percent of its assets tied up in intangibles and only 15 percent or less are tangible. But banks still rely on tangible assets to secure loans, now offered at historically low interest rates. Unfortunately, small, rapid growth enterprises (RGEs) have been frozen out of the debt capital market because they don’t have the hard assets that banks require to lend. A recent New York Times article discussed the expensive alternatives these companies are forced to consider. Yet big companies hold incredibly large amounts of cash.
What’s the proposal to alleviate the problem?
The white paper asks, what if the private sector put together a loan guarantee mechanism that would bridge the chasm between what RGEs need to innovate and create jobs and mitigate risk for banks? It would be a win all around: banks get stronger borrowers, big companies stimulate the economy and get good return on idle capital, while RGEs grow their businesses.
What inspired you to write this?
I’m a problem-solver and I hate inertia. The $2 trillion in corporate treasuries earning low rates of return is a logjam to economic growth. The private sector can put those assets to work without risk. I’m frustrated with the attitude that government will fix everything. To do something positive, we have to band together.
Read on the next page about the engine of productivity.
Aren’t companies already freeing up capital to innovate? What’s new about this?
Companies are slowly beginning to invest in organic innovation or acquisitions. But we have to do a little bit of everything. So if large companies are accumulating stockpiles of cash, and can put that to work in organic innovation, strategic partnerships, acquisitions, and something new and different like this, that would really move the needle.
Why don’t we hear more about specific solutions like the one you propose?
In some ways it’s not new. For years, entrepreneurs have brought in wealthy Uncle Harry to co-sign loans. This is for people who don’t have a wealthy Uncle Harry. The Private Employment Partners Program’s intent is to augment great initiatives like the SBA Loan Guarantee Program and fund RGEs with intangible assets.
You write that small and mid-size companies are the engine of productivity and job creation. It’s hard to believe organizations with the power to act don’t get this. What’s holding them back?
Politically we’re in a difficult time and the private sector has to step up. Until we have a more collaborative government, the burden is on our backs to get the economy up and running.
What was most surprising in your research for this paper?
Every single banker we talked with said this would be a huge help to stimulate lending to RGEs. They see this as a fantastic idea, and would definitely do more lending if something like it existed.
Read on the next page what seems to be a slow growing cancer.I was particularly struck by the impact of underemployment. Why is this an important factor?
A recent Rutgers University study documents the extent of underemployment among college graduates since 2008. We are quick to move the unemployment rate down by a tenth of a percent when someone gets a job. But if you have a master’s degree in finance, and you’re working in a warehouse you’re underemployed, not challenged, and underwhelmed. To stimulate quality job growth, and the productivity and innovation that comes with it, you have to attack underemployment – it’s a slow growing cancer in our country.
What types of companies are ideal candidates for corporate sponsored funding?
Any type of family owned or closely owned company in technology or services, or government contractors that want to invest in research and development or new markets.
What would it take to realize the vision you outline?
Corporate buy-in. The private sector companies with sufficient cash – and their shareholders – need to believe this is a good deployment of that cash. If the number is $2 trillion in cash and we can liberate five percent, that’s a lot of money that can be used in this loan guarantee fund. All of the other constituents – rapid growth businesses and banks are ready to participate. We need corporate America to join the party.