Fidelity chief warns of global corporate solvency crisis

Fidelity International boss Anne Richards has warned that the asset management industry will struggle to provide enough capital to fix the solvency problems public businesses face as economies emerge from lockdown.

The fund management executive, whose investment company oversees £305bn in client assets, said many businesses would need an injection of capital to offset the high levels of debt they had accumulated during the crisis, which has left whole industries unable to operate.

But she said it was vital that businesses focused on ensuring they had access to as many pools of capital as possible, adding: “The [asset management] industry is not going to be enough to solve this solvency problem.”

The scale of cash needed to repay the public funding businesses have received from governments or central banks is likely to be so large that it is “either going to be written off or sit on balance sheets, where it will have a depressing effect”.

“If you don’t want that drag from the overhang to depress the recovery, you have to think about the plan to recapitalise. The [fund] industry can support a high proportion of that, but I don’t think it can do all of that recapitalisation.”

Her comments come as investors grapple with big questions over which companies to back and which to let fail, after the pandemic left businesses ranging from travel to retail struggling to survive.

The UK has already experienced a spate of fundraisings as companies attempted to deal with cash flow problems, with more than 50 share placings taking place in the two months from late March alone, according to PrimaryBid, a group that links retail shareholders with companies.

But even more businesses are expected to turn to share sales in the months ahead in order to balance debt to equity ratios, a measure used to understand whether companies have enough cash to satisfy debt obligations. Others will attempt to build cash piles that allow them to buy up other distressed businesses.

Although fund managers globally are sitting on larger cash piles than usual — at 5.7 per cent compared with a 10-year average of 4.7 per cent, according to a Bank of America survey — Ms Richards said there were not huge levels of cash quickly available to support companies.

The chief executive, who took over the running of the asset manager in 2018, signed a letter in April urging companies to respect the rights of small shareholders in future equity fundraisings.

The letter was sent after many businesses shunned retail shareholders while running emergency equity placings in response to the pandemic.

Ms Richards said there were some circumstances where putting aside pre-emption rights, which give original shareholders a first right of refusal on share issuances, made sense but said that it was important to be able to tap retail shareholders for capital.

She added that it was unfair that retail investors were also missing out on good investment opportunities.

Despite huge volatility in markets, Ms Richards said Fidelity had fared well. The asset manager suffered just two weeks of net investor redemptions so far this year.

Portfolio managers at Fidelity are holding slightly more cash than usual as part of an effort to manage liquidity “very closely”.

But she said the rapid action from central banks in response to the crisis had stabilised markets, giving people confidence that although “we might be going into a deep recession that didn’t mean a financial crisis”.