Corporate finance, or corporate finance, however you pronounce it, is a very intimidating topic and many people are very frightened of it. Do you think it’s a frightening topic?
No, I’m very fond of saying in my own business which is a merchant bank that there are only twelve things that you need to know about corporate finance, and I’ve never met anybody who knows more than six of them. There’s just so much nonsense talked about it, and what I do find, for most people, they’re used to doing corporate finance, or finance, transactions in their daily life, buying a house, getting HP high purchase on their products, buying something on credit, whatever, they know how to do all those things.
The concepts are embedded in us from a very early age. The calculations to work them out are embedded in us from a very early age, and then somehow people say it’s corporate finance and then it all gets difficult. So a discount, when you go into a shop is a discount, but when you apply it in corporate finance people go pale and their knees wobble and they panic and they think it must mean something different – it doesn’t. Paying over the odds for something is a premium, again we all know that, but if you go into corporate finance and people say this thing is going to carry a premium, for some reason people panic.
I think I would say, sorry, the other thing I would say is that there’s a load of code that comes into this where very simple concepts are made more complicated just by using the wrong word. So for example, the word coupon, which means interest payment on a certificate, isn’t really very complicated if you know that that’s what it means. If you get a mortgage it’s 1½%, the coupon is 1½%, that’s all you need to know. There are another five things I’m prepared to share with you in this discussion, I’m keeping the other six secret.
So what are the other five?
Well the difference between debt and equity again seems to confuse people enormously. Debt is when you borrow money, and equity is when you buy shares in something, and after that it doesn’t get very complicated.
Similarly, redeemable, convertible, I can see people rushing off to have cold showers when this is mentioned. Well redeemable means it’s going to be redeemed, i.e. I lend you some money and you’re going to pay it back. Redemption, not very complicated.
Convertible means it’s going to be converted from something to something else. Let’s take for example a redeemable convertible loan. Loan equals debt, redeemable means you’re going to pay it back, convertible means, guess what, you can convert it to something else. Like what? Well there is only one other thing as I covered earlier and that’s equity – QED.
I think that’ll do.
Thank you very much.
You’re very welcome.
Ken Olisa was talking to Janette Rutterford, of the Open University's Faculty of Business and Law, after a recording of The Bottom Line.