Joined-up Thinking on Retail?

Everybody and his wife has an opinion on what should be done to revive the UK’s High Streets and retail.

They range from the defeatist “the High Street is dead” thanks to online shopping to the Portas Pilots that have given 27 towns in England approximately £100,000 each to try out new ideas.

We’ve had the pop-up shop idea, policy changes on planning, calls for a review and reduction of business rates and calls for the scrapping of town centre parking charges.

Now Bill Grimsey, former Chief Executive of Wickes has decided to do what he calls an alternative review of the High Street, after calling all of the above “tinkering at the margins”. He believes what’s needed is a complete solution encompassing health, education, housing and leisure as well as shopping.

K2 Business Rescue agrees.

People define the High Street in different ways but what’s really needed, we believe, are integrated communities that put less emphasis on shopping as a destination activity. 

For example it used to be the case in the City of London that there was nothing but acres of offices. There was nowhere one could pop out to buy a shirt, or a gift, or perhaps a few groceries. That has changed and it’s a principle that can be applied in High Streets around the country.

Stop press:  Latest to come from a review of Portas Pilots is a proposal to allow more empty shop to residential conversions in town centre side streets to stimulate footfall.  http://tinyurl.com/nj2knoy

Are We About to See a Rise in Insolvencies?

New research by the insolvency industry’s trade body, R3, has found that the number of zombie companies has gone down by just over 50,000 since November last year.

Zombies are defined as companies that are only paying off the interest on their debt.  However, R3 also found that more SMEs are now in distress as they struggle to negotiate new payment terms with lenders or to repay loans when they fall due.

As banks have been set new targets for improving their capital reserves they are unlikely to do anything other than improve their position.

However we at K2 believe they are also unlikely to pull the plug, so the march of the zombies will continue for some time.

As a result we are unlikely to see the number of insolvencies rise until interest rates are raised. Indeed any significant rise in interest could cause the carnage that normally follows a recession where it is in fact evidence that the economy is coming out of recession.

What’s your view? Are we about to see a rise in insolvencies?

How can private equity help to turn around a business?

When a private equity group buys out a struggling company they are often seen simply as injecting finance that only adds to the debt on the company’s balance sheet without substantially improving its performance.

Nevertheless, the PE’s objective is surely to achieve a higher return for fund members on their investment and a recent article in the Economist (June 22 2013 edition) highlighted how a US-based company, Clayton, Dublier & Rice, operates post buy-out to achieve this.

This company not only puts in money, it calls on its collection of expert former corporate bosses, as partners in the Private Equity fund,  to go into the company either as chairman or chief executive and drive the restructuring process forward.

In the UK, private equity firms don’t really do this, yet it makes sense to get in the experts and incentivise them in a way that encourages them to get closely involved in and improve on the company’s operation.

If an improvement in performance, and therefore in profits, is driven by someone with the expertise as well as a financial interest in the outcome the likelihood of a successful restructuring  is arguably greater than it would be if the only interest is financial.

Successful turnarounds need fresh ideas, knowledge and hands-on involvement that are unlikely to be generated by the company’s existing directors and managers, who will likely struggle without them.

Culture Shock

If all the recommendations in the Banking Commission’s long-awaited report on banking standards are implemented the banking industry will undergo a profound change in its operating culture.

We would argue that it is not only in banking and finance that a change in culture is long overdue following the 2008 credit crunch.

Businesses and consumers have already had to rethink the way they manage their finances. Businesses have been paying down debt and larger companies with comfortable capital reserves are not spending or investing. Consumers, too, are trying to repair their finances while coping with rising inflation and falling incomes.

Depending on which audience they are speaking to, however, Government seems to be wedded to austerity, sustainability or growth, as the solution to the UK’s economic ills.  

Every new monthly statistic is used to herald imminent recovery.  Most recently, new figures showing a 17% rise in mortgage lending in May 2013, compared to May 2012, will doubtless be seized on as evidence of success for schemes like Funding for Lending and the newer Help to Buy in stimulating home ownership.

Yet all the “experts” warn that without massive additional home building, they risk precipitating another housing bubble because the lack of affordable small homes will overinflate house prices.

With the homeless charity Shelter estimating that a first time buyer may have to spend 14 years raising the deposit to get on the property ladder, the chances are that consumers are already facing a massive culture change from home ownership to long-term renting, but without the tenancy protections that used to provide some security and continuity in living arrangements.

Is it time that politicians stopped grasping at short term electioneering straws and underwent their own cultural revolution to get real about economic life in the 21st Century?

Is Starting a Business in a Recession Wise or Foolish?

It is no secret that the Government is relying on SMEs to stimulate both the economic recovery and jobs.

Lord Young, senior adviser to the Prime Minister, is on record as saying that a recession may actually be a good time to start a small business on the grounds that wages are low, competition may have fallen by the wayside and premises, too, may also be cheaper to get.

That’s all well and good but there is more to starting a business than having a bright idea and the passion and motivation to get started.

There are a number of other factors to consider, especially where the business is something new and innovative and therefore unlikely to raise finance from currently risk-averse banks and investors.

A start-up must carry out research, identify potential customers, set sensible targets and put all of this into a business plan.  If it needs finance it should consider alternatives to the mainstream sources, whether these are friends and family, partnering with existing firms, seed funding, crowd funding or business angels and also investigate what grants and special concessions may be available that will help in the first year or two of trading.

A mentor or business guardian to help set the path and keep things on track can also make the difference between success and failure.  It’s impossible for a novice to do everything themselves without support and joining local business networks can also be a valuable source of advice and support.

If it is the kind of venture that can benefit from collaboration with other enterprises where there is a synergy, this is an option worth exploring since partnering with existing businesses in a market will help a start-up forge relationships with both a supply chain and  potential customers.

When money is tight, entrepreneurs should explore cash saving ideas such as offering equity, or future work, or future discounts, or other benefits in kind to any business that can provide them with useful services. Examples include introduction to customers, advice, market research, book keeping & accountancy, manufacturing prototypes, provision of office space, use of specialist or expensive equipment, and many more ideas that are only limited by the entrepreneur’s imagination.

Recession or not, starting up a business is all about doing all you can to weight the odds in your favour.

Politicians and Economists are failing SMEs

Investment in innovation has to be a long term strategy while the UK’s fixed term parliamentary system and the need to grab headlines encourage short term thinking.

The evidence is piling up for all to see.

Firstly, research by the Big Innovation Centre has emphasised, if it were needed, that there is a “systemic failure” holding back the economy shown in part by the worsening of access to finance to SMEs and in particular to those developing entirely new products and processes.

Yet these new innovative SMEs are the most likely to create new markets and achieve rapid growth, so have a disproportionate impact on employment and the national economy.

The point was reinforced by Tony Robinson OBE, a successful micro-business owner with more than 25 years’ experience and co-owner of Enterprise Rockers, which supports micro enterprises. In an article in the Daily Telegraph business pages, he says that despite the UK’s 4.5million micro businesses providing 32% of private sector employment and 20% of its turnover: “…95% of all government employment support and training funding goes to the largest 5% of UK businesses.”

Sir Hossein Yassaie, CEO of Imagination Technologies, has also weighed in, comparing planned support for innovation in S. Korea over the long term to what happens in the UK, where much of industry has been sold to overseas owners: “…The Government changes and everything is short term…. I think we really need to stop all that.”

In his view, also quoted in the Telegraph, instead questions need to be asked now about what we need to do today to be in markets in ten years’ time and imagination now is the key to future success.

Politicians need to put in place support that is genuinely aimed at SMEs that is more than rhetoric and not prone to change by a new Government, or they need to provide real short-term incentives to investors in innovation that will have the same effect over the longer term.

Examples of such incentives might be to provide soft loans, or offer matched funding alongside new share capital. We don’t want politicians trying to be clever as they have been with the flawed Enterprise Finance Guarantee Scheme which was never going to stimulate business.

It is a great pity that ‘highly regarded’ economists like the BBC’s Stephanie Flanders, who I understand also advises the Government, are unaware of the Small Firms Loan Guarantee Scheme that for approximately 15 years drove much of growth by SMEs in the 1980s and 90s. I asked her recently, and she had never heard of it.

This makes me think that economists like to operate at a theoretical and strategic level rather than try to understand what really makes SMEs tick so they can develop tactical stimuli that promote SME growth. Quantitative Easing is another example of theory not working for SMEs.

Investors need to rethink their requirements

Many of us believe that a change in investor culture is long overdue. We need to incentivise long-term investment in sustainable growth instead of short-term ‘quick flip’ or ‘get rich quick’ schemes that deceive everyone into thinking that making money is risk free and easy.

It is this short-term thinking that has made it more difficult for Private Equity firms to raise new funds for further investment.

Private Equity firms depend on their reputation for making profits for their investors and their problem since the Credit Crunch of 2008 has been that funds have been tied up in businesses that are effectively zombies because of the amount of debt they have, no matter whether these businesses may have good potential for growth.

Similarly both lenders and investors are very wary of taking a risk with new and small businesses, hence the Government’s failure to persuade funders to support start-up companies and SMEs, even profitable ones and those with potential for growth. The only source of funds really available for such businesses are book debt and asset based lenders but these only improve cash flow they don’t provide equity or loan capital for investment.

To address the funding culture issue we need to justify a switch from investing in property to investing in businesses. This will involve understanding a risk rated return on investment that provides for better returns to investors.

There are a number of ways of achieving this change of investor behaviour, one is to penalize investment in property by taxing them, another is to provide for matched funding from banks alongside new equity, possibly with a Government guarantee, another would be for debt forgiveness by banks to restructure their ‘zombie’ client loans alongside new equity, others could be an expansion of the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, or simply a reduction in the corporation tax rate.

But all this requires a Government to confront those who view property as their source of security.

Is it all doom and gloom or are there rays of sunshine on the horizon?

It started mid-May with the Bank of England governor Sir Mervyn King upgrading the economic forecast for the rest of this year.

The British Chamber of Commerce (BCI) was also slightly more optimistic in its forecasts and reports on business confidence.

In the last few days we’ve had three forecasts on monthly performance for the manufacturing, service and construction sectors, all of them showing signs of growth.

While no-one is denying that there are some years to go on paying down household and business debt, as the Telegraph’s CItyAM editor Allister Heath emphasises this week, is his doom-laden piece predicting an even more cataclysmic crisis really justified?

He cites the need to further massively cut the welfare state and also to what he calls the “terrifying recklessness” of the Government’s proposed Help to Buy scheme that could stoke up another credit-fuelled housing bubble.

It doesn’t help that we are only building 100,000 new houses a year instead of the 300,000 that we need to satisfy demand.

However, if the scheme were to stimulate house building we might stem house price inflation and avoid a bubble. It could also be used to redress the scarcity of smaller homes for both first time buyers and older people wanting to downsize as well as provide jobs for the approximate 20% of all SMEs that a thriving construction industry could employ.

We all know that “bad news” sells papers but there is also a converse argument that we need businesses to believe they have a future. With some measure of confidence in the future, businesses and SMEs in particular might begin to invest in growth.

So are you a pessimist, a realist or an optimist?

Calls for Private Equity investment to stimulate growth

There has been a chorus of voices recently wanting to see private enterprises or Private Equity firms investing to stimulate a recovery and growth, both in the UK and Europe.

It’s all very well demanding someone else invest money but why should they? There are many ‘zombie’ companies that could be ripe for investment but in effect are overvalued due to the debt burden which will almost certainly never be repaid. These firms need restructuring with bank lenders prepared to take a hit if they are to be attractive for investors.

The chorus may not be aware that investors normally rank behind the bank, or are they hoping investors are naïve enough to underwrite the bank debt by pouring good money after bad? Private Equity companies rarely have either the time or the patience to spend on business improvement as most rely on financial restructuring followed by a swift exit to deliver a huge return on investment to their own investors.

Another factor is Private Equity’s reliance on cheap and easy money to recover their investment by refinancing assets and to realize profits by funding a sale where the lending market underwrites their returns. This is how many of the banks were left with bad debts so it may be a while before they return to providing cheap and easy money.

Private Equity firms, like most alternative investments, depend on their ability to attract funds from investors who want to see an adequate return, normally in a relatively short period. 

Since the financial crisis began many investments by Private Equity have been locked in due to the inability to refinance or sell their investments, which has impacted on their return to investors and thus on their ability to raise new funds.

Rent seeking is a drain on growth

There has been more media doom and gloom about the High Street, with the news that 10 out of 12 of the Portas Pilots have suffered an increase in empty shops and the CBI’s May retail health check showing the steepest falls in sales this year, not only on the High Street but also online.

This is not solely about the squeeze on household budgets but also about the fact that the High Street, like many SMEs, is not competing on a level playing field.

Economists have a word for financial gain that doesn’t do anything to stimulate either real production or economic growth.  It is called rent seeking. It covers everything from income gained from vast financial sector fees, bonuses and charges on transactions to actual rent received by landlords.

Sports Direct owner Mike Ashley has given landlords a deadline of today (May 31) to accept a deal to reduce the rents on the Republic chain that he “rescued” in February from administration or he will walk away and the 116 shops will close. 

The BBC also recently highlighted the plight of one trader in electrical goods in the “Portas” town of Nelson in Lancashire, who needs to move to larger premises. He has identified an empty property vacated by a national chain but it is still tied to a long lease so the landlord has no incentive to re-let at a lower rent.

Add to that the ridiculously high town centre business rates that are no longer justified in the current climate and that the Government has not reviewed since 2007 – arguably another form of “rent seeking”.

How are SMEs supposed to be the engine of growth when even those with potential to grow are facing such impossible odds?