The UK economy has been largely put on hold for 10 weeks and the resumption of normal commercial activity is likely to be slow and unpredictable. Companies find themselves shutdown or severely disrupted and are building up a debt pile of government support, deferred supplier payments and extended facilities with their commercial funders. Business leaders, by their nature, are looking to the future - to invest in the parts of their business that can gather momentum in the new economic reality. How will they fund the opportunity to invest in efficiency, productivity and growth against this backdrop?
Corporate debt levels were high going into this crisis, with business leaders managing a fine line between an efficient capital structure and tipping towards a level of debt that created risk or damaged corporate development in the future. This delicate balance has now been completely blown out of the water, as companies incur losses and delay payments to suppliers, lenders, landlords and HMRC. What sort of mindset does this now create, as those business leaders walk to their desks each morning?
It is estimated that the level of unsustainable corporate debt that has been created in UK private businesses is around £100bn. That is 10-15 times more than the typical amount of new equity funding raised each year and is a massive and multi-year issue for our economy, at a time when we already faced productivity and competitiveness challenges. This is not the sort of base that we hoped to spring into post-Brexit!
This corporate debt burden falls on a UK corporate economy which is highly fragmented. There are approaching 6 million businesses in the UK and 99% of them are SMEs (less than 250 employees). SMEs in the UK account for 60% of private company UK employment. Do they have the scale, experience, resilience and governance to survive this and drive our economy forward again? The UK also has a long history of regional inequality and whilst London scores highly on financial metrics, it scores poorly on life satisfaction. It is now perhaps inevitable that we need a shake-up in our UK corporate landscape, to consolidate our strengths and to produce a broader geography driving economic success for our country.
Recent years have seen significant growth in non-bank lending, e.g. from fintech, credit funds, or other asset-based lenders. Are there new structures and solutions here which might provide alternative and additional support to UK companies? Some of these lenders feel that they are now being disadvantaged by government lending mechanisms and see their competitiveness and liquidity decreasing. It will be important to sustain and grow alternative sources and structures for lending.
The size of the problem means that government must act now to sustain any momentum in our economy, to prevent mass unemployment and to protect the ownership of our strategic assets. The instruments and delivery mechanisms for this support are still being developed, but in addition to dividends and exec bonuses, there will be further strings attached. Political priorities to be wrestled with include Brexit, state aid trade wars, foreign ownership, public ownership v capitalism, green commitments and the levelling up agenda.
How else can businesses get back on track and be fit for the future? Will this come from business alliances throughout supply chains, or indeed between competitors; or minority investments and joint ventures on a scale never seen before? These business structures have been approached with caution before and with good reason, but with a new impetus to act now, we will need to forge new ways of making these ideas work.
What about the role of Private Equity? UK PE funds invested over £20bn of equity in FY18, half of which was invested in the UK. With growing firepower and an appetite to invest in growth, this must be part of the answer. Finally, it is increasingly common to hear talk of ‘Patient Capital’ – is this a new force to sustain long term business planning, or just a pipe dream?
We will explore more from each of these topics in the coming weeks.
“After the storm, the sun will always shine...”
About the author: Richard Peberdy leads KPMG’s National Markets Deal Advisory business. An Economics graduate, he has spent the last 25 years helping our clients develop their strategic business models and then fund and execute their corporate development ambitions.