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1UK Private Company Director
UK Private Company DirectorQ2 2020
Welcome to the July 2020 issue of UK Private Company Director, the quarterly newsletter for directors of owner-managed, family and private equity backed businesses.
We cover financial, legal, tax, wealth management and similar issues crucial to both building and realising the value of your business. Corbett Keeling’s report on deal activity in the private equity markets also provides a clear insight into financial investor appetite.
The current issue addresses some of the topics at the forefront of directors’ minds:
• Despiteweaknessinsomesegments,privatecompanydealmakingactivityoverallprovedprettyresilient,andmanysellersarestillmanagingtoobtaingoodvaluations(pages2to4).
• ThenewInsolvencyActcontainsusefulmeasures–sometemporary,otherspermanent–whichshouldhelpbusinessesstrugglingtostayafloatasaresultofthecrisis(page5).
• Thesteepestdecline ineconomicgrowthsinceWorldWar IIhas takena tollonstockmarkets,butshouldinvestorsnowbepositioningthemselvesforarebound(page6)?
Bestwishes,
Megan Peel, [email protected]
2UK Private Company Director
The COVID-19 lockdown has clearly taken a severe toll on economies and businesses around the world. But what has it meant in terms of deal activity for private companies in the UK? Jim Keeling of corporate finance advisor Corbett Keeling analyses the data from the second quarter and finds a perhaps surprisingly upbeat outlook for any business owners looking to sell.
Evenasthelockdowneases,thesituationremainsprecariousformanybusinessesandthepathaheadappearsuncertain.YetIdon’tsharethegloomyoutlookofmanycommentatorsinthemedia.Infact,Ihavebeenhugelyimpressedwiththeresilienceshownbybusinessownersastheyhaveadaptedtotheirnewcircumstances. Over the last fewweeks we have spoken tomanyprivateequityfirms,anditfeelsasiftheimpactofCovidhasbeensplitequallyacrosstheirportfolios;athirdhavebeennegatively impacted, a third report a neutral impact, a thirdhave foundCovidhadapositive impacton theirbusinesses.TheGovernoroftheBankofEnglandappearstoagree,havingrecently expressed his confidence that the recoverymay bestrongerthanpreviouslyexpected.
Ofcourse,adropinactivityintheprivatecompanytransactionsmarket was only to be expected, and some segments have
been hit hard sinceMarch. That said, the overall figures forthesecondquarteroftheyeararewellabovethelevelsseenduring the global financial crisis, as I explain in more detailbelow.Anditcouldwellbethatwearealreadypasttheworst.
Thegoodnewsisthatwecontinuetoseelotsofactivityinthemarket. Inparticular,privateequityfirmshaveplentyof fundsavailable, and they are actively looking for opportunities toputthatmoneytowork.Thismeansthatmanysellersarestillmanagingtoachievefullvaluationsfor theirbusinessesevenwhereearningshave takena temporaryknockasa resultofthelockdown.Ourlatestsurveyresponsesconfirmthatmarketparticipants are in a realistic but determinedmood, workinghardandgettingdealsdone.
Assessing the deal data
Corporate Finance
After a record strong startto theyear, thesmaller buy-outssector(transactionswithenterprise valueof less than£150million)tookthehardesthitinthesecondquarter.Thevolumeof deals fell from48to just 11, while their valuewasdownfrom£2.5billionto£338million,thethirdlowestquarterlyfiguresince2000.
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Past the worst?
3UK Private Company Director
Corporate Finance
The declines were not assteepinthelarger buy-outssector (enterprise valueof £150 million or above).The number of deals wasdownfromeighttofive,andthe value of transactionsalso fell, from £10.4 billionto £3.9 billion. Still, that isa respectable quarterlyfigure, and the total valuesforthefirstsixmonthsoftheyearareverysimilar to thesameperiodlastyear.
Early-stage and expansion capital deals were easilythe most resilient segmentof themarket. The numberof transactions heldremarkably firm, edgingdownfrom143thepreviousquarter to 131. The valueof these deals declinedrather more significantly,from £3.4 billion to a stillveryacceptable£2.0billion.That enabled the segmentto setanew recordvaluestotalforthefirsthalfofanyyear.
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4UK Private Company Director
So what does our latest survey suggest?
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Do you expect deal volumes <£100m to increase or decrease?
Do you expect deal volumes >£100m to increase or decrease?
Is debt availability increasing, decreasing or neutral?
How have the restrictions imposed to stop the spread of Covid-19 affected your portfolio companies?
Forthesmallervaluesegmentofthemarket,the percentage of respondents predictingariseinvolumesoverthenextsixmonthshasfallenfrom55%to32%.However,thatoutweighs the 22% forecasting a drop inactivity, which is little changed from lastquarter’s18%.Theremainder(45%)expectactivitytostayaroundcurrentlevels.
For the larger value segment, mostrespondents expect little change. Of therest,22%predictariseinactivity,thesameproportionasthoseforecastingadecline.
WiththeBankofEnglandinfullsupportivemode, debt availability is not seen as aproblem.Overthreequartersofrespondentssaidtheyexpectdebtavailabilitytoremainaroundcurrentlevels,andonly11%thoughtitwasdecreasing.
When asked how the restrictions relatedto COVID-19 have affected portfoliocompanies, our respondents were evenlysplit between those reporting a positive,negativeandneutralimpact.
Corporate Finance
Contact us
Withthelockdownrestrictionsonlyjustbeginningtoeaseandtheshapeoftherecoverystilluncertain,it’slittlesurprisethatsentimentremainssubdued.However,Ifinditencouragingthatwereceivedmorepositivethannegativeresponsestooursurveyofmarketparticipants.
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5UK Private Company Director
COVID-19 temporary measures
• Suspension of winding-up petitions and statutory demands
From27thApril, statutorydemands servedon companiesbetween1stMarch2020and30thSeptember2020can’tbeusedas thebasis forpresentingawinding-uppetition.Duringthesameperiod,creditorscan’tpresentawinding-up petition unless they have reasonable grounds tobelieve thatCOVID-19hasn’thadafinancialeffecton thecompany,orthatthecompanywouldstillbeunabletopayitsdebtsevenifCOVID-19hadnothadafinancialeffectonthe company. The courts will probably find this a difficultquestiontodetermine.
Thesechangesshouldhelptoreducetheuseofstatutorydemandsandwinding-uppetitionsasanaggressiveformofdebt collection (awinding-uppetition canbepresented ifnopaymentismadewithin21daysofastatutorydemand).In particular, these provisions seek to prevent landlordsusing statutory demands to get around the moratoriumon forfeiture introduced in previous coronavirus relatedlegislation.
• Suspension of wrongful trading rules
Under the wrongful trading rules, directors can bepersonally liable if the company enters into liquidation orinsolvencyadministrationandthedirectorknew(orshouldhave concluded) that there was no reasonable prospectof avoiding such proceedings. The New Insolvency Acttemporarily suspends directors’ personal liability for anyworsening of a company’s financial position during theperiod.Thisshouldhelpdirectorsofcompaniesaffectedbythe pandemic tomake decisionswithout fear of personalliabilityarisingfromtheapplicationofthewrongfultradingrules.
However,directorswillstillbesubjecttotheirusualduties– such as promoting the success of the company andconsidering creditors’ interests in certain circumstances –andmaystill incurliabilityforfraudulenttrading.Itremainsimportant for directors to take legal advice. Furthermore,thetemporarysuspensiondoesn’tapplytocertainexcludedcompanies,suchasthosefinancedbyratedorlistedbonds.
Permanent insolvency law reforms
• New statutory moratorium mechanism
Companiesindistressmaybegivenmorebreathingspacetonegotiatewithcreditorsiftheytakeadvantageofanewstatutorymoratoriummechanism.Thisstopscreditorstakingenforcementaction,restrictsinsolvencyfilingsandprovidesapaymentholidayforcertaintypesofpre-moratoriumdebtsaswellaspost-moratoriumdebts.Themoratoriummustbeproposedby thecompany’sdirectorsand lasts forafixedperiod. As with wrongful trading, some companies areexcludedfromusingthemechanism.
• Restructuring plan
A company in financial difficulty will be able to proposea compromise or arrangement between its creditors orshareholders,subjecttotheapprovalofthecourtand75%ofeachclassofcreditors.Incertaincircumstances,thecourtmaysanctiontheplanevenwhereoneormoreclassesdon’tvote for theplan.Thefirstplanspresented to theEnglishcourtswill be closelywatched to see the scope of theseprovisions.
• Other provisions
The Act prevents suppliers from relying on contractualclauses that allow termination because a counterpartyenters an insolvency or restructuring process. It alsoincludesCOVID-19relatedmeasuresforcompanymeetingsandfilings.
The COVID-19 pandemic has brought forward the government’s plans for major reform of the UK’s insolvency framework. The Corporate Insolvency and Governance Act 2020, which came into force this June, introduced some permanent landmark changes as well as temporary measures to help businesses cope with the crisis. Anthony Frost of Dechert LLP highlights those of particular relevance to company directors.
Contact us
Legal/Tax
New Insolvency Act: Some breathing space
6UK Private Company Director
• Economic regime
Despite surprisingly positive economic data recently, theglobaleconomy ison track this year to suffer itsdeepestrecession since World War II. The World Bank’s latestforecast(on8thJune)wasforglobaloutputtocontractby5.2%,withpercapitaincomefallinginthelargestproportionof countries since 1870. Although their lockdowns areeasing, advanced economies are still expected to shrinkby7%thisyear.Inperfectconditions,areboundmaybeginassoonasthethirdquarter.Ourinhousemacro-economicindicatorhasjustswitchedfromaregimeofcontractionintooneof recovery, suggestinga favourableenvironment forrisk-taking.However,thisisahighlyunusualsituation,soweareawaiting furtherconfirmationofeconomicstabilisationoverthecomingmonths.
• Valuations
Valuations for equities – the largest source of risk andreturn inmostportfolios– remain challenging in absoluteterms.TheUSequitymarket,whichrepresentsnearly60%of the global total, is currently trading at a forward price-to-earningsmultipleof22,thehighestsince2002.That isexpensive.However,withinterestratescloseto0%,thereisagoodcaseforahigherthanusualtoleranceforvaluations,particularly for large-cap companies which appear to beimmunetothebusinesscycle(oftencalledseculargrowthstocks).Moreover,whencomparedwithcashorgovernmentbonds,equitiesstillhaveaclearadvantageintermsoflong-term expected returns. So, while equities are expensive,therearefewattractivealternativesamongstthecoreassetclasses.
• Momentum
Thesecond-quartersurgeinequitymarketsillustrateswhymomentumisacriticalfactorinourassetallocationprocess.Marketsdon’thavetofollowexpectationsorevenlogic,andtrendscanprovetobeself-fulfilling.Wetakealonger-termviewofmomentumandonlyassess it atmonthend.Thishelpsus toavoidbeingcaught inshort-termmarketcross
currents,guidingustotakeadvantageofthosetrendsthathavesufficientstrength.Asof theendofJune, theglobalequitymarkethadjusttippedbackintopositiveterritoryontheten-monthmovingaveragemetricthatwefavour.Shouldthisbesustained,wewillviewitaspositiveforrisk-taking.
• Sentiment
Sentiment for risk assets, such as equities, has oscillatedwildlyoverthelastfewmonths.Oftheindicatorswefollow,some – for example, the S&P 500 Index net speculativepositions–implyacertainbullishness.Others–suchastheten-yearUSTreasurynetspeculativepositions–implymorebearishness.Overall,weareinneutralterritory.
The bottom line
Taking all the above into account, we remain cautiouslypositioned in our portfolios. Risk assets remain volatile –for example, the most closely watched index of volatility isnear 30, well above its long-term average – and thusmoreunpredictablethanusual;theyalsoappearexpensiveonmostmeasures.Nevertheless,thesignalswefollowfortheeconomicregimeandmomentumhaveshiftedtowardsincreasingriskinportfolios. Should these signals remain supportive, we mayseektotakemoreriskinthemonthsahead.
Contact us
Wealth Management
After steep declines at the onset of the COVID-19 crisis, stock markets have bounced back. However, they remain below pre-crisis levels and are still highly volatile. So where do they go from here? Fahad Kamal, Chief Market Strategist of Kleinwort Hambros, explains what the four main factors he watches are suggesting about the path ahead.
Getting warmer
7UK Private Company Director
Contributors
corbettkeeling.com
dechert.com
kleinworthambros.com
Weguideownersofprivatecompaniesonraisingcapital, selling their business andbuilding valueby M&A. For 25 years our bespoke, personalservice has delivered the optimal mix of Cash,Certainty andChemistry for our clients, recentlyachievingmorethana30%upliftinsalevalueforourclientsanda97%dealcompletionrecord.Ourbroadsectorexpertisecombinedwithaccess toglobal trade and financial buyersmeanswewillfindthebestinvestororbuyerforyou.
Contact us
8AngelCourtLondonEC2R7HP
+44(0)2076266266
JimKeeling,Chairman
Dechert is a full-service international law firmwith 27 offices, 900+ lawyers and a top-rankedPE andM&A practice offering clients innovativesolutions to deal-specific issues and on thelegal and technical aspects of complex,cross-bordertransactions.
Contact us
160QueenVictoriaStreet,LondonEC4V4QQ
+44(0)2071847000
RobertDarwin,[email protected]
Contact us
8StJames’sSquareLondonSW1Y4JU
+44(0)2032077136
KleinwortHambroshasover200years’experienceinBritishbankingandanetworkofofficesacrossthe UK and Channel Islands. It offers its clientsindividuallytailoredwealthmanagementsolutionsdeliveredwithahighlypersonalservice.
BenWhitworth,HeadofEntrepreneurs&SeniorExecutives
Thecontentsofthispublicationareforgeneralinformationpurposesonlyandshouldnotbereliedonas,orusedasasubstitutefor,professionaladviceconcerningaparticulartransactionorspecificsetofcircumstances.EachofCorbettKeeling,DechertLLP,KleinwortHambrosandtheirrespectivelicensorsthereforedisclaimallliability(whetherarisingincontract,tortorotherwise)andresponsibilityarisingfromanyrelianceplacedonsuchcontents.
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