By Darren Forshaw, Partner, Endless LLP
I’m an avid watcher of Masterchef and I even record it. Embarrassing, I know, but I feel better for coming out. The reason I mention this is that on a recent episode, the chefs were required to truss a chicken before gutting it. It wasn’t pleasant to watch, although the chefs seemed fine with it.
It must be a familiar feeling for UK Ltd, however, in the inclement funding environment. Listen to corporates at conferences, roundtables and seminars these days and it’s clear that “trussed and gutted” is how they view their treatment by UK clearing banks.
With limited or no refinancing alternatives, except for the very best companies, the average board of directors is finding long-term bank support difficult to obtain and very expensive. There is a new approach to covenant breaches (I have heard one UK bank describe covenants as a repricing option) and intransigence towards facility expiry timeframes. Equity concessions or equivalent are sometimes even a feature of term sheets – the prices being driven are too high and businesses are angry. The rubicon has been crossed. I have no axe to grind with UK banks and, having survived the last couple of years, I can understand their approach to lending.
Ask yourself how you would react if you sat on the RBS or Lloyds credit committee, having been mercilessly kicked for “mistakes” you were deemed to have made in the past. Not unreasonably, you wouldn’t want to be thought of as likely to make the same mistakes again. While banks justify this risk-averse approach to lending and high fees by talking of “market rates” and their need to rebuild balance sheets, corporate customers see this as a tax to fund losses they did not cause. The battle for trust is being lost – some in banking circles will argue that this is unavoidable and a cost of survival.
As a turnaround investor I have seen some unpalatable decisions taken out of necessity, but I do not accept that this is the banks’ only course of action – things are not that bad. The decision to recover profits quickly, because they can, is being taken at the cost of long-term customer trust, and this is potentially a legacy that UK banks will regret. I hope that trust in banks is rebuilt, but I am unsure it will be and suspect that the vitriol of those that have felt the ignominy of being trussed will continue. Unexpectedly, however, this presents a unique opportunity for private equity.
Having been one of the first industries profiled in “I’m a celebrity MP, get those money grabbers out of here!” it feels as though private equity’s time to put up or shut up is upon us. The endgame is nigh. With SMEs struggling for funding support from traditional sources and the majority of UK private equity focused on this precise arena, the opportunity to prove our value to the economy has never been more defined.
This does not mean replacing banks, which of course we cannot, but we must show that at a time of great opportunity we evolved as investors, supported UK corporates when others would not and sought a fair return for the risks taken. We must also win the PR battle, making sure the average man in the street understands at least a snippet of the differences private equity has made. It’s time to publicise key success stories and not get bogged down in boring statistics that nobody trusts on how funds have performed over the past decade versus the FTSE.
Simon Walker at the BVCA has led a remarkable action to recover private equity’s reputation. As he moves on, we need to ensure that the momentum is not lost. The next few years will give us the opportunity to show how we made a difference, that private equity can be trusted and (whisper it) is an industry the UK can be proud of. Frankly, if we cannot prove we stepped up or don’t take on the PR challenge, we have nobody else to blame. Originally published in Real Deals on 10 October 2010.
Originally published in Real Deals on 10 October 2010