From the country’s perspective
When examining the reason for failure at a business level, the management, the cost base and the fi nancial structure are three obvious places to look. Taking each in turn, the national economic and political status is alarming.
The first place to look is at the people who are making the decisions. Management who are unqualifi ed for the task in front of them have a larger risk of failure. That would seem unsurprising to most, yet the electorate has just given two young, inexperienced, ex-PR executives the top jobs at “UK Plc” – an odd choice.
Overheads have been swollen to the extent that the national defi cit totalled just under £170bn in 2009/2010 – an unsustainable proportion of income. It doesn’t take trained accountants or proven entrepreneurs to understand the need to spend proportionally less than your competitors.
Another obvious parallel is between the politicians’ and business leaders’ desire
to borrow beyond belief. UK national debt stands at approximately £800bn; in simple terms for every pound of goods and services sold, the country owes around 55 pence
to creditors on the balance sheet. If we measure this by creditors held off balance sheet – notably pensioners and the recipients of PFI funding, totalling an additional
£1.13 trillion – then it illustrates a nation fundamentally and catastrophically insolvent. Many businesses have improbably large debt burdens – endurable only because of extremely low interest rates.
The business perspective
There will always be poorly managed businesses, both in boom and bust times, primarily because there are always going to be poor managers. However, given the widespread effects of the recession combined with the aftermath of the global banking crisis, poorly directed and poorly fi nanced companies are more likely to be encountering funding crises of their own. This is where the politicians’ failures and those of the individual managers are meeting head on. Hence the opportunity for turnaround.
Turnaround investing
Turnarounds are not simply over-geared entities which are languishing under a capital and interest repayment burden, which is the result of a heroically structured MBO in 2005-2007. Those businesses are not in need of turning around, simply recapitalisation and resuscitation.
By the same token, turnarounds are not archaic companies wheezing under the competition of new and effi cient business models. Those businesses do not deserve to exist – and when interest rates rise, many will not.
Turnarounds are companies with fundamentally decent business models generating losses and burning cash. Mismanagement is usually the primary driver for the losses – strategic, financial and operational mismanagement are common – all three together poses an obvious opportunity.
Investing in such companies can be, and often has been, very profi table, as obviously companies near extinction do not command much of a price, whereas healthy profi table ones deserve, and usually get, a much higher valuation.
Turnaround investing is diffi cult, risky and the requisite combination of experience and cash is rare. Traditional investors shy away from turnaround situations because often available information is poor or misrepresented, timescales are short, the technical legal, fi nancial and taxation skills are demanding, time pressure is ever present and most of the people are inevitably stressed. Experience helps a lot, as it enables you to deal with things quickly and effectively.
Better capital
Better Capital looks for turnarounds where operational realignment or change is required. In many cases the necessary restructuring steps are already known to the management but they lack either the backbone or capital to make the diffi cult decisions.
A handful of profi t-enhancing steps need to be identifi ed very early on. If they aren’t easily identifi able then they may not exist.
Identifying the process to profi t may well be easy but successfully implementing it is most defi nitely not. Skilled and experienced turnaround operators are hard to come by.
Successful turnarounds often require the slimming of a swollen cost base and the cessation of sales of low or no margin products. A short term reduction in revenue but increase in profi tability is common.
With rising mortality rates, market turmoil, tough regulation and business underperformance, an increasingly common problem is that of the cash and profi t erosion caused by a defi ned benefi t pension liability. Often insolvency processes are the only way to free a business from these problems entered into by previous owners.
Turnaround investing often yields great successes; for the funders, the operators, the management team and the customers and suppliers to the underlying businesses. Greater risks can often bring better results and more excitement.
The misery of the recession and fi nancial crisis will provide a lot of opportunity for the next few years and Family Offi ces can be well placed to capitalise on such entrepreneurial situations – often having well outperformed institutional lenders in previous recessions themselves.
There is money to be made.