Insights
By: Richard Hill
Decisive action is key to coming out on top in a crisis – Richard Hill
Private investors have key role in supporting those businesses that do
One lesson we can learn from the Global Financial Crisis, is that it was those companies who stepped up and took decisive action, who thrived in its aftermath. Others drowned.
The two situations are very unalike of course. The Covid-19 crisis has different causes and consequences and will no doubt have different long-term outcomes. The similarity, though, is that the situation will produce winners and losers in the investment and corporate community: those who got it wrong and those who got it right.
This time, decisive action for companies could have taken many forms. Whether it be taking advantage of government schemes, raising capital to shore up their balance sheets, acting swiftly to change their business models or restructure their operations, those decisions may turn out to have been make or break. For some it may have simply accelerated decisions that they would otherwise have put off until later. Either way leaner, more efficient companies will emerge.
For the private investment market, those who have been successful will be identifiable according to what sector they invested their capital into, the degree of leverage they employed and at what stage in a company’s lifecycle.
Private investors with a bias towards heavily impacted sectors will be disproportionately affected, but those whose investment case is overly reliant on leverage or multiple expansion for their base case returns will also suffer. The same is true where investors have simply invested at inflated valuations, which has been a bit of a feature in recent years.
Restructurings will be required leading to potentially substantial equity losses or a requirement for shareholders to invest further to protect their position. Those with robust business models and the ability to change or restructure decisively, however, will survive. Their success will be a good thing for the health of our economies.
Private capital has a significant role to play in helping businesses recover and grow in the coming years. We are already seeing a structural shift from listed public equity to a greater number of privately owned companies and this looks set to continue.
In order to be able to help in the UK, private capital needs more help from the government in terms of the structure of support finance. While helpful, the current schemes are not the answer, particularly for earlier stage companies, which, after all, are the ones that will drive the future economy.
Private investors in the UK benefit from schemes such as the Enterprise Investment Scheme (EIS), which offers potentially significant income tax and capital gains reliefs to those investing into an eligible business. But with government schemes focusing on debt finance and the Future Fund requiring matched funding from private investors, such reliefs are not available. Much greater amounts of government capital are also likely to be required.
Entrepreneurial families allocating capital to private equity investment will also play an important role. They are the ones with long-term investment horizons, with the operational experience of managing their own business through challenge and crisis. Their role will be more crucial than ever in supporting businesses in the new environment.
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