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It’s a Pandemic with a capital P, right? Surely no-one saw this coming? This LBO model is commonplace and proven to work, right? We’re entitled to State Aid too, right? Yes, Yes, Yes… maybe not.
The Financial Times reported in a non-opinionated article that Private Equity-owned companies have missed out on bailout loans. It cited a quote from a managing partner at Graphite, the firm that owns a majority stake in Hawksmoor, stating unequivocally that the upmarket restaurant chain represented “exactly the sort of situation in which government aid should apply, but it’s the application of technical rules that prevent it from happening”.
Yet is this fair? Graphite’s portfolio is saddled with debt; the use of debt minimises their share capital and interest payments on that debt can result in statutory losses even if their operations are generating cash.
The result? Less to collect for the taxman, ultimately leading to less funding to distribute in CBILs money, or furlough payment, or for the next group clamouring for state aid. Rules may have changed and there are other reasons as to why PE firms use loan notes, but there’s no doubt who the winners and losers are in deals like this from the taxpayer’s perspective.
It’s easy to bash PE firms as greedy and out of touch; yet further down the food chain the same type of behaviour is easy to spot. Indeed, the most common clichés from an embattled SME Director, let’s call him/her Jo Bloggs of SME Ltd, is that “companies like mine are the reason that CBILs has been rolled out” and “the bank just doesn’t get it”.
The key premise of CBILs was that businesses must have been viable entities were it not for COVID. Given the limited number of CBILs-accredited lenders and their inherent pickiness, it was hardly a surprise that so many SMEs were left scratching their heads when they were turned down.
At this point, of course, other more viable schemes came into play. BBLs in particular proved to be a tonic for many businesses, without the rigmarole of applying for CBILs. Inevitably, well run businesses who keep accurate management accounts, updated projections and practice transparent accounting have been rewarded in large (providing, of course, you bank with the right bank).
If Jo Bloggs has rinsed the company of cash through director’s loans, poor strategy and dodgy corporate governance, there’s a good chance SME Ltd will be on the end of a hiding once lockdown finishes, and it’s not the Banks’ job to dole out the millions just because they can.
Furloughing staff was another a hugely important tool to help businesses withstand pressure. However, at what cost? It will be very interesting to see whether businesses will be rewarded for repaying furlough funds early (as Taylor Wimpey publicised recently).
It could become an important weapon for businesses to use in the future in seeking R&D claims for instance, or deferring VAT payments in future lean times. The scheme is totally open to abuse; directors furloughing themselves, staff being forced to work despite being furloughed, companies delaying bringing back staff to maximise profit at the expense of staff who are effectively doubling up… it will be interesting to see if the government has the capacity to punish rule breakers.
At the moment, the government is sticking to carrot and avoiding stick, evidenced by the recent announcement that the furlough scheme will be replaced with a one-off £1,000 reward for each worker retained for three months, regardless of whether their job is under threat or not.
At times of crisis, the risk-reward balance becomes harder than ever to meet. Erring on the side of caution when it comes to handouts from the government might just stand businesses in good stead once the dust has settled in 2020.
