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E-scooters at a crossroads
E-scooters at a crossroads

Archive for October, 2019

A long time in politics – 20 years of political due diligence

This article appears in the current 20th anniversary edition of Real Deals.

Cast your mind back to 1999. Tracey Emin’s My Bed was shortlisted for the Turner Prize, Manchester United won the treble, and the Millennium Dome was opened (to mixed reviews) as the cornerstone of the UK’s millennium celebrations.

Politically, it seemed like a simpler time. Tony Blair’s New Labour was still riding high in the polls, having won an historic landslide majority of 179 seats two years previously on a platform of progressive social reforms.

Two party, centrist politics was the order of the day, with the Labour Party and Conservatives looking for ways to capture and hold on to the centre ground. Labour had its ‘Third Way’, founded on establishing a modernised social democracy, passionate in its commitment to promoting social justice. The Conservatives, for their part, were trying to reconcile historic Thatcherite principles with the demands of a more socially liberal age. This process would reach its peak with the one-nation principles of social obligation that came to characterize the Cameron years in No.10.

The political philosophies of the end of the 20th century seem something of an anathema at the end of 2019, where political parties appear no longer interested in reaching out beyond their core support base and are retrenching to each represent a smaller and smaller subset of the electorate.

How did we get here? The answer is simple: if a week is a long time in politics, then 20 years is a millennium. Trying to find an answer to why did we get here is much more complex.

The journey from political stability to relative instability over the last 20 years has been punctuated by political risk flashpoints, all of which have driven us closer and closer to the ‘new normal’ in which we find ourselves.

The ongoing uncertainties around Brexit is the latest, and perhaps most obvious, example of a tidal wave of political change. But other events, domestically and globally, have also shifted us further and further away from where we once were, tilting the political system off its stable pre-millennium axis.  It has created an environment where political decision-making has become, on the face of it, less predictable, while presenting greater risks to those affected by them.

The UK economy still bears the scars of the 2008 financial crisis, with the subsequent recession bringing about austerity policies that are still being heavily felt across the public sector. Jeremy Corbyn’s Labour Party, promising a politics ‘for the many, not for the few,’ is perhaps the best example of an electorate tired with a political class mired in scandal and perceived to be ignoring the views of much of the population. The same can be said for UKIP, and latterly the Brexit Party.

Devolution of policymaking to Scotland, Wales, the EU and city regions has meant powers are more dispersed than ever. The creation of the first peace-time coalition in 150 years has changed the way we think about parliamentary democracy and accountability in the UK.

Demographic and behavioural changes, lifestyle factors and the rapid evolution and democratisation of technology have all played their part in creating the current disequilibrium in politics, having changed how we interact with the world, and how we engage with political processes and each other.

These changes, both individually and in concert, have brought us to a new political risk horizon, where decisions taken hour by hour, if not minute by minute, significantly shape the external environment.

It’s no longer enough for investors to tune into the ten o’clock news or the Today programme to understand policymaking and political priorities. In the past we have had the luxury of long periods of relative political stability where trends were easy to follow and predict; decisions made by policymakers were at least logical, even if we disagreed with them. 24-hour news, an omnipresent social media, and our permanent connectivity to emails and messaging apps mean that crises, comment, response and reactions now appear to happen at alarming speed, and political agendas seemingly evolve overnight.

20 years ago political due diligence didn’t exist in the way we know now. It has understandably become a key part of the M&A process as investors seek rationality in what appears to be a chaotic and disordered political reality.

That’s why political due diligence is now more important than ever. While there is method in the political madness, it’s harder to find and to follow. For investors to make informed decisions, based on real insight and understanding, they need specialist support.

WA Investor Services is at the forefront of providing that support, helping investors understand the risk and impact of political, policy and regulatory changes on their portfolios and potential assets. We keep them up to date with the fast-paced and ever-changing political world. We forecast and scenario plan for different outcomes and provide ongoing intelligence to track issues as they develop. In an era of rising political uncertainty in the UK, across Europe, and on the international stage our services help investors accurately price in risk.

The quality and salience of our advice is reflected in the sustained, extraordinary growth in demand for our services, and the regularity with which clients bring us on board time and time again as a key part of their transaction team.

If we know how we got here, and we’re some way to understanding why we got here, the next question must be what do we do now? The savviest investors will be those that quickly understand that restless, fractured politics is the new normal, and embrace the opportunities that those changes bring. Michael Gove was wrong – we need experts now more than ever, particularly when it comes to unpacking the nuances of politics in 2019 and beyond.

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As Ofgem turns up the heat, what will reforms mean for the energy sector?

Parliament may be paralysed, but in the world of regulation, change is afoot. In a bid to catch up with the way the energy market is evolving, Ofgem has announced a raft of new proposals to better protect consumers from the possibility of their supplier going into administration. New plans under consultation until December 2019 would require small energy supplier to meet more stringent requirements to take on new customers, enhance financial disclosure rules and strengthen the safety net for customers in the event of a supplier’s failure.

Under these new reforms, energy suppliers would have to prove they have the right resources for customer growth when they reach thresholds of 50,000, 150,000, 250,000 and 500,000 to 800,000 customers. Ofgem is also planning to tighten its “fit and proper” requirements, with more scrutiny on the fitness of senior management staff, and bringing in a new openness and cooperation principle.

The new proposals, published at the beginning of the week are in response to over a dozen energy providers going into administration since January 2018 – Toto being the latest to cease trading on Wednesday – and the bill that has been picked up by customers as a result of these collapses.

If the proposals are accepted, it would bring existing energy suppliers into line with new market entrants who have been under additional scrutiny since similar proposals were introduced in June 2019. The final decision on whether to take the proposals forward will be taken in early 2020, but implementation is unlikely to take place before 2021.

Ofgem have long been caught in a dilemma between protecting consumers from market failures and encouraging competition in the energy sector. These proposals are an attempt to find a balance, but as always, the devil is in the detail, and there are some differences of opinion within industry about what this detail should be.  Unsurprisingly, while energy retailers have overwhelmingly supported the ambition of Ofgem, there are different ideas on how financial and operational resilience should be measured.  Where the dial comes to rest will undoubtedly affect what the sector looks like in terms of the number and scale of market participants, and the industry’s overall stability.

Earlier this month, Ofgem warned that Delta Gas and Power, Gnergy, Robin Hood Energy and Toto Energy would be unlikely to meet their Renewables Obligation late payment deadline. Toto ceased trading shortly after and as the example of Solarplicity, which collapsed in August shortly after it was banned from taking on new customers earlier in the year, helps illustrate, Ofgem has already shown that it is not afraid to step into the market where it thinks necessary to do so.

These proposals will give the regulator more scope and power to intervene and could therefore have serious consequences for the industry.

For more information  on what impact these proposals could have on the domestic energy market and advice on how you can engage and prepare, please contact our investor services and specialist energy team.

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How could investors benefit from Boris Johnson’s passion for science?

Yesterday saw the unusual event of a government with a majority of -43 putting forward a Queen’s Speech to kick-off its legislative programme for the next parliament. This has created the possibility that we will see a Prime Minister lose a vote on a Queen’s Speech for the first time since 1924. Given these parliamentary mathematics, a general election taking place over the next few months is extremely likely. Despite Johnson’s inability to win a vote in the House of Commons, significant uncertainty about whether he can agree a Brexit deal with the EU, and a healthy dose of personal scandal, Boris Johnson is (currently) still favourite to be Prime Minister following a general election.

Since becoming the leader of the Conservative Party in July, Johnson has attempted to establish the Conservatives as a ‘post-austerity’ party. The spending taps have been turned on, with the Chancellor Sajid Javid announcing the largest increase in public spending for 15 years in September’s spending review. While many of the spending pledges have focused on the NHS and education, Johnson’s government has signalled its intent to financially support specific industries to help the UK succeed economically outside of the EU. The ambitions set out in the spending review and the Queen’s Speech may be on hold for now, but they offer valuable insights into the industrial strategy and economic priorities of a potential Boris Johnson government.

In September, Boris Johnson made a commitment to ‘supercharge science’ through more liberal immigration rules and increased government funding for R&D. The emphasis on science is believed to be driven by Johnson’s Chief of Staff Dominic Cummings, who is reported to have been behind the government’s new fast-track visa rules to attract leading scientists to the UK. Johnson has also set out ambitious funding plans for the science and technology sector. September’s Spending Review committed the government to ensuring total R&D spending increases from its current level of 1.7 per cent of GDP to 2.4 per cent by 2027, which would mean an extra £6 billion at the current rate of economic growth.

As part of this effort to boost long-term economic growth through increased R&D spending, the government has made a number of specific funding and policy pledges to support the development of UK science and technology. The Queen’s Speech announced the creation of a National Space Council to launch the UK’s Space Strategy, as well as a new funding body based on the United States Advanced Research Projects Agency. The new body, a brainchild of Cummings, will aim to cut bureaucracy and back emerging technological fields. Johnson has also stated the government will provide over £200 million to help deliver the world’s first commercially viable nuclear fusion power plant by 2040.

Johnson’s plans are bold and represent a clear attempt to shine a path towards the promised post-Brexit sunlit uplands, while also compensating for the loss of significant amounts of research funding from the EU. In the wider context of the UK’s long-term economic performance, a focus on science and technology certainly makes sense. The UK’s most successful exports have always been high-value, capital and research-intensive goods, such as the aerospace industry, and any successful industrial strategy will seek to build on this platform.

The details of the R&D funding framework Boris Johnson will seek to introduce are due to be finalised this autumn and will set out the opportunities available for investors focused on the cutting edge of technology. However, to take advantage of the government’s strategy, investors will need to be aware of the wider political trends that will dictate how and where any additional funding is directed. While the government wants to reduce the amount of bureaucracy in how science and technology is funded, the process itself will still be a political one.

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