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

Archive for the ‘Private Equity’ Category

Mission Zero: Chris Skidmore’s independent review and America’s Inflation Reduction Act

America’s Inflation Reduction Act (IRA) is one of several major pieces of legislation underpinning the bold new economic agenda of the Biden administration. Its name is misleading as it will have little impact on US inflation but is the combination of a domestic industrial policy and an ambitious strategy for net zero, offering $369 billion in investment and tax breaks over the next ten years.

Across the pond, the IRA has been sharply criticised by UK and European politicians and policy wonks due to strict “made in USA” rules that would disqualify European based companies from generous tax breaks and lucrative investment opportunities. UK Trade Secretary, Kemi Badenoch described the legislation as protectionist, stating “it is onshoring in a way that could actually create problems with the supply chains for everybody else.” It risks incentivising companies to re-locate to North America and diverting investment away from the UK and Europe.

Or to quote the Chair of the UK’s Energy Digitalisation Taskforce, Laura Sandys CBE, “the IRA is a game changer… big investors are saying ‘US first, Europe second, Asia third and if you’ve got any spare peanuts at the end of it maybe you can look at the UK.’”

As the US Treasury and Department of Energy are expected to publish IRA guidance in March, UK and EU energy ministers are haggling with their American counterparts to secure concessions and minimise the risks to their respective energy markets and economies. For UK investors, it also prompts questions about the state of play closer to home, with the Conservative Government’s approach putting the UK at risk of falling behind in the global race to maximise the growth potential arising from net zero.

Green leadership in the UK

To rephrase an idiom, the Government’s approach could be described as ‘all wind but no power’. Whilst the UK’s net zero ambitions are well rehearsed by politicians and have been written into law, the policies and funding fail to match the rhetoric. This has created a vacuum which the Labour Party is filling with its Green Prosperity Plan and the promise of £28 billion annually for capital spending on projects designed to tackle climate change.

The Government will need to move quickly for two reasons. Firstly, the High Court ruled in July 2022 that ministers need to explain and substantiate how they plan to deliver on the Government’s Net Zero target by April 2023 following a successful judicial review by climate change campaign groups.

The Court-ordered report is likely to be wrapped up with Government’s response to the independent review of net zero, published in January 2023 and chaired by former energy minister, Chris Skidmore OBE. Skidmore’s 340-page review contains 129 policy recommendations that present the economic case for net zero as “the growth opportunity of the 21st century”.

Secondly, as highlighted by Skidmore’s review, many of the UK’s competitor economies have already made bold and ambitious interventions. Both the USA’s IRA and the EU’s €250 billion Green Deal Industrial Plan provide significant funding and the long-term policy certainty that is mission critical to securing private sector investment in their respective economies. If UK investors are left out in the cold, the UK risks not only losing out on new opportunities, but also current economic activity moving away.

What next for investors?

UK investors can expect the Government to act imminently. Ministers are acutely aware of the competition concerns arising from the USA’s IRA and will want to exploit the UK’s pre-existing market strengths. While the UK cannot compete with the sheer industrial capacity of North America, it is likely ministers will seek to capitalise on the UK’s strong science base and highly specialised expertise in both clean technologies and green finance.

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Gold in the Garbage: Private Equity turns to waste

The waste sector is making headlines in the private equity world as investors are searching the rubbish for opportunities. Admittedly, it is not the most glamorous of industries, but there is good reason for the spiked interest in waste and recycling and it is likely to gain traction in the coming years.

The £1.4 billion bid for waste management company, Biffa, is the latest move in the rush of investment into waste and recycling. This follows moves by KKR to buy Viridor (waste management), Macquarie to buy Beauparc (recycling services) and Ancala to acquire Augean (hazardous waste management). Reconomy (waste broker) was acquired by EMK Capital in 2017 and has since embarked on an aggressive expansion strategy to become one of the sector’s biggest operators.

The pandemic has accelerated this trend, increasing the attractiveness of critical infrastructure and shining a light on its stability in uncertain times. Since then, the regulatory and political direction of travel towards the circular economy has boosted investment appetite.

The government wants us to recycle more, especially as rates have recently plateaued after years of rapid growth. It also wants to tackle the wave of plastic being sent abroad for ‘recycling’, which is landing atop toxic piles of waste in poorly regulated countries. To this end, plans include standardizing waste collections, introducing a deposit scheme to boost recycling of plastic bottles, and imposing ‘polluter pays’ rules that will force packaging makers to incorporate the cost of recycling into their products. According to analysts, the industry will have to invest up to £10 billion to fund the infrastructure needed to meet these commitments. Jacob Hayler, director of the Environmental Services Association, said “it definitely feels like a very dynamic, exciting growth area at the moment, with plenty of opportunity to invest.”

The bio-boom

Companies with a strong portfolio of recycling or energy from waste (EfW) infrastructure are experiencing high profit margins and levels of growth, proving lucrative for private equity backers. The current energy crisis is favouring the domestic supply of energy and the government’s focus on a windfall tax for large oil companies has allowed many EfW plant operators to reap the rewards of higher prices. Sector specialists have explained that many of these plants were modelled on an expected power price of approximately £60 MWh, but current revenues are about £200 MWh, so income has tripled, turning biomass and EfW plants into green cash cows. As a result, large investment firms specializing in infrastructure are circling such projects. For instance, Copenhagen Infrastructure Partners has active investments in SSE’s Slough Multifuel project and is part of a joint venture with FCC Environment for the Lostock EfW plant.

The demand for recycled materials is also growing. London-based PE firm, Exponent, formed the wood recycling and biomass supply specialist, Enva, after acquiring DCC Environmental. Following an acquisition spree, it is now one of the largest wood recycling firms in the UK and supplies a large amount of recycled material to biomass plants which has proved highly lucrative. The site also turns waste into materials for the panel board industry and animal bedding products, the latter for which it won the Recycling & Waste Management Circular Economy Award in 2019.

The green rush

Investors’ interest in waste management is underpinned by the increasing prioritization of ESG in investment decisions, and the swelling of ESG funds globally. Markets such as gas, electricity and water are also more mature and therefore harder to penetrate. The fact that there are only a few large players in the waste space, of which relatively few are listed opportunities, only adds to the excitement. That being said, the market is becoming more sophisticated. Biffa has been silently snapping up smaller players, spending £260 million on 25 deals since 2016. Further consolidation is likely to gather pace as regulations are tightened and operators try to scale up to mitigate supply chain issues; doing so helps reduce costs and carbon footprints.

Investors should be mindful that waste management contracts tend to be short term and volatile, unlike in wind power where long contract terms have helped fuel a construction boost. The sector is also not immune from the cost-of-living crisis, as recessions tend to see households produce less waste. Nevertheless, the political climate is such that investors should be excited about waste management assets that can offer steady returns and can demonstrate green credentials.

To discuss the current policy and regulatory environment for waste, EfW and recycling issues in more detail please email Thea Southwell Reeves on

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The Government’s Food Strategy: a fork in the road

In the build up to the Government Food Strategy, the Prime Minister promised bold action to address the problems in the UK’s food system. This week, health and sustainability campaigners have voiced their disappointment that not all of Henry Dimbleby’s recommendations are being adopted, including the proposed salt and sugar tax.

Seemingly ‘hollowed out’, the publication is seen by many in the agri-food sector as a holding response for a serious long-term strategy that has been conditioned by Conservative backbenchers who the Prime Minister considers key to his survival. In other words, a tactical short-term response to a set of political pressures. Published against a backdrop of the cost-of-living crisis, the effects of the war in Ukraine, and recent party politics, the Food Strategy represents a notable departure from long-term priorities such as environmental sustainability and tackling obesity. Instead, the Strategy focuses on technology and innovation, job creation, productivity. In short, the government sees growth in the UK’s agri-food sector as the remedy.

The government says it is backing British farmers to boost domestic production, increase employment and grow the economy

At the heart of this shift is a concern about food insecurity. Not necessarily as a result of climate change and other environmental concerns (although those can’t be ignored for much longer), but from the impact of the war in Ukraine on food supplies and prices. As a result, the government has pivoted away from longer standing political priorities and is now focusing on plans to strengthen the resilience of supply chains and boost domestic production to help protect against future economic shocks and crises.

While wars don’t necessarily create trends, they do tend to accelerate them. In the case of the war in Ukraine, it has rapidly accelerated the desire of Western governments for freedom from supply chain dependence on Russia and China. It has also increased the trend for food nationalism globally which has lengthened the list of countries Western governments can no longer rely on for food imports as a result, and it has sped up trends towards market intervention. The last significant spike in food prices was in 2010/2011 following a heat wave in Ukraine which impacted crop harvests and can be seen as a catalyst for riots in middle income countries and the Arab Spring, the effects of which are still being felt. The impact of today’s crisis has the potential to be far greater and will be felt particularly acutely in the UK because we have relied so heavily on global markets for cheap food imports.

Agri-food: a growing sector

While new funding programmes to drive innovation will be welcomed by the sector, the government is playing catch up with investors who have recognised the potential of agrifoodtech in recent years.

As with most modern industries, technology plays a key role in the operation of the agri-food sector. However, the pace of innovation has not kept up with other industries and, according to research conducted by McKinsey, agriculture remains the least digitized of all major industries.

The industrial agri-food sector is also much less efficient than others and more susceptible to the demands and constraints being placed on it. A growing global population, climate change, environmental degradation, changing consumer demands, limited natural resources, food waste, consumer health issues and chronic diseases all mean the need for agrifoodtech innovation is greater today than it ever has been, and creates opportunities for entrepreneurs and innovators to create new efficiencies in the value chain. Many of the agrifoodtech start-ups attracting investors are aiming to address some of these challenges, identifying innovative solutions to issues such as food waste, CO2 emissions, chemical residues and run-off, drought, labour shortages, sugar consumption, distribution inefficiencies, food safety and traceability, farm efficiency, and unsustainable meat production.

According to the 2022 Agrifoodtech Investor Report, $57.1 billion was invested in agrifoodtech companies in 2021, an increase of 85% on the previous year. 2021 also saw the UK’s highest ever deal flow with UK-based deals reaching £1.3 billion in value, the highest since data has been collected and up from £1.1 billion of investment in 2020. The UK sits 5th in the global ranking of deals by country, just behind Germany, India, China and the USA, though the UK government has set out its intention to be a world leader in this space. While investment in so-called ‘upstream’ technologies (such as on-farm tech, tools and services) remains high at around $20m, there is a shift beginning to emerge, with interest now moving towards farm management software, indoor farming, ag-biotech (such as gene editing), and e-grocery (which attracted a third of all global sector investment).

The new normal

The challenges with our food system such as supply, distribution and pricing have been propelled by the pandemic, complicated by Brexit, accelerated by the war in Ukraine, and intensified by the cost-of-living crisis. In many ways, this has created a completely different backdrop for the UK’s food system than when Henry Dimbleby published his recommendations to government almost twelve months ago. Many commentators will argue this is why the Government Food Strategy appears to have been watered down in comparison with its original intentions.

Nevertheless, many investors have already recognised the importance and opportunity the agrifoodtech sector presents in terms of investment potential, with many more likely to follow suit. The changes and challenges to the food system we are witnessing today are not temporary. Rising prices, food nationalism, and supply chain challenges are not a blip in the road, they are the new normal. This reality means the agrifoodtech sector is likely to provide an abundance of opportunity for private equity to back exciting, innovative, and high-impact ideas that deliver the ground-breaking change in our food system that campaigners are calling for.  Although this Food Strategy gives the agri-food sector ideas to work with and push the government on, it is also clear that we are now unlikely to see a properly considered long-term strategic response to food insecurity this side of the election.


To discuss the government’s Food Strategy in more detail, please email Thea Southwell Reeves on

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Holy guacamole! Vegan food for thought this Easter

2021 saw M&A in the food and drink industry bounce back from a tumultuous 2020 laden with supply chain issues, challenges from Brexit, and workforce disruption. According to findings by commercial law firm EMW, the value of M&A deals for UK food and drink companies jumped 950% to £4.5 billion in 2021, up from £430 million the previous year. Interest from private equity helped drive the rise in M&A. In total, 24 UK deals in 2021 were PE backed, making up 42% of M&A deals in the sector. This is up from 31% in the previous year.

Whilst plant-based, free-from and sustainable food and drink have been upward trending for the past few years, it is now clear that they are entering a new stage of growth, with M&A transactions rocketing in the last year. Investments in the ‘low and no’ alcohol and premium soft drinks market also continue to thrive; consumption of these is currently forecast to grow 31% by 2024. And across all subsectors, transactions in healthier and low sugar options continue to rise as trends point towards healthier food and drink options being more attractive to consumers. This is mirrored by a decline in food-to-go, confectionery and frozen foods transactions.

You need only visit the seasonal aisle of your local supermarket to see that vegan easter eggs and sugar-free chocolate are the big trends this Easter, and initial market data is also signaling this. According to research by B2B online marketplace ShelfNow, online searches for ‘vegan easter eggs’ in the UK rose by 79% between 2020 and 2021, while online searches for ‘sugar-free’ reached their highest point in the last five years. To this end, the UK has launched the largest number of food and drink products with a ‘no added sugar’ label in Europe.

Sustainability in food and drink is also catching our attention, with demand for British produce and environmentally-friendly products on the rise. The emerging agritech subsector is booming, with new investment in the global market receiving a record $10.5 billion injection. The UK continues to lead the way in Europe, with the 2021 AgriFoodTech Investment Report outlining $1.1 billion of investment and 164 deals recorded in 2020.

This could be explained by private equity’s spiked interest in environmental, social and governance (ESG) issues over recent years, as investors increasingly acknowledge the role such factors play in influencing M&A decision making. There is now widespread recognition in the investor community that ESG considerations continue to move from after-thought to essential hygiene factor. There is certainly a recognition that investment should align with an organisation’s embodied values. We witnessed this in action recently when many businesses ceased operations in Russia following its invasion of Ukraine. Furthermore, the adoption of a formal ESG strategy is increasingly seen by some investors as a value-creation mechanism. Shifts in mindset like this are closing the gap between the corporate treatment of ESG and its standing within the investor community. With organisations returning to growth mode, we expect the role of ESG to continue to increase at pace.

Though it may seem ripe for the picking, investors with an interest in the UK food and drink market should be mindful of navigating regulatory and policy changes in this space.

The Covid-19 pandemic has altered the government’s approach to addressing obesity. As part of the Obesity Strategy, the government will introduce a ban on advertising foods high in fat, sugar or salt (HFSS) on TV before 9pm and a total ban on online advertising. Restrictions on the placement and promotion of HFSS products in stores will also be introduced. With the spotlight growing on childhood obesity, these issues are firmly set in the political landscape.

Similarly, the government has outlined proposals for reducing plastic waste in England, which will impact food and drink packaging. Plans include banning certain products, a new Deposit Return Scheme for drinks bottles and an enhanced producer responsibility regime to incentivise a reduction in plastic packaging. The Plastic Packaging Tax came into effect on 1 April 2022, introducing a levy on plastic products containing less than 30% recycled plastic content. As this regulatory direction of travel continues, under mounting public pressure and in light of increasingly disturbing IPCC climate reports, investors should expect regulations to become increasingly restrictive.

Investors should also expect the rising prices of energy and raw materials to be a significant issue in 2022. Russia’s invasion of Ukraine and the subsequent sanctions, trade restrictions and supply chain disruption are likely to translate into rises in food prices and temporary shortages, according to the Food and Drink Federation. We saw global wheat prices spike at over 80% higher than last year, while sunflower oil becomes rapidly scarce. Global transport problems and workforce shortages will also continue to be disruptive to the industry and full custom controls introduced for goods moving between the EU and UK are causing headaches for food and drink importers.

Nevertheless, the UK food and drink market is clearly at a fork in the road.

We expect private equity to capitalise on this in the coming year. Plant-based, free-from, low sugar, healthy food and drink with a low environmental footprint is likely to bear the most fruit, and that should give investors plenty of food for thought this Easter weekend.


To discuss the government’s current approach to food and drink regulation, please email Thea Southwell Reeves on

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Statement of Intent: Rishi goes from spender to saver…for now

This article originally appeared in Real Deals on 24 March 2022. 


Rishi Sunak might have hoped that his first truly post-Covid fiscal statement could be one brimming with sunny optimism. With the Perspex screens, masks and social-distancing markers gone from the Commons, he perhaps imagined enjoying his time in the spotlight buoyed by impressive growth figures, record employment and harmony throughout the land.

Instead, as the Chancellor rose to deliver his Spring Statement he was faced with an unenviable challenge. Rising energy prices, global disruption to supply chains –exacerbated by the Russia-Ukraine war – have driven up living costs to the point of crisis. Add to this the threat of inflation creeping into double digits before too long and Sunak’s task begins to look Sisyphean.

With this context in mind, it was crucial that the Spring Statement needed to outline the government’s plans for addressing immediate economic imperatives and set out a coherent plan for tackling the economic headwinds that threaten to cause economic hardship for millions over the coming months.

And that’s what we got, to an extent. Sunak’s approach sought both to meet the short-term challenges which the economy faces and to demonstrate something of his own ideology in charting a course for the longer term. Since he took office in No.11, the Chancellor has had little opportunity to set out his stall as a true fiscal conservative. This Statement was a marker, outlining a multi-year plan towards economic strength and sustainability, and looking beyond immediate tax rises and medium-term tax cuts.

Saving today, but more spending likely in the autumn

Sunak’s tone was, for the most part, sombre. He repeated the government’s commitment to provide military and humanitarian resources to Ukraine and to ongoing sanctions on Russia, but warned that this would not be cost-free. He told MPs to prepare for the economy and public finances to worsen – “potentially significantly”. The OBR feels similarly, and has revised its GDP growth forecasts downwards, to 3.8% in 2022 and 1.8% in 2023.

Sunak set out headline-grabbing plans to raise the National Insurance Contribution threshold by £3,000 – bringing it in line with the income tax threshold – alongside a drop in fuel duty by 5p per litre for 12 months, and exempting energy efficiency measures from VAT. The Chancellor will use these as clear examples of the additional – decidedly Conservative-sounding – support he is offering.

He has deliberately chosen not to capitulate to those calling for another spending spree to handle the cost of living, instead choosing to save and to leave a clear “margin of safety” to create fiscal headroom. This has not gone unnoticed. The RAC has already called the fuel duty cut “a drop in the ocean” and the Institute for Fiscal Studies has expressed concern about support for those on means-tested benefits. This may come with a political cost. Sunak has gambled that the benefits of focusing on tax cutting outweigh the risks, but with even the Daily Telegraph focusing on the coming cost of living crisis, there is every chance that Sunak will be forced to revise his fiscal strategy.

Charting a low-tax course

In tone and emphasis, this was a very different Sunak to the one who delivered the Budget last October. Where that Budget made large spending commitments – raising the budgets of every government department – the Spring Statement acknowledged that rising inflation will mean that the real-terms increases will now be less than anticipated. Where last year’s Budget revolved around the ever-present phrase “Levelling Up”, this time the Chancellor didn’t say those magic words once.

Instead, the Chancellor unveiled his new “Tax Plan” – an approach to reduce and reform taxes for people and businesses, with more detail on measures due in the Autumn Budget. The publication of the Plan signals a clear direction of travel for the Conservatives for the remainder of this parliamentary term, and the rationale seems clear: the Chancellor wants to keep backbenchers concerned about the tax burden becoming too high on side. His ambition to lower the basic rate of income tax by 1% by 2024 is a sure sign that reducing the tax burden on voters will be a key part of the Conservative strategy at the next election.

But the government will need to walk a careful tightrope over the next two years. It will have to provide enough support to those in immediate need, maintain sufficient headroom to deal with further uncertainty, and still offer enough eye-catching policies to the electorate to reverse their current deficit in the polls.

The Chancellor has been clear that engaging with businesses will be key to the success of this plan. He has long sought a “business-led recovery” and is likely to provide ample opportunities for businesses to make their voices heard as the next Budget approaches. With changes to R&D tax credits, reductions in investment taxes and new incentives for employee training all under consideration, investors will want to make sure that their portfolio companies think carefully about the changes that they would like to see, and develop clear strategies for conveying those ideas to the government over the coming months.

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Rishi’s recipe for growth: private sector investment

Capital, people, ideas. A simple strategy but one built on much thought and observation about the future direction of the global economy, and Britain’s place in it. These are the strategic priorities outlined by Rishi Sunak in his Mais lecture last Thursday. To be more accurate, the word ‘private’ should be added as a critical pre-cursor to all three words.

This was the heart of Sunak’s ambition, to incentivise much greater private sector investment in all three areas. Sunak’s position as a free-market enthusiast was never in doubt and this belief in the benefits free markets deliver sits at the heart of his political and economic philosophy. As such it is unsurprising that his core aim is to lift private investment rather than deploying the power of the state. This approach will be challenged as pressure grows for intervention to soften the impact of rising inflation and the cost of living crisis but his starting point is fundamentally fiscally hawkish.

But what does this tell us about Sunak’s likely approach to policy development in future and key questions around tax and spending priorities?

No un-funded tax cuts

This message was unambiguous. Sunak wants to cut taxes but emphatically does not believe that all tax cuts automatically pay for themselves. Indeed, the unspoken message here was more about tax rises coming down the line. The example cited was Thatcher and Lawson in their first term – fixing the public finances before going on to deliver lower taxes.
There is already intense pressure from the Tory backbenches to scrap or delay the national insurance rise due in April. It is clear the Chancellor will resist those calls if he possibly can given the premium he is placing on strengthening the public finances. This will be a key test of the strength of his resolve, and political positioning ahead of any future leadership bid.

Capital: options to drive more investment

The Chancellor acknowledged that a ‘cloud of uncertainty’ over Brexit and Covid had played a part in holding back business investment but set out his ambition to turn that around now that the cloud had passed. He accepted that low corporation tax on its own had not been enough and indicated that cutting taxes on business investment will be a future priority. Capital allowances are the most obvious tool to deliver this which is likely to be good news for manufacturers.

People: promoting lifelong learning

Consistent with his central theme, the message was that the state is playing its part with an upbeat analysis of the state of schools and university education in the UK. The gap in the Chancellor’s view is the provision of adult technical skills and the need to promote continuous lifelong learning. He wants to see much greater investment from the private sector in upskilling the UK’s workforce.

He pledged to ‘reform the complexity and confusion’ of the current technical education system, noting people currently must navigate a menu of thousands of different qualification options at levels 3 and 4. Reform is clearly on the agenda. Beyond this, he noted he would examine whether the Apprenticeship Levy ‘is doing enough to incentivise businesses to invest in the right kinds of training’.

There will clearly be opportunities for business to inform the Treasury’s thinking on how best to incentivise skills investment, with greater flexibility in the Apprenticeship Levy a potentially valuable outcome.

Ideas: more R&D required

Once again, Sunak’s diagnosis is that the state’s contribution is already generous enough and the gap that needs to be filled is from the private sector. His vision is optimistic, believing new technology such as artificial intelligence can significantly boost productivity across multiple sectors of the economy. However, he was ambiguous on the mechanism for delivering this.

The tax regime is the clear focus for intervention and Sunak strikingly noted that despite apparently generous R&D tax reliefs available in the UK, ‘business spending on R&D amounts to just four times the value of R&D tax relief. The OECD average? 15 times.’ Clearly the level of the reliefs isn’t the only issue and the Treasury is likely to take a close look at how these reliefs are structured and what more can be done to reform the current approach.

This is likely to open up interesting opportunities for knowledge intensive industries, but those that currently benefit from R&D reliefs will need to be alive to the potential impact of change to the system.

Where’s the green agenda?

Many suspect (and are concerned) that the Chancellor is less interested in the green agenda and decarbonisation than some of his Cabinet colleagues. This speech didn’t assuage those worries. There was no focus on climate change or environmental issues. Indeed, the words ‘green’, ‘sustainable’ and ‘carbon’ didn’t feature at all, with only a passing reference to climate change and a single reference to electric vehicles and offshore wind as examples of areas where productivity increases could be found.

Of course, there will likely be other occasions where he seeks to burnish his green credentials, particularly as he will need a coherent green narrative in the event of any future leadership bid. But this speech tells us is that Sunak’s priority as Chancellor is first and foremost restoring the public finances and driving growth via private sector investment. Where green initiatives and decarbonisation help deliver this, he welcomes them but ‘green for green’s sake’ doesn’t appear to be part of his core focus.

What does this mean for companies seeking to influence the Treasury?

There are three core points to consider from this speech:

  1. If you have suggestions on how to incentivise greater private sector investment in the three priority areas (capital, people, ideas) the Treasury will listen and you have a great window of opportunity this year to shape the Chancellor’s thinking.
  2. If you are already planning investment in the UK then be sure to break down that investment and highlight how it will contribute to these three areas: don’t just give the headline figure, provide examples of the new buildings or machinery you plan to build; outline your skills investment strategy and how it will upskill your workforce; shout loud and proud about the any R&D initiatives you are bringing to, or growing in, the UK.
  3. This Chancellor does not believe that increasing the scale or involvement of the state is the answer to driving growth. So any requests for additional funding or more regulation will simply not cut through unless supported by a clear narrative about how this will incentivise greater private investment.

The Chancellor has a plan, and it centres on businesses investing more. This means the voice of business will be critical in shaping the future economic strategy of this Government.

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On the charge: government plans to stimulate the uptake of electric vehicles

Encouraging the uptake of electric vehicles (EV) has become a key part of the government’s plans for a “green industrial revolution” and for meeting its Net Zero targets. The sale of new petrol and diesel cars and vans is due to end by 2030, by which time all new vehicles will be required to have “significant zero emission capability”. By 2035, the government plans that all new vehicles will be zero emission.

WA will shortly be launching consumer polling looking into the priorities of the public in relation to EVs, focusing on the barriers to greater uptake and on charging infrastructure in particular. The government has taken the view that expanding and improving the UK’s network of EV charging points will be key to achieving this transition. It is expected that many will regularly charge their vehicles at home or work, but sufficient provision of public charging points – including rapid charging stations on motorways and kerbside charging for those without a driveway – will be particularly important.

There is considerable regional variation in the availability of charging infrastructure. Only 1,000 of the roughly 6,000 on-street chargers, for example, are outside London, and the total number of chargepoints per head in Yorkshire and the Humber is a quarter of those in London. At motorway and A-road services, there are 145 public charging stations at motorways and A-road services, providing around 300 individual chargers across the UK.

Stimulating investment in charging infrastructure is seen as a priority for regulators and the government

In order to promote the development of charging infrastructure, regulators have been keen to encourage increased investment in the sector. In May 2021, for example, the UK energy regulator Ofcom approved a £300 million investment round for regional network companies across more than 200 low-carbon projects over the next two years. This is expected to include the installation of 1,800 new rapid charging points at motorway service stations and a further 1,750 charging points in towns and cities.

These new installations will go towards the government’s vision for the rapid chargepoint network in England, for which the Department for Transport has set the targets of having:

In pursuit of these targets, the government has allocated £950 million to the Rapid Charge Fund (RCF), designed to “future-proof electrical capacity at motorway and major A road service areas”. While the government has stated that it expects the private sector to deliver chargepoints where they are commercially viable, the RCF may provide a potential source of funds for businesses seeking to expand the charging network in areas where they can make the case for what the government calls “a clear market failure”.

Concerns over competition in the charging sector are likely to inform the government’s approach to regulation as the sector expands

Alongside efforts to stimulate further investment in the sector, the regulatory framework for chargepoints – particularly in relation to ensuring adequate competition – remains a subject of active debate, liable to evolve rapidly as more infrastructure is installed.

In July 2021, the Competition and Markets Authority (CMA) published its report – Building a comprehensive and competitive electric vehicle charging sector that works for all drivers – outlining challenges to effective competition in the market in relation to rolling-out charging along motorways, in remote locations, and on-street. As a result, the CMA recommended a number of “targeted interventions” to “kickstart more investment and unlock competition”.

For chargepoints along motorways, where one chargepoint operator holds a market share of 80%, the CMA found that constraints on the capacity of the electricity grid and long-term exclusive contracts prevent entry by competitors at many sites. It recommended that the government use its commitment to fund upgrades to the grid as a means of opening up competition and facilitating market entry.

For on-street charging, the CMA highlighted that the roll-out is slow, and suggested that local monopolies could arise if the market is left unchecked. It recommended that local authorities play an active role in overseeing the market in their areas, and suggested that they could require fresh powers to ensure that they were adequately equipped to do so.

In response to these recommendations, the government has confirmed that it is considering regulatory changes with a view to enhancing competition in the sector. This includes considering requiring service area operators and large fuel retailers to tender charge point service contracts openly and have a minimum of two – and at some sites more than two – different charge point operators at any particular site. The Department for Transport has also suggested requiring existing providers of charge point services at motorway service areas to make their charge points open-access rather than available only to an exclusive network or group of networks or manufacturers. The Office for Zero Emission vehicles’ consultation on the Future of Transport regulatory review closed in November 2021, and its findings will feed into legislation which may feature in the next Queen’s Speech.

The regulatory environment for chargepoint providers is thus likely to evolve rapidly as the UK’s road charging network expands over the next few years. With changes likely to impact established players in the sector as well as providing potential means of market entry for challenger firms, investors will want to monitor these developments closely in evaluating opportunities for their target or portfolio companies.

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Decoding private equity’s video game spending spree

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More bang for our buck, please: the government wants more out of R&D tax credits

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Navigating the NSIA: which way for M&A?

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An historic opportunity…for more of the same? A look at post-Brexit procurement trends

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Solvency II reforms: a key Brexit win for the government?

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Politicians signal regulatory change on the horizon for IVF clinics

After a long period of stability, IVF policy is set for a shake up as a result of new regulatory proposals made recently by the Human Fertilisation and Embryology Authority (HFEA), the industry regulator. HFEA is looking to amend the Human Fertilisation and Embryology Act 2008 in a number of areas which would affect access and treatment types.

Scrutiny of IVF clinics has been growing over the past year. In June 2021, the Competition and Markets Authority (CMA) collaborated with the HFEA to develop new guidance which allows couples to initiate legal proceedings against IVF clinics that have falsely guaranteed their success rates. Following on from this, Julia Chain, the newly appointed Chair of HFEA, has called for far reaching changes to be made to current IVF regulations, which would allow HFEA to fine clinics that mislead patients over the efficacy of their treatments, as well as widen access to treatment. Chain has also called for IVF regulatory reform to allow scientists to use embryos for research beyond the present 14-day limit.

Chain has argued that IVF policy has become outdated, with reproductive regulations no longer matching the reality of treatment provided in the UK. She has highlighted several areas of the 2008 Act as being in need of reform, including patient protection and the means of maintaining the quality of care provided for them. Chain has called for a broader range of methods for addressing poor performance, such as economic sanctions against non-compliant clinics. This would also include addressing the increasing commercialisation of the fertility sector, where 65% of treatments are self-funded and public funding is unevenly distributed, resulting in a postcode lottery.

Political awareness of the discrepancy in NHS funding for fertility procedures has been growing. Under pressure from MPs across all parties, in September 2021 the then Care Minister Helen Whately MP announced that the government had conducted an internal review of variations in coverage and was currently considering its next steps.

This additional scrutiny substantially changes the political environment affecting IVF. Government reviews, the attentions of the CMA, a new activist Chair of the HFEA, as well as increased press coverage and ongoing legal cases will all increase the need for careful political due diligence of any investments in the sector. Demand for IVF services will remain high, and indeed is three times higher than it was in 1999, but investors will need to take the political and regulatory changes on the horizon into account as they plan their strategies and make their decisions.

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Building safety regulations: what to expect from the next phase of reforms

With the return of Parliament from its summer recess, the Building Safety Bill has entered its Committee Stage in the Commons. This marks the latest phase of the government’s plans for far-reaching reform of building regulations. The plans – born of the tragedy of the Grenfell Tower fire – are likely to result in a significantly different operating environment for the construction industry;  investors in the sector will need to pay close attention to the proposals, and the changes are also likely to present a number of opportunities in related sectors.

The fire at the 24-storey Grenfell Tower on 14 June 2017 claimed the lives of 72 people, with dozens more seriously injured. Combustible cladding surrounding the building was found to have exacerbated the disaster, allowing the flames to spread and engulf the tower. As a result, the principal focus of the government’s funding initiatives to date has been to ensure the removal of both aluminium composite material (ACM) cladding and other combustible non-ACM claddings from high-risk buildings. £5 billion has been allocated to cladding-removal schemes, including:

Buildings under 18m tall but over 11m, with a lower safety risk, have access to protection from the costs of cladding removal via long-term, low-interest, government-backed financing arrangements, which will see no leaseholder pay more than £50 per month for cladding removal works. Leaseholder groups have voiced their opposition to leaseholders being liable for the removal of cladding and – while the government has not indicated it will change its approach – it remains under considerable political pressure to do so.

The Hackitt review found widespread shortcomings in current building regulation

The Grenfell Tower disaster has also precipitated a comprehensive review of fire safety and building regulations, led by former Chair of the Health and Safety Executive (HSE) Dame Judith Hackitt. The recommendations of that review have formed the basis for the legislation which the government subsequently introduced.

The Hackitt review published its final report in May 2018, having found a “system failure” in the current regulatory regime. The report found that:

As a result, the review recommended a new, overhauled regulatory framework, designed to be simpler, provide stronger and clearer oversight of dutyholders, and provide more robust means for residents to raise safety concerns than under the previous system. The review recommended that initial focus of this new regime be on multi-occupancy higher-risk residential buildings (HRRBs) or 10 storeys or more, and would include specific safety measures for each of the design, construction, occupation and refurbishment phases of a building’s life.

The Fire Safety Act has been approved by Parliament, but is not yet in force

As part of its efforts to implement the Hackitt review’s recommendations, the government introduced the Fire Safety Bill – amending the existing Regulatory Reform (Fire Safety) Order 2005 – in March 2020. The Bill passed into law on 29 April 2021 but is not yet in force.

The Act applies to all multi-occupancy residential buildings, regardless of their height, and introduces significant new obligations on those in control of multi-occupancy buildings. These “Responsible Persons” (RPs) will now have an obligation to “reduce” as well assess and manage fire risks, and risk assessments will now have to include the risks posed by the structure and external walls of the building, as well as by any individual doors opening on the common parts of the building. In seeking to make these new assessments, there may be increased demand from RPs from specialist fire-safety consultants. Businesses providing these services may represent an opportunity for investors.

The government has said that it will not enforce the Act until it has finalised comprehensive risk-based guidance to aid compliance. The considerable additional duties on RPSs will be accompanied by severe new penalties for non-compliance, with criminal prosecutions and unlimited fines possible in the most significant cases. RPs and investors in the space will therefore want to be very familiar with the guidance, which is likely to be published in the autumn.

The related Building Safety Bill is still before Parliament

The government published the Building Safety Bill in July 2021, having promised it in May’s Queen’s Speech. It will begin its Committee Stage in the Commons on 9 September 2021 and will likely pass into law in early 2023.

As in the case of the Fire Safety Act which it complements, the Building Safety Bill is set to introduce new obligations for the controllers of multi-occupancy builders, and provisions which will have a considerable impact on the sector. Chief among these provisions is the creation of a new regulator – the Building Safety Regulator – which will operate as a division of the HSE and have substantial enforcement and prosecutorial powers. This move represents a centralisation of oversight compared to the current regime, in which developers have been able to choose a local authority of an approved inspector for higher-risk buildings.

The Bill will introduce tougher sanctions for non-compliance. Directors or managers of companies responsible for high-rise residential blocks will be personally liable for safety failures, and the most serious cases will carry the potential for two-year prison sentences. Similarly, neglecting to register buildings with the new regulator, or failure to apply for a buildings assessment certificate when required could result in criminal actions.

Taking up a recommendation of the Hackitt review, the Bill will seek to introduce a “golden thread” of information and documentation sharing through new responsibilities to collaborate between all responsible parties from development to construction, to occupation, to refurbishment. Ensuring that the “golden thread” is comprehensive and robust is likely to require significant digital transformation and expansion activities; investors will want to pay close attention to specialist firms offering promising technologies in support of this goal, as these may present considerable growth opportunities.

The outlook for investors

The new regulations will entail significant changes for the building sector and, while the new regime is unlikely to come into force until next year at the earliest, investors will want to monitor the evolution of the government’s guidance over the next few months in order to ensure that portfolio or target companies remain fully compliant. The new regime also looks set to drive growth in related sectors – not least specialist safety consultants to meet new risk-assessment requirements and digital technologies to ensure reliable information sharing among responsible stakeholders. Investors should pay close attention to these areas to maximise their opportunities under a regime which, the government hopes, will ensure that the tragedies of 2017 are not repeated.

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The Competition and Markets Authority: new powers and new roles?

The article below was written by Pauline Guénot, a member of WA’s Investor Services practice.

The Covid-19 pandemic has had a profound impact on every part of the UK economy, and this has generated an ever-more complex raft of challenges to which the Competition and Markets Authority has had to respond. The watchdog has had to address, at short notice, new issues facing consumers and businesses in response to restrictions and new ways of working. It reported this year that its increased casework volume had gained “refunds for thousands of holidaymakers, secured landmark changes for leaseholders and given increased protection to people arranging funerals for loved ones”. As businesses and regulators begin to focus on the post-pandemic environment, attention has turned to ensuring that the CMA remains fit for purpose in the longer term.

Digital regulation post-pandemic

As the UK’s competition regulator, the CMA already has a wide-ranging role. Its powers include investigating mergers that may reduce competition, studying entire markets or sectors where consumer problems have arisen, and sanctioning businesses and individuals which it finds taking part in cartels or other anti-competitive practices. Proposals currently being considered by the government may expand and enhance its remit further.

Among the most significant proposals focus on digitisation. The pandemic has increased the CMA’s emphasis on digital markets, with consumers spending more and more time online. Since the beginning of 2021, it has targeted all but one of the Big Five tech giants, opening different investigations into suspected breaches of competition law in digital markets: into Amazon and Google over the numbers of fake reviews on their sites; into Facebook over its collection and use of advertising and single sign-on data; and into Apple and Google for their privacy settings.

In April 2021, the government launched a new digital regulator within the CMA, the Digital Markets Unit. It is initially operating in “shadow form”, on a non-statutory footing, but the government has committed to introducing legislation when parliamentary time allows to formalise its authority. The DMU will be responsible for overseeing the UK’s digital regulatory regime; it will have a duty to promote competition and innovation, holding powers to regulate, investigate and ensure compliance from digital firms. The government has launched a consultation that will remain open until October 2021 to seek external input on its proposals for the new regime. These include proposals that would designate companies with “substantial market power” as having “strategic market status”. Such companies would be subject to an enforceable code of conduct, and to potentially greater interventions in their M&A activities. Investors in such companies will want to monitor these developments closely to understand the precise implications on their portfolios.

New powers for the CMA

Alongside a focus on digital markets, the growth in the number and value of private equity funded buyouts in the UK more generally has spurred debate as to the CMA’s overall ability to protect consumers and employees.

There has been speculation over possible CMA interventions in a number of markets with a significant private-equity presence. Concerns about private equity interest in UK supermarkets including Morrisons and Asda, for example, prompted the chairman of the Business, Energy and Industrial Strategy Committee, Darren Jones MP (Labour, Bristol North West) to write to the CMA’s Chief Executive, Dr Andrea Coscelli, questioning whether it had “insufficient oversight or powers to intervene when new owners act irresponsibly”, particularly in relation to private-equity owned businesses acquiring significant debt.

Dr Coscelli’s response stated that the CMA’s statutory functions covered merger control and market studies/investigations, and that its powers of intervention on the basis that an asset is highly leveraged is very limited. He did, however, add that a study can be launched if the status of providers appears to affect the price and quality of their services, or their financial resilience. While this reply did not itself outline his stance on possible reform, the CMA has already suggested that a stronger and more flexible competition and consumer protection regime would make its work more efficient.

In July 2021, the government announced that enhancing the CMA’s powers to tackle anti-competition business practices was under consideration and opened the consultation “Reforming competition and consumer policy”. The government’s proposals would enable the CMA to conclude investigations faster and impose stronger penalties for non-compliance. Breach of consumer law could entail a fine of up to 10% of the firm’s turnover; civil fines could be given to businesses that refuse to collaborate or that give misleading information to the regulators and penalties could be imposed for companies that do not comply with the CMA’s investigations equating to up to 5% of annual turnover, plus daily penalties of up to 5% of daily turnover while any non-compliance goes on. The length of court processes would also be reduced as the CMA could accept binding, voluntary commitments from businesses at any stage of its investigations, aiming at delivering quicker results and lower costs.

While these proposals signal stronger powers for the CMA, the government has also proposed removing mergers between small businesses with a turnover of less than £10 million from the CMA’s control. The government envisages that this change will allow the CMA to focus its efforts on larger players, and it aligns with its desire to remove some of the bureaucracy within which smaller businesses must operate more widely. Dr Coscelli has welcomed this balanced approach suggesting that the plans “take forward many of the CMA’s suggestions for a swifter, stronger and more flexible competition and consumer protection regime, which will protect consumers and enable businesses to grow and thrive.”

The government consultation is open until 1 October 2021, and, while legislation is unlikely before 2022, investors will want to pay close attention to the development of the government’s approach and prepare their portfolios for any changes in the regulatory landscape, as well as to identify those areas which the government is most enthusiastic to see grow.

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WA Investor Services supports Agathos’ investment in Hunter Healthcare

WA Investor Services is proud to announce it has supported Agathos’ acquisition of Hunter Healthcare, a specialist recruiter working across the healthcare and life sciences sectors. The investment will help support Hunter’s ambitious growth plans, providing vital staffing solutions to healthcare providers and medical researchers, including developing its offer in international markets.

WA provided political due diligence to support the transaction, with its team of healthcare policy experts providing insights integral to the deal process, working closely with Agathos and other due diligence providers to deliver clarity on how ongoing structural changes to the NHS, the elective recovery and acceleration of the digital transformation agenda will affect healthcare recruitment decisions and priorities.

Commenting on the deal, WA Partner and Head of Investor Services Lizzie Wills said: “We are extremely pleased to have worked with Agathos on this deal. NHS staffing is a very high-profile issue at the moment and ensuring the NHS meets patient demand while undertaking fundamental system reform is a priority for political and NHS leaders, not least as they tackle the post-Covid backlog. As a market leading provider of political due diligence in healthcare transactions we were in an extremely strong position to support Agathos’ successful deal and we look forward to seeing the business develop over the coming years.”

Hugh Costello, Investment Director at Agathos said: “WA Comms produced a comprehensive report with insightful conclusions that were well supported by desktop research and interviews with sector participants. The team was available for calls as and when required and were always a total pleasure to deal with. Ultimately, the output produced by WA was instrumental in our decision to complete our investment. I would recommend their services wholeheartedly.”

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WA Investor Services Supports Cairngorm Capital investment in E-zec Medical

WA Investor Services is proud to announce it has supported Cairngorm Capital’s investment in E-zec Medical, England’s largest independent provider of Non-Emergency Patient Transport Services. The investment will help support E-zec medical accelerate its growth and allow it to strengthen its data capabilities to deliver enhanced performance and innovation to commissioners and patients.

WA provided political due diligence to support the transaction, drawing on its market leading expertise of NHS commissioning policy and the government reform agenda for health and social care. This insight was supported by the views of key decision makers and policy influencers from across WA’s extensive network.

Commenting on the deal, WA Partner and Head of Investor Services Lizzie Wills said: “We were really pleased to support Cairngorm Capital on this deal. The NHS is going through a period of significant change, transforming its structure and approach to commissioning, which will affect all businesses operating in health and social care. Our deep networks across government and the NHS, and our understanding of how the next round of structural reform will impact the commissioning landscape allowed us to generate valuable insights for the Cairngorm team. Congratulations to everyone involved – we look forward to seeing the business grow over the coming years.”

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The impact of Covid on international travel this summer and beyond

The article below was written by Pauline Guénot, a member of WA’s Investor Services practice.

While Prime Minister Boris Johnson declared that on 3 June there was “nothing in the data” to suggest a delay to the 21 June reopening target will be necessary, hopes of holidays abroad are still stymied by both testing and quarantine requirements, potentially jeopardising the recovery of the travel industry.

The UK is currently operating a three-tier “traffic light” system for international arrivals, which is reviewed every three weeks. Arrivals from countries in the red list require a 10-day hotel quarantine, while those from countries on the amber list are required to quarantine at home for 10 days and book tests for the second and eighth days. Arrivals from the green list – which presently includes only 12 territories – need not quarantine but are still required to take a test on the second day post-arrival.

Key barriers facing travellers

Ongoing restrictions to international travel will exacerbate the economic damage which the pandemic has done to the travel and aviation industry. According to the ONS, it has been the worst affected by the pandemic, with a fall to its lowest turnover rate in May 2020, at just 26% of February levels, compared with 73.6% in all other industries. The Minister responsible for tourism, Nigel Huddleston, has claimed that the government’s response to the travel industry crisis has been “immense” but, as yet, there is little sign of a sustained upswing in the industry’s fortunes, as the additional hassle Covid protocols entail continuing to deter travellers.

Firstly, the testing system has drawn criticism for its cost – up to £378 for the two tests for one individual. The government has been called upon to cap it to £50 by the Institute of Travel and Tourism, and to scrap the VAT on tests as a means of promoting the travel and aviation industry’s recovery. But the issues of testing go beyond cost. Private laboratories are already overwhelmed and travellers face delays in getting their results, demanding more flexibility around arrivals and departures. This problem is likely to be magnified if the green list is expanded in the coming months. Travel insurance has thus become a hot topic, and some travel companies might also offer packages including testing to ease travellers’ minds, like TUI which has partnered with Chronomics to offer the service from £20.

Industry experts have warned that summer holidays be thrown into further chaos by hours-long queues in airports created by onerous health checks at borders both upon arrival and departure. In response to lengthy waiting times, Heathrow Airport has pledge to lay on more staff and upgrade its passport e-gates, but such improvements will not be available until autumn 2021 at the earliest.

One of the key problems with the three tier “traffic light” system is that it cannot provide the certainty necessary to book holidays abroad very far in advance. The classification is guided by the analysis of factors including the country’s rate of infection, the prevalence of variants of concern, and the access to reliable scientific data and genomic sequencing. As a result, countries can move rapidly between the lists, in both directions; Portugal had only been added to the green list for a few weeks before being removed. The Nepal variant spreading in Europe is also currently making the headlines, threatening the green list’s expansion.

Towards a global understanding around Covid-19 certificates?

Before booking a trip to a country on the green list, British travellers must consider the entry requirements of their destinations, as well as the requirements for their arrival back in the UK.

The European Union has implemented a digital certificates system; travellers demonstrating vaccination, a recent negative PCR test or immunity from past infections are exempt from travel restrictions within the EU. If they succeed in reaching an agreement with the UK, British tourists could enjoy European trips as the continent’s restrictions are due to be lifted by the end of the month. Nevertheless, individual EU member states can still set their own rules when facing a deteriorating health situation or a new variant. For example, France and Austria recently tightened restrictions to prevent the Delta variant detected in India from spreading: a negative PCR test or a proof of vaccination is no longer sufficient to cross these borders. Over the summer, however, countries relying on tourism might not be so strict. Greece, Cyprus and Portugal are already open to British tourists, with Spain due to follow.

When it comes to crossing the Atlantic, the G7 summit taking place in London this month might answer that question. Boris Johnson will attempt to negotiate a quarantine-free air corridor with the US aiming at exempting vaccinated Americans from self-isolating upon arrival in the UK, in the hope of a reciprocal agreement for British citizens flying to the US. If he is successful, the current restrictions would be lifted in early July, allowing both British and American citizens to travel. However, the US administration has proven to be reluctant to lift the travel ban, arguing that prioritizing countries with a successful vaccination programme would send the wrong message to developing countries benefitting from the Covax scheme.

Holidaymakers must therefore remember that for travel to be possible, a reciprocal agreement between countries has to be reached. While Australia is on the UK’s green list, for example, limitations in place by the Australian government still prevents British nationals from landing on their territory. Furthermore, travel regulations are highlighting broader political motivations: the United Kingdom had to consider different variables, not least its hoped-for bilateral trade agreement, before placing India on the red list.

A digital and sustainable model of tourism ahead?

Electronic Covid passports along the lines of those currently operating in the EU might be the first illustration of a more digital model of tourism. As a result of Brexit, summer 2021 will be the last time that EU citizens will be able to travel to the UK with their identity cards (rather than their passports). Priti Patel confirmed that the new requirements would take effect from October onwards.

She also plans to introduce an Electronic Travel Authorization system, similar to the ESTA in the US. Also being considered by the EU, the ETA would see all visitors without a visa or immigration status charged a fee, and would be in place from 2025. As yet, the government has not given an indication of how much the system will cost each visitor.

A longer-term impact?

Ongoing restrictions and changeable regulatory requirements may mean that the travel industry does not recover to anything like 2019 levels of activity much before 2023, so pressures on the traditional approaches to mass-market tourism will remain even when the immediate trauma of the pandemic recedes. This may compound longer term trends of heightened environmental awareness about both the impact of air travel, and the impact of large numbers of visitors in potentially sensitive ecological areas.

Business travel will inevitably change as well, with virtual conferences becoming much more commonplace and, where necessary, longer trips blending work and leisure activities seen as the norm. Investors will want to pay close attention to such developments in order to stay ahead of what promises to be a rapidly evolving picture.



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How to take advantage of AI data-analysis tools in the financial sector

The article below was written by Pauline Guénot as part of her work experience placement with WA’s Investor Services practice.

According to a study published in 2017, over 50% of the activities currently undertaken in the global economy could be replaced by automation within the next 40 years. To some, this will be a startling estimate, but the Covid-19 pandemic has undoubtedly accelerated some trends for automation and catalysed the adoption of data-driven solutions.

With the availability of data continuing to expand, and ever more sophisticated analytical tools available, the financial sector is well placed to capitalise on the potential benefits offered by artificial intelligence.

Potential applications

The potential applications of AI are wide-ranging, and often rest on the ability of the methods to harvest, manipulate and analyse data beyond the capacity of traditional techniques. AI tools can, for instance, enable higher loan approval rates with fewer credit losses for lenders. Building accurate predictive models on the basis of large data sets can help banks to identify and assess borrowers considered “at-risk” of default like millennials or small business loan applicants. Such models naturally rely on the quality of their input data; the dataset must be large and representative enough to return accurate predictions.

AI could offer significant benefits to the industry given its capacity to improve anti-money laundering and anti-fraud detection management. The traditional risk documentation process is expensive and time-consuming, while an approach based on both pattern recognition and intelligence-based models could diminish the administrative burden. Ayasdi, a US-based predictive analytics platform, declared that one of its clients saw a 20% reduction in financial crime investigation cases after having used their services.

According to the UK Payment Markets Report 2020, while 58% of all payments in 2009 were in cash, this proportion was only 23% in 2019. Since the beginning of the pandemic, there has been a 60% decline in cash usage. With more and more transactions proceeding electronically, identifying fraud and other illegal activities with rapid, real-time techniques will become all the more important.

Potential risks

Whilst these techniques – implemented well – can reduce exposure to credit risk and increase confidence in the financial system, they undoubtedly come with their own risks. The most obvious is that poor input data will, almost certainly, yield poor results – the classic “garbage in, garbage out” refrain – and this is all the more relevant for AI techniques, which might be expected to proceed with comparatively less supervision than traditional methods. A further risk is that, if consumers learn how the model works, they may then seek to mimic “correct” behaviour to get a loan or achieve their objective under false pretences.

The current regulatory landscape and the future outlook

Given these risks, investors and financial services providers will want to take a close interest in a potentially changeable regulatory environment for AI.

Companies must build the right data partnerships to develop unique products, insights and experiences that differentiate them from their competitors. However, big tech companies remain critical sources of data and customer experience. As they anchor their financial value, smaller firms are left at a disadvantage. Earlier this month, the government announced the launch of a new regulator, the Digital Markets Unit, based in the Competition and Markets Authority to enforce a “new pro-competition regime to cover platforms with considerable market power”. Companies such as Google or Facebook, designated as having “strategic market status” and funded by digital advertising, will be monitored by regulators.

Financial firms could use alternative data, as mentioned during the second Artificial Intelligence Public Private Forum last March, but they must have clear due diligence processes to ensure that data is still from a trusted source. Financial services can also find inspiration in data standards developed in the open banking regime to apply existing data standards to AI. They must align with existing requirements like the European Banking Authority’s guideline on outsourcing, ensuring that their system is transparent and explainable.

The government has finally announced that “a new plan to make the UK a global centre for the development, commercialization and adoption of responsible AI will be published this year”, as AI could deliver a 10% increase in UK GDP in 2030. The European Commission will also propose new EU regulations on AI on 21 April 2021. Embracing Artificial Intelligence is therefore a priority for financial firms, but the prospect of reforms means that they must monitor it to ensure continuity of services globally.

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An enduring bond? The outlook for US investors in the UK


The United States is the United Kingdom’s single biggest source of foreign direct investment, and this relationship is growing. US FDI in the UK was $851.4bn in 2019, a 6.9% increase on 2018. The Covid-19 pandemic has, naturally, stalled that trend somewhat; the total number of private equity investments in the UK fell by 17% in the first half of 2020 on the same period last year. However, much of this downturn can be attributed to the caution of domestic investors, and there is still a clear appetite from foreign investors for UK assets. The market share of private equity investments in the UK from the US grew by 5% to 25% in the first half of 2020 in terms of the number of deals. At the same time, the rest of the world accounted for 17%, up from 14%.

The UK’s exit from the European Union could represent a significant opportunity for US investors and has the potential to boost their appetite for the UK yet further. Below, we examine some of the factors which investors are likely to consider when deciding to invest in the UK.

A natural second home?

Much is made of the Special Relationship between the UK and the US on the geopolitical stage, but the ties between the two countries run deep on the business and even the personal level, too. The UK and the US both employ a million of each other’s citizens. They share many cultural and business norms. They share a language. It is clear that they hold one another in high regard. Indeed, a survey conducted by the British Council in 2018 found that 69% of Americans rated the UK as a “global power”, placing it above all other countries except China. The UK also topped the respondents’ rankings for the most attractive places to study and, crucially, for the top partners for trade and business.

These ties – not to mention the UK’s favourable time zone between the Americas and Asia – have long made the UK an attractive base for investors seeking to expand into international markets. But the UK market itself is seen as an attractive one in which to do business. A number of surveys of market leaders have highlighted the value which investors place on the UK’s perceived pro-business environment, its transparent regulatory regime, its adaptable labour market and its stable political institutions.

These sentiments were echoed in the World Economic Forum’s Global Competitiveness Report for 2019. The UK ranked ninth globally for its competitiveness, with Singapore first and the US second. The UK scored particularly highly for its macroeconomic stability (achieving a maximum score of 100), for the strength of its infrastructure and for its highly-developed financial system. While the WEF paused its rankings for 2020 as a result of the pandemic, its “special edition” for 2020 suggested that the UK was well placed for the post-Covid recovery, particularly in terms of trust in its institutions and in rethinking labour regulations to meet the needs of the post-pandemic economy.

Relatedly, London remains by a considerable margin the most competitive financial centre in Europe according to the Global Financial Centres Index. As of March 2021, London ranks second in the Index, behind New York, with which it last traded places in 2018. For comparison, the best performing other European centres, Zurich and Frankfurt, rank ninth and tenth respectively.

The impact of Brexit

For any who have followed the machinations of the UK’s Brexit negotiations closely, it may seem somewhat counterintuitive to see the WEF rank its “stability” so highly. The political uncertainty which Brexit has caused has undoubtedly had an impact on investment decisions. Coupled with the Covid-19 pandemic taking up so much government time, recent years have seen short-term responses often come at the expense of long-term planning.

A longer-term view, however, is likely to be the more important focus for many US private equity investors than any current uncertainties and, in this context, the signs appear positive. Post-Brexit, many of the inherent advantages of the UK for US investors will remain. The UK will maintain its pro-business environment, its skilled labour force, its stable institutions, and all of these will weigh in its favour.

Indeed, Brexit does not appear to have had a significant negative impact on UK-US M&A activities, which have remained robust despite turbulent political times. While 2018/19 saw an overall global decline in both domestic and cross-border M&A activity by around 30% on 2016 levels, US investors have continued to demonstrate a clear appetite for the UK over other European destinations. Of the 333 total “inbound” deals (by US investors in Europe) in 2018, for example, 119 were in the UK, representing more than the total for France, Germany, Italy, Spain and Switzerland combined.

Technology and the UK’s traditional strengths in technological areas are likely to be key drivers in sustaining this appetite. Some 38% of UK-US M&A deal activity has been in the technology sector over recent years, with large firms like Microsoft, Salesforce and Oracle among the most active acquirers. This priority for investors aligns closely with the ambitions of the UK government. Tech skills have been identified as a clear priority by the government as part of its commitment to make the UK a “scientific superpower” with its Research and Development Roadmap, increasing R&D spending and encouraging top talent from around the world to make the UK their destination of choice.

Added to these continuing attractors, the UK’s departure from the EU presents opportunities for the UK and the US to strengthen their commercial relationship. A full UK-US trade agreement is still some time away but – as evidenced by the fact that the Prime Minister was the first European leader to receive a call from President Biden – there is an enduring appetite for close and mutually beneficial co-operation. Similarly, Trade Secretary Liz Truss and the new US Trade Representative Katherine Tai spoke in March with a view to accelerating the trade agreement process and highlighting “the importance of continuing to work together to build a closer economic relationship.”

Investors will want to monitor the details of this evolving relationship very closely, as there may be scope for incremental agreements – including, for instance, mutual recognition of professional qualifications – before a “full” free trade agreement is signed.

Of course, the benefits for building closer UK-US relationships may be rather offset in the minds of US investors if there are significant UK-EU barriers as a result of Brexit. Such obstacles could make the UK a somewhat counterintuitive prospect as a base for building pan-European operations, as compared to, say, Frankfurt or Paris. However, continuing agreements between the UK and the EU to lower commercial barriers (including an agreement on continued data sharing signed in February and a Memorandum of Understanding for co-operation in financial services to be signed shortly) are likely to help the UK remain a natural second home for US investors seeking European opportunities. As for the emerging UK-US agreements, investors will want to take a close interest in the recalibration of the UK-EU relationship as part of their decision-making process over the next few years.

The opportunity for investors

The UK’s emerging from both the pandemic and the political uncertainty of its Brexit negotiations represents an important opportunity for US investors. The UK will continue to be a stable, transparent, pro-business environment, with a convenient time zone and no language barrier. The UK government has also placed attracting foreign investment and talent alongside future-proofing the skills of its domestic labour force high on its agenda.

A full UK-US trade agreement may still be some way off, but the mood on both sides of the Atlantic for closer ties and increased co-operation could well see interim agreements and approaches put in place before then. US investors will want to pay close attention these developments if they are to take advantage of what could be a stronger and highly profitable renewed relationship.

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WA Investor Services Supports Chatsworth Schools expansion

WA Investor Services is proud to announce it has supported Synova backed Chatsworth Schools successful acquisition of Riverston School and Beech Hall School from The Riverston Group. The Riverston Group is a privately owned education group, known for providing a mainstream educational environment with the highest levels of pastoral care, for children with moderate and mild learning needs. The acquisitions take the number of schools and nurseries in the Chatsworth Schools family to fourteen.

WA provided political due diligence to support the transaction, with its team of specialist political risk analysts assessing the SEND policy outlook in light of the ongoing government SEND review and reviewing the funding landscape. This insight was supported by the views of experts from across the sector, representing national and local government, parliament, the private sector, and the third sector.

Commenting on the deal, WA Partner and Head of Investor Services Lizzie Wills said: “We are extremely pleased to work with Chatsworth Schools and Synova to support their expansion. WA is recognised as a leading provider of political due diligence to support transactions in the education sector and we look forward to our future work in this area.”

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Hell’s kitchen or a smorgasbord of delights? Is now the time to invest in hospitality, retail and leisure

For industries not normally put under high levels of regulation, the hospitality, retail and leisure sectors have felt the heavy hand of the government since Coronavirus restrictions were first introduced in the UK. This has sent the valuations for many businesses tumbling. However, this means now could be the time for private equity investment from those who have a handle on where restrictions, and government support, are heading and are prepared to weather the short-term storm.

What’s the outlook for reopening?

The government has set a target of getting the most vulnerable vaccinated by mid-February. Whilst some optimists think this could mean a return to normal by early March (when limited immunity from the first dose will start to take effect), a full reopening is unlikely then. The ultimate test for whether high street venues can reopen is whether cases, hospitalisations and deaths have come down, perhaps even close to zero. It will take some time for vaccinations to have this effect. Limited reopening might be expected in the spring, but a return to ‘normal’ shouldn’t be expected before the summer. Those premises which can survive will then likely reap the reward of pent up demand from a populace desperate for release.

What government support is available in the meantime?

The government has launched numerous schemes to aid this survival. The latest is a grant scheme for hospitality, retail, and leisure premises forced to close during the current national lockdown, worth up to £9,000 per property.

This follows loan schemes designed to provide cheap credit, including the Bounce-Back Loan Scheme, the Coronavirus Business Loan Scheme (CBILS) and the Coronavirus Large Business Loan Scheme (CLBILS). The loan schemes close to new applications on 31st March.

Furlough has also helped businesses retain staff and so avoid training and recruitment costs once restrictions are eased. The current furlough scheme ends on 30th April.

Alongside these wider measures, hospitality and leisure have benefitted from a 5% cut in VAT from 15th July 2020. This has now been extended until 31st March 2021. Hospitality, retail and leisure properties will also benefit from not having to pay business rates for the 2020/21 tax year.

With all these schemes soon coming to an end, what’s next?

The Treasury was hoping the need for business support would end in the spring, but this seems increasingly improbable as restrictions are unlikely to be lifted completely and we will see knock on effects of the crisis on spending through reduced income due to job losses.

Nevertheless, Sunak will hope to bring in less generous support, as he is increasingly showing a tendency to fiscal conservatism, as demonstrated by the fact that the November spending review saw a £10bn cut to non-Covid government expenditure. Thus, the March Budget will likely see a less generous replacement for the furlough scheme. This may be along the lines of the scrapped Winter Economy Plan, where workers were to be required to work at least part-time. There may also be an extension of loan schemes, depending on the severity of the restrictions still in place, as the government will want businesses to survive the home straight to reopening.

Large question marks remain over the likelihood of extensions to the VAT cut and the business rates relief. Sunak has spoken often about the need to repair the public finances. Any business rate relief extension for a short period would also be logistically complicated as it would require different rates to be applied for different parts of the 2021/22 tax year. Therefore, if the vaccination programme is on track, Sunak may make use of the Budget on 3rd March 2021 to start a return to a more normal fiscal programme, reining in his generosity to businesses.

In all, March will likely see a winding down of support from an anxious Chancellor, but some support is likely to be extended to avoid businesses going bust just before the storm passes.

Longer-term: the business rates review

Alongside these short-term measures, the government is conducting a fundamental review of business rates, due to conclude in spring 2021. The review is set to consider, among other things, how premises are valued for the charging of business rates, the effectiveness of business rates and alternatives to it, and who gets relief from business rates. The review is a chance for the government to level the playing field between online and high-street retailers as well as boost the long-term recovery from coronavirus across high-street sectors. However, with the main beneficiaries of business rates, local governments, already strapped for cash, the Treasury will be wary of giving too much away.

Great uncertainty, but also great opportunity, lie ahead for investors in hospitality, retail and leisure. As we head into the spring, savvy investors must consider the challenges presented to the sectors by policy in a way they might not have done previously; something which WA has the experience to help with.

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Sustainable returns? Trends to look out for in ESG in 2021


Evaluating investments on the basis of environmental, social and corporate governance (ESG) principles has been one of the most visible trends in the investment industry over the last few years. A far cry from the familiar, straightforward screening of traditional “sin stocks”, investors are increasingly demanding a much deeper read of a company’s ESG procedures – from staff welfare and internal governance to supply-chain risk and climate action – in order to assess the sustainability of their returns.

Across the world, the proportion of investors applying ESG principles to at least a quarter of their portfolios has risen sharply from 48% in 2017 to 75% in 2019. The Covid-19 pandemic has brought questions of sustainability to the fore, and looks set to reinforce the trend towards greater awareness and uptake of ESG principles. An estimated 200 new funds in the United States with an ESG investment mandate are expected to launch over the next three years, more than doubling the activity from the previous three years. ESG-mandated assets could grow almost three times as fast as their non-ESG counterparts in the coming years, so that they make up half of all professionally-managed investments by 2025.

This growing trend represents a clear opportunity for investors, yet the consensus of a number of studies and surveys is that the significant variety of approaches to ESG incorporation by investment management firms, regulators, and investors means that its full potential is not being realised. Below, we assess some of the key issues which investors will want to bear in mind when formulating their strategies.

Changing regulatory environments

Over 170 ESG-related regulatory measures have been proposed globally since 2018. This marked increase (it is more than the number of proposals from 2012 to 2018 combined) is a measure of the pace of change in this area and the level of regulatory focus upon it.

The traditional approach in the US, for instance, has been the SEC’s principles-based approach to company disclosure, which applies equally to ESG-disclosures as non-ESG. There, are, however, increasing calls for a more prescriptive approach for ESG, along more “European” lines.

In the EU, sustainability risk has been integrated into MiFID II, AIFMD and the UCITS framework. The changes will dictate how market participants and financial advisors must integrate ESG risks and opportunities in their processes as part of their duty to act in the best interest of clients. It is small wonder, therefore, that 97% of European institutional investors now say that they interested in ESG investments.

The UK is expected to retain an approach similar to that of the EU after Brexit. In December 2020, for instance, the FCA set out proposals to promote better disclosures on climate risk from premium-listed companies and will publish a consultation paper in early 2021 with a view to widening the scope of these measures. The Government is due to consult on measures in the Taskforce on Climate-related Financial Disclosures framework, which would oblige large listed and private companies to disclose the risks to their businesses from climate change. Influential investors have also urged the Government to consult on the idea of introducing mandatory “say on climate” votes for shareholders at AGMs, somewhat akin to “say on pay” votes.

Whilst different regulators have taken different approaches, the overall trend is for more stringent ESG disclosure requirements, with ESG more firmly integrated into the investment advisory and decision-making process. International frameworks, including that drawn up by the Sustainability Accounting Standards Board (SASB) are gaining influence in developing consistency in ESG reporting across companies. Indeed, many companies have already identified the value placed on ESG transparency by investors, and are using these frameworks for reporting and disclosure which goes beyond the requirements set by regulators.

The role of technology

As the amount of ESG data available to investors has increased, so too has demand for analysing it. Spending on ESG content and indices rose by almost 50% between 2018 and 2020, indicating the scale of growth in the field.

The trend has been for investment management firms increasingly to develop their own capacity for gathering and processing data, but emerging technologies including Artificial Intelligence are likely to hold the key to extracting material ESG insights as the volume of data increases. AI engines can, for instance, be used to sift through unstructured data – which may not have formed part of a company’s formal disclosure – with a view to uncovering further material information. Such tools are potentially very powerful, but investors and investment managers would do well to keep an eye on the potential for regulation in this area, given the creation of the Centre for Data Ethics and Innovation in the UK and the EU’s forthcoming legislative proposals on AI.

Emerging technologies also have a large role to play in addressing environmental questions – and are thus a significant contributor to the “E” in “ESG”. Here, again, AI is an important field – with promising applications from energy monitoring and control systems to automation in agricultural production. Alongside it sit emerging technologies in energy generation, including carbon capture, small modular reactors and nuclear fusion.

The impact of Covid-19 on ESG trends

The ongoing coronavirus pandemic has had a profound effect across the economy, with Governments playing much more interventionist roles in economic affairs than they might have envisaged pre-pandemic. The UK Government has spent almost £300bn on coronavirus measures, and the EU has agreed its €750bn Recovery Fund. Recovery plans unveiled to date – whether the UK’s Ten Point Plan or the EU’s Green Deal – have set clear ESG priorities and could, therefore, represent significant opportunities in sectors including clean energy, building technology and electric vehicles. In addition, an increase in demand for hygiene and diagnostic technologies may be a boost to the life sciences sector.

The logistical challenges which the pandemic has presented to many firms may bring about a renewed focus on supply-chain risk. Faced with a sudden shock, the vulnerabilities of many widely-dispersed supply chains were exposed, and this may galvanise efforts by companies to “reshore” some elements of production. To achieve this will likely require greater spending on advanced technologies including AI and robotics if moving production necessitates a move away from low-cost manufacturing elsewhere.

Perhaps the most obvious post-pandemic trend is the move towards remote working and digital commerce. For many, these have become embedded into daily life and will doubtless have long-standing social implications well into the future.

The opportunity for investors

The trend towards ESG investing is here to stay. It is an area of intense regulatory focus and the pandemic has heightened interest further still.

This growth represents a substantial opportunity for investors who can fully integrate ESG principles into their investment process. Such integration is likely to go beyond a mechanical exercise in completing an ESG “checklist”. Rather, it is likely to be a robust, thorough due-diligence process, illuminating past sustainability risks and providing a real picture of how target companies conduct their operations. Using the ever-increasing amounts of available data, and the evermore sophisticated technologies available to harness them, investors can gain deeper insights into their target and portfolio companies than ever before, and have the opportunity to generate genuinely sustainable returns.

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How to capitalise on the Super Deduction tax benefit

This roundtable was originally published by Real Deals and features WA’s Head of Investor Services, Lizzie Wills. Please find the original here.

In the wake of the UK Spring Budget announcement, Rhiannon Kinghall Were, head of tax policy at Macfarlanes and Lizzie Wills​, head of investor services at WA Communications, discuss how GPs can take advantage of the Super Deduction tax benefit.

Rhiannon Kinghall Were, head of tax policy at Macfarlanes

The Super Deduction was the surprise in the Spring Budget. There was the expectation around an increase in the rate of corporation tax, which has now increased to 25 per cent as the rumours suggested, and the hike in the rate has been tempered by this new investment incentive. The announced Super Deduction should be a significant incentive to businesses, because not only do they get a deduction for the full cost of investments made in the year of acquisition, but they also get an additional 30 per cent, making it a total of 130 per cent that can be deducted against profits. However, as the Super Deduction is only temporary in nature, companies will feel the full impact of the increase in the rate of corporation tax in 2023.

Unprecedented tax policy

From a global policy perspective, it is unusual that they’ve opted for this measure, I haven’t seen any other country go over 100 per cent before. By way of example, through the Super Deduction if a business makes an investment in plant and machinery of £10m then they get a deduction from their profits of £13m. That provides a potential tax saving of £2.47m.

In terms of where the Super Deduction will impact the PE industry, it will largely be the portfolio companies that invest heavily in ‘plant and machinery’ who will benefit. Many operators in manufacturing, infrastructure, pharmaceuticals and biotech, will be the largest benefactors. Interestingly when you look at total capital allowances claims the financial services sector takes third position, following manufacturing and retail.

Just what is classified as ‘plant and machinery’ isn’t actually defined in legislation but most tangible assets used in business should qualify, whether that’s robots on production lines in factories, electric vehicle charging points or simply computer equipment. If a company is buying new software platforms to be used in business, then that would also qualify. One thing to note is that these deductions do not extend to actually buying a property.

Act quickly

While the 130 per cent deduction is very novel, the extent to which companies will be able to benefit will depend on their circumstances and where they are in their investment cycle.

For instance, the Super Deduction can only be made on new contracts entered into after the budget date. If you had already signed contracts to purchase new equipment that investment would not qualify, as the investment was effectively made before the Super Deduction came into play.

The biggest limitation of the policy is the short window of time. The incentive is only available for two years, from 1 April 2021 through to the end of March 2023. It’s a short timeframe to make a big difference. There is also the caveat that it has to be new items, you cannot deduct the purchase of second-hand items which is significant for manufacturers where there is a good market for second-hand equipment and machinery. My advice to businesses would be to look down the pipeline of where the business is going, if there’s any investments or purchases that you can bring forward now is the time to do it.

Lizzie Wills​, head of investor services at WA Communications

As political risk specialists, WA supports investors and their management teams to understand the often-contradictory messages coming out of government. The last twelve months have shown just how important it is to be able to read these signals, to interpret them, and to be in the strongest possible position to mitigate the risks and capitalise on the opportunities they represent. The Budget has been no exception, and the Super Deduction is a case in point. The announcement has raised several questions about the government’s intentions, not least: What does the announcement tell us about how the government plans to balance the books post-Corona? How is the Treasury going to pull off its ‘spend now, pay later’ promise but minimise the pain that both businesses and taxpayers face in the coming months and years.

Hey Big Spender

The Chancellor’s Budget announcement on the Super Deductions benefit was one of the few that had escaped the extensive media pre-briefing. The Chancellor was understandably keen to soften the ground for many of the planned announcements, not least that the government’s intention to increase corporation tax to 25 per cent in 2023.

Getting to the bottom of the Treasury’s thinking, at least on the face of it, is pretty straightforward. Through measures like the Super Deduction, the Treasury is hoping to supercharge businesses’ appetite to invest – to the tune of £25bn – and to spur on the post-Corona recovery.

It’s an eye-catching pitch, with businesses previously reticent to invest in new plant and machinery potentially now having the impetus to do so. The Government will also be hoping that as an added benefit it supports their headline domestic priority to ‘level up’, given its the big manufacturing firms located outside London and the South East that are most likely to benefit.

What’s the catch? 

There are questions already about whether the Super Deduction is the best way for the Government to spend £25bn. Arguably the majority of the companies benefitting from the tax relief would be making these investments anyway.  It will also add another layer of complexity to a tax regime that already runs to thousands of pages. Not only that, but there are strict eligibility criteria which means that not all firms will be able to access the relief, super deductions are only available to companies subject to corporation tax. Therefore those facing the 25 per cent rise in 2023. Sole traders, partnerships and LLPs are not eligible.

The deduction is also only available for new plant and machinery, rather than second-hand equipment. There may also be additional criteria that firms must meet if they are intending to purchase plant and machinery under a hire purchase agreement, which is pretty standard for SMEs.

A further restriction is the tightly defined period for accessing the deduction, meaning that some businesses might inadvertently miss out. Any investment committed to, ahead of 1 April 2021 won’t be eligible for the relief, and any delays between signing new contracts and incurring costs may have implications for what qualifies as tax deductible expenditure under the new scheme.

Mark Bryant, head of manufacturing at BGF

“Specific improvements in capital allowances that encourage manufacturers to invest in equipment will ultimately improve productivity and competitiveness both internationally and domestically. It is a positive move for the UK economy at large. For many businesses across the country that have faced severe disruption over the last year and are confronting the big challenge of rebuilding their balance sheets, there are still concerns that they may not have the flexibility to make significant capital investments at this time. It will be important to continually assess the extent to which smaller companies are utilising these new tax incentives.”

Simon Wax, partner at Buzzacott 

“The main question for PE firms should be how much do tax deductions influence their buying decisions. Arguably the underlying performance of the business is more significant, however, paying less tax will clearly improve the cash flow forecasts for companies which could be another catalyst for PE houses to get more deals approved in the short term. Another opportunity for PE firms would be where they are looking at buy-and-build strategies that would require their portfolio investment companies to invest in order to see growth and realise returns.”

Andrew Aldridge, partner at Deepbridge Capital.

Growth-focused businesses will ultimately be the backbone of economic recovery. Investors will be working with portfolio companies to assist them in utilising Super Deduction and growth schemes which can assist with either short-term working capital or longer-term growth capital. The past twelve-months have seen unprecedented UK Government initiatives for supporting businesses which, coupled with longer-term initiatives such as the EIS, make the UK one of the best places to scale a business.”

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Private equity – How to win friends and talk to government

Benjamin Franklin said: “It takes many good deeds to build a good reputation, and only one bad one to lose it.” There is truth in this for the private equity industry; much of its socially valuable contributions go largely unnoticed while its missteps are widely publicised and serve to tarnish the sector’s reputation. One need look no further than the Financial Times or The Telegraph (two publications not known for their hostility to free enterprise) to see regular criticism of private equity and the way it does business, especially its leveraged approach to buy-outs.

A recent Due Diligence column in the FT is a classic of the genre, setting out the regular critique of private equity in a discussion of the potential sale of The AA: “they buy companies, leverage them up, pay themselves juicy dividends and leave their targets over-indebted and far too vulnerable to the slightest shock, with little room for error.” Despite this somewhat crude account of private equity business practices, it has had cut through into the political sphere – although more so in the US than the UK. But where the US goes, the UK quickly follows.

Political criticism

In the United States, Senator and former presidential hopeful Elizabeth Warren last year set out her Stop Wall Street Looting Act 2019, which squarely took aim at the private equity sector and many of its business practices. Included in the Act were 100% taxes on monitoring and transaction fees and bans on dividends for two years after a transaction, as well as forcing PE funds to share responsibility and liability for a target company’s debt and closing loopholes on carried interest. While the Act was not passed into law, the fact a serious presidential candidate proposed an all-out assault on the private equity industry demonstrates the strength of feeling with US politics.

In the UK, there has been little criticism of private equity from mainstream politicians, but Covid-19 and the increased scrutiny of businesses that will accompany the economic recovery could change this. In February of this year, criticism of private equity came from an unlikely source in the form of Guy Hands, founder of Terra Firma. Speaking at a conference on alternative investments, Hands claimed the industry was too insular and said that rather than caring about improving companies and creating jobs, instead “We tended to only talk about ourselves – the funds we raised and the pay cheques received.”

One might think if private equity has friends like these, who needs enemies? Fortunately for the sector, it does not have any high profile political detractors in the UK, yet, and crucially, private equity does have some friends within government. When it emerged that private equity-backed firms would be excluded from the CBILS and CLBILS schemes because their leveraged financial structures meant they fell foul of EU state aid rules, HM Treasury lobbied hard for exemptions for private equity-backed firms. Despite the Treasury being largely unsuccessful (exemptions were granted for smaller firms), its efforts show there are those in government who understand the value of private equity to the economy.

Managing the problem

To a large extent, private equity’s wider reputation problem is the result of availability bias. People, including politicians and policymakers, have a tendency to think that issues that come easily to mind occur more frequently than they do in reality. Private equity only makes it into the mainstream news following a high-profile business failure (often a distressed asset to begin with), while its successes are buried in trade publications or celebrated at industry awards evenings. As such, when influential people from outside the world of private equity come to form their views, they are much more likely to take a dim view of the sector as these negative stories come to mind much more easily.

Fortunately, private equity still has the opportunity to change this perception. With a significant number of businesses requiring injections of equity, and private equity sitting on a large amount of dry powder, the industry can play a key role in ensuring that many businesses can survive the downturn and become profitable once again. However, there is a risk this type of action could be branded as ‘vulture capitalism’ with private equity firms charged with sweeping up assets when they have no choice but to sell.

To mitigate this risk and demonstrate the value of private equity to the wider economy, private equity needs to make its case to government that it is a force for good. At a fundamental level, this would involve making clear to MPs and those within government what private equity brings to the table and the motivations behind its business model. Beyond this, the industry should explain to decisionmakers the vital contribution private equity has made to economic growth and building British businesses, and that the sector is responsible for the employment of millions of people. As the economic crisis begins to bite, private equity can use its resources and position to recalibrate its reputation. But it will have to do this quickly; a failure to get on the front foot is only likely to result in a solidifying of the sector’s already mixed reputation.



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Distressed hospitality: What investors need to be thinking about

With high street names such as Café Rouge and Byron Burgers entering administration, investors will be weighing up their options and trying to understand whether there are bargains to be had.

High street restaurant chains were competing in a crowded market before the onset of the Covid crisis, and lockdown has tipped a number of firms into the red as they’ve struggled to access government support schemes. Over the long-term, investors will need to consider the extent to which the public’s appetite for high street casual dining will remain, particularly given the prospect of social distancing measures continuing for many months to come.

More immediately, there are three areas where government decision-making will have a significant impact on hospitality assets, which will need to be factored into commercial decision making by investors.

Commercial rents

Commercial rents continue to be a problem for hospitality assets, with lease agreements no longer reflecting the value properties operating under social distancing conditions. Many businesses have taken advantage on the government’s moratorium on commercial evictions and have been able to defer paying their rent, but this will no longer be a possibility from 1 October 2020 when the moratorium ends. From this date, businesses will either have to renegotiate their tenancies with landlords or start paying again if they don’t want to face eviction or winding-up petitions.

Further government interventions on the issue of commercial rents are likely, and it is one of HM Treasury’s top priorities, with Treasury officials especially concerned about wider contagion to the financial sector should the issue of firms not being able to pay their rent not be resolved. Options for the government include a subsidy scheme proposed by the British Property Federation and the British Retail Consortium. The Furloughed Space Grant Scheme would involve government grants to cover fixed property costs, with the level of subsidy determined by the fall in turnover experienced by a business. Action from the government in this area could be a massive boost to potential investors, as commercial rents are a significant burden for hospitality assets. It will need careful balancing by the government, but any reforms could be enough to put high street restaurants back investors’ menus.

Short-term measures

With Rishi Sunak set to make an economic statement tomorrow, measures to support the hospitality sector are likely to feature heavily in his attempt to kick-start the economy.

The government is increasingly concerned with protecting jobs as the furlough scheme is wound down and will be keen to save as many of the 3.2 million jobs in the hospitality sector as possible. Short-term measures could include a reduced rate of VAT for the hospitality sector as a means of stimulating demand, as well as a possible further extension to the business rates holiday for hospitality firms that is set to run until the end of the financial year in 2021.

Interventions of this kind will certainly be welcomed by the sector, and any reduction in operating costs will help stabilise a number of businesses. However, the big question mark for government is whether they are enough to persuade consumers who are concerned about the virus to venture out of their homes and start spending again. It could be that measures such as a VAT cut only end up helping customers who would have spent anyway, making little difference to overall demand and causing the government to miss out on much-needed tax revenue.

Longer-term support

Beyond the Chancellor’s economic statement, the government will carefully monitor the economic performance of hospitality businesses, and further economic support could be forthcoming in the autumn Budget should it be required.

This additional help could be in the form of reduced employer’s National Insurance Contributions or through wage subsidies for younger workers to help in the battle against unemployment. The government has won plaudits for its commitment to the economy since the start of the crisis, and investors may want to gamble that the Chancellor’s cheque book stays open. Going on the government’s actions so far, this might be a sound bet, but investors will have to judge carefully whether purchasing a hospitality asset is only viable if the government continues to offer the industry financial support.

Investors looking to get a taste of the hospitality sector face an unenviable task. Not only will they have to make a long-term prediction about consumer attitudes towards high street casual dining (during a pandemic), but also consider the extent to which the government will continue supporting the sector.

However, investors who take the plunge could get their just deserts. The market will undergo a long overdue natural thinning over the rest of the year and beyond and firms that can embrace new revenue streams such as online ordering and delivery could stake out a sustainable position on the UK’s high streets.



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Connect Four: Choices for fiscal stimulus and what it means for investors

For an unabridged version of this article please visit Real Deals.

With the economy facing its worst crisis in generations and unemployment figures increasing at an alarming rate, the government is preparing a number of measures to help the economy recover. The Chancellor Rishi Sunak will deliver a ‘fiscal event’ in July, which will set out the immediate steps the government is taking to boost the economy. It is expected that a full Budget will follow in the autumn once the government has a better idea of which parts of the economy are in need of further support.

With rumours the government is considering a temporary decrease in VAT, we take a look at four potential measures the government could implement to kick-start the economy and what they would mean for investors:

A temporary VAT cut

Top among the Treasury’s options is a temporary cut to the rate of VAT. The thinking behind this move is that it could encourage a nervous public to start spending in shops, restaurants and pubs. The move would be good for consumers and investors alike, encouraging spending and increasing the revenues of firms hit hardest by the crisis.

The problem with the plan is that it’s expensive and it might not work. If people aren’t spending because they are scared of contracting or spreading the virus, a small adjustment to VAT is unlikely to encourage them to start spending. Also, the Institute of Economic Affairs estimated the government loses £7 billion of revenue for every percentage point it reduces VAT. That is a lot of revenue for the government to give up on a plan that could failwhen concerns about debt and the deficit are mounting.

Bringing forward infrastructure spending

Spending on infrastructure is a good old fashioned way to get the economy moving. Officials in Downing Street are keen to use the delayed National Infrastructure Strategy, worth around £100 billion, as part of an economic stimulus with them hoping to get projects started as soon as possible. This is positive news for infrastructure supply chain investors, as well as for those with assets in the north of England and Midlands where much of the spending is expected to be targeted to shore up support in seats won by the Conservatives in December 2019.

While infrastructure spending can help the economy recover, to do so, it needs to happen soon. However, large projects that will do the most to stimulate the economy are the most difficult to start quickly, often taking years to get off the ground. The government is searching for projects that can be completed in 18 months, but even these smaller projects will struggle with the twin problems that there is a shortage of skills for many of the jobs the projects would create and that the government’s own planning rules are making it difficult to start projects quickly.

Cutting National Insurance Contributions (NICs)

To try to prevent an unemployment crisis, the government is considering a cut to employer’s NICs, or more radically implementing a temporary NIC holiday where employers don’t have to pay NICs on newly hired employees. After employees’ wages, employer’s NICs are the biggest cost to firms, reducing this cost would make it cheaper for firms to hire new employees and keep furloughed workers on the payroll.

A cut to employer’s NIC would be popular with employers and investors alike and has been endorsed by the former Chancellor Sajid Javid. However, if the combination of social distancing requirements and Covid-19 induced changes to consumer behaviour means that millions of jobs don’t exist anymore, a cut to employer’s NICs will do little to stem the tide of unemployment. The UK’s labour market is flexible enough to reallocate workers in these non-sustainable jobs to new roles, but this will not happen quickly. Also, while uncertainty over how long we have to live with the virus remains, businesses will not know which jobs will be viable over the long-term.

Cutting Stamp Duty

An often criticised tax, Stamp Duty has been claimed to create friction in the housing market, preventing growing families move home and stopping older people from downsizing. By cutting Stamp Duty, Rishi Sunak would be able to offer a significant boost to the home moving sector which would in turn increase spending in other areas, as well as create a more flexible labour market.

Think tanks such as the Centre for Policy Studies and Onward have recently called for reforms to Stamp Duty, with the latter suggesting Stamp Duty should be abolished for all homes worth less than £500,000. Choosing to limit the Stamp Duty cut to homes valued at less than £500,000 would make sure that the benefit of the cut is aimed away from the most well off individuals and would limit losses to the Treasury. Such a cut would benefit investors involved in the housing market, as well as those with assets in the home improvement and retail sectors, given that home moving is a stimulus to demand in these sectors.

There are no easy answers for the Chancellor, but there are certainly changes that could be made to help individual parts of the economy. While some of the options available will be costly, the government is likely to take the risk given the current exceptional circumstances. The unfortunate reality for the government is that the one thing that would allow the economy to grow unhindered is for the virus to be completely contained, but there is little sign of that occurring any time soon.



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Under the microscope: M&A faces new post-Covid world

As most European countries appear to have passed through the peak of the coronavirus pandemic, governments have turned their attention to how to bring the economy back to life. It is becoming clear across all countries affected by the virus that one of the consequences of lockdown will be a wave of businesses entering administration or facing a fundamental restructuring of their operations.

Governments, ranging from populists in Poland and India to fiscal conservatives in Germany, are concerned that the number of businesses looking for new ownership will lead to foreign buyers acquiring assets in bulk. To tackle this, they have turned to protectionist policies to keep prospective buyers out.

Protectionist tendencies were becoming more common before the coronavirus pandemic

The economic policy response to coronavirus is likely to continue to vary significantly across the Eurozone and beyond. However, one emerging trend is the number of countries, including the UK, that are introducing legislation designed to increase scrutiny of M&A transactions on national security grounds. Primarily designed to exclude foreign buyers from purchasing assets of national importance while prices are lowered by the coronavirus pandemic, the wider effects of these laws may make cross border M&A a more complex task for all investors in the future.

The willingness of governments to intervene in M&A has been increasing in recent years. Australia and the United States have been particularly interventionist and have been hawkish on the issue of Chinese investment, both banning Huawei from helping build 5G networks. Although the UK to date has not blocked an M&A transaction on national security grounds, in recent years the Competition and Markets Authority (CMA) and UK government has scrutinised an increasing number of transactions on national security grounds involving various kinds of acquirer, including financial investors. Acquisitions of Cobham, Northern Aerospace and satellite operator Inmarsat have all been investigated by the CMA and the transactions approved. In all instances, the acquirer offered several legally binding assurances to the government before the deal was approved.

The government is taking rapid action to protect strategic industries

Here in the UK, Boris Johnson, Rishi Sunak, Alok Sharma and Dominic Raab are currently developing new legislation that would make it easier for the government to intervene in M&A transactions on national security grounds. In the short term, amendments will be put forward to protect UK assets during the coronavirus pandemic, however, a more detailed plan for a new, more interventionist takeover system is being drawn up and will be presented to Parliament before Summer recess.

Two new proposals already tabled in Parliament will make it tougher for foreign buyers to acquire any assets related to the nation’s healthcare self-sufficiency and, separately, artificial intelligence and other tech. One amendment would drop the £1 million revenue threshold currently in place for screening takeover targets in AI and other areas that pertain to national security. This would allow the government to intervene in the takeover of loss-making start-ups developing medicines or technology of national interest. The other amendment will widen the government definition of sectors critical to national security to include the food and drink sector for the first time.

Crucially, neither of these amendments specify what kinds of investors will be targeted under the new legislation. While concern may rest primarily with state-owned buyers, investors should be mindful that the CMA has instigated action against several US funds in recent years, including in the sale of Cobham and Inmarsat indicating the importance of the asset will take precedence over the nationality of the buyers.

A new long term takeover regime will change how investors should approach UK assets

The new takeover regime being devised would require UK businesses to declare when a foreign company tries to buy more than 25% of its shares, assets or intellectual property. The plans are significantly more stringent than those drawn up under a similar scheme considered by Theresa May’s government, under which companies would have been expected to notify the government of takeovers voluntarily.

Reporting will only be required for businesses where a takeover would pose a risk that it could give a foreign company or hostile state the power to undermine Britain’s national security through disruption, espionage, or by using “inappropriate leverage.” The significance of this legislation will be determined by how this risk is defined. Legislation planned under Theresa May used an incredibly broad definition, which, if replicated, would allow any secretary of state to intervene in any M&A transaction if they were concerned about the security implication.

The sectors most likely to be affected are civil nuclear, communications, defence, energy and transport, however compulsory reporting of transactions would likely have the effect of slowing the pace of deals across all sectors. Investors, whether they deal with sensitive assets or not, are likely to have to get used to greater government interest in their activities, an increased reporting burden, and potentially greater media scrutiny of their activities as the government makes its investigations public.

Change in the EU brings challenges and renewed opportunity

Countries across Europe are also acting. Margrethe Vestager, EU Competition Commissioner and Executive Vice-President of the European Commission, has encouraged EU states to take action to prevent foreign takeovers. Describing the protection of EU businesses from takeovers as a “top priority,” Vestager has effectively encouraged states to act against any takeovers deemed to be a cause for concern.  While this fear relates primarily to Chinese investors amid concerns about intellectual property and national security, the political unwillingness to single out the Chinese for special restrictions could risk creating significant collateral damage. Plans put forward by the Commission would exclude all state owned buyers, potentially eliminating some of the competition for assets created by the increasing activity of Middle Eastern and Asian funds in Europe.

Poland’s populist government is among those planning changes. Legislation is currently being drawn up to allow regulators to block non-EU companies from taking stakes of more than 10% in businesses deemed to be providing critical infrastructure, goods or services for two years. This more stringent block on foreign investment is in part due to the comparative affordability and availability of Polish businesses. 30 years on from the end of communism in Poland, those who have built successful businesses are beginning to reach retirement age, while a drop in the value of the zloty has also pushed prices lower for foreign buyers.

The issue for investors comes back to Brexit. Much of the proposed legislation would impose additional restrictions on all non-EU countries. Proposals, such as those put forward by the Dutch government, would ensure governments could halt companies from buying EU competitors at inflated prices or undercutting them with artificially low selling prices. The Spanish government, meanwhile, is proposing that non-EEA investments larger than 10% in key domestic assets in the “strategic industries” such as infrastructure, technology and media be authorised by the Spanish government. The European Commission would also have the authority to demand greater transparency in foreign companies’ accounts.

These restrictions will soon apply to the UK, with the true impact likely to be determined by the extent to which the UK chooses to diverge from EU law relating to financial services. It may be possible to negotiate the UK’s exclusion from these additional barriers to investment if the UK and EU agree to a close trading relationship for the financial services sector. This would be unlikely to be completed by the time the UK leaves the transition period on 31 December and negotiations around the full financial services future relationship are likely to take years to complete due to their complexity.

Much of the legislation remains in draft phase across the EU and the UK as politicians continue to prioritise the immediate economic and health challenges and much will depend on whether governments can pursue such ambitious regulatory change in the coming months. If these laws do make it onto statute books, investors willing to deal with the additional bureaucratic burden may find greater choice and potentially lower competition for assets in areas of “national interest.” Regardless of sector, as the size of government increases and its post-Covid appetite for intervention grows, investors will need to adapt to greater government engagement in the future.

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Counting the cost: what coronavirus means for care homes

As the UK continues to struggle with the effects of the coronavirus pandemic, the frailty of our social care system has been confirmed, weakened by decades of underfunding and delayed reform. The government is now beginning to lay the groundwork of finding solutions to the complex problems the sector faces. However, the scale of the challenge involved – and the daunting political risks – mean the sector will have a long way to go before it can benefit from the pressure of the media spotlight government is under.

The social care sector is often seen as the poor relation of the NHS in the UK, fragmented and without the long-term funding solution pledged by successive governments.  The social care green paper promised by then Prime Minister Theresa May in 2017 never materialised, and her successor Boris Johnson has yet to set out his vision for dealing with the system, beyond saying that he would be seeking a ‘cross party consensus’ on the way forward.  There has been little evidence of this cross party approach in practice, but No10 and the Department for Health and Social Care are now assessing whether a social care tax for over-40s is a viable option.

With the issues the sector has grappled with for more than a decade becoming more pressing with every passing day, the government will struggle to put off reform for much longer.

Legacy issues have been compounded by the covid crisis

Even before the coronavirus pandemic, the UK’s social care sector was under serious strain. A June 2019 survey published by The Association of Directors of Adult Social Services (ADASS) found that in the previous six months, 80 councils had experienced a home care provider failing and 38 experienced providers handing back contracts.

Despite rising demand for care across the UK, investors drawn to the sector are struggling to find ways to translate demand into a strong business model. Now, rising PPE and staff costs, and falling resident numbers mean that care homes are under even greater financial strain. The government has allocated £3.2 billion to councils in the past two months to help them respond to coronavirus outbreaks, but to date, the additional funding – in the form of an increase in the fees they pay care homes – has failed to reach some providers.  An example of this was in Sheffield, where on 19 May care homes wrote to the council to ask for additional support, arguing the forms they were required to fill in to access the funding were overly complex and made the system too slow.

The government is continuing to seek solutions to the additional pressures coronavirus has put on the social care system. On 8 June Health Secretary Matt Hancock announced the formation of a new coronavirus social care support taskforce led by David Pearson. The task force is responsible for the delivery of practical advice and support for the care sector, but no additional funding is available through initiatives it manages.

Many privately owned care businesses are also holding high levels of debt.  Accounts for HC-One, Four Seasons Health Care, Barchester Healthcare, and Care UK, which combined run about 900 care homes and look after 55,000 residents, show they are paying an overall average rate of almost 12% interest on total debts of £2.2 billion, according to Opus Restructuring. To pay debts as well as meet staffing and care costs, as well as the increasing cost of PPE, an estimated occupancy of at least 80% is required – a figure increasingly difficult to maintain as the pandemic continues. The Knight Frank care home index found an average occupancy rate of 88.9% in 2019, but the sector has reported a decline in occupancy of between 4%-8% in April 2020, potentially putting remaining residents at risk of their care provider becoming insolvent.

Issues with quality, while improving, also remain more common in for-profit care homes. 84% of care homes run by local authorities were rated good or outstanding in 2018-19, compared with 77% of for-profit homes, according to LaingBuisson analysis in August 2019. This could be in part a funding issue. Analysis by Care UK has found evidence of local authorities providing preferential funding to their own care homes, at the expense of for-profit providers. One council, for example, was found to be paying £650 per person per week for its own care home versus less than £500 to an independent provider. LaingBuisson estimates costs for a well run home will be between £623 to £726 a week per person, meaning some for-profit providers will be struggling to make fees cover the cost of care.

Coronavirus has once again brought the issue of quality of provision in care homes back to the top of the political agenda. After the media drew attention to the 10 coronavirus related deaths in a single HC-One owned care home on Skye in May 2020, the regulator carried out an inspection and raised “serious and significant concerns” about its management.

The whole sector should expect more scrutiny of the services it is providing, from the media and parliament, particularly as the coronavirus inquiries begin. Care homes, particularly larger chains with complex management structures, will see enhanced, sustained scrutiny as a result of the coronavirus crisis, with politicians and the media alike keen to assess how businesses have managed the crisis, and where mistakes were made. Care homes, with their tragic death toll and specific vulnerability to the disease, will be an area of focus as the government looks to learn lessons from the pandemic.

A significant issue for the sector, and one that has been repeatedly highlighted by politicians and the media during the coronavirus pandemic, is the comparatively low pay of care workers. All supermarkets now offer higher minimum hourly pay than the average social care worker hourly rate. Unlike other sectors, opportunities for promotion and pay increases are often hard to find, leading to an average annual staff turnover of over 30%. Although care workers will benefit from increases to the National Living Wage pledged by the government, if other sectors continue to go above and beyond the minimum standard, the sector will continue to struggle to find enough staff. Care England, the representative body for independent care providers, has warned that without an increase in the fees local authorities pay care providers, increases to the Living Wage will be unsustainable for the sector. Without an increase in funding levels, the government risks further destabilising the sector through the NLW increase, but without higher pay, the sector is unlikely to find the long term staffing solution it needs. Finding a solution that works for the sector, its employees and the government will be key to any long term settlement.

What is the future of the sector?

Social care will certainly face some difficult days ahead, and business failures are likely. However, the coronavirus crisis could be the wakeup call the government needs to enact real change in the sector and to give it the stability it needs. Media scrutiny has never been higher, and the oncoming onslaught of parliamentary and independent inquiries into the response to coronavirus will inevitably lead to focus on how the government should rectify the problems in the sector. A continuation of the status quo is likely to become impossible as pressure grows.

Large care providers, particularly those owned by private equity investors, will face more pressure than ever to demonstrate their value to the sector and the quality of their services. This will require a concerted communications effort with government, regulators and, in some cases, the media. If the sector is to ask the government for additional support, it will need to demonstrate why additional funding is necessary and to assure the government that businesses receiving additional funds are responsible employers and care providers. The affairs of care providers, like the wages they pay to staff, the amount of tax they pay, and the fee structure they use for residents, will soon be under much closer scrutiny.

This will be a particular challenge for private equity owned businesses, where perceptions of highly paid executives using profits to fund bonuses, rather than improvements in care, continue to persist. Without addressing the perceptions of policymakers head on, for-profit care homes will struggle to make an impact on government policy and will find offers of financial support thin on the ground. P

The government’s response to Covid-19 has also demonstrated that Private equity as an industry will itself face this challenge. Government reticence to provide financial support to private equity backed businesses during the crisis has laid bare how reputational challenges translate into real world business problems. The private equity industry will have to tackle negative perceptions of the sector head on to ensure the government understands its needs, and the needs of its portfolio companies.

Investors willing to look at the longer-term picture for the sector could be rewarded with a new, more stable financial settlement, if the government is prepared to make hard choices on how it will be paid for.

Polls show there is public consensus on how to pay for social care – a system that is free at the point of use, funded by general taxation in a way that is similar to the NHS. However, the additional funding required for social care is substantial, and very many people will have less disposable income as a result of the lockdown and likely economic downturn. How government chooses to balance this trade-off will say a lot about its longer-term priorities. Recent reports indicate that the government is considering taking advantage of the public polling to introduce a new system of taxation for over 40s to help pay for elderly care.

Before the coronavirus pandemic, the government was revisiting the recommendations of the 2011 Commission on Funding of Care and Support and held talks with the Commission Chair Sir Andrew Dilnot. The main principles of the Commission’s recommendations were a more generous means test for government funding, combined with a lifetime cap on care costs. Versions of Dilnot’s model were proposed and subsequently dropped by both David Cameron and Theresa May, who both saw the electoral pitfalls of tackling the social care crisis head-on.

Now, the government appears to have advanced its thinking in response to the clear urgent need for reform displayed during the pandemic. Health Secretary Matt Hancock in particular advocates taking inspiration from countries thought to have successfully found solutions to funding social care, while encouraging the development of a well functioning competitive market for providers.

Two sources of inspiration are Germany and Japan, where the ageing population led the two countries to reform their respective elderly care systems far earlier than in the UK. In Germany, reforms introduced in 1995 introduced a social care insurance system, with employees paying around 3% of their income annually and the amount being matched by their employers. This insurance system covers the cost of a minimum standard of care for individuals regardless of their age and is not intended to cover the full cost of an individuals needs. For providers, the system combines the nationally set benefits with local commissioning which combines financial certainty for providers with local flexibility, allowing them to negotiate with local authorities for funding that reflects the needs of the area.

The system in Japan, introduced in 2000, is relatively similar to that of Germany. Long term care insurance provides universal care to those over 65, covering an unusually wide care remit that includes wellness and prevention. Insurance payments are compulsory for over 40s, with the rest of social care funding being collected from general taxation. In addition to paying premiums, service users must pay a co-payment when accessing services, although those on very low incomes are exempt. Most people pay 10% of their care costs, although this rises to 30% for those on high incomes. The care provider market is an incredibly competitive one, primarily consisting of small care providers and which are a mix of for-profit and not-for profit companies, social enterprises and charities.

Both of these systems have significant attractions for the UK government and show that creating a care system that satisfies the population while limiting government expenditure is possible. Issues with both systems still remain. The cost of care, particularly in Germany, has risen in recent years, increasing the amount of care people must self-fund and both Germany and Japan suffer from the same workforce shortage issues faced in the UK. However, with the UK’s social care system untenable in its current form, social care providers can look to the examples of both Germany and Japan and see a way forward that includes high quality of care and financial stability for the market.

The road ahead for social care is certainly difficult and there are no easy choices. Yet the sector needs change, and pressure will continue to grow for meaningful sector reform. Johnson has promised this reform, but with everything else the government has to deal with at the moment, we may be waiting a while longer for the difficult decisions to be made.

This article was originally posted on 9 June and amended on 28 July. 

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Beyond the Future Fund: What it means for VCTs

Nearly two weeks ago, HM Treasury launched the Future Fund, the latest in a series of schemes to support businesses through the economic crisis brought on by Covid-19 and lockdown. Having been overlooked by the Coronavirus Business Interruption Loan Scheme, start-ups are now eligible for government financial assistance via the Future Fund. While this funding will help many pre-profit firms through the immediate disruption, it could also present opportunities for VCTs down the line.

The Future Fund, administered by the British Business Bank (BBB), provides an initial £250 million in funding to UK start-ups. Through the Fund, firms have access to convertible loans of between £125,000 and £5 million as long as government investment is matched by third-party investors. Funding is offered in the form of a convertible loan, with no requirement that companies make regular payments; the convertible loans will convert into equity at the next funding round. Firms must have raised at least £250,000 in third-party equity investment over the last five years to be eligible for future fund investment.

As with almost every government intervention since the start of the Covid-19 pandemic, the Future Fund has been created against a very tight timetable which led to initial criticism of the scheme on the grounds it was not compatible with the existing Enterprise Investment Scheme (EIS). The EIS is a government scheme to help early-stage firms raise money by offering tax reliefs to individual investors that buy shares in a company, but the EIS could only be made compatible with the Future Fund following new legislation. Having been keen to avoid further delays to launching the Future Fund, the government decided to exclude the EIS; this decision led one investor to claim: “If it’s not EIS-able, the scheme just doesn’t work.”

Despite this criticism, there has been significant take-up of the government’s offer of matched funding through the Future Fund, with the BBB receiving requests for £515 million of funding on the day of launch. Funding is being allocated on a first-come-first-served basis, with those firms that have all their application materials in order at the front of the queue to receive a slice of the £250 million on offer. However, the BBB has indicated it is confident the Treasury will increase the size of the Future Fund following the strong initial response from investors, and an announcement setting out additional funding is likely to be made soon.

The popularity of the Future Fund may have dispelled fears prompted by its lack of compatibility with the EIS, but Katherine Griffiths, writing in The Times, points out there are issues with the Future Fund that will only be realised once the crisis has passed. Griffiths argues that the way the Future Fund is set up means that there will inevitably be a battle for control of the business at some point because “the government and its matching investors will decide whether to convert the loan into equity at the end of the term, removing significant freedom from the founders.”

While this may be suboptimal for founders, it could be a bonus for VCTs. In the event the government does convert loans to equity, it will have little interest in holding the equity stakes for a long period of time, particularly given the coming pressures on the government’s balance sheet. When the government does choose to sell, it will provide investors with the opportunity to take equity in firms that have received a healthy dose of government funding to help them to the position they are in. While investors will have to pay government for the privilege, it is possible the Future Fund may be responsible for a wave of high-growth firms coming to market at the same time, ready for VCTs to use their knowledge and expertise to propel them to further growth.


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Navigating choppy waters

This article was originally published by Real Deals, please find the original here.

The impact of the global Covid-19 lockdown on UK deal flow has been stark and swift. Processes that haven’t been cancelled have been put on hold, with investors and advisors alike stopped in their tracks by current events.

The unprecedented nature of the crisis, its impact on pre-Covid valuations and, crucially, the lack of visibility beyond the immediate future – including the potential for future lockdown periods – makes determining the future profitability of any business near impossible. Until the economy starts to recover and we have more clarity on which sectors have been particularly hard hit by lockdown, that lack of visibility will continue.

Changing roles

Given the drop-off in M&A, the role of due diligence providers has changed. As political risk specialists, WA has been able to swiftly pivot away from transaction-specific work to support investors, and their management teams, in other ways. Helping them understand and navigate the rapidly moving political landscape has been key, as has supporting communications that have needed to be had with staff, customers and other stakeholders.

The savviest investors have made available a raft of specialists to their management teams to mitigate the worst of the crisis and to get them in the strongest position possible for when the recovery begins. Policy, government relations and corporate communications specialists have been key amongst these.

Political shifts

Politics is moving at the most rapid pace we’ve ever seen. Policy making has become a public spectacle, with all the missteps, U-turns and teething problems being played out in real-time. Policies that would usually take months of careful planning and consultation are being rushed out in a matter of days, set out in broad strokes, with detail being back-filled.

Government is watching the business response to any measures announced like a hawk and has already demonstrated it will tweak its position if a robust case is put forward on why it should do so. The burgeoning number of business support schemes to cover different parts of the economy, as well as the extension to key policies like the Job Retention Scheme, is a clear illustration that government is reacting to business sentiment, and needs input from experts to make sure its support is both sufficient and appropriately targeted.

Lobbying government, on the face of it, looks easier than ever. Not only are policymakers arguably more alive and responsive to external events than ever before, but they are actively
seeking input from business. But a word of caution – influencing policy at a time of national crisis is only possible if it is done so sensitively with an acute awareness of the government’s wider set of priorities. The case needs to be made to the right people, at the right time, and be reinforced by advocates and influencers that have a say in the decision-making process.

The five ministerially-led ‘taskforces’ are one recent example. They have been designed to advise on the development of guidelines to underpin the government’s back-to-work ‘roadmap’ and will be seeking input from sector specialists to make sure the voice of business is heard. The taskforces have already been inundated with communications so making your business stand out will be crucial.

WA has already supported several companies navigating business-critical issues to make their case to government, positioning them as part of the solution to getting the UK economy back on its feet.

From putting together an evidencebased campaign to get the housing market moving again, to demonstrating the valuable role of cycling as an alternative to public transport, we’ve helped businesses engage with government in a way that helps them achieve both commercial and policy objectives at a very challenging time. 

‘New normal’

Once the market returns, it’s likely to be busier than ever on the M&A front. Demand for businesses that have demonstrated their resilience are likely to do particularly well, and competition for these businesses will be fierce, more so if other deals slated for the latter part of the year have fallen away.

Political due diligence will be more important than ever. Covid-19 has shifted the political sands and some things that we may have taken for granted – the government’s appetite for political intervention, the size and reach of the state, tolerance for poor corporate behaviour – we will no longer be able to bank on.

Government has already promised a “rapid re-engineering” of government’s structures and institutions to deal with this historic emergency and to “build new long-term foundations”. This is the ‘new normal’ we’ve been hearing so much about.

What is also clear is that once the dust has settled, there will be a corporate reckoning to sort those businesses deemed to have had a ‘good’ crisis from those seen to have performed poorly – either in how it has dealt with its employees, how it has communicated to customers, its approach to senior pay and dividends, and the asks it has made of government, financial or otherwise.

It is vital that businesses plan now for the aftermath and ensure they are preparing their case, planning their communication strategies and reaching out to potential advocates. Failure to meet political and public expectations could result in lasting reputational damage and potential excessive intervention by government. There are currently 17 Select Committee inquiries already underway relating to the coronavirus response of government, four of which are directly scrutinising the response of businesses.

As Winston Churchill once famously said, this is “perhaps the end of the beginning,” but we are a long way from this crisis being over and businesses that move now still have time to get ahead of the game.


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Government’s Covid-19 response: What it means for private equity

The government’s response so far to the Covid-19 pandemic provides for a mixed report card.

Disasters have been averted in the NHS, but death numbers are among the highest in Europe and coronavirus is having a devastating impact on care homes. Questions about the timing of lockdown and the government’s testing infrastructure also remain. The government’s business support measures have been more successful. The furloughing scheme has undoubtedly saved hundreds of thousands, if not millions, of people from unemployment and credit is finally making its way to businesses who need it via the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme (CBILS).

Private equity firms and their portfolio companies have not been at the front of the queue to receive government financial support, nor have they been at the forefront of the government’s mind throughout the policy development process. The furloughing scheme has allowed portfolio companies to keep staff on the payroll, while the government subsidises their wages, and the news the scheme will continue until October provides certainty to both workers and management teams for the next few months at least.

CBILS, when it was announced in March, gave the impression that it could provide a vital line of credit to support the liquidity of many private equity-backed portfolio companies. CBILS allowed firms with a turnover of less than £45 million to borrow up to £5 million, with 80% of the loan backed by the government.

However, many portfolio companies were ineligible for the loans as turnover was originally calculated on a group basis, taking into account the portfolio as a whole. This rule was later relaxed to allow portfolio companies to apply as separate entities for the government-backed loans, alongside the introduction of the Coronavirus Large Business Interruption Scheme (CLBILS) that provided credit to firms with turnover over £45 million. CLBILS was created after it was pointed out to government that many firms were too large for CBILS but were not of investment-grade so could not access the Bank of England’s Covid Corporate Financing Facility (CCFF).

Just when private equity firms thought it was possible to dip their toes into this new pool of credit, another issue raised its head that has proved to be a significant barrier to portfolio assets accessing the government-backed loan schemes.

Under EU state aid rules, firms that had accumulated losses greater than half their subscribed share capital as at 31 December 2019 are not eligible for government support as they are deemed to be a ‘business in difficulty.’ Due to the leveraged structure of the vast majority of private equity portfolio companies, this rule has made them unable to access CBILS and CLBILS.

Both the British Private Equity and Venture Capital Assication (BVCA) and the Confederation of British Industry (CBI) are currently lobbying the EU Commission to change the rules, but so far the Commission has held fast.

The saga of how the government’s various support measures have arguably fallen short in supporting PE-backed companies illustrates two important facts about government.

The first is that the old adage about not wanting to see how the sausage is made still holds true. The government has had to conduct policy development that would normally take years in a matter of months, with every mistake or problem that would have been caught along the way being made in full view. Fortunately, industry groups like the BVCA, and expert advisers supporting individual investors have been on hand to support the government and ensure the measures have been refined enough to help the majority of businesses.

The second is that while government has been willing to make some concessions to private equity, the sector is clearly nowhere near the top of the government’s agenda. This partly comes down to a lack of understanding of how the private equity model works, for which the industry itself must take some responsibility. If policymakers buy in to many of the enduring myths about the sector –  that UK private equity firms are sitting on huge amounts of cash that could be deployed to support their portfolio companies – for example, there is little incentive to go to any special lengths to provide them state-backed financial support

The post-coronavirus recovery will offer private equity firms the ideal opportunity to rectify this problem and ensure a more prominent position in the government’s thinking. By demonstrating how private equity firms bring expertise, innovation and growth to businesses in all sectors across the UK, private equity can make its case that it is a force for good.

Government will be looking for every opportunity to promote growth and investment, and private equity firms will be in a strong position to contribute to this.


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New Year, new politics: dealmaking after the election

Politics in 2020 is shaping up to be a very different beast than in 2019. But what does it mean for investors and dealmaking?

Yes, Brexit is still the talk of Westminster, but we now have a government with a clear agenda, and crucially, a mandate big enough to deliver it.

Johnson’s election campaign strategy was clear – a laser like focus on the need to Get Brexit Done, wrapped in a wider narrative of hope, optimism and aspiration. And it worked. Johnson’s government now has a majority bigger than any other Conservative administration since 1987 and the Labour Party is potentially looking at another decade in the political wilderness.

The Prime Minister’s election campaign was also underpinned by a number of retail policies designed to reach out beyond the Conservative’s traditional voter base – rollout of full fibre and gigabit-capable broadband, further rises in the National Living Wage, 20,000 more police and tougher sentencing of criminals, and targeted support for the British high street.

Johnson knows that many traditional Labour voters ‘lent’ him their votes in 2019 and he will be keen to consolidate their support ahead of 2024.

Brexit upended traditional party loyalties and the strategy of the Conservative Party election machine (led by a reassembled Vote Leave contingent) of pushing hard into former Labour strongholds in the Midlands and the North of England saw a swathe of constituencies go blue.

Johnson will be acutely aware that the only way of shoring up new lower middle-class and blue-collar workers will be by making sure there are tangible improvements in their lives – more money in their pockets, safer communities and more accessible public services.

The market response to the Conservative majority was clear – the FTSE 250 saw its biggest jump in a decade as investors piled into UK stocks and Sterling rose sharply against the Dollar and jumped to a three-and-a-half-year high against the Euro.

Shares in politically sensitive markets like water, which faced the threat of nationalisation under a Labour government, saw big gains and banks exposed to the UK economy witnessed their share prices rise sharply once the election result became clear.

So, what does the Johnson government mean for UK investors and dealmaking?

1.    Johnson is Getting. Brexit. Done. 

The UK will leave the EU on 31 January. We’ll then enter an 11-month transition period during which the UK and the EU will try to thrash out a free trade deal. If a trade deal is successfully agreed, the UK and EU will start trading on those terms immediately after the transition period ends.

If not, the UK faces the prospect of having to trade with no agreement in force, or to agree to a number of stop-gap measures with the EU.

While leaving on WTO terms now appears relatively unlikely, the next few months of trade negotiations are likely to be fraught, and it may be that the UK leaves the EU with a relatively bare-bones ‘zero-tariffs, zero-quotas’ deal on goods in place. Investors in cross-border or export-dependent businesses would do well to watch how this develops and adjust their dealmaking strategy accordingly.

2.    The policy and regulatory horizons are clearer. 

From a domestic policy perspective, we finally have what investors crave: certainty.

The Conservatives have been clear on their domestic policy agenda and on the modernised ‘One Nation’ rationale that underpins their approach to government. With Johnson gearing up for a ten-year stint in No.10, we can expect departments across Whitehall to start gearing up for a period of intense policy-making.

Whilst this may mean change in the short-term, a lengthy period of implementation will likely follow, taking some of the guesswork out of business planning.

3.    Business is no longer a dirty word. 

Contrary to Johnson’s anti business stance back in June, the Conservative Party manifesto also contains a lot that will be comforting to British business. Frequent references to a ‘dynamic free market economy’ set the scene for an unashamedly pro-business agenda and should be good for dealmaking.

Notably, the Conservative manifesto makes repeated reference to the ‘symmetry’ at the heart of the UK economy, and the importance of maintaining this balance through the support of British business: “We are the only party that understands the symmetry at the heart of the UK economy. That the only way to fund world-class public services and outstanding infrastructure is to encourage the millions of British businesses that create the wealth of the nation – especially small businesses, family firms and the self-employed.”

A revived recognition of the role of private sector business is already coming from coming from No.10 – promises to ensure regulation is ‘sensible and proportionate,’ a continuation of the ‘spectacularly successful’ Enterprise Investment Schemes, increases in R&D tax credits and a reduction in business rates all signal Johnson’s intentions.

More powers to the Competition and Markets authority to tackle rip-offs and bad practices will be the government’s nod towards making sure consumers aren’t forgotten.

4.    The age of austerity is over, at least in the North. 

Ahead of the anticipated Budget in the Spring, the Treasury is reportedly rewriting the way the government calculates value for money in order to divert additional funds away from London and the South east and towards the North and Midlands.

Traditional calculations (on a Gross Value Add basis) have disproportionately focused spending on transport, infrastructure and business development projects in areas with the highest population and business density. Under the new rules, government investment will be directed towards reducing inequality rather than predicated on promoting overall economic growth.

Given these changes, we can expect major productivity-enhancing projects outside London to be high on the government’s list for early spending commitments.

However, Johnson’s political honeymoon won’t last long, and he’ll have several critical issues that he’ll need to tackle once he’s back behind his desk in January to demonstrate his government is delivering on its promises. Creating a sustainable social care system, addressing an increasingly complex housing crisis, tackling historically low productivity rates and reversing the public’s disillusionment with the political establishment will be no mean feat, nor are there likely to be any quick fixes.

But Boris has spent most of his adult life preparing for this and will want to make sure that his government and eventual legacy is not solely Brexit-shaped – he wants to deliver lasting political change based on an optimistic, aspirational and enterprising new Britain.

2020 will be a year when we see just what Johnson is made of.


This article was first published in the January 2020 edition of RealDeals


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The Polish Paradox: how investors can navigate Poland’s new normal

Poland has long been viewed as one of the most attractive countries in Europe for foreign investment. A highly skilled workforce, comparatively low labour costs and enviable geographic links to major European countries contribute to Poland’s ranking as the second largest Foreign Direct Investment (FDI) destination by jobs created in Europe, ahead of major economies like Germany.

Opportunities for investors look set to increase over the next decade, with a generation of pioneering Polish businesses established after the fall of communism now seeking new ownership as their founders retire. While this potentially creates an attractive investment landscape, business opportunities are complicated by Poland’s ruling Law and Justice (PiS) party, which has struggled to balance the Polish reliance on FDI with the nationalist policies preferred by it’s traditional supporters. This is a factor that potential investors will have to seriously consider before entering the market.

One of the major attractions the Polish market holds is its enviable economic stability. Following the 2008 financial crisis, Poland was the only country within the Eurozone to avoid a recession, a fact the Polish government has been keen to publicise. In the thirty years since the end of communism in Poland, the economy has been boosted by pioneering entrepreneurs taking advantage of Poland’s newly open markets. As the generation approaches retirement, Poland’s Ministry of Enterprise and Technology estimates that one million family run businesses will have to consider succession issues in the next ten years. Many of these businesses are likely to move outside of family control, with the Poznań based Family Business Institute finding that just eight per cent of Polish business heirs want to take over the family business.

These dynamics offer a major opportunity for foreign investors, but only if they can successfully navigate the policies and approach of the nationalist PiS government, and the complex and often contradictory attitude it holds towards foreign investment. A recurring theme in PiS’s economic policy has been its willingness to renationalise or buy significant stakes in companies in strategic sectors that are bought by foreign investors. This has been particularly prevalent in the finance sector. Following the renationalisation of some previously foreign owned banks, the Polish government now owns 40 per cent of all banking assets in Poland. Nationalist and protectionist economic policies such as these are hugely popular with the working class, rural voters who make up PiS’s electoral base.

Despite the trend toward renationalisation, there is acknowledgement within PiS, and particularly by the current Prime Minister Mateusz Morawiecki, that FDI is crucial for maintaining the party’s popularity. New generous welfare policies, such as the reversal of a planned rise in the pension age and new child benefit payments, mean FDI is needed to ensure the country’s deficit does not grow above the EU limit of three per cent, or the Polish constitutional limit of a debt to GDP ratio of 60 per cent. PiS, therefore, walks a tightrope between maintaining credibility with its nationalist base and avoiding an exodus of foreign investors from the country.

PiS has a famously difficult relationship with the EU, which dominates the image of the party abroad. Attempts to reform the judiciary in Poland, including forcibly retiring existing senior judges and giving the government greater powers to appoint replacements of it’s own choosing, resulted in a protracted battle with the EU. In December 2018, PiS announced that the changes would be reversed, effectively ending the long running dispute. However, PiS remains Eurosceptic and prone to courting confrontation with the EU, a policy that may have more serious consequences for investors now that the European Parliament has approved measures to freeze EU funding for members who “undermine democratic values”. The proposals will now move to the European Council, consisting of the leaders of all EU member states. The measures are likely to be a source of confrontation as the Council negotiates the budget, with the most confrontational EU member states – Poland and Hungary – currently being net recipients of EU money.

It’s an election year in Poland, with voters deciding on the new government no later than 1 November 2019. Polish politics is deeply divided between the beneficiaries of PiS’s populist social policies (typically more rural, working class voters), and supporters of the more socially liberal, pro-business Civil Platform. Despite this, PiS has a nine point lead in the polls, and has consistently maintained a lead since winning the last election, held on 25 October 2015, making a change of government this year unlikely. With PiS firmly in control of Polish politics, investors will have to learn to navigate the risks posed by the government in order to reap the potentially significant rewards of the Polish economy.




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Are investors ready for primary care networks?

The NHS Long Term Plan, published in January 2019, identifies newly established primary care networks (PCNs) as important drivers of NHS reform. By June 2019, PCNs will bring local GP practices together into geographical networks, covering populations of between 30,000-50,0000 patients. GP practices have worked collaboratively for years, but the new GP contract, taking effect in April 2019, and the NHS Long Term Plan, have created the more formal PCN structure. According to The King’s Fund, the thinking behind PCNs is that they will allow general practices to benefit from economies of scale through increased collaboration: staff can be shared between practices, estates can be managed more efficiently, and practices will find it easier to work with the wider health system.

PCNs will be expected to provide a wide range of primary care services to deliver the NHS national service specification, and this will be a level of service beyond what individual practices can provide. These services will include access to: a pharmacist, physiotherapy, extended GP services and social prescribing link workers (non-clinical services, e.g. healthy eating advice). From April 2020, PCNs will be required to deliver services including structured medication reviews, personalised care and supporting early cancer diagnosis. By 2021 PCNs will be charged with discovering cardiovascular disease in patients and addressing health inequalities in the local population.

The funding for PCNs is in the form of a directed enhanced services (DES) payment. This payment will be worth £1.8 billion by 2023/24 and includes money to support the working of the network, and up to £891 million to support the hiring of additional staff. As part of the new GP contract, the funding from NHS England for primary care and community care will put the total increased investment into general practice at £4.5 billion by 2023. GP practices will not have to join a PCN; but if they choose not to, they will miss out on the extra funding provided by NHS England.

The creation of PCNs, while providing the foundation for a more efficient and better-integrated system of primary care, brings with it both challenges and opportunities. One particular challenge concerns how PCNs can take advantage of the efficiencies that could be realised through reform of NHS estates. Greater collaboration between GP practices raises the possibility of consolidating existing property assets to achieve efficiency savings. By grouping key services in one location, PCNs will be able to cuts costs by reducing the replication of facilities and enjoy economies of scale related to administrative savings. However, in many instances, to achieve these savings PCNs will need new purpose-built centres that can provide a host of primary and community care services. This represents an opportunity for private firms that specialise in the provision and management of healthcare facilities. As PCNs become more established, there is likely to be increased demand for facilities that can improve outcomes for patients and help the NHS work more efficiently.

PCNs require GP practices to work more closely with each other, as well as with other primary and community care providers. To ensure this communication occurs effectively, there will need to be significant investment in digital technology to facilitate record sharing and appointment booking. Also, it is a key element of the NHS Long Term Plan that, over the next five years, PCNs will have to offer patients telephone or online consultations. NHS England is also planning to use digital technologies to expand the GP workforce by offering more flexible working conditions to part-time GPs. It was announced in the Long Term Plan that NHS England would “create a new framework for digital suppliers to offer their platforms to primary care networks.” There is a clear need for increased use of enhanced digital technology to help administer the new network of PCNs, and it is a need that many firms will be looking to fulfil.

However, there are some risks to the private-sector from the reforms in the new GP contract. Under the new contract, GPs will not be allowed to advertise private healthcare services in their surgeries, nor will they be allowed to permit private GPs to offer services in their practice. These rule changes mean that practices will not be able to charge patients to see a doctor more quickly and patients will not be able to be charged for services that are offered for free on the NHS. The aim is to create a stricter divide between NHS GP care and the private sector. There is the suggestion that this is the first step by NHS Chief Executive Simon Stevens towards reducing the privatisation of NHS services, as NHS bosses are concerned that privatisation undermines the ability of the NHS to provide ‘joined-up’ care.

The NHS is undergoing significant reform, and with this reform the NHS is taking on a Janus-faced approach to the private sector. In many areas, the NHS will not be able to move forward without working closely with the private sector, yet stricter rules could be on the horizon that will limit the involvement of private firms in the supply of NHS services. There is certainly room for the private sector to thrive working with, and alongside, the NHS, but there could be some twists in the road ahead.

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Buy low, sell high street?

In recent years the high street has not been a happy hunting ground for many private equity firms. Competition from online retailers and high rents and business rates have combined to create a difficult trading environment. These pressures have come to bear on several private equity-backed high street names, including Toys ‘R Us, Debenhams and HMV. The government is well aware of the problems facing the high street and is introducing plans to revitalise an important element of the national and local economy.

In December 2018, the High Streets Expert Panel published its independent report into the future of British high streets. The High Street Report made three separate recommendations: the creation of a High Streets Task Force, the establishment of the Future High Streets Fund, and various short-term measures to support town centres. The task force aims to facilitate collaboration between local stakeholders and provide expert help and support so that high streets can be revitalised from the bottom-up, rather than having top-down solutions imposed on them. This will be achieved through improved data sharing, allowing town centres to assess their performance and compare their progress to that of other towns, and the provision of expert help in areas such as communications and project management. Streamlining the planning system is also within the remit of the task force, and it will play a role in encouraging planning decisions to be made more quickly and in line with local strategies. However, the task force has yet to be officially launched, and there has been no announcement on who will be part of it.

The report also recommended the creation of the Future High Streets Fund to provide local authorities with the resources to improve town centres. The government has allocated £675 million to the fund, with towns able to bid for grants. The money from the fund will be used for two broad purposes: to support the development of long-term strategies for high streets and to co-fund projects to improve physical infrastructure, such as transport links and physical spaces in town centres. Bids for grants from the Future High Streets Fund will be undertaken in conjunction with the High Streets Task Force; the Task Force will support the bidding process and ensure any regeneration involves local stakeholders. The report also proposed measures to make town centres more visually appealing and reduce the number of empty shop fronts, as well as suggesting local authorities need to be mindful about providing adequate parking to encourage shoppers to travel to town centres.

The government has deliberately avoided creating a plan that must be applied uniformly to high streets up and down the country. Towns will have different consumer profiles and be able to exploit different advantages (geographical, historical, cultural etc.). As such it makes sense for local areas to set the terms of their own regeneration.

The Institute for Place Management echoed this sentiment in its report High Street 2030: Achieving Change, which was released in conjunction with The High Street Report. The High Street 2030 report presented evidence to support the development of policy towards town centres, based on the experiences of towns that had successfully achieved change. The report concluded that towns need to avoid being identikit copies of one another and that people value independent shops, community atmosphere, cultural venues, heritage and unique features.

These findings present a problem for those looking to either make a success of their existing assets or are trying to find new avenues for investment on the high street. The success of many high street brands is founded on their name recognition and the guarantee of a particular standard of good or service at a consistent price nationwide. This recipe for success is at odds with the approach to regeneration successfully adopted by towns such as Altrincham and Shrewsbury, where the focus has been on independent retailers and unique local features, such as historic market places. Investors will need to come to terms with a new era where consumer demands for authenticity and individuality are matched by government policy that aims to establish a new breed of high street.

The government has neither the will nor the ability to compensate for the huge shift in consumer behaviour away from the high street and towards online shopping. A tax on online retailers has been discussed, but if it was to be introduced, it would not be imposed at a rate that would level the playing field, especially given the cost advantages enjoyed by online retailers. Such a tax could also be illegal under EU rules. Business rates have been blamed for much of the high street’s malaise, and there have been calls to reform the business rates system. However, according to the Institute for Fiscal Studies, there is little evidence that reducing business rates would help the high street over the long-term. Any decrease in business rates is likely to be matched by an increase in high street rents, leaving businesses no better off.

When it comes to making a success of a high street business, it appears that small really is beautiful. The challenge for investors is to find businesses that can engage with local stakeholders and become part of the fabric of a town or city. There will always be room for brands that can use their economies of scale to provide consumers with good value products; however, the product itself is no longer enough to sustain a high street presence. On the high street of the future, businesses aren’t just selling goods and services; they are selling themselves.

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Investing in fertility with IVF

The in vitro fertilisation (IVF) sector has been catching investors’ attention for some time, with growth accelerating due to demographic trends, a market which looks ready for consolidation and stretched NHS budgets increasing the amount of lucrative private work available. But with promising commercial indicators for the market are there any political, policy, or regulatory risks investors in the sector should watch out for?

Accelerating sector growth

Change may be coming in the way the NHS commissions IVF providers. NHS England is working to develop a benchmark price to inform what CCGs should pay for IVF. This is aimed at reducing the significant variation in pricing across the country but may also lead to a reduction in the average price paid. Commissioning guidance aimed at improving adherence to the NICE guidance was also promised by NHS England in the face of concerns over variation in commissioning across CCGs. However, rather than an NHS England-led review, this is now being primarily driven by NHS Commissioners, the national member organisation for CCGs, suggesting that it has been de-prioritised for national focus.

The emotional investment of patients, and the few other options available to those with fertility issues, mean IVF patients are considered particularly vulnerable and the issue is likely to stay active in discussions around pricing and NHS availability.

Scrutiny of “added extras”

There has been criticism from public figures, such as Labour’s Lord Winston, a fertility expert, who have verbally attacked some private clinics for allegedly exaggerating the chances of patients achieving a successful pregnancy as a result of IVF cycles. Added extras, which some clinics offer, such as endometrial scratches, embryo glue, and immune therapy, have come under particular scrutiny, with Lord Winston saying there is little evidence for their efficacy.

In other areas such as dentistry, government has sought to encourage competition by requiring clinics to publish detailed price lists and supporting the creation of comparison websites, so patients can more easily research service levels and affordability. Media commentators have suggested similar measures could be taken forward for IVF as part of government’s consumer rights agenda.

Though there is scope for some regulatory disruption, many of the other trends are positive. The sector, which contains many small operators, looks ripe for consolidation and scaling and there has been some investment from private equity already. Nexxus Iberia and Capzanine acquired a 35 per cent stake in the largest European fertility network, Eva Fertility, this year; Mobeus Equity Partners provided growth capital to Bourn Hall, the first IVF clinic in the world, in 2014; and Create Fertility, a low-cost provider, received backing from Livingbridge Capital in 2013. The UK’s largest private fertility clinic group, CARE Fertility has been wholly owned by Bowmark Capital since 2012.

The UK market varies in scale and ownership. In 2017 there were 132 licensed clinics and laboratories in the UK of differing types. Some performed 4,200 cycles of IVF treatment whilst the smallest provided fewer than 100. Most (34 per cent) are privately owned, many of which are part of groups owning clinics across the country. 29 per cent of clinics are run by an NHS/private partnership where self-funded patients can access services through NHS institutions. NHS-only services make up just 22 per cent of all clinics.

“Patchy service” within NHS

One driver of demand is the increasing restriction in IVF availability on the NHS. NICE guidelines for England, which must be considered by Clinical Commissioning Groups (CCGs) but not necessarily adhered to, specify that women aged under 40 should be offered three cycles of IVF treatment and those aged 40 to 42 should have access to one cycle.

However, the Human Fertilisation and Embryology Authority (HFEA), the sector regulator, has noted that the trend is for CCGs to “reduce the number of treatment cycles they fund”, resulting in “patchy service”. This has been corroborated by Fertility Fairness, the campaign for access to fertility treatment, which has published an audit showing the treatment CCGs offer across the UK. Just 12 per cent of CCGs now follow NICE guidance, down from 24 per cent in 2013. Seven CCGs offer no IVF at all, while many are introducing new criteria to restrict treatment such as: changing the definition of an “IVF cycle”; lowering the upper age limit for treatment to 35; restricting treatment based on Body Mass Index; and stopping` treatment based on past relationships.

Falling fertility

Another factor is reduced fertility and delayed parenthood. According to the HFEA, 32 per cent of heterosexual couples in the UK experience unexplained infertility, with the primary treatment being IVF. This high rate of infertility can partly be explained by the increase in the average age women have their first child – up from 27.2 years in 2005 to 28.6 in 2015. In 2014, 52 per cent of all live births in the UK were to mothers aged 30 and over (with 67 per cent of fathers over 30).

Declining male fertility is also a key factor causing an increase in IVF usage. Sperm counts of men in western countries have more than halved in the past 40 years and are falling by an average of 1.4 per cent per year. Male infertility, for which there is no treatment, is the main reason for people pursuing IVF and therefore its growth will continue to drive demand.

To ensure investors can take advantage of these trends towards growth, they must navigate their way around the increased attention on IVF access and pricing and mitigate potential regulatory hurdles. They must pay close attention to stakeholders commenting on the sector and carefully consider how their companies will operate and sell to patients.

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Why investors should start caring about what the government thinks of national security

When WA first wrote about these changes last month, the government’s proposals for competition regulation were flying under the radar. Thanks to a devastating report by John Fingleton, former Chief Executive of the Office of Fair Trading, they are now starting to get the attention they deserve. More wide ranging than the reforms introduced in June 2018, which allowed the government to intervene more easily in mergers affecting three specific sectors, these reforms represent a significant change to the way all investment will be conducted in the UK.

Under the new proposals, the Competition and Markets Authority (CMA) will be entirely removed from the process of investigating deals related to national security. Instead, an entirely new unit will be set up to deal with these cases, with the government estimating that over 200 cases will be reviewed on national security grounds every year. This would be a significant increase when compared to the current system, which has opened eight informal investigations on national security grounds since 2003.

The huge expected increase in caseload is driven by the changing scope of the government’s powers. Although the consultation specifies sectors where intervention is most likely (civil nuclear, communications, defence, energy and transport) any Secretary of State would have would have the power to call in any deal regardless of sector. In many cases this would be the Secretary of State for Business, Energy and Industrial Strategy, although the consultation also specifies that “government proposes using “the Senior Minister” in any legislation, which would be defined as covering Secretaries of State, the Chancellor and the Prime Minister”, meaning that any Senior Minister would be able to trigger a review, regardless of the sector it affected. Additionally, the changes would not only affect mergers and acquisitions, but would also give the government powers to intervene in investments, loans, and acquisitions of intellectual property rights, including copyright and patent rights, and physical property.

This amounts to a fundamental change in the way that UK approaches mergers and competition law, particularly foreign investment. While the changes will also affect UK based firms, by citing ‘national security’ as the reason for the changes, it is clear the government has foreign firms in mind when making the reforms. This could result in a reduction of foreign investment in the UK, as firms become deterred by the increased bureaucracy which acquisitions would have to negotiate, and the uncertainty generated by new rules and a new regulator. As Fingleton sets out, if this does deter foreign investment, then the general value of UK assets is likely to decline, meaning bad news for the wider industry too, particularly as Brexit continues to be at the forefront of some investors’ minds.

The proposals won’t just affect foreign investors, as the effect of the changes will be felt across the whole sector. Investors, faced with a new system and a new regulatory body, will have to navigate additional bureaucracy and new uncertainties regardless of where they are based and what sectors they are investing in. There is no word from government yet on when the results of the consultation will be announced, but investors should use the proposals as a signal of government intention and start to prepare. Increased awareness of the political mood across parliament, and among ‘Senior Ministers’ will become increasingly necessary as investors enter this new regulatory world.

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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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Negotiating the future: What a Labour-led government could mean for investors

Speculation about the likelihood (and outcome) of a snap General Election to break the Brexit deadlock has been rife in recent days. Boris Johnson has been adamant that he won’t call one this side of the Brexit deadline on 31 October. Other commentators believe that a no-confidence vote held shortly after recess might mean he has no other option. The whys and wherefores of how this might play out has been the subject of acres of column inches in recent days. What seems to be increasingly apparent, however, is that even if Labour performs well at an election in the near future, it is more than likely Jeremy Corbyn would have to cut a deal with the SNP, the Liberal Democrats, or both if he wants to form a workable government.

Recent polls show the Conservatives taking just over 30 per cent of the vote in the event of a General Election, with Labour currently sitting in second place on around 25 per cent. Despite the Conservative’s current lead, their polling would not guarantee them an outright majority, potentially opening the door to a Labour-led government.

Labour’s fence-sitting on Brexit has squeezed the party’s vote share, with the Lib Dems the main beneficiaries of Labour’s jumbled message, and the SNP still dominant in Scotland. Boris Johnson’s ‘do or die’ commitment to Brexit has further widened the distance between the Leave and Remain parties, leaving Labour in the middle, and with the SNP and the Lib Dems both hoping to win at least 40 seats should an early election be called. If the SNP and the Lib Dems do achieve this level of success, it will leave them with the greatest number of seats held by minor parties in the modern era, significantly increasing the chances that neither of the major of parties can command a majority in the House of Commons.  If these numbers play out, the two parties will be the kingmakers in a post-election fight for control of the House of Commons.

The art of the deal: What would a Labour-led government look like?

A formal coalition between Labour and either the SNP or the Liberal Democrats is much less likely than dual confidence and supply agreements with each party. The SNP’s aversion to voting on matters that do not affect Scotland largely rules out a formal coalition and the Liberal Democrats will be very wary of going into government with a Corbyn-led Labour party, not least because of their bruising experience as the junior coalition partner with the Conservatives between 2010-2015. For the SNP, any deal would almost certainly only involve their support for key pieces of national legislation, e.g. Brexit and key Finance bills, with a similar arrangement made with the Lib Dems to cover votes that affect England. Depending on parliamentary numbers, this could produce a curious outcome where a Labour-led government has a working majority for UK legislation, but not for legislation only affecting England.

If an election occurs before the UK has officially left the EU, a second referendum or even revocation of Article 50 will be top of each party’s shopping list, and a deal with a more Brexit-agnostic Labour party would be preferable to propping up a pro-Brexit Tory party. John McDonnell, the Shadow Chancellor, has now publicly stated that he would be happy to allow another Scottish independence referendum in return for an alliance with the SNP to keep the Conservatives out of power. Theoretically, if the Conservatives were willing to sacrifice their leader and/or grant a second referendum on Brexit, there could be room for an agreement with the Liberal Democrats. However, given the current mood of both the parties, the probability of this occurring is extremely low. Whatever the outcome, both parties will seek to leverage far more than concessions on Brexit and, in the case of the SNP, a route to a second Scottish independence referendum.

The SNP and the Lib Dems are the two most likely partners for Labour to come to a deal with, given the number of seats they can potentially bring to the negotiating table. But, in a closely run election, smaller parties such as Plaid Cymru and the Green Party could also hold sway. Plaid will echo the demands of the SNP and the Lib Dems on Brexit, along with wanting more powers delegated to the Welsh Assembly, potentially as a first step toward full independence. The Green’s support will come at the price of a much more ambitious decarbonisation agenda, although this could tally well with Labour’s plan for a Green New Deal.

SNP policy priorities

The SNP and Labour share a great deal of common ground, largely centred around opposition to austerity – support for the reversal of welfare cuts, increasing public sector pay and tax increases for high earners, so there is scope for the parties to work together. Nevertheless, the SNP has recently made a number of costly commitments in areas such as health and the environment, and any deal with Labour would likely involve ensuring these commitments can be fulfilled. This could be achieved through assurances on the future of the Barnett formula, greater tax-raising powers for the Scottish Parliament and more financial support from Westminster for specific projects.

Energy and transport infrastructure investors will be particularly interested in the SNP’s commitment for Scotland to reach net-zero greenhouse gas emissions by 2045 at the latest – the toughest environmental targets in the world. To achieve this, money will need to be made available by the Scottish government to support an ambitious rollout of electric vehicle infrastructure alongside efforts to significantly decarbonise the electricity generation sector. While Labour will be reluctant to allocate too much cash to Scotland that the SNP can take credit for and given their own spending priorities, bolstering the fight against climate change should be a winnable argument for the SNP.

Scotland has also recently seen its health care bill increase rapidly; the 2019-20 health budget is set to increase by 3.4 per cent in real terms and will account for nearly half of the Scottish government’s overall spending budget. Scotland’s Auditor General has said the extent of the SNP’s health spending would mean real-terms spending cuts in other areas as the Scottish government faces a more than £1 billion shortfall over the next three years. The SNP’s price for supporting a Corbyn government may be that more money is made available to the NHS in Scotland to spare spending cuts elsewhere. This could be welcome news for those operating in the pharmaceutical and health sectors as the SNP will look to continue their investment in health infrastructure and staffing.

Liberal Democrat demands

Parliamentary mathematics mean that any confidence and supply deal may also have to include the Lib Dems. Jo Swinson, the new Lib Dem leader, has ruled out a deal with a Jeremy Corbyn government. This could be read as a tactical stance ahead of any negotiation, though the Lib Dem’s extremely poor showing at the ballot box after their coalition with the Conservatives may mean Swinson’s position is one of party-preservation. The Lib Dem priority is undoubtedly one of stopping Brexit, but there are other policy areas where they will seek concessions, should they come to an agreement with Labour.

Much of Labour’s recent policy platform has been based on nationalising key elements of infrastructure, including water, rail and energy networks, to provide what they envisage to be a better deal for consumers and to increase environmental protection. The Lib Dems are not natural supporters of state monopolies, and Swinson has publicly criticised Corbyn’s nationalisation plans, which suggests Labour may have to water down these commitments in the event of any deal between the parties. This may not involve a complete abandonment of the nationalisation agenda, but the Lib Dems could force Labour to restrict their nationalisation plans to facilitating a more localised approach to utility provision, which would fit in well with their wider devolution ambitions.

Another area where the Liberal Democrats could seek to force change would be by demanding greater devolution to the regions. More powers for ‘metro mayors’ and traditional county councils could have important implications for how local infrastructure spending decisions are made. For example, if other elected mayors were given the same powers as those allocated to the Greater Manchester Combined Authority, it would give them much greater scope to raise and control funding to support locally directed infrastructure projects, opening up the possibility of more spending in areas such as transport and housing.

Labour’s compromise

The conundrum for Labour will be how much moderation of their agenda they are willing to accept as the price of power. It may be that when the results are in, Labour only requires the support of either the SNP or the Lib Dems and can play one potential partner off against the other, protecting much of their policy platform. The SNP is currently warmer to a deal than the Liberal Democrats, and it could be that the Lib Dems will only enter into a deal with Labour if Corbyn steps down; this may seem an unlikely outcome at the moment, but some in the Labour Party may see it as the perfect time for him to make way for a new leader.

If a deal is not possible, Labour will be forced to govern as a minority government (providing it is the largest party). Because of the various alliances that could be built on the issue of Brexit, it is possible the party could sustain itself long enough to recalibrate the Brexit process towards a second referendum. Beyond this, it will be difficult for a Labour government to pursue its radical policy agenda without an outright majority. Both the SNP and the Lib Dems will be willing to support Labour on some issues, but it would effectively give the two smaller parties a veto on any legislation they did not like the look of, which could mean Labour having to push on with a severely diluted set of policies. If this proves to be unsustainable, another election will have to be held. This would be the first time the two elections general elections had taken place within 12 months since 1974.

In any negotiation, Labour will be in an uncomfortable position. The left of the party, in touching distance of power for the first time in several generations, will need to seize its chance or risk losing it forever. The Lib Dems and the SNP will be well aware of this and will seek to extract the maximum possible concessions from any negotiation. If Labour does take power, it could come with several (billion) strings attached.

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