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

Posts Tagged ‘private equity’

The Celebrity Touch: What does it mean for Private Equity?

The announcement that Kim Kardashian is setting up a private equity firm has injected some celebrity magic into the normally sedate world of alternative investments. Kardashian, best known for her role in the reality TV show ‘Keeping up with the Kardashians’, is branching out into the investment industry with business partner, Jay Sammons, formerly of The Carlyle Group.

Kardashian’s new company, SKKY, is set to focus on sectors which the TV and social media star knows well: consumer products, consumer media and luxury. Traditionalists who say it will never work should look closer. With a reported net worth of over $1 billion, Kardashian is nothing if not a savvy businesswoman.

Skims, a clothing company which Kardashian founded in 2019, was valued at $3.2 billion in January 2022. Kardashian also sold a 20% stake in her cosmetic brand, KKW, to Coty for $200 million last year. Kardashian, who boasts 319 million followers on Instagram, knows how to leverage her celebrity for financial returns.

The experience of her new business partner, Jay Sammons, will of course help. Sammons was previously Head of Global Consumer, Media and Retail at Carlyle. He was also the driving force behind Carlyle’s investments in Beats Electronics, Vogue International and Ithaca Holdings. Sammons, in other words, has previous. Combined with Kardashian’s global influence, an investment from SKKY could well support portfolio companies’ sales and see stronger market valuations.

But it’s not as if Kardashian is the first celebrity to go down this route. Others have already started down the same road. Recently retired tennis superstar, Serena Williams, entered the alternative investment space in 2014. Her business, Serena Ventures, aims to invest in founders ‘whose perspectives and innovations level the playing field for women and people of colour’. Rapper Jay-Z founded Marcy Venture Partners focusing on ‘consumer and culture with an emphasis on positive impact’. Fellow music artist Snoop Dog has started Casa Verde Capital.

What does this celebrity trend mean for sector? Are there any political risks?


Stateside, President Biden already has private equity in his sights. Concerns about oligopolies and private equity buying swathes of American businesses are causing disquiet among policymakers across the pond. Celebrity involvement in private equity will only draw further attention to a sector that political heavyweights already feel is underregulated.

Whilst private equity involvement in a range of sectors in the UK periodically makes headlines, the government is still in a different regulatory place to policy makers across the Atlantic. Then Parliamentary Under-Secretary of State in the Department for Health and Social Care, Lord Kamall, said last year that ‘private equity plays a role in many companies in turning them around and retaining jobs.’ Under the new Truss government, which is expected to be less interventionist from a regulatory perspective than its predecessors, we can expect this trend to continue.

The Government has been clear that there are established processes for considering public interest concerns if necessary under the Enterprise Act 2002 and the National Security and Investment Act 2021. In an economic and energy crisis, there is little appetite in government to focus attention on the private equity sector.

Yet the risk for private equity investors in the UK is perhaps more acute than in the US. Celebrity involvement in UK private equity, should this become more widespread, has the potential to raise the profile of a sector that has largely managed to stay off the government’s radar.

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What does the Truss Premiership mean for private equity investment in football?

Truss’ in-tray is bulging as she enters No.10, and although a World Cup win in Qatar would undoubtedly inject a much-needed boost of morale to the long, bleak winter ahead, football is unlikely to be at the top of her to-do list.

But love it or loathe it, no one can deny the Premier League’s role as a significant source of UK soft power and, increasingly, world football’s dominant financial power. The 2022 summer transfer window is a prime example; Premier League clubs spent around £1.9 billion, pulverizing the previous record of £1.4 billion set in 2017. Put another way, England’s top twenty clubs spent more than all clubs in Spain’s LaLiga, Italy’s Serie A and Germany’s Bundesliga combined. The UK government plays a major role in creating a favourable political and regulatory environment for football’s finances to thrive, and under successive Conservative governments, that’s exactly what’s happened. Truss, as former Trade Secretary, will be acutely aware of the league’s status as one of the UK’s most successful exports.

Nevertheless, football has found itself increasingly in the political and public spotlight in recent years, most notably with the unprecedented wave of backlash to the now aborted plans for six Premier League clubs to break away and form a European Super League. Arguably one of the biggest own goals in recent football history, JP Morgan Chase & Co had allegedly intended to back the project. In 2022, the government found itself under mounting pressure to sanction then Chelsea owner, Roman Abramovich, possibly the most well-known Russian oligarch in the UK. Whilst Abramovich was not initially included on the sanctions list in response to Russia’s invasion of Ukraine, the sale of the club for over £4 billion to a consortium led by American Todd Boehly and private equity firm Clearlake Capital, was not without controversy.

Politicians have also made notable comments about footballers in the press. In the early days of the Covid-19 pandemic, then Health Secretary, Matt Hancock, said “I think the first thing that Premier League footballers can do is make a contribution, take a pay cut, and play their part.” The decision of footballers to take the knee in support of the Black Lives Matter movement and anti-racism in the sport also received mixed political response. Truss herself, then Equalities Minister, criticized the practice, saying it was “not the right thing to do” and a form of “identity politics focused on symbols and gestures.”

This has culminated in a remarkable appetite for change, primarily driven by fans, to address the culture, governance and financial flow in the existing football system. In his overly-enthusiastic opposition to the European Super League (despite hosting the former Executive Vice-Chairman of Manchester United just days earlier and declaring it – according to a government source – “a great idea”), Boris Johnson commissioned Tracey Crouch to chair the Fan-Led Review of Football Governance. The report is not a perfect roadmap (it says very little about women’s football or the sport’s toxic relationship with the gambling industry), but its diagnoses are damning: the underlying disconnect between fans and owners, inadequate regulation, and the cavernous financial inequality between the biggest and smallest clubs. To shake this up, the review proposes the establishment of an independent regulator which would oversee financial regulation in the sport, an increased role for fans in club decision making, and a 10% transfer levy on Premier League clubs to be distributed to the grassroots game.

Although Truss previously indicated that she would back the review’s 47 recommendations, recent rumours suggest that she will now backtrack on this due to waning support amongst influential players in her own team. Johnson recognised the popular appeal of football and was fully prepared to harness it ahead of the next general election. Truss will have bigger challenges and priorities to grapple with and is likely to lack the political appetite to drive forward a complete structural overhaul of the sport.

Football’s growing fanbase

Private equity has gradually been gaining a foothold in the world’s most popular sport and will be a keen spectator to Truss’ next move. Taking a lead from the billionaire soccer fans, Middle East petrodollars, and the spate of Chinese purchases which have dominated football investment over the past two decades, private equity, credit vehicles and hedge funds now represent the latest wave of investors. The industry was once considered too risky due to eye-watering levels of debt, inflated player salaries and the unpredictability of politics and febrile fans. The threat of relegation if teams don’t perform well means that returns are never guaranteed. However, investors are finding creative ways to address this volatility. Some have loaned money to keep Europe’s high-profile clubs afloat. Others have purchased media rights, bought a stable of smaller teams, or snapped up stakes in clubs as assets in peril. In 2019, US private equity firm Silver Lake paid $500 million for a 10% stake in City Football Group, which counts Manchester City, Yokohama F. Marinos in Japan, Girona FC in Spain, and New York City football team in its collection. Some are even pursuing the Holy Grail of investing in an entire league, like UK-based private equity firm CVC Capital Partners’ venture with Spain’s LaLiga.

European football has always been cash hungry, but that has grown more acute since the pandemic kept crowds away from stadiums and left some of the continent’s biggest and most successful clubs with soaring debt. Indeed, it was the catalyst behind the failed breakaway Super League. This had left many Premier League clubs reeling at the suggestions included in the Fan-Led Review, and arguing that proposed changes would reduce the competitiveness of the league and therefore its value to the UK. Private equity investors are concerned that cascading finances down the system will impact their returns. However, in an attempt to address some of the issues highlighted by the review, many clubs are taking remedial action (such as introducing supporter ‘shadow boards’) in an attempt to stave off full frontal regulatory reform. By addressing concerns around governance and financial fluidity downstream in the system, the Premier League could alleviate some of the existing political pressures.

Whether Truss gives the recommendations a red card or not, you can’t help but sense that change is on the horizon for the Premier League. Nevertheless, there will always be a strong demand for English football and fans will continue to buy tickets. These two simple facts mean private equity is unlikely to be relegated from football any time soon.

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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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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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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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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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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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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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