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Covid-19 and UK government support for private equity

3 April 2020

In terms of an economic response to the impact of Covid-19, the UK Government has so far come off smelling of roses. Chancellor Rishi Sunak responded early on with a package aiming to see off the impact on UK companies and protect the Conservative’s business-friendly reputation.

A determination to avoid the mistakes of the global financial crisis and focus on employee job protection, as well as businesses, saw the biggest ever package of support for UK companies.

The scale of support is bold and unprecedented. But as we navigate the support available to our own portfolio companies, there are hurdles and gaps apparent in the measures presented so far, which mean that risk is far from gone and scant protection is available for investors who have backed these companies and the jobs they create.

Government support for SMEs

Let’s take a look at some of the principle support mechanisms available:
  • The Job Retention Scheme (‘JRS’) – 80% wage support for designated furloughed (non-working) employees up to £2,500 per month initially until the end of May
  • The Coronavirus Business Interruption Loan Scheme (‘CBILS’ or ‘BILS’) – access to business interruption loans which are 80% guaranteed by the Government
  • VAT deferral (one quarter for one year at present)
  • Deferral of PAYE/NIC/Corporation Tax on a case by case basis using the HMRC ‘Time to Pay’ service
  • Business rates relief

Clearly the JRS is extremely welcome and allows businesses to retain staff, not only preventing redundancies but helping them to get back to normal once things stabilise, rather than having to expend time and money on re-hiring.

Access to loans under CBILS will be critical for many businesses in the UK. It seems likely that more political pressure will be needed to free these up, as at present, banks seem reluctant to take new credit risk on the 20% not guaranteed cases, where the need is most pronounced.

The situation is under daily review as this unfolds, alongside the inevitable bottleneck of demand for accessing all measures across the country. To be truly helpful, the cash will need to be deployed quickly for businesses to continue their operations. Feedback from BVCA members at the start of April has not been positive in terms of ease of access.

As for rate reliefs and tax payment deferrals, these will allow businesses the breathing space they need to concentrate on implementing short-term business changes to boost their chance of survival.

Support for private capital

We are yet to see anything resembling a loss of profits scheme for those businesses most impacted. Whilst understanding it to be a second order priority to health and wage/self-employed support, it will be galling for the pain of this to be borne by chance according to which asset was held, on the shoulders of the equity holders.

The insurance industry has suggested that only an extremely limited number of companies will have cover enabling them to potentially claim on their insurance for the presence or impact of the Coronavirus pandemic, in order to offset business losses (source: ABI). And, at present, it looks unlikely that the Government will step in.

With private equity and venture capital backed businesses responsible for over 843,000 UK jobs (source: BVCA), perhaps in time this will change, so that those exposing themselves to the risks of backing SMEs are able to gain some measure of support, be this through loss relief or another mechanism.

When the crisis passes, there will be many businesses in the UK which will need access to capital to deal with debts accumulated in these difficult times. Companies may also require funding for working capital in order to ramp back up. And, of course, companies that have remained insulated will be looking to grow, perhaps taking greater market share if competitors have not fared as well.

Private capital has the potential to play a huge part in the UK’s SME recovery story, we want to ensure that future potential investment is not discouraged.

Claire Madden, Managing Partner
April 2020

Sources

1. Abi.org.uk
2.BVCA feedback on impact of COVID-19 on the UK private equity and venture capital industry, 26 March 2020.

 Russell O'Connor
07760 282 586 or Email

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