News: Insight & Opinion | 8 November 2021

Q4 2021 Private equity and debt commentary

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My commentary in the last two Reviews has been dominated by Covid. Amidst the initial outbreak last year, I covered the approach we were bringing to managing your investments and, in February 2021, this moved onto the actions we had taken and how your investments were fairing.

I am pleased to report that as at today’s date, thanks to the efforts of the management teams we have backed, support from our bank partners, and sensible funding structures, we have not made any calls on our clients to invest further into our direct private equity or private debt portfolio.

Clearly, it has not all been plain sailing and some client interest payments have needed to be deferred in order to assist with liquidity, but these have been few and far between. In most cases companies have been able to trade through with either no change to debt, or with some supplementary debt facilities, some of which the banks have elected to designate as CBILS assisted.

From our perspective, this government backed programme and the banks who have managed it have done a sterling job supporting UK companies. I fully expect all the loans made to our investees and the majority of the loans advanced elsewhere in the UK via this scheme, to be repaid.

At this point, I would like to acknowledge the assistance of an unsung hero of the Covid crisis, namely the ‘tax man’. HMRC and its staff, reacted quickly and I would say generously, in providing much needed liquidity in the early days of Covid, giving employers the confidence to continue business as usual as they could. In all but one case, PAYE and VAT in the portfolio are now back on ‘normal’ terms.

So where are we now? In summary, we have a number of businesses which have sailed through Covid unaffected or with improved trading. There is a second cohort where trading has been affected and we have probably lost around a year from the business plan. Then there is a third group which have been closed, some with nil revenue through no fault of their own, which have now re-opened and are re-building revenue, on the whole with good success – James Bond is helping us get back to the cinema, staycations have boosted UK leisure hotel revenue and eating out and visiting drive thru’s for a coffee are also firmly back ‘on the menu’.

A portion of the latter two groups have had to dig into cash reserves or take on more debt and all companies now have their own version of ‘Building back better’ (to borrow a phrase from Boris) to manage.

Of course, Covid is just one of the two big ‘one off’ events for business to manage. The aftershocks of Brexit’s seismic shift on the UK are now in play – amplified by Covid.
A recent survey of our CEOs indicated that trade with Europe has a long way to go to be frictionless and we really are missing a swathe of skilled and unskilled overseas workforce.

I am sure it will all be alright in the end as we find our way through, but ‘Building back better’ will not be straight-forward and there is no longer furlough or CBILS to help ease the pain. The same survey showed a good level of confidence in growth and a positive frame of mind amongstour management teams, with target
profitability a good step on from current levels. We have worked hard with CEOs and NXCs over the past few years and there have been management changes amongst the portfolio. It’s not always been easy, but CEOs report their teams to be committed to implementing their equity value creation plans, which by and large have remained consistent throughout the Covid/Brexit period.

For the first time in many a long year we can see significant inflationary trends with metal prices on the rise. There is also the well-publicised shortage of semiconductors which are ubiquitous in use from photocopiers through to motor vehicles, alongside wage inflation in many sectors. How significant and long term these trends will be is unclear, so we continue to prioritise liquidity and management quality in the portfolio as our prime defensive tools.

Hot on the heels of the 4x gross return made by our Carter Accommodation investment, which was sold in January 2021, was the AIM listing of Virgin Wines, which grew from a £12m MBO in 2013 to a £110m capitalisation on listing, generating a 7.6x gross return on investment. We may well have a few more high return investments already on the books and performing well to follow in their footsteps.

We remain committed to hunting out the best investments we can and managing them through thick and thin on your behalf and we thank you for your patience and your messages of support for us and the management teams we have backed together.