17 minute read
markets
This year has been tough on the markets. And with further inflationary pressures around every corner, a war raging in Ukraine and disrupted supply chains, what does the economic uncertainty mean for the corporate services market and investors?
light in the darkness?
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Words:
David Stirling
AS THE TWO-YEAR pandemic began to fade there were high hopes last New Year’s Eve that 2022 might deliver some muchneeded global economic cheer.
But with inflation soaring in major economies, interest rate hikes to tackle the rise, the Russian invasion of Ukraine spiking energy prices and placing a strain on the global food supply chain, alongside zero-Covid policies hitting Chinese growth, that optimism has long since passed.
And that was all before the new UK prime minister announced – and then pegged back – an unexpected ‘mini-budget’ that spooked the markets and sent interest rates, and mortgage costs, spiralling.
Furthermore, indicators suggest the US and UK are already in or at least close to recession, sparking uncertainty and fear in the investor and corporate world.
According to the Investment Association, UK savers took £129m out of funds in July. Although this was well down on £4.5bn in June, it still marked the sixth month of net retail outflows this year.
“Some investment professionals will say financial markets are efficient and therefore can re-price themselves around economic and geopolitical uncertainty.
“Others will say markets are inefficient and therefore can be exploited to take advantage of mispriced assets,” says Tim Sanders, Senior Investment Director at TMGA Wealth Management.
“These two opposing views, combined with other macro-economic events, such as those experienced over the past 18 months, can lead to market instability and volatility – and, understandably, cause confusion and uncertainty for investors.
“Rarely do we see all asset classes, including equities and bonds, moving in the same direction. But that’s what we are experiencing at the moment – it’s certainly a difficult and unusual time.”
Sanders believes that while some investors are less comfortable than others during times of market volatility, a disciplined investment approach provides reassurance and confidence for investors. He says: “It’s important to have that approach, supported by a strong investment framework and a long-term strategic view.”
“We’ve seen turbulence in the markets before and we’ll certainly see it again. Embracing volatility, looking for new opportunities in areas such as technology, infrastructure and ESG, which are multidecade themes, and ensuring appropriate diversification, is key.
“If you combine this with a ‘keep calm and carry on’ attitude, and ignore shortterm trends and market noise, this will deliver long-term sustainable growth.”
PRIVATE EQUITY SLUMPS
The trends around private equity and M&A don’t look good either. The sector had a tremendous 2021 with, according to White & Case, a global total of 8,548 deals worth $2.1tn achieved. This was double the previous record set in 2007 – and more than double 2020’s $1tn.
“There was a huge acceleration in 2020 and 2021, which seemed counterintuitive as everybody was in lockdown,” says Ed Shorrock, Director, Financial Services Compliance and Regulation at Kroll.
“But managers found that they didn’t have to jump on a plane to do a deal. Buoyed by record low interest rates and more time available, they discovered they could do deals at a more rapid pace.
“Accountants, law firms – in fact anyone involved in financial services – were the busiest they had ever been.”
However, according to EY, 2022 has been more of a struggle. PE firms announced deals valued at $486bn during the first half of 2022, representing a decline of 18% from the same period a year ago and a decline of 9% from the second half of 2021. ▼
Firms have also struggled to raise funds, with $257bn raised to the end of June, down 15% on the same period last year. “The year 2021 was phenomenal and, really, even the first half of this year was on target to be the second greatest year in terms of numbers,” says Ogier Partner Richard Daggett, a member of the firm’s Private Equity Group.
“A lot of that was a reaction to the pandemic and finally being able to get out and start finding targets. It allowed PE houses to put to work the money raised previously. But over the past three months there has been a noticeable slowdown in terms of new buyouts. Deals are still happening but in general they have fallen away because of economic uncertainty.
“There are a lot of things going on, from the conflict in Ukraine to the energy crisis and a new UK prime minister. It’s harder to be bold and go out and make big acquisitions.”
The brakes on PE activity have come, he adds, from inflationary prices and rising interest rates, which are making it harder to finance deals.
“If you are going out and looking to acquire your target and leverage up a reasonable percentage of that then levels of borrowing are important,” Daggett says.
“It means you’ve got to find the right deal whereby perhaps you don’t need as much financing. In addition, when banks are looking to lend, they are asking a lot more questions given the dark storm clouds on the horizon. They are doing more stress-testing on loans – what would happen if inflation goes to 13% or 14%, for example.”
PE houses are also reticent about paying over the odds for targets and are focused on getting the right valuations while sellers are also waiting for better times to exit.
Daggett says: “Trying to align prices and find a point where both parties are happy is really difficult at the moment, although there are opportunities out there, such as more inflation-friendly infrastructure assets.
“PE managers are stress-testing potential targets to see if they can ride out what is coming over the next year. They don’t want companies with a huge exposure to rate rises. PE houses are also looking at their current holdings and deciding whether they need shoring up and more investment in these times.”
PE houses may also have taken on board lessons from the frenzy of 2021.
“You have to question some of the prices that were being paid for assets,” Shorrock says. “There was such competition that there was a risk of underperforming financials or increasingly regulatory due diligence and overpaying.”
Alex Di Santo, Group Head of Private Equity at Crestbridge, agrees that due diligence is an increased focus. That’s not only general partners at an asset and valuation level, he says, but also limited partners when allocating funds to a specific PE fund manager.
Di Santo says the LPs may consolidate their allocations with well-known PE names that have a track record of delivering through a recession.
Rarely do we see all asset classes moving in the same direction – but we’re experiencing that now
PE OPTIMISM
However, because of the funds that PE houses have built up in their war chests – dry powder – over the course of 2021, there is confidence that they are well placed to ride out present and future uncertainty. “PE is actually pretty well
PE is pretty well insulated, has a lot of firepower to stay invested and is more sophisticated than in the financial crisis of 2008
insulated,” says Shorrock. “The sector has a lot of firepower to stay invested, is more sophisticated than back in the financial crisis of 2008, and is more diversified across asset classes.
“They are also more long-term focused, which means they can bide their time until the market picks up again.”
Di Santo adds: “Investors expect PE managers to place that money and make good long-term investments in a recession. That drive is always there and as such funds will continue to be raised and get off the ground.
“There are still deals to be made at the right price in areas such as infrastructure, private credit, distressed assets at lower valuations and venture capital. It might be more challenging and will just take a little bit longer because of extra due diligence.”
Elsewhere in corporate markets, the global IPO market has fallen this year with, according to EY, global volumes dropping 46% in the first half of the year alone. SPACs activity, notably in the US, has also dwindled in these uncertain times. “The corporate markets scene is quieter. Companies are parking IPOs as they are not going to get the prices they thought they would get even six months ago,” says Daggett. “With M&A, nobody wants to make the big moves.”
However, Matthew Allen, Senior Director, Corporate Services, at JTC, remains positive. “Our clients are still active and looking to do their best to take advantage of the current economic situation however possible,” he says.
“With real-estate clients, there is no rush to sell assets, and clients in the renewable energy space are raising additional capital.”
ASSET VALUES
He adds that there is increased uncertainty around asset values where clients are looking to purchase, with the ability to raise capital varying from sector to sector.
“It seems to be more important than ever to have an investment proposition that is differentiated from others in the market. We have seen an increase in the number of joint venture structures, some of which are cross-border, in order to access capital quickly and to allow deals to be done,” Allen states. “We are leveraging our relationships with banks, legal advisers and tax advisers to help keep our clients’ deals moving forward.
“Other areas where we are seeing a requirement for additional support remain unchanged: regulatory change is one area where we are able to support our clients, providing director and governance services. This enables our clients to focus on their core business.”
Other challenges, he adds, include the ongoing cost to run structures and bank account opening, which is still a difficulty and becoming more so.
“Our main advice to clients is to continue to play to your strengths, stay close to investors and allow service providers to focus on running your structures,” Allen says.
Sanders also stresses the need for providers to enhance communications with clients during these times.
“It is crucial to give regular updates on market conditions and have face-to-face meetings with clients,” he says. “It may be an unknown future, but communication is key to providing assurance to investors in uncertain times.” n
New developments in Guernsey Insolvency
Ogier Partner Alex Horsbrugh-Porter (pictured), Senior Associate Michael Rogers and Associate Chloe Gill set out all you need to know about the new Guernsey Insolvency Rules
GUERNSEY’S INSOLVENCY LAW regime is due to be updated and revised by the Companies (Guernsey) Law, 2008 (Insolvency) (Amendment) Ordinance 2020, passed on 15 January 2020, which is anticipated will come into operation in the latter part of 2022.
The Insolvency Rules have been developed by the Insolvency Rules Committee (IRC), of which Ogier Partner Alex Horsbrugh-Porter is a member, with a view to addressing some of the deficiencies with the current insolvency regime.
The rules provide background and context to the changes within the Ordinance and provide insolvency practitioners and industry-related parties with guidance on their practical application, addressing the following topics.
1. MEETINGS OF CREDITORS AND SHAREHOLDERS
Meetings of creditors and shareholders will now be governed by sections 386A, 398A and 399 of the Ordinance. These detail the applicable provisions relating to such meetings, requiring liquidators to call initial meetings of creditors and send explanation to creditors of the aims and likely process of the administration.
The Ordinance specifically gives the IRC the power to make regulations in respect of these meetings.
During the course of a winding up, where a liquidator becomes aware that the company does not in fact satisfy the solvency test, pursuant to section 398A of the Ordinance, the liquidator will be required to convene a creditors meeting.
Section 398B addresses the scenario where a declaration of solvency has not been made and liquidators are required to convene a meeting of creditors, unless they are satisfied that there will be no distribution to creditors.
The Ordinance also inserts provisions prior to dissolution of a company, where a final meeting of shareholders is called but no quorum is present.
The draft Insolvency Rules cover the following: • The requirement for a meeting to be held and specific circumstances when the requirement can be dispensed • Convening creditor meetings and general meetings including timeframes • Notice of creditor meetings and content of notices • Location, quorum, chairing, voting at creditor meetings • Suspension and adjournment of creditor meetings • Proxies (including a standard form) • Minutes • Electronic communication regarding creditor meetings.
2. REPORTING DELINQUENT OFFICERS
Under the Ordinance (sections 387A and 421E), administrators and liquidators will have a duty to report to the Guernsey Registry and, in the case of regulated entities, to the Guernsey Financial Services Commission, if it is considered there may be grounds for a disqualification order.
The draft Insolvency Rule will provide full information on the detail and format of the report, as well as introducing standard form reports.
3. DECLARATION OF SOLVENCY
Section 391A of the Ordinance requires directors to make a declaration of solvency. If a declaration of solvency is not made, the Ordinance requires that an independent liquidator is appointed (not a director or former director of that company). The liquidator will be required (subject to certain exceptions) to report to creditors and hold a creditor meeting.
These amendments ensure that liquidators of insolvent companies are independent and will be required to investigate the cause(s) of insolvency actions of company officers and ensure liquidators of insolvent companies communicate adequately with creditors.
The draft Insolvency Rule will cover the format of the declaration of solvency in standard form. It is also proposed that the definition of ‘solvency’ is consistent with section 527 of the Companies (Guernsey) Law, 2008.
4. DISCLAIMING ONEROUS PROPERTY
New provisions within the Ordinance provide liquidators with the power to disclaim onerous property, even though they may have exercised rights of ownership over the property – for example, by taking possession or endeavouring to sell it.
The amendments proposed by the IRC preserve existing contractual rights relating to: (i) close-out netting (ii) set-off or (iii) compensation – and any rights of enforcement are also unaffected.
The draft Insolvency Rule will address: (i) the terms of the notice of disclaimer (ii) details of a non-effective notice of disclaimer to interested persons for information and (iii) those circumstances when a notice of disclaimer is presumed valid and effective.
IN CONCLUSION
The proposed Insolvency Rules will be a welcome addition to the operation of the Guernsey corporate insolvency regime. They will assist insolvency practitioners and lawyers by creating certainty and predictability within the existing framework to the benefit of creditors and stakeholders, reducing costs to assist with increasing returns for creditors. n
FIND OUT MORE
Alex Horsbrugh-Porter advised on the amendments both as a member of the Insolvency Rules Committee and as a member of the Legal and Regulatory committee of ARIES, the pan-Channel Islands industry body.
Entrepreneurs and their succession It’s time to talk
Building a business succession or exit strategy can be one of an entrepreneur’s best investments. But in practice, traditional succession approaches can be complex. Joe Peacock, Client Advisor at UBS Global Wealth Management in Jersey, discusses why talking and communication are critical to a successful business sale or transfer, based on extensive experience working with entrepreneurs
IN THE SECOND quarter of 2022, a UBS Investor Watch survey found that 37% of investors were highly concerned about the value of the assets they’d pass on to future generations.
Succession and exit often depend not just on business value, but also on financial wealth and its ability to support the founder’s and their family’s lifestyles.
Current economic and market uncertainty, particularly around the path for inflation, may make entrepreneurs more worried about their next steps.
Building a business succession or exit strategy can be one of an entrepreneur’s best investments. But in practice, traditional succession approaches can be complex, and this is the reason why talk and communication are critical to success.
WHY DOES TALK MATTER, ESPECIALLY TO FAMILY BUSINESSES?
Family involvement can be a business’s biggest strength, but also its greatest weakness. Numerous studies show that family businesses tend to outperform listed peers. A UBS CIO analysis of the public family firms from the 500 largest public and private ones (where the family owns at least 32% of the shares and voting rights) indicates they generated consistent highsingle-digit excess return versus global equities between 2000 and 2021 while growing earnings 370% versus 290% growth for developed market equities.
Potential reasons include their long-term focus on revenue growth and profitability, lower-risk funding structures, and greater investment in research and development.
But the theory that families work for their collective good is not universally borne out in practice.
One study found that 85% of family businesses are not passed down to the next generation because there has been too little planning for defusing family disputes, or for preparing successors to become successful owners and managers. Some of the key challenges are: 1) A lack of transparency around decision-making 2) An inability of prior generations to cede control to the next generation 3) An over-reliance on formal documents such as wills, trusts and expressions of wishes, whose contents may only come to light after an emotive family event such as death or incapacity.
OPEN AND DYNAMIC COMMUNICATION CAN UNITE FAMILIES
Talking can help resolve reservations about passing a business to family members.
A 2018 UBS Investor Watch survey found that 57% of business owners were reluctant to retire and pass on their company because they were concerned family members would take the business in a different direction or sell it outside the family.
One conversation at a specific moment in time cannot address all the operational issues confronting an ever-changing business. Nor can a single discussion account for a family’s evolving financial needs or personal circumstances.
Ongoing communication also encourages the following generations to seek the counsel of family and trusted advisors (who can offer a wealth of experience and institutional knowledge) rather than look for answers elsewhere.
Tools to build effective communication include forming an independent board of directors or drawing up a formal family constitution.
TALK CAN BUILD FINANCIAL (AND FAMILY) RESILIENCE
Families, employees and stakeholders frequently rely on a firm for their livelihoods, so it can be vital for founders to communicate how their exit plans tie to financial resilience.
Business owners who are accustomed to holding most of their money in a firm they control may not have the skills or experience to become wealth managers. Managing a concentrated stock position comes with familiar risks but may jeopardise entrepreneurs’ financial wellbeing over the long term.
And challenges during a business sale or exit may show how entrepreneurs’ personal and commercial finances are insufficiently protected against potential risks (whether inflation, litigation or the loss of a key employee).
Trusted advisors can help business owners through this transition and guide them on how to manage their single stock position, build financial resilience and even devise asset protection strategies for peace of mind.
One of the most common – and potentially most destructive – challenges is how to distribute inheritance fairly.
It may seem ‘fair’ to split a family’s total wealth equally. But diluting business ownership across multiple generations, including those with no operational role, could lead to inefficient decisionmaking that maximises personal gain over commercial profitability.
Some family members may need more short-term liquidity than others, so an ‘equitable’ approach – seeking to distribute resources based on each family member’s requirements – may be another approach that should be considered.
TALK CAN HELP FOUNDERS AND FIRMS PREPARE FOR CHANGE
Corporate change is inevitable following a sale or succession. But business owners can prepare all parties by anticipating the extent and communicating early to minimise risks of key personnel loss or erosion of corporate culture.
Conversations can clarify how the nature of the change will impact employees and uncover ways to keep the workforce engaged and productive after the handover.
If business owners are preparing for liquidation, trusted advisors with corporate finance and wealth planning experience can discuss how to separate personal and commercial assets. This crucial step can reduce the risk of creditor claims that reach beyond the scope of the business.
And preparatory conversations with lawyers to set up a power of attorney or expression of wishes can smooth decisionmaking if a liquidation becomes necessary due to incapacity.
Family constitutions or mission statements are also useful additional tools to empower business managers and family members with objective guidance in a potentially emotional liquidation scenario. n
FURTHER INFORMATION
Whether you’re looking for trusted advisors to guide a sale or succession conversation or to connect with peers who have already walked the path, please contact Joseph Peacock for more information.
Joseph Peacock, Client Advisor, UBS Global Wealth Management in Jersey 1, IFC St Helier, Jersey JE2 3BX 01534 701143 joseph.peacock@ubs.com
You can also read the full report here: https://bit.ly/its_time_to_talk
