Disdain for ‘fat cats’ is not a reason for inaction, writes David Morton
Scotland is no stranger to political uncertainty over the past few years where referenda and elections have helped to put the brakes on a fragile economic recovery. Following the UK’s vote to leave Europe, one of the few certainties is that political uncertainty is set to remain, with pre-2008 levels of bank lending unlikely to return anytime soon.
If corporate lending in Scotland was on the road to recovery in the period following Scotland’s independence referendum, the vote to leave the EU has added extra miles on the journey before we can return to a healthy borrowing environment.
The business community is certainly not beating a path to the banks’ door, despite Scottish banks being keener than ever to lend to the corporate community. The intense competition amongst banks, together with continuing low interest rates, makes it an ideal time to be a borrower, provided you have a solid business with a good track record, and the confidence to grow further.
The lack of management buyout activity is another important factor restricting the banks’ ability to lend. Typically buyouts occur when a mature business is sold by founders to the existing management team, thus providing an exit for founders and incentivising management to excel in performance.
Buyouts require capital, and are traditionally achieved through a combination of bank debt and private equity. In return for a substantial ownership stake in the business, these private equity or venture capital funds provide the necessary funding alongside the banks to acquire the business.
For those who remember the nineties, 3i, a major private equity player operated from offices in Glasgow, Edinburgh and Aberdeen often doing a deal a week. However, due to a number of factors this frenetic activity gradually abated and there is now a dearth of private equity funds operating in the Scottish market – to put things in perspective, 3i no longer has an office in Scotland. As larger deals tend to make bigger returns for the same effort spent, focus has increasingly been given to the South, where there are more large deals to be done.
For founders of burgeoning Scottish businesses, even if they choose to exit, the most likely route is through a trade sale, usually to a larger competitor. And if the buyer comes from overseas, this removes value from the Scottish economy.
So, how do we change the situation? Organic growth may be the conservative way forward but if we want a progressive economy in a nation well regarded for its entrepreneurs and enterprise then there is a requirement for increased private equity and the opportunities it brings. .
How then can we incentivise private equity funds to invest in Scotland? An obvious solution would be tax incentives for investment in Scottish businesses. These are already available to individuals investing in start-up companies but could be extended to private equity funds in some manner to enhance their return on investment in Scotland. Doing so could increase overall tax takes, offsetting any lost revenue from individual transactions.In the current political climate with its disdain for “fat cats”, such a solution may not be palatable but there is a need for a kick-start to transactional activity. While properly incentivised private equity funds may not be a panacea for all ills, they definitely provide scope for increasing activity, and could help to grow a confident economy to the benefit of all.
• David Morton is a partner at DLA Piper in Edinburgh