Lower-for-longer interest rates are patently bad for depositors and good for borrowers. But the widespread tacit assumption is that by borrowers we mainly mean mortgage payers and people who need unsecured loans. But a group for whom our historically low rates are also something of a boon is that oft-maligned sector, private equity – viewed as financial engineers by some, feral asset-strippers by others, and strategic business turnaround experts who also put their own money at risk by the industry itself.
Tim Hames, director-general of the BVCA (British Private Equity & Venture Capital Association), says: “Yes, on balance lower for longer interest rates are more attractive to investors. They finance deals, you can stretch money over a wider range of deals. We used to think 5 per cent was a low interest rate. They ran between 5 and 10 per cent. But we might not see those rates for another decade.
“If ten years ago you had forecast we would have such generally low rates for so long [0.5 per cent since 2009 cut to a mere 0.25 per cent this summer] people would have thought you were mad or we were trying to avoid another Great Depression.”
Back to the sometimes pejorative public image of the private equity sector, Hames says, somewhat disarmingly, that it is “still a concern” but that it is something to do with private equity being a “terrible name”.
“They are weird words. It does not tell you what it does, but it sounds complicated and must be something to do with banking or hedge funds.” Hames says this is a fundamental misconception. Banks and hedge funds aim to do clever things with money, he says, but they don’t sit on company boards or take control of business strategies as private equity players do. “Private equity are owner managers, they are actually part of the conventional business community.”
Hames cites private equity’s role, in the shape of BC Partners, in rescuing upmarket estate agents Foxtons – now FTSE-250 quoted – following a turbulent period of ownership, buying at the top of the market in 2007 just before the property crash. Of the liquidation in the 2008 recession of Woolworths, one of Britain’s best-known retailers, the BVCA chief says: “If my members had bought it, Woolworths would still be a business.”
One great advantage of the sector, he says, is that it can buy time for struggling businesses, and wait for a turnaround of their new strategies to bear fruit, typically between three and five years. There is no need to rush to the door or the banks.
Despite his defence of the industry, Hames is a realist. “You are only one horror story away from a business going wrong when it is in your charge. I know people who think [wrongly] that Sir Philip Green [of BHS notoriety] was in private equity.”
Hames’s background is far from just vanilla finance and earnings spreadsheets. He started out in the late 1980s as a lecturer at Oxford University, specialising in American politics, before moving on “through a mixture of poverty and ego” to the higher echelons of journalism with the Times between 1996 and 2009, during which he was at different times a columnist, chief leader writer and assistant editor. For a year he was special adviser to the Speaker of the House of Commons, John Bercow, before joining the BVCA in 2010 as director of policy.
After a spell as deputy chief executive of the organisation, he became director-general in May 2013. Hames says he was one of Napoleon’s “lucky generals” in the timing of taking the BVCA helm as there was a positive symmetry in play. The private equity industry had raised substantial money to fuel investment in 2006 and 2007 before the financial crash, had deployed it between 2009 and 2011 – “having a pretty good recession” – and largely got its money back with profits between 2014 and 2016.
Latest data shows that 2015, despite a backcloth of economic and political uncertainty, was another strong year for private equity and venture capital. The industry built on the steady levels of activity in 2014, with global investment by BVCA members rising to nearly £17 billion last year from £13.4bn.
Then Brexit happened. The BVCA did not take a formal position on the EU referendum debate, but early this year it had asked Ipsos Mori to survey 200 chief executives backed by private equity or venture capital money. A total of 83 per cent were in the Remain camp, 6 per cent Leave and 11 per cent don’t knows. Hames’s take on that watershed vote and its implications for his sector? He wrote a missive to BVCA members the morning after the vote in June, presciently forecasting an “eerie calm” in the immediate months following “although I did not anticipate Theresa May being canonised so quickly”.
He does not see Brexit as an overnight Lehman Brothers-type collapse that is a game-changer for his members. Rather, he predicts a period of uncertainty and “incremental” changes of mood on business deals and investment until Article 50 is triggered by the UK government and the two-year period kicks in of leaving the EU and trying to craft alternative trade deals with the single trading bloc.
He does admit, however, that the potential “erosion of London’s standing” as a global financial powerhouse is a concern to the BVCA. Hames says it is a “wild exaggeration” to presume that our departure from the EU means that private equity would put up the shutters in the UK. Historically, two-thirds of the money that is raised by the industry comes from outside the UK, and two-thirds is spent within the UK. The total amount of funds raised by BVCA members last year rose to just under £12bn from £10.8bn in 2014.
But there is a caveat. “If you were looking at a manufacturing business in Lothian and two-thirds of its historical market has been supplying a German business making other products, and you were not sure what the [post-Brexit] rules would be, you would consider worst scenarios. You would at least scratch your head.”
Hames also alludes to private equity’s strong presence in the UK restaurant industry, which tends to employ a high proportion of foreign labour, with obvious implications if there is an immigration clampdown as part of the UK’s exit from the EU. “There won’t be any problem in our members and the companies they have taken over bringing in that ‘top Italian chief executive’, but there is a grudging recognition that the world will change on that lower level and it will be much harder to argue to recruit waiters from Latvia rather than Lewisham.”
There are still bargains out there, however, he says, citing the oil and gas industry in general, and its Aberdeen heartland in particular. He says oil and gas assets owned by private equity are less likely to go under because of the timeframes involved for BVCA members to get returns. “The price of oil will rise or $50 a barrel will be the new normal. Energy assets are relatively attractive. They are cheap over a five-year horizon.”
Turning to venture capital, Hames says it continues to be the case that it is often riskier than private equity because it involves so many start-up companies, many not in profit, that may founder. He says the first decade of the new millennium was tough for the sector “with the legacy of the dotcom bust and the financial crisis”. Even by 2012 it was hard for his members to raise money for deals.
However, he says, there has been a notable turnaround in areas such as technology clusters, including the famous “Silicon Roundabout” in Old Street on the fringes of the City of London, and the exponentially growing fintech industry. He also mentions great interest in Dundee’s thriving video-gaming industry.
Hames says: “Venture capital is not easy. Innately, investing in early stage businesses is more risky than in a business that has been around for 40 years. But there is a lot of excitement around fintech, in particular. Fintech is disruptive!”