What our clients are telling us
Amidst a dynamic and volatile market, we are finding our clients wanting to understand market intelligence more quickly and efficiently than ever before. This will enable them to inform their own views and to navigate and plot the best outcome for their companies.
With this in mind, we have produced a focused overview of topics which are front of mind for clients across our business.
- The key event in the last month was the Spring Budget. It has broadly been perceived as pro-growth and pro-business, but more clarity on the announcements will be needed.
- Lord Hill’s Listing Review has prompted a positive response from corporates as a number of companies have confirmed London as the location for an IPO.
- A backdrop of resilience, survival and no changes in capital gains tax paves the way for a potential period of deals in the next six months.
- As we move quicker than expected to a post-pandemic world, there has been a rapid rise in sovereign debt yields. This is particularly prominent in US debt yields which have risen 60 basis points since the start of the year.
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Advisory & Corporate Broking
Aaron Jones, Seb Wright, Callum Macpherson
Recent conversations with our private company clients have highlighted three core focus areas. Firstly, many are reflecting on key learnings from 12 months of Covid-19 related trading. Secondly, the majority are looking to the year ahead with a sense of cautious optimism. Lastly, the consensus around the recent Budget suggests it has been received as both fair and well-balanced.
For many private business owners, 2020 was a year characterised by resilience and survival. In contrast to those businesses able to lean on their private equity sponsors for support, private companies have had to predominantly rely on the grit, determination, skills and resilience of their people in navigating the challenges of the past year. Where opportunities for revenue growth haven’t materialised, they have turned their focus to driving cost-base efficiencies. Where they had previously laid out five-year digitalisation roadmaps, they have moved to implement these seemingly overnight. Where they have spent time building deep relationships with their financial partners and key stakeholders, they have reaped the benefits.
When looking to the year ahead there is a very palpable sense of a renewed optimism albeit a cautious one. The continued scale and success of the UK’s vaccination programme appears to be the key driver of this overarching sentiment. There is a sense amongst our clients that they have an opportunity to build back better after successfully embedding more sustainable business strategies and operating models over the past 12 months. We are also seeing a willingness to consider inorganic growth opportunities from owners who have traditionally focussed on organic growth alone. Additionally, discussions with business owners around part and/or full-value crystallisation are returning to the fore. It’s been very encouraging to note how many of these are now looking to existing management teams as likely and deserving successors given how integral they have been in successfully navigating the pandemic. With capital gains tax concerns abated, business owners are looking to do the "right deal" rather than a "quick deal".
Clients predominantly viewed the Budget as very well-balanced and the Chancellor's priority stack resonated well. Business owners remain incredibly appreciative of the various government support schemes over the past 12 months and as a result, consider the announcement of corporation tax increases to be aligned and fair. The extension of the furlough scheme is also welcome news. The new super deductions tax is perceived as positive as well, although many are still working to understand the details of both.
Advisory & Corporate Broking
It has been a busy period for clients recently. We can only see that intensifying as the reporting season gets underway.
Recently eyes have been on the Spring Budget and what measures the Chancellor has proposed for the UK economy. However, the equity markets and corporates have been keeping close tabs on Lord Hill’s UK Listing Review, only briefly alluded to in Chancellor Sunak’s address. The proposed measures include:
- Improving the environment for companies to go public by:
- Allowing dual-class share structures
- Lowering the free float requirements
- Making it more attractive for special purpose acquisition companies (SPACs)
- Improving the market perception of the Standard Listing segment
- Redesigning the prospectus regime to reduce disclosure requirements
- Changing the liability regime for forward-looking information in a prospectus and amending the historical financial information requirements
- Using innovative structures for secondary issues to increase retail participation
- Amending or repealing the requirement to include unconnected analysts in the IPO process.
Lord Hill’s review has had an immediate effect as Deliveroo confirmed London as its intended market for IPO (coming to the market with a dual share class) the very next day after the findings of the review were announced.
I imagine this will also put to bed some of the negative media commentary about the London IPO market being dead - this has centred on the London Stock Exchange losing out to the US SPAC phenomenon and a number of high profile IPOs. Even before Lord Hill’s review had generated interest, London has demonstrated its ability to attract interesting IPO candidates: such as The Hut Group in 2020, and so far in 2021 we have seen Dr Martens, Moonpig, Virgin Wine, Auction Technology Group and Cordiant Digital Infrastructure (led by Investec) debut on the London market, with many more expected to come in the following month.
Finally, whilst I still expect to see businesses continuing to be impacted by the Covid pandemic to approach the market for fresh equity to shore up their balance sheets, the trend of raising equity for growth is anticipated to continue.
This month, clients continue to bounce back from the strains of the pandemic. There have been plenty of businesses that have weathered the storm, trading resiliently and now thinking about transactions, whether that is M&A, change of ownership, wealth diversification or growth finance. This is particularly relevant for businesses involved in the goods supply chain (e.g particularly serving online demand), technology and healthcare end markets.
For less fortunate businesses (e.g. facing into hospitality, travel, and bricks & mortar retail) the extension of government business support and the furlough scheme is welcome news, but in many ways delays the inevitable "shake out" which is coming down the track. Restructurers continue to wait eagerly, but then we have been talking about this for some time now. We can certainly expect restructuring, insolvencies and accelerated M&A to pick up, perhaps toward the back end of 2021. Unfortunately, it is not a matter of "if", but "when".
Potential change to Capital Gains Tax has been the topic of conversation for a while now. With the expectation that it was going to change in the Spring Budget, M&A and business owner wealth diversification was fast-tracked and the volume of activity heightened. However, with Chancellor Sunak’s message of "no change" for the time being, business owners who thought they had missed the window, have in fact not. Off the back of this, there could be another slew of deal doing over the spring and summer given the somewhat longer runway up until the next Budget in autumn when CGT will be under the spotlight again.
Finally, something our clients are mentioning with increased frequency at the moment is the raised cost of moving cargo by ship between Asia and Europe. The price of moving a container from China to Europe has skyrocketed up to 600% for various reasons including supply/demand imbalances and disruption to the global shipping industry caused by the virus. We explore this in more detail in a recent article which you can read below.
It appears that the significant market moves are impacting activity this month.
The recent weakness in the US dollar has meant that many USD denominated funds have non-USD portfolio assets with meaningful unrealised FX gains, which managers are considering hedge strategies for. To manager this, traditional buyout private equity funds, with uncertainty over the timing of asset disposal, are looking at longer-dated FX hedges with flexible settlement dates.
Many fund managers may need to reassess their forecasted levels for management fee hedging for the next few years after the recent movements in GBP/EUR. There is a growing consensus that budgeted hedging rates below 1.13 will not likely be achievable and that sterling may continue to appreciate in the medium term.
Turning our attention to rates. With such a benign policy rate environment, clients have been surprised by the magnitude and speed of swap rate movements in major currencies such as GBP, USD & EUR. Curves are both rising and steepening throughout February and into March. As an example, the GBP 10yr SA swap was trading at 40-50bps in Jan and now stands at just under 100bps.
In other major news, on 05-Mar-2021 the FCA announced the future cessation or loss of representativeness of all 35 LIBOR benchmark settings currently published by ICE Benchmark Administration. ISDA confirmed that this announcement constituted an “Index Cessation Event” meaning the IBOR fall back adjustment spreads are now set. With this announcement out the way and timelines for LIBOR cessation agreed, clients and banks will be looking to engage actively in their IBOR remediation efforts in the coming months.
Finally, to touch on commodity risk. Clients are generally trying to digest the significant moves higher in oil in recent weeks. Oil is no longer obviously cheap, but consumers fear it may go higher. On the other hand, our producers while interested in the move higher, feel there is more upside.
Aaron Jones, Seb Wright, Callum Macpherson
The recent rapid rise in sovereign debt yields has been the primary driver of equity markets over the last few weeks. US Treasury yields have risen as much as 60 basis points since the start of the year, peaking at around 1.6%. Growth expectations are driving this rise in yields as we nudge closer to a post-pandemic world and increasingly a belief that we are heading back to normality quicker than expected. Additionally, enforced consumer saving over the pandemic period has led to suggestions of a surge in consumer spending when restrictions are finally lifted but also driving fears of a spike in inflation – that risk has already been acknowledged by the European Central Bank, the Fed and the Bank of England.
Much like the previous month, the debate around value vs growth continues. Although recently the repricing of government debt has accelerated that rotation from growth into value. There has also been some significant outperformance from companies directly exposed to the impending easing of restrictions especially in the travel and leisure sectors.
Our clients also observed the recent Budget as mainly pro-growth and supportive of the re-opening of the economy. Those clients directly exposed to the re-opening were especially pleased to see furlough extended through to the autumn, reduced business rates maintained until June and on-going VAT relief.