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EU rivals gaining on UK as top spot for investment in finance

02 August 2018 Consultancy.uk

A new study has suggested that uncertainty surrounding the Brexit process is making the UK less attractive as an investment destination. A third of global financial firms changed their plans regarding Britain after the referendum in 2016, while competitors France and Germany saw leaps in the number of foreign investment projects arriving in 2017.

A number of reports in recent months have reflected the varying degrees of optimism and antipathy directed towards the troubled Brexit process, as negotiations between Brussels and the UK enter their final phase in the coming months. One third of SMEs recently told OCO Consulting that they believe Brexit will have a positive business impact, while professional services firm Duff & Phelps Corporation polled financial sector leaders to find that the UK’s capital city had supplanted New York as the world’s financial hub, but warned that the approach of Brexit could soon change that. Meanwhile, A.T. Kearney found that while a weakened pound continues to make the UK a target for bargain hunters in 2018, the country faces considerable hurdles from Brexit’s impact on its economic outlook, something which could see overseas investment in Britain dry up in the post-EU wilderness.

Now, as debate continues to rage on as to the degree of Brexit’s impact on the UK economy – while the March 2019 deadline steadily approaches, and with it the possibility of a “cliff-edge” No Deal walk-away – a report from Big Four firm EY has found that the UK hosted just 14 more foreign investment projects in financial services last year than second-placed Germany, down from a gap of 67 in the previous year. In line with A.T. Kearney’s warnings then, Brexit anxieties seem to have had a major impact on levels of foreign investment in the UK already, with the number of projects in the UK falling 26% in 2017, compared to an increase of 64% in Germany, and a domineering 123% in France, while Europe as a whole saw growth of 13%.

EU rivals gaining on UK as top spot for investment in finance

UK financial services still attracted the most foreign investment projects last year, at 78, although this was a fall from its record 2016, which saw 106 such projects arrive on British shores. Meanwhile, the nation’s closest competitors look to have gained serious ground, with Germany, in second place, winning 64, and France seeing 49.

According to EY’s analysis, this shows that Britain’s EU neighbours have to some extent already capitalised on uncertainty over its future access to European markets, encouraging financial firms to set up shop in their own countries, in a challenge to its long-established reputation as the European capital for the sector. So far, one of the most successful of these seems surprisingly to have been Ireland, which could see Dublin become a key financial hub in the future – though this is still distant at present. Subsequently, Ireland saw foreign investment projects there boom from 12 to 28.

For global financial firms that rely on Britain’s membership of the EU to run European operations, the continued slow progress in Brexit negotiations – along with International Trade Secretary Liam Fox’s shock suggestion that the Government should favour a No Deal Brexit over compromising with its former trading partner – has stoked fears that access to the bloc could be restricted or even shut off altogether after March 2019. As a result, many entities have commenced the enacting of plans for a worst-case scenario, a “No Regrets” policy which usually involves the shifting some of their British operations on to the continent to insulate their operations if Britain crashes out of the bloc without a deal. The Bank of England anticipates that this trend could eventually see some 75,000 financial services jobs exit the UK.

More optimistically, alongside the current state of play in terms of EU investment, EY’s survey also found that two-thirds of global financial firms hadn’t changed their investment plans following the Brexit vote, while three quarters said they had no plans to relocate to the continent. However, retaining strong trading arrangements with the EU was cited by 39% of investors as key to ensuring the UK remains attractive in future, with 33% suggesting the same for trade deals with new countries and 31% highlighting incentives for foreign investors.

Speaking on the shift of investment, Omar Ali, EY’s UK financial services leader said, “The question is, will this be a temporary shift or the start of a more sustained trend?” He added that while Britain had hung on to the top spot as an investment destination in Europe, thanks to factors like its talent, infrastructure and robust regulatory and legal systems, the nation can only rely on these factors for so long before an inability to trade overseas impacts.

Ali concluded, “We can’t ignore the drop in investment and forward-looking sentiment - investors are sending a clear message that answers are needed on future trading arrangements, access to skills and the UK’s future approach to the economy.”

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.