Hello, I'm Sam burchill reporter at Real Deals and welcome to
today's podcast on how private Equity is navigating
government-backed Aid during and following the pandemic at the
start of the covid-19 crisis, government announced a wave of
loans to assist businesses through economic stress.
And Yet Market, and participants have really struggled to access
funding. What then have been the
challenges? What has this pandemic revealed
about the relationship between private equity and the
government? And most importantly, as fairly
schemes and access to government Aid, comes to an end.
What does the future hold for private equity and Venture
Capital backed businesses? Here to answer.
These questions is political risk, expert Lizzie Wills
director of investor services at wa Communications and joining us
for our legal perspectives is whiten case partner.
Daniel toggle. Hi Beau, thank you for joining
me today. It's a real pleasure to have you
both speak on this topic. And as it's one, that's really
been front and center and on the agenda of most firms and and
businesses. So, just to set the scene, Lizzy
as a political risk expert leading.
Wa s investor Services, practice.
What has your role and wa has been throughout this whole
pandemic? Thanks so much for having me on
the podcast. Our role has, typically been
before the pandemic supporting investors, understand the
political context for investment decisions.
And this has obviously changed quite significantly over the
course of the pandemic and over lockdown in particular, when the
number of m&a, transactions has has greatly reduced.
So what we Spent the majority of our time doing has been
supporting investors. In other ways, particularly,
helping their management teams to understand the vast amount of
information coming out of government and helping them
navigate that. And obviously a huge part of
that has been understanding the business support schemes, how
they work the eligibility criteria around them and how
they can best use government to support to to help their
businesses over the longer. Time.
Thanks Lizzy. And thanks for being here again.
And Dan coming over to use of, what was your role at White and
casein, and what's been your experience with the various
bailout schemes, from the start of the pandemic.
My name is Dan Tagle. I am a corporate partner in the
London M80 matte white and case. Thank you very much, Sam and
Dean Z or having the And discussing is automatic.
I carry leads our boss growth, practice across Amia and helped
investors on a portfolio companies.
Beginning of the crisis, particularly looking at what
measures are available and helping them navigate through
the tough times and reducing Runway and seeing how they can
position themselves in the most efficient manner going forward.
I also was advising someone who participants in relation to the
Future funds when it was being launched initially.
And I would go to the government in relation to the terms and
helped clarify. And why didn't the applicability
of those to Market to Market participants generally?
And since the future fund has been launched.
I've helped numerous companies access to Future fund itself.
And I also have clients who are Lendl under Sybil's
arrangements, and clients who are or was under was wrong.
Great. Thanks for that to Ann.
And thank you both so much for being here.
It seems like you both really been in their eye of the storm
during the whole crisis. It's really great to be able to
have this discussion with you today.
Lizzie. So as we as we all know from the
very start that was a certain sort of lack of clarity in how
the scheme's worked and which businesses were eligible for the
loans, from your perspective. What were the main problems that
he firms and P back to business. But facing when access accessing
these bailout loans. Yes, as you say, we've had,
we've had a busy few months advising investors on what this
all looks like and what the ramifications are for their
business. I think, when the schemes were
initially announced what was quite interesting to see was
that because this was such an unprecedented time for the
government. The policy-making was almost
made, you know, front and center.
It was being made in public and some of the schemes that were
announced. In normal circumstances would
have taken, you know, to three months of quite detailed
deliberation behind the scenes and we actually saw it sort of
being made in real time. And I think that was inevitably
going to lead to some confusion and some lack of clarity around
what the scheme is actually meant in practice.
In particular, very early on. There was a lot of confusion
trying to, essentially bridge the gap between what the
announcements that were coming out of Treasury were and what
was actually in the small print, in terms of the eligibility
criteria, particularly as it's as it was regarding private
Equity businesses who are obviously in a slightly
different different category, then you got to the the sort of
the navigating, the actual application processes
themselves, which which proved a whole new challenge particularly
given each of Accredited lenders were being told specifically by
the British Business Bank at the time that they were individually
responsible for interpreting that eligibility criteria.
When they were deciding to approve or not approve those
loans. So what you ended up with was
quite a significant variation between the different lenders
and you had a sort of a series of Chinese Whispers going
around, the P industry about you know, which banks were taking a
more. More or less aggressive stance
in relation to the eligibility of P backed businesses.
So, quite early on the main questions that PA seem to be
struggling with in particular was whether some of these loans
would be decided on the basis of the aggregate size of the fund,
in which case, many investors breached that upper turnover
threshold or whether it was being judged on the basis of the
individual. Companies.
So there's been a lot for them to get their head around.
And as I say, a lot of this policy making was being made in
real time. They were being changes, made to
them as a result of various sorts of lobbying efforts,
particularly from some of those parts of the economy that felt
that they were perhaps being left behind or not addressed in
terms of some of those business support loans.
So yes, lots of challenges For PE to to get their head their
heads around. Yeah, it certainly keeps your
job, very busy. And I just wanted to touch on
something quite interesting that you mentioned.
There's been a bit of controversy around kind of a lot
of private Equity owned companies or rejected from
receiving loans. Because of the way, the industry
has relied on a Model that can cut their tax bills but leaves
them with debt and was it, was there a sense that the
government was purposely trying to prevent P Backed Aid, Lizzie
I don't know if it was a question of PE being purposely
shutout of the scheme's. I think the way in which some of
these schemes were introduced possibly didn't take into full
account of how P back to business has worked, and some of
the levels of debt that some of them had on their books.
I don't think we can extrapolate from the way that government has
necessarily behaved in terms of setting out these loans.
Is that it was sort of anti private Equity, but I think
certainly there has been a misunderstanding or a lack of
understanding at government level about how PE operates and
perhaps the most effective ways that they could be supported
over this crisis Lizzy. So tax changes to carry
interest. Another thing that has been kind
of increasingly on the headlines at the moment in your opinion.
Is this kind of again another example of private equity.
Being being reined in or penalized.
And I don't know if we can necessarily say that it is
private Equity, deliberately being targeted.
Because the government sees that there is in fundamentally wrong
with, with peony. What I do think, is true, is
that private Equity is seen as almost an easy, political Target
for the government to, to look to when they're trying to get
their financial position. Isshin back on an even Keel.
If you think back to the government's Manifesto last
Ember which now feels like a very long time ago.
They obviously committed to not raising any of the personal
taxes. So income tax, v18 National
Insurance, they said they're not going to raise.
So you have to have a think about or where is this?
Where is this additional money? Going to come from?
And we know that they need to raise a huge amount of money.
Be able to plug some of the gaps that have been created by covid
and targeting PE will not raise too many eyebrows amongst the
wider. Electorate who he see investors
of sleepy investors in the UK as being you know people with lots
and lots of lots and lots of money Deep Pockets and see them
as being the kind of the quintessential.
Those who have The broader shoulders should bear the
heaviest load. So I think from a government
perspective. They can certainly look to
private Equity to try and raise some of that additional funding.
And then you have to think about what, what does, what does that
look like in practice? We know that the treasury has
announced a review of capital gains tax that's going ahead at
the moment and I think we can genuinely see a case being made
now in treasury by not only back benches.
But but members of the cabinet as well, the capital gains tax
is something that should be reviewed in light of the, the
covid pandemic. So, It's now a question of the
timing rather than whether or not arise and cgt is actually
going to happen. And I think it is inevitable.
The question is just about when the government's going to be
grappling with that question of timing ahead of the budget,
which were expecting probably early.
December this year. Now, the government's obviously
going to want to raise as much tax as possible in the short
term, but So bring in to balance the economy, make sure that, you
know, early stage and nascent growth isn't compromised by by
huge rises in tax. So, you know, the government is,
is walking bit of a tightrope here and that's something that
the treasury is discussing at the moment in terms of the
carried interest point. I think that that speaks to the
same the same wider agenda. Linda it's obviously been sort
of chipped away at at budgets over the last four to five or
six years and the government will be looking at whether there
is any more room for manoeuvre in terms of carry, potentially
bring it in line with with income tax.
Potentially bringing it up. Not quite that high, but making
quite a shift up to the sort of the mid 30 percent.
So potentially an easy win for the government.
Whether they understand all the ramifications on private equity
and businesses that private Equity supports in the UK.
I think that's probably a question for another day.
Great. Thanks, Lizzy.
It's not so much a matter of if, but when they will carry out
this tax hike then. Yes, I think that and Dad, I
just wanted to come over to you because your area of expertise
really lies with the future fund.
That was announced. Could you talk us through?
What this was when it came about and how it how it operates.
Sure, so early on in the covid pandemic there was the there
were clear signs that was class growth loss-making early stage
to growth stage. Businesses were missing are all
the measures that have been made available to other SME
businesses and there was clearly a need for some supports for
that particular segment of the economy.
Tiffany, UK wanted to keep growing, its its technology
capabilities, and to support the businesses that they were
thriving in the UK prior to the pandemic.
So, there were various Lobby groups who were requesting the
government, didn't Place schemes to support that particular
seconds, and ultimately the Future Farmers was announced in
early, May and Orchard. In the middle of names.
And although there were there were quite a few people who were
concerned about he would be included or excluded as a result
of the eligibility requirements. Generally, speaking and Market,
participants have been happy with the way that the future
fund has worked in practice. And again, it was rushed through
quite quickly. So there were Some TV problems.
Generally, speaking things of progressed quite nicely
applications and now moving fairly swiftly.
So new applicant now will normally find out whether they
are successful within it roughly three weeks and they could be
funded within a month or five weeks of their mission
application. So there were early stage
bottlenecks, but generally speaking things have gone.
Well initially, it was supposed to It's 250 million pound funds,
but that amount was exceeded even on the first day of
applications and it's so far. The government's LED
significantly more than 250 and it will continue to do so.
And the chancellor has publicly declared the fact that he will
provide funds for for as long as the applications come in and
companies are eligible until the end of September.
Remember when the fund is supposed to end, they'll be
funds available. If, if applications are made
that, that are successful. Thanks a lot done.
And I know that the BBC, a kind of criticized it at first for
excluding some businesses, those challenges.
Would you say if they have they've been have been, they've
been solved or. Yeah, so so some of the main
criticisms and concerns of be BBC, a and coalition's digital
economy. Codec, another leading industry
group were around. The fact that he is an SEC is
investigating. These were not able to put money
in an onside, the government to access the scheme.
And the main reason for that was State a driven, which is also
the main reason why symbols and the, and the coronavirus loans
that Lizzie were talking about earlier and not available to
loss-making businesses. So the state aid rules are quite
rigid in that regard. And It was, it was determined
that in order to get this scheme through as quickly as possible
and available to as many companies as possible before it
was too late. And then that unfortunately
those businesses and those investors had to be excluded
from from the scheme. So, yes that that that was
initially a big concern in industry and there are still
lots of people who are upset. $2 and dissatisfied by that, but
other than very early stage businesses who are heavily
reliant on those type of investors.
Who generally speaking later stage businesses have not
necessarily been impacted by the fact that, you know, smses
investors camera kind of constitute much invested for the
purpose of the funds. And also we assisted numerous
early stage businesses who have Just decided that they are able
to access funds from investors who are willing not to take.
The is an SEO is treatments in respect of their actual
Investments. And any are there, there were on
the other side of the coin. People arguing that That's, you
know, providing providing government incentives to invest.
He's to match, the government's funding and the future fund also
was was kind of counterintuitive and who was basically the
government matching government. So there are also people are
doing along those lines. Yeah, really interesting.
Thanks, Dan. And just on that soon.
So, some sport support offered via the future fund is quite a
lot of generous than funds offered via Sybil, are they
there for missing out on? Capital are really vital time in
their development and considering this will the future
fund remain an attractive option for fast growth and startup.
Companies seeking to increase runways and survive the
pandemic. Yesterday.
That's interesting question because I don't think the future
find this tool. Generous than Sybil's in Sybil's
for small to medium businesses, goes up to 5 million pounds.
And so, does the future fund. If he tries very different in
that. It's a, it's a matched Equity
investment. It's the first time.
The government's taking direct investments in, in UK startups
and the whole nature of the future fund is that, you know,
the government is willing to put Equity alongside industry
participants. So if an independent, Pendants
investor is willing to put money into a business and the
government is relying on on their judgment and their due
diligence in order to put money alongside them.
But the actual Universe, the size of the funnels is purely
dependent on what the match investor is willing to put in.
So for match investors willing to put in five million pounds,
then the government will also put involvement in powers and
there's no subjective test as regards to stay to business of
literally. The government will just match
exactly what the investors will invest is willing to do.
So, I then I don't think that it's necessarily right to
categorize future, binders, less generous, turn signals.
Yeah, sure and and Lizzy kind of like, what was your take on?
This would you would you agree with was down on that?
Now, I think so. I mean, I think, what's been
interesting about the future fund, which was obviously set
out slightly later than some of the initial business support
schemes. Was that the government was was
very much in listening mode around which parts of the
economy really needed that support.
And, you know, quite a concerted lobbying effort was was brought
about by these very early stage startups, and the government
responded to that. So I think it goes to show Over
the course of the pandemic government has been a Mina ball
to stepping in and intervening and putting in place schemes
that are genuinely saw as being necessary to support all the
different types of businesses in the UK economy.
Yeah, definitely. And I guess sorry.
No, go ahead, done. Alright, hope or all.
I was going to say, is one thing that people don't necessarily
realize all the gods speech and as well as that the businesses
that the it's supporting of range massively from companies
that are only weighs 250 K, previously, all the way up to
potentially unicorns as well. And lots of late stage companies
are also taking advantage of the future and say, it's For to the
very kind of diverse range of companies across the economy.
Yeah, and on that. I was just going to say to both
of you. How do you think that the UK
loans have compared to some of the state state bailout loans in
Europe or the rest of the world? From my perspective.
I think the general consensus has been that the UK bailout
schemes have been incredibly generous.
I think more so than a lot of businesses were anticipating
when the coronavirus pandemic hit.
I think you know, the government has taken a view that they will
do anything. That is required be that pumping
in huge huge and you know, unprecedented amounts of money
into the economy. Make sure that the businesses
can come out of this in one piece.
I think the bigger question now is, how does the government
start unpicking that? So we don't see a massive uptick
in unemployment, massive uptick in businesses becoming insolvent
because I think a lot of parts of the economy have got to some
extent dependent on on this public sector support.
So yes, I think the government has been very, very generous.
Generous, whether they have made a rod for their own back.
In terms of what happens. Next.
I think is the big question that now needs to be addressed.
Yeah, and II agree with that entirely dizzy.
I think if you compare the app the equity back schemes to
what's being introduced across Europe, I think, you know, we
really have led the way typically in terms of the size
of the funding that's available the France.
Germany and Spain have similar schemes, but The way it's been
implemented in the UK to take up in the market has been has been
quite radical and extremely well, received by most of the
market. Participants, as I mentioned
earlier. Obviously, there are companies
that are excluded and, you know, I should mention is not just, he
is, and SE is match investors. That have kind of caused
concern. It's also a relation to for
Example, the fact that you have to, you have to have raised
equity and actually issued shares worth at least 250,000
pounds prior to prior to receiving the future funds loan
and lots of companies raise money, by way of convertible low
notes. So there were some, there was
some businesses who have had successful fundraisers in the
past are in desperate need of whole extensions.
That Runway Currently but are excluded because of the way that
the funds has been structured be set up.
So, you know, there are people who are who are disappointed and
who could have desperately desperately benefited from the
future fund but on the whole I think they were the reception
has been very positive. Yeah, that's really interesting
because obviously there's as I mentioned before there's been
this kind of debate around whether or not.
The government was kind of purposely trying to prevent P
back businesses from accessing financial aid, but you don't you
don't think that all done? Yeah, I don't I don't think the
government has purposely as purse purposely sought to
exclude private Equity from these from these measures are
serving some. Some of the measures may not may
not be applicable due to some of the state eight requirements and
connection over. And I think actually lots of are
probably lots of our probability class of little things with
differently. It's a here, even if If they and
their portfolio, companies could technically ask them some of
these funds. They've taken a more holistic
view asked in what is arriving to do.
Even if we can technically access, these funds should be
accessing These funds. And generally, speaking of a lot
of Reproductive Rights of decided that in their happy for
their businesses to access furlough, in order to ensure
people's job, security, Etc, and death Tax.
But generally speaking. We've had a lot of clients who
decided that it was not in the best interest for them or their
companies to access the sibyl's and other another loans have
been made available. Yeah, and I think it's really
interesting. Kind of what was available.
What was available today. And what was available during
the 2008 financial crash. That's pretty interesting.
I just wanted to kind of turn now and look at some of the The
Wider implications of government-backed dadon, the p +
VC Community, kind of going into the future and you touched on it
before busy but kind of how will the government and the finance
sector kind of work together to help deal with the amount of
incoming bad debt accumulated by businesses.
Yeah, I think the longer-term implications for particularly
for the PE Community is really, really interesting.
And I think we will see a very different approach to that part
of the economy from the government.
And I think that's already starting to come through.
If we look at what was included in the requirements around the
CL bills scheme, which was obviously introduced like, You
later for some of this slightly larger, mid-market companies.
I think that tells us quite a lot about how the government is
intending to behave towards companies that have drawn down
on some of the business support that's been made available.
I think the main take out from my perspective, is, there's a
sort of inherent quid pro quo, that's been embedded in the
terms of some of the loans. So, most notably, for example
car, some of the companies that are drawing down very large
amount of money. So over 50 million from the CL,
Bill scheme are going to be subject to a number of
restrictions on things, like dividend payments, senior pay
share BuyBacks those sorts of Things.
And I think that is quite an interesting interjection from a
government in terms of how they want to see this money being
spent in the very early days of the pandemic.
I think a lot of the money was being sort of handed out hand
over fist as almost a government freebie to say, look, we've got
this money. We want to help, we want to
shore up the economy, do with it.
What you will to try and get your business up.
At the other end of this. And is the pandemic has
progressed in the business support schemes have become
slightly more slightly more sophisticated.
The government has been embedding some of these
requirements into the very nature of the schemes, to make
sure that they almost get something back, which I think is
really, really important. So I think we can definitely
anticipate that, there will be almost a sort of corporate
Reckoning coming out. The other end of this crisis and
we're already starting to see that where businesses will be
will be judged on what they have spent business support loans on
how they've behaved towards customers and their staff.
In terms of, in terms of the furlough and essentially whether
they're seemed to have had a good crisis and those that are
deemed to have not behaved. Well, I think will will face a
bit of a reckoning in the Cho. Yeah, that's, that's really
interesting. Lazy eye.
And I think we're definitely already seeing some of those
businesses already kind of Quinta Keen to show that they've
sort of had a good crisis. Like you said.
And Dan did you, did you have any thoughts on this at all?
Do you think the, yeah, what's quite interesting on the, on the
future fund side is that the government, as I said, is only
putting money where private investors are willing to put
money. So, so, It's a bit different in
that regard and the government's obviously hoping that businesses
are going to perform well and generate a return for them in
the future. And actually the eligibility
requirements in a have have have changed a bit since it was
initially launched, but one of the eligible eligibility
requirements makes it open to more participants.
That includes the fact that you no longer can only access this
if you have a UK Top Co, you can also access it as well, if you
have the U.s. Topo and I've been a member of a
u.s. Accelerator.
So in fact, they've kind of widens the applicability to a
certain extent as well. And they also they also enabled
Founders to do invest alongside the government as well when that
wasn't clear in the first place. So I think the future fund is a
bit different to to the loans where by the government's hoping
people. Can, we pay them?
But ultimately the man Not be able to move the future funds
that they're making Equity Investments and hoping that
these companies will ultimately come through the coronavirus
pandemic and and and be winners. And and in fact, a lot of the
businesses that are being supported our technology, enable
businesses who are very well placed, you would hope to come
out fighting from this from this pandemic.
Digital transition is extremely important to the economy and
these leaders at the top companies that you could argue.
The government should be backing.
And actually, from a taxpayer perspective.
The fact that independent investors are willing to put
their money alongside the government, support his business
as well. Should be seen, as very positive
thing because the government's not just putting money into a
business that may have otherwise fail because their shareholders
decided to abandon. - e and I think it would be.
It would be really interesting because of have this
conversation, a few months from now or a year from now and see
what shape everyone's in. Excellent Lizzie Dan.
It was a pleasure to speak with you.
Thank you so much for your insights and thank you for
listening.