Interest Rates, Inflation, Insolvencies And Private Equity

Interest Rates – Heading Higher?

Well, we now know that the Governor of the Bank of England and his committee voted in favour of holding the Base Rate at 5.25%.

But is that the right decision?

Various notables in the City consider that it would have been better to have raised the rate to get the pain more evident, certainly enough for the Exchequer to realise more quickly that the power of our economy must be switched to growth, as opposed to stall.

The question though is still whether the rate hiking cycle has peaked.

Rate Of Inflation – Lowering Or Not?

The rate of inflation may well be a reduced 6.7% but ask any housewife what the rise in her costs over the last year has been.

There are rumours, spread by the powers that be, that the scourge of shrinkflation is over – well that is real nonsense, if you ask me.

Heading into Christmas have you looked at the lower weight of chocolate bars and also seen the much higher prices.

Have you seen pots of jam or peanut butter or the like – again lower weight volumes by 10% or more, while prices are some 15%-25% higher than a year ago.

Is that the shrinkflation that has ceased? 

Absolute nonsense – of course it has not.

And you cannot really blame the manufacturers because their costs too have risen exponentially over the last year or two.

Rental Rates Increasing

There is no way that I would like to be a landlord or a vendor today.

Higher mortgage rates, insurance and maintenance costs help to significantly reduce property income margins.

Housing costs are higher while property values are slipping away quite markedly.

Expectations of inflated values are being swiftly corrected in a market where owners are finding it difficult to identify buyers, especially those who have already sold their properties and have cash in their pockets ready to complete – it is just not happening.

Prices being sought will inevitably reduce even further until a ‘bottom’ has been found, with sellers then adjusting their hopes significantly to complete disposals.

At the same time new buyers have yet to be encouraged enough by lower mortgage rates and reduced buying costs.

Rising Insolvencies

The number of companies going bust is yet another reflection of the cost-of-living crisis significantly reducing consumer spending.

In the first nine months of this year some 18,367 businesses were declared insolvent, which was some 13% up on last year, while actually reaching the highest such figure since 2009.

The absence of grants has left masses of enterprises still battling away to get back onto an even keel.

Begbies Traynor, the sector specialists, this week stated that in the three months to end September some 37,722 companies have been designated as being in ‘critical distress’ – which is said to be a ‘precursor to formal insolvency’ – that is a very worrying figure.

Just look at the rising numbers of quoted companies beginning to disappear – that makes the market an ever more precarious playing field.

Private Equity Pockets Are Deep And Situations Plentiful

The number of takeover approaches and bids being made by Private Equity outfits is still on the rise.

And you cannot blame them for looking to take advantage of the low market valuations of so many enterprises within the UK smaller company sector.

Take a small stake as an initial springboard, then privately approach the victim company seeking discussions and then the ability to handle ‘due diligence’ of its books and affairs.

That stake would be steadily increased as positive elements become visible to such a possible bidder.

If it becomes ‘whisper knowledge’ then a rapid disclosure of such an approach has to be made, with a ‘possible offer price’ being highlighted.

The gamble then is whether the victim Board is incentivised enough to recommend such an approach.

The danger for such a bidder is whether another predator has also been waiting in the wings – the last thing that the initial bidder wants is to get into a ‘Dutch Auction’ with the takeover cost going through the roof as a game of ‘macho’ is being played.

It has to be remembered that globally the pockets of the Private Equity houses are deep and very well financed – certainly well enough to bid for a company, take it off the market, vamp up its operations while refunding it sufficiently to make even better profits.

The then private company value and its prospects increases to such an extent that it is either sold off by way of a ‘trade sale’ or even then put back on to the market by way of an IPO at significantly higher values – it really can be a textbook operation when played properly.

That makes the PE boys, their investors and their financial sources, so much more money to then chase after other such undervalued situations.

And there really are a lot of ‘cheap’ propositions out there to tempt such savvy participants.