Cassandra calling 19 May 2016
Are we on the brink of some kind of economic meltdown? We’re seeing lots of indicators showing the UK, US, European and Chinese economies cooling off – and plenty of doomish commentators warning this might trigger a tipping point into some kind of collapse. Is this Cassandra – cursed by Apollo never to have her accurate forecasts believed – calling? Or are they just paranoid?
Any follower of these things will have seen lots of pieces warning about an imminent lurch caused by ballooning Chinese debt, for example. On the public markets, sluggish earnings haven’t yet dented share prices – although given the lack of safe haven investments right now, that might simply be inertia at work.
We’ll come onto what that means for finance execs in growth businesses in a minute. But even without the financial fundamentals looking slightly off (and remember: a crash in the housing or stock markets will hurt real business activity as consumers batten down the hatches), both short- and long-term risks are pretty unnerving. Brexit, migration, Donald Trump, demographic cliffs, breakneck industry disruption… no wonder people are jittery.
A glance at newly released figures for private equity investment in Q1 also tells a story. Here are the hard facts from the American Investment Council (whose name change from “Private Equity Growth Capital Council” probably ought to tell us something, too…).
“US private equity investment volume dropped from $144bn in 2015 Q4 2015 to $122bn in 2016 Q1.” A fair fall, albeit from a record level in Q4 2015. But then: “Total equity financing for US leveraged buyouts increased to 47% in 2016 Q1.” Ah. That’s four years in a row that the equity component has risen, to a level not seen since 2009, when the market was in a pit.
And it gets more interesting. “Annual US private equity fundraising volume decreased from $77bn in 2015 Q4 to $59bn in 2016 Q1.” They’re spending less, on fewer deals, deploying more equity – so a fall in the amount they raise probably isn’t that surprising. Especially when you read: “Callable capital reserves (“dry powder”) of global buyout funds rose from $460bn in 2015 Q4 to $496bn in 2016 Q1.”
We’ve written about “dry powder” before. The problem is that we’re seeing more capital in need of a home, but fewer deals to use it on. No wonder equity is rising, even in a market where debt is relatively easy to raise. (And no wonder corporate buyers are feeling the M&A pinch for PE bidders keen to deploy their capital.) And here’s the kicker: “Annual US private equity exit volume decreased from $129bn in 2015 Q4 to $64bn in 2016 Q1.”
All sorts of factors probably contributed to this drop, not least the low investment levels five to eight years ago. But whichever way you look at it, it’s big.
Final data point: even three years ago, the media was making a fuss over UK plc’s vast cash hoard. (Mind you, in 2013 the whole of the FTSE 100 cash pile was about half the value of Apple's ready cash. Wow.) Then yesterday I was talking to an SME business banker, who said they had seen a marked increase in cash balances since 2014. “British business is being ultra-conservative,” he said. “When we talk to customers about cash and working capital, it’s less about freeing it up, and more how to optimize around the biggest opportunities in their business.”
So, what to make of this as an FD or FC of a growth business?
Well, being conservative and getting ready for the worst? That’s the day job for a finance function. Don’t be ashamed. But equally, limiting investment cash is as bad for a business as it is a nation (especially when rates are low). Challenge your operational colleagues to find new things to invest in. You only have to look at those PE industry numbers to know you’ll probably get a fair hearing from your backers, too.
It’s right to be cautious, then. But when the economic indicators are looking wobbly, the fear is less that you’ll be Cassandra and more that you’ll put the fear of God into the business. And that's bad.
This was a theme Martin McCourt, former CEO at Dyson, explored at the Contemporary FD event in March. “The CEO needs their senior officers raising morale, not saying ‘no, but’ all the time,” he told delegates. “So a good CFO calibrates their assertiveness – holds management feet to the fire when necessary, but not in a way that engenders stress and demotivation. Being respected and admired by your business means you can take more risks.”
For our older readers, that means being a bit less like Corporate “Don’t Panic!” Jones or Private “We’re Doomed!” Frazer - and a bit more like calm Sergeant Wilson. Carry on.