With the UK a challenging place to do business, should the focus be on emerging markets?
We’ve lost our coveted triple-A status, growth for 2012 has been revised up to the dizzy heights of 0.2%, Europe is still a mess and to top it all it’s cold outside. Both economically and meteorologically spring seems a very long way off.
Amidst this rather gloomy backdrop but within the warm embrace of the Covent Garden Hotel Marble Hill Partners convened the first of 2013’s Business Breakfasts. Bringing together Chairman,CEO’s and Investors from the Business Services sector we discuss whether in fact the first bluebell shoots are visible through the undergrowth?
As a service lead economy Britain is reliant on these individuals, their businesses and those like them for a significant proportion of GDP. In turn and by their very nature these businesses are reliant on each other to achieve growth, but being Private Equity backed 0.2% GDP growth simply won’t do.
If you speak to retailers you will hear them talk of consumer resignation to the “New Normal”; a phrase which sets a pessimistic tone that consumers no longer think things are going to get better any time soon, we’re in this for the long run. Accepting this however has allowed retailers to develop an appropriate strategy hence the continued growth at the “value” end of retail. The question for the business services sector is whether industry leaders are also resigned to the New Normal and whether there remains opportunities for them to grow?
Discussions on UK growth suggest that the strategy must be a tactical one with a boots on the ground approach,winning business by being better and eking out market share. It’s important however that new business is not won at the expense of margin and hard fought gains must be consolidated. The Chairman of a UK based consultancy suggests that a continued focus on costs and efficiencies is imperative, businesses have to be fit for purpose in this environment and there is no room to carry fat.
Posing the question of international growth Sam Smith, MD of Marble Hill Partners, asks with the UK a challenging place to do business should the focus be on emerging markets?
All agree that no matter the size of your business the rapidly growing Asian and BRIC markets are an attractive proposition as are the likes of Australia with a booming mining industry, but how do you go about it. China represents a scary proposition with the requirement to engage in JV’s with local operators as well as it proving difficult to extract money from the country to return a profit. India too can be hard to extract money from and with a lack of regulation it can be difficult to protect IP and service offerings.
America and the land of the free are largely ignoring the UK and Europe at the moment despite a visit from Mr Kerry, turning instead to Asia and what might be seen by some as protectionist policies. As discussed Europe remains a mess. Break America however and you are into the biggest free market in the world.
Looking at the different means of international expansion one chairman in the room discusses that they operate a flexible model, acquiring in the far-east whilst going for an organic start up in the US. Creating new business in the US can be a difficult proposition “don’t be fooled by the “special relationship” warns one Chairman, the Americans are culturally very different and getting the right balance of ex-pat vs local staff is of paramount importance. The debate intensifies; in any new territory is it best to install a British MD with local support or a local MD with a few key senior ex-pats? There appears no obvious solution and the decision must be reached depending on the nuances of that territory or the specific business.
With the challenges and potential pitfalls of international expansion is it something to be considered? The CEO of an international advisory firm notes that whilst it might be difficult to extract cash from certain emerging markets at the moment they are important places to be, as the risk of them developing without you is too great. He also suggests that when it comes to looking at an exit having a footprint in those regions is appealing to both trade and secondary buyers.
What’s clear around the table however is that the reasons for going international must be compelling and well thought through, failure to deliver on an international strategy can impact domestic business at a time when this is already open to attack by competitors. If the UK/ Europe are flat and America and the rest of the world are fairly difficult to do business in, is now the right time for Private Equity to be investing in Business Services? Conversely should management teams be looking to Private Equity for funding given what can become an expensive funding structure?
Unsurprisingly, Mark Williams, Investment Director, of Inflexion Private Equity believes that it is. This is caveated with the opinion that involving Private Equity is only right if you are keen to make a step change in the organisation and are looking to finance a significant period of growth. Input from the table suggests that with senior lending still frustratingly difficult to come by and the public markets essentially closed it may well be one of the only options available. The clarity of focus that Private Equity can bring as well as the introduction of seasoned Chairman like those round the table can also help these businesses to achieve their ultimate goals.
As we finish the last of the coffee the consensus is that the times of investors and management making easy money are long gone but there remain plenty of ways to make businesses successful. As should always have been the case it’s about striking the right balance of focus between internal efficiency and outward growth.
So, it has been a long cold winter and it isn’t over yet, you can top up the tan by heading overseas but as many a Scandinavian will tell you “there is no such thing as bad weather just bad clothes…”
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