Douglas MacDonald, founder of London-based chartered accountancy and turnaround specialist The MacDonald Partnership, says he is an “extremely bitter” man. But this is nothing to do with a recent deal going sour or the fact that he has had a hard day at the office. No, he says, he is bitter because “UK Plc is in damn good shape”.
A healthy corporate sector spells bad news for The MacDonald Partnership, which was founded by the eponymous Scotsman initially as a mainstream chartered accountancy, but which has formed a specialisation in business turnarounds since.
“We have not seen the growth in the UK recently that we might have expected and our feeling is that the market [for bankruptcies] could decline a further 30 percent before we see another upturn,” he says. But he hasn’t given up hope of ‘better’ times: “If we get further interest rate increases or a housing crash then there will be an increase in insolvencies – the last UK insolvency boom was property-led in 1992. Also, if personal insolvencies suddenly increased, that would have a knock-on effect on the corporate world.”
Although the UK turnaround market is smaller than MacDonald would like, he says it is second only to the US in terms of sophistication. And it is this sophistication that has enabled The MacDonald Partnership to carve out a profitable niche.
Without it, the “three-legged stool” model he applies to any turnaround situation would be unworkable. MacDonald explains that his job in any turnaround is to provide balance sheet restructuring skills (leg one of the stool), while riffling through his contacts book to bring in new management and secure fresh sources of capital (legs two and three).
It may sound like a truism, but new capital is essential to the majority of turnaround situations. To this end, MacDonald decided not to sit on his hands waiting to see how long it would take financiers to latch onto turnaround opportunities. In 1999, he set up the Turnaround Finance Group (www.turnaroundfinance.com) to promote turnarounds by providing information, organising events and enabling turnaround finance providers to identify and communicate with each other. “Five to ten years ago, you didn’t know where to go for finance. Since then, the availability and sophistication of finance has increased massively,” he says.
Visit the group’s website and you will likely conclude that this claim is far from hot air. Count up those listed as ‘finance providers’ and you will find 19 equity houses and 34 firms offering various forms of debt solution, such as structured debt, factoring and asset-based financing.
Kelso Place Asset Management, one of the equity providers listed on the site, has an unspecified minority stake in The MacDonald Partnership, and the two firms occasionally work together on turnaround deals (and, incidentally, share the same office floor in London’s Covent Garden). The MacDonald Partnership also has its own fund, TMP Turnaround Capital, which invests a minimum of £500,000 of equity and loan finance solely in business rescue situations.
MacDonald says the importation of asset-based lending techniques from the US has provided a considerable boost to an ailing company’s survival prospects, alongside the greater willingness of equity providers to provide high-risk capital in the hope of substantially outperforming mainstream investors in those deals that have a happy outcome. Asset-based lenders such as Bank of America, Burdale Financial and GMAC are not concerned about a company’s balance sheet problems – focusing instead on lending against its assets. It is the difference between the value the company has placed against assets in its accounts and what the lender determines to be the “realisable value” of those assets that creates the financing gap normally filled by an equity provider.
As well as the increasing availability of finance, MacDonald also sees signs that an American-honed culture of debt forgiveness has reached UK shores. “As the arch proponent of debt forgiveness, the US is either the most advanced culture in the world or the most backward, depending on how you look at it,” he says. “My own view is that debtor-friendly regimes promote good economies.”
MacDonald provides the example of a creditor forgiving a portion of debt owed by a company it supplies. If the debt is not forgiven and the debtor goes out of business, the creditor loses not only the cash it is owed but also the profits from future sales – possibly leading in some cases to a ‘domino effect’ of insolvency. Alternatively, forgoing a percentage of the debt could allow the company to keep trading.
All of which has been made easier, MacDonald believes, by the introduction of the UK Enterprise Act in 2002. The Act demands the appointment of an independent administrator to balance the interests of all creditors when a company goes into administration. This helps to overcome the prevailing situation where secured lenders – normally banks – had nearly all the say in determining the fate of an ailing business. Consequently it gives more of a voice to those that may wish to see the company emerge from the process as a going concern.
And that can only be good news for MacDonald. With the legislative framework developing in a way that favours turnaround professionals, the only lacking ingredient is deal flow. And that is why people like MacDonald are hoping for the interest rate rises that the rest of us fear.