Confidence and determination are important, but cash pays the wage bill. The industry has already witnessed some casualties of the downturn, and we are not out of the woods yet. What does “through cycle investing” really mean?
First, let’s acknowledge that not everyone is in the same predicament.
If you have a monopoly on an essential product or service you can boast how many requests for rate reductions you have politely declined or ignored. Some call these “begging letters”, but the form and substance varies widely.
Some are well considered, with a tailored personal message from named senior executive to named senior executive. Perhaps even uncomfortably comparing published customer and suppliers profit margins!
Other such letters seem little more than computer generated junk mail, sent scattergun to an accounts department mailing list.
Tactics vary.
Outcomes vary.
Some suppliers can compete on value rather than price.
But some don’t even have current contracts to cut rates on. The vultures are circling high above the vulnerable.
I have been visited by “restructuring specialists” (aka insolvency practitioners) from other parts of Scotland asking whether they should be opening offices in Aberdeen.
I would like to see some of our vacant office space taken, but is this the way to do it? Whilst there is truth in the saying that a prophet is not welcome in his hometown, hopefully we don’t need too many such prophets to help us address our costs and communicate with our stakeholders (insolvency practitioners make lawyers look cheap).
The messages aren’t difficult.
Time to recall our canny heritage? It was Aberdonians’ who were accused of having short arms and deep pockets. I remember hearing an industry mogul boast how eight out of ten of his senior management team drove cars more than ten years old.
It’s not that some of them didn’t have swimming pools at home (they did, and they had earned them), but the external message was their business was lean and they were focused on customers not consumption.
The example was set from the top. It’s perhaps easier to ask for a discount when you’re not arriving in the latest, biggest, Range Rover. I have seen a few captains of industry in economy class of late (sweating their Gold Cards and leaving the seats further forward to the bankers, whose industry is on a different cycle).
Can’t we just ask those bankers for more debt to fund us through the cycle? Yes, but the cost of debt reflects the risk and current market sentiment. I have recently seen arrangement fee percentages that look more like interest rate percentages. Somebody is paying for those bankers to fly up front!
More equity investment then? Remember the pitches by “through cycle” investors who claimed to understand the industry? Time for a second round of funding, for working capital and growth (when resources are cheaper and more available) in confidence that the cycle will come back round. Now is the test.
But any bank or investment committee needs to get its confidence from somewhere. Perhaps time for owner managers to lead; digging deep and reinvesting from the good years profits. All sunk on swimming pools? Surely not.
But if all you can, or want, to offer is a personal guarantee I prophesy a dry conversation with a lawyer ahead. Swimming pools were never a great financial investment. Don’t leave it to an expert to tell you what you already know.
Peter Murray is a partner at Scottish law firm Ledingham Chalmers where he specialises in UK corporate law and international projects.
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