HSBC’s swift purchase of the collapsed Silicon Valley Bank’s UK arm was a lifeline to thousands of technology businesses regarded as pivotal to sustainable economic recovery, post-Brexit and post-Pandemic. One leading UK private equity investor focused on the tech sector said that 30 of the 70 companies in his firm’s portfolio banked with the institution and had averted, at best, severe disruption as access to their own cash was restored. Both HSBC and the UK government’s relevant departments deserve credit for leaping into action without delay. Nonetheless, the failure of the broader bank and its effect on world markets has prompted a sober look at the ever-swelling tech bubble.
It has been said that the underlying issues may be less obvious for stakeholders aged under 50, many of whose careers may have been built (and sometimes fortunes made) against a generally benign economic environment. Companies face a higher cost of capital for the foreseeable future and those whose business models have relied on artificially low interest rates face tough times ahead. Valuations are also problematic: those of private equity and venture capital investors in tech have only gone one way, unhindered by wider economic woes and, in some cases, lack of near-term returns. For those businesses requiring bank debt, lenders’ margins over central bank rates are widening, so options for funding investment and growth will be shrinking.
The long term picture for UK tech remains very positive. As home to eight of the world’s top 50 universities, companies can access a healthy pool of skilled talent, and research and development programmes. There is no shortage of software engineers on these shores. Success in starting, scaling and selling UK businesses has been proven. London’s Silicon Roundabout, Canary Wharf’s Level 39 and other major cities, notably Bristol, Cambridge, Manchester and Cardiff, have produced several impressive digital start-ups, many of which have already been snapped up by large US or Asian corporates. However, UK growth companies should treat the SVB episode as a shot across the bows: they need to be as nimble as HSBC has been if they want to secure their longevity, which means being ready for action on a number of fronts:
- Preparation for fundraising – financial content for Information Memoranda
- Efficient structures for founders and directors
- Support for tech grant applications
- Assisting in communications and negotiations with lenders
- Advice on R&D allowances
- Recognition of complex revenues
- Treatment of Intellectual Property and intangible assets
- Advice on structuring strategic alliances and major contracts
- Scaling strategies
- Due diligence on potential transactions
These don’t just apply to first-timers. Successful tech businesses are resilient and able to ‘pivot’ or reinvent themselves in a global industry with seemingly endless possibility and diversity – internet security, Software as a Service, (SaaS), Platform as a Service (PaaS), carbon-ion batteries, trading platforms, e-commerce and telecoms solutions, to name just a few that we have worked with at Buchler Phillips.
Recruitment, retention and rises
It is hard to get a true picture of the job market. On one hand, vacancies in the UK have fallen for the eighth time in a row – 51,000 in the three months to February, against the same quarter last year – as companies blamed economic pressures for holding back on hiring new staff. At the same time the number of job vacancies remains high at 1.1 million. There are also 328,000 more vacancies compared to the pre-pandemic period of between January and March 2020. There are still millions of economically inactive Britons who are not part of the workforce either because they are students, have retired or are suffering from long-term illness.
Work patterns and career priorities have been changed by Covid’s disruption to ‘normal’ working life. Retaining and recruiting skilled staff is increasingly challenging and, regardless of motivations cited by employees, financial incentives remain the strongest tools for attracting talent and slowing staff turnover. The main alternative is attempting to recruit from a wider pool. This applies not only to executive and skilled positions, but to the less skilled end of the workforce, where relatively cheap labour is no longer readily available. Both these tightening factors in the labour market have added to a wage spiral and have been compounded by the effects of Brexit on labour supply at all levels. The potential for valuable working capital to be impacted adversely by recruitment issues is very real.
The Government hopes to entice people back into work by boosting the amount they can save for their pensions before it is taxed. That may slow the numbers retiring early, but will do little to address labour issues at the lower end of end of the scale. Managers need to consider the role of staff incentive plans within their capital structures, as well as the exploring the potential for operational restructuring to save cost and optimise productivity.
The changing face of fraud and forensics
The UK has achieved a new world-leading position – in cyber crime, overtaking the US in fraud incidents per internet user become a world. Some 39% of UK businesses reported suffering a cyber attack in 2022, with cyber crime costing UK businesses an average of £4200 last year.
Desperate economic times inevitably lead to desperate behaviours in business, not only from seasoned criminals sensing an opportunity in economic turbulence, but also from newcomers to white collar crime who have no other means of accessing large funds quickly. Highly experienced in fraud and forensics, we at Buchler Phillips are not surprised to have seen in recent times the sorts of ‘internal’ challenges that often present themselves when time get tough. These are typically the result of director malfeasance with the aim of diverting funds: false accounting; aggressive invoicing and booking of revenue; inaccurate valuations; recovering funds from former members of a company; dereliction of duties; and reviewing business controls. However, in an increasingly digital world, the threat from external fraudsters to all sizes of businesses has never been greater – and this has been amplified by home working and disjointed office environments since the pandemic: it is increasingly common for frauds to be committed by employees with technological help from outsiders.
The growing digital-first approach of both consumers and business customers presents significant risk to companies. Fraudsters are finding new and innovative ways to commit fraud and steal individuals’ identities, personal details and, ultimately, their money. Consumers expect to be protected by the companies they transact with, while those companies in turn face unwelcome assaults from digital criminals.
Here are some areas that businesses from SMEs to larger concerns need to watch out for. They are very real and our consultants have had first-hand experience of these with business clients in recent times:
- Cryptocurrency scams – unregulated financial services providers offering to facilitate business transactions in cryptocurrency with claims of significant monetary benefit.
- Ransomware attacks – criminals not only asking for ransom to be a paid but potentially then stealing and releasing hacked data; an entire new sector of cyber ransom negotiators is developing.
- Text and cold-calling scams – receiving a cold call or text message claiming to be a genuine organisation asking for a payment to be authorised relies on a small business to be panicked into complying, usually if a relatively minor amount is involved.
- New ways of authentication – passwords controlled by individuals within companies may be guessed by fraudsters researching their social media. Knowledge-based Authentication (KBA) is far from fool proof and moves towards biometrics and other ID should be accelerated.
- New business account opening – two areas are particularly prevalent: ‘bust out’ account opening, where challenged businesses which already have an account with a financial provider knowingly open a further account or credit card with no intention of repaying; or simply falsifying information on an application to access more borrowing or favourable terms. The same principle applies to new credit lines or trade accounts with suppliers.
Business owners already reviewing the potential for cost-effective digitisation must consider ransomware, Know Your Customer/Client (KYC) processes and authentication systems as imperative investments. Those handling third-party data risk serious reputational damage, with customers happy to move to companies which they believe are better able to handle their information in a safe and secure way.
As ever, the Buchler Phillips approach to business challenges is ‘workout, not bail out’. Don’t hesitate to get in touch for an exploratory chat if your business needs help. Addressing the cracks now will, in many cases, avoid the need to start again.
Our helplines below are open for free initial consultations.
Jo Milner 07990 816904
David Buchler 07836 777748
Let’s get to work!
About Buchler Phillips
Buchler Phillips is an independent, UK based corporate recovery and restructuring firm, with an impeccable Mayfair heritage dating back to the 1930s.
Led by David Buchler, former Europe and Africa chairman of global consultancy Kroll Inc, our senior team is equally comfortable advising large corporations, Small & Medium Enterprises (SMEs) or individuals. In addition to decades of experience, each of our Partners brings to any given assignment unique independent insight, free from conflicts of interest, that is often sought but rarely found by clients or co-advisors.
The firm is sector-agnostic, but has particularly strong credentials in property; financial services; professional services; leisure and hospitality; retail and consumer; UK sports; media and entertainment; transport and logistics; manufacturing and engineering; technology and telecoms
Our activities fall broadly, though by no means exclusively, into financial restructuring, including fraud and forensic investigations; operational restructuring and turnaround; expert witness services and recovery solutions for corporates and individuals.
This newsletter is published for the purposes of general information only and does not constitute advice. Any action taken by readers upon the information above is entirely at their own risk.