Maplin stores failed this morning. Owned by a venture capital fund that bought it for around £85 million in 2014, since then it had accumulated about £42 million of interest charges due to that fund on a loan on which 15% interest was due. I have prepared a note on this for Joel Hills at ITN, available here.
As I said in that note:
Maplin had almost no chance of meeting the expectations of its new owners. The chance that it could ever pay a 15% return was remote in the extreme. The chance that it was over-stressed in an attempt to make such payments is highly likely. The result is its employees losing their jobs and a valuable resource for many being lost to the High Street.
The time has come to question whether the venture capital business model adds value in the UK. The evidence is it may not because it places real business under too much financial stress to survive, let alone prosper.
And I also asked these questions:
- Why is it permitted in the UK for the acquisition costs for a trade to be piled onto the balance sheet of the company that has been acquired? Doesn't this just encourage:
- Asset stripping?
- Financial stress?
- The impression of a business focused solely on the need to generate a return to shareholders seeking excessive interest payments (as 15% might reasonably be interpreted to be)?
- An attitude that discourages further investment in the trade when that is sorely needed?
- Should there be unlimited liability for companies that trade when showing a deficit of funds on their balance sheets, and why?
- Should there be clearer indication of interest payments that are not considered tax allowable with better explanation given?
I think these are questions needing answers.
As I said earlier today, we need a healthy environment in which business might flourish in the UK. I do not think venture capital is providing it.
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If you want to see the mechanics of how the rich growing richer whilst ordinary people grow poorer you can’t get a better model than this.
It’s infamy – that’s what it is.
Pilgrim ,they haven’t just got it in for you, they have got it in for everybody.
Finance Capitalism . Pure rent seeking, adding no value to the economy whatsoever. The central aim of Monopoly and finance Capitalism is not to make maximum profit, it is to extract maximum surplus.
Prompts me to think that we do not have a generic term for the destructive form of capitalism that predominates today. It gets referred to as ‘monopoly’, ‘rentier’, ‘turbo’, ‘financialised’, ‘neo-liberal’….
Being a fan of George Lakoff, it would be helpful if there was a consistent term that got used when talking about it, to clearly separate it from potentially more benign, properly regulated forms of capitalism. A term that can get lodged in public consciousness and avoids just being seen as generally anti-capitalism. Assuming that you accept that capitalism has an important role, which I appreciate some here may not.
Pilgrim made a good point when he talked about perhaps referring to unfairness rather than inequality. We need a new lexicon as part of establishing a fresh centre-Left or Left vision.
I agree
But it’s a struggle to find it
Social business?
Robin Stafford says:
“Prompts me to think that we do not have a generic term for the destructive form of capitalism that predominates today. ”
Vulture Capitalism springs to mind, but is inappropriate because vultures are carrion eaters and these ‘venture capitalists’ are killers. Vulture capitalists actually have a useful role and can ironically actually resuscitate corpses of failed businesses.
Ichneumon wasps come pretty close. https://en.wikipedia.org/wiki/Ichneumonidae
Their larvae consume the living host.
As Kenneth Williams famously said…
https://youtu.be/kvs4bOMv5Xw
More seriously, feels like a text book example. Following close on the heels of Carillion. The self-destructive nature of today’s heavily financialised businesses.
An excellent explanation of the situation at Maplins and of course Venture Capitals place in it’s inevitable closesure. Everyone is blaming Brexit and not looking at the way we do business in the country. While a company like Amazon can operate, paying little or no tax, the climate is certainly not good for the high street. I will leave EBay and their lack of paying VAT, they certainly have a large part to play in all areas of retail. Where have all the retailers gone? Longtime passing.
I think you will find it is the victim of a change in consumer habits from the high street to Amazon.
What was there to asset strip? That involves the sum on the parts (after being sold) being greater than the purchase price.After paying £85m I presume the VC firm is hurting as well.
I suspect the VC is hurting
I am not saying it isn’t
And I said this is not the only reason for failure
BUT this structuring could not have helped in my opinion
Such high coupon debt is clearly a reflection of the risk of the business and the fact they couldn’t get financing elsewhere.
For all those bashing venture capital presumably because you believe the industry is populated by Philip Green wannabies.. it actually isn’t. Please take a look at https://hgcapital.com ..HG Capital have been around for ages and have helped hundreds of small entities grow by providing capital and support and providing 10s of thousands of jobs in the process..and there are many many firms like HG.
With respect, they got bank funding at 3.5%
That makes your comment look like nonsense
I think HMRC agree – with reason
I have often bemoaned the quality of tax journalism in the UK, and the reporting of stories like this annoys me, you appear to have slightly fallen into the trap of “headline grabbing” which is a shame as I read your blog because its normally more accurate on these things than the mainstream press.
The Rutland loan note was not cash pay interest – no cash flowed out of Maplin back to Rutland, the £42m was accrued but not paid – Rutland have lost all their investment in this business – to suggest they are asset strippers or anything else in this context is crazy. There are many examples of asset strippers and bad behaviour in the PE world, but unfortunately this isn’t one of them.
You yourself have championed more restrictions around interest deductibility so I thought you would be pleased to see the rules working. As you know the UK now has a 30% EBITDA interest cap as well as the thin cap rules we had historically – the fact that HMRC didn’t consider all the interest deductible is very common in these circumstances and happens all the time in the PE industry.
Rutland accrued a liability at an exceptional rate of interest that I suggest put undue strain on the business
I explain why
I acknowledge all you say
I am really not sure what you are accusing me of
I suppose I don’t recognise your “over stressed” description. Rutland could waive/ capitalise the interest and make it disappear if they chose (again I advise on this all the time in a pe context). The fact they haven’t suggests there is rather more of a fundamental issue with the business. I suspect it’s to do with high shop rental, the same as house of Fraser are struggling with.
Until 2017 they made an operational profit
Things may have got worse
We do not know
If it is rents than landlords have a tsunami heading for them on the High St
You imply management chose 15% mezzanine financing over 3.5% financing from the banks..they didn’t. The covenants of the loan limited the size of the loan and required other sources of finance to stand in front. So they needed alternative sources of finance. Indeed it is because no further finance is available that Maplin is in the state it is in.
Also using the term “asset stripping” bears no relation to the situation at Maplin. It is like you just want to whip your audience into more anti capitalist rhetoric. Businesses fail, it is part of the evolution of society and an economy. In truth we have no idea of what sectors of business will dominate in 20 years time..many of them we currently will be completely unaware of. Sectors of the workforce provide the impetus for innovation of which venture capital is very much at the forefront. This is a good thing otherwise we risk stalling in a global economy.
With respect, this business, in reported accounts, made an operating profit pre Rutland related costs
Yes it failed for commercial reasons, I am sure
But a mentality that was driven by the need to service 15% finance could never have helped a positive framework for development
This was a business that was being stripped, in my opinion
We will have to disagree – but please let’s not suggest 15% is appropriate
The Guardian had an interesting piece of the swathe of mid market chain restaurants that are currently experiencing major difficulties.. where money has piled in to grow businesses, resulting in a market of leases ballooning out of proportion. It was more complex than just this, but it was an interesting aspect when considering short termism in business.
Bugger ! And I needed a thermal fuse for the water heater. Should have got it last week. The 99p might have kept them afloat.
Venture capital, by it’s nature invests in new or established businesses with high potential for growth who have little or no access to the equities market and an amount of risk large enough to warn off banks. In so doing they are hoping and expect a massive return on that investment. This ROI, when such companies are floated on the stock market, was shown to be over 330% in a study in 2007. Of that, 100% reflected the growth in stock markets, 167% represented additional debt raised by the firms over levels at comparable companies and 62% was from improvements to the businesses. Of course if there is no opportunity for a flotation or sale then losses can be high
Maplin registered in 1985 has been owned by Saltire Plc 1994, Graphite Capital 2001 (management buyout £41 million), Montague Private Equity 2004 (£244 million). Rutland Partners 2014 (£85 million)till now . All are venture capital companies which appear to have served the company well until now. As can been seen the losses sustained by VC’s has been considerable. Without them Maplin may have failed much earlier as its place in the market was never ever main stream and its advertising poor and ineffectual
So, as I said, the venture capital model has failed Maplin
Thanks for agreeing
Venture capital is a high risk business and the last time I found any decent research circa 2012 from USA it noted that if you classified failure as failing to see the projected return on investment then more than 95% of start-ups fail Unfortunately there is no such reliable information on established companies bought by VC. The actual failure rate quoted at that time was 75%. Consequently the information implies that there was a considerable amount of support given to start ups. The model is never ever going to be stable but in the UK retail sector from 2007 423 companies have failed the vast majority had no VC involvement whatsoever.
Maplin was a start up?
Richard Murphy says:
March 1 2018 at 5:27 am
“So, as I said, the venture capital model has failed Maplin”
And many care homes as well Richard
Can I suggest that people have a look at Tom Brown’s book ‘Tragedy and Challenge’ pp.144-186?
In a critique of City attitudes to engineering and other sectors, Brown asserts that many new owners of companies – especially those driven by so-called investment returns and financial gearing – completely fail to understand the businesses that they buy which leads to unrealistic expectations and poor performance. There are good investment houses who manage their companies well but they are in the minority it seems.
So (Jim) it seems reasonable to expect that if Maplin’s advertising was so bad – the owning VC was to blame as well as saddling Maplin with debt service.
What I find unethical is that a bunch of outsiders can raise a loan for company , buy it and then saddle said company with paying off that debt whilst having their noses in the trough whilst it is still running.
That does not sound right to me – given the notorious reputation that the City and VC has for short term rent seeking, something that Will Hutton also pointed out as far back as the 1990’s in his book ‘The State We’re In’.
I also remember when the Glaser brothers bought Manchester Utd and then placed the purchase loan firmly on United’s books – something that still angers real United fans to this day.
“I also remember when the Glaser brothers bought Manchester Utd and then placed the purchase loan firmly on United’s books — something that still angers real United fans to this day.”
They have no need to be angry. They just need to stop buying tickets. But you can’t legislate for stupidity.
I’ll second that book recommendation. Coincidentally I was talking to an ex-colleague of Tom Brown’s who had pointed me to the book. He’s been a director of a number of major engineering companies and his opinions, not least on banking and finance, would not be out of place here. Another friend who is a director of a very large mining company and an engineer by training says much the same things. Or look at some of the arguments that Polmans of Unilever has had with the City. They deeply oppose Unilever’s work on sustainability.
Yes there are too many directors out there who are only too happy to play the City’s game and take the large bonuses and share options. However, there are many who would be delighted to see the City’s power diminished and a return to a more long term form of capitalism that addresses the interests of all stakeholders.
Maplin gone, Toys Were Us gone.
Which other businesses are at similar risk?
They are not alone
100 Prezzos
Anything that’s highly geared
Or old fashioned
That list always has to have Debenhams on it. How it is still around?
Here’s the Guardian piece on the sector:
https://www.theguardian.com/lifeandstyle/2018/feb/22/casual-dining-crunch-jamies-italian-strada-byron-struggling
David Flint says:
Maplin gone, Toys Were Us gone.
Which other businesses are at similar risk?
A considerable number, and not all specifically because they are being screwed by venture capitalists. We will see more and larger casualties before the game changes. But it’s the price of money which will kill most of them, allied with the diminishing demand from would be customers who are also feeding too much of their stagnant income into the financial sector.
Austerity is sucking the economy dry. Quelle surprise. This is how neoliberal economics dies. Slowly and painfully with lots of collateral damage.
So it goes.
How did the auditors give clean audit reports?
With a 15% loan commitment, it must have been obvious that the company’s ability to trade at a profit was small
Is your argument, Richard, that the unpaid interest accruing on the shareholder debt of MEL Topco was responsible for driving the group into administration? Or that the accounting charge for amortization of goodwill did it?
As Anth says above, I rather suspect the real problem was the underlying performance of the operating business compared to its cost base, which included £21m of rents and £40m of staff costs in the year to March 2017.
In the year to March 2017, the operating company Maplin Electronics Limited made an operating profit of just £2,4m on a turnover of £240m. That was down from a profit of £4.5m on a similar turnover the year before. That profit margin is not a sign of a thriving business, and no doubt the downward trend continued into 2017-18.
Maplin Electronics Limited also owned about £67m to its direct parent, Maplin Electronics (Group) Limited, which helped to give it negative net current assets.
There is a very long “going concern” note in the accounts, largely driven by the commitment of the banks to continue lending, and the shareholders agreeing not to ask for their money back. The accounts said it should have been able to continue in business until at least November 2018…
My argument is that the cultural of overburdening with debt drove a situation where unrealistic returns were expected with the consequence that investment was too limited, adaptation to a changing environment was not undertaken, and as a result there was, indeed, a commercial crisis
My argument is with the entire culture of venture capital, in other words
Surely the business would still have failed if Rutland invest via equity instead of a shareholder loan?
The culture would have been different
There would have been a buffer
It would have been solvent
The pressure would not have been there to fund absurd debt charges
The culture would have been long term and not short term
Yopu really don’t get it, do you?
Not sure why you can’t debate without being rude. I advise PE firms on tax as my day job, I like to think I have some insight into the realities of these structures. I’ve designed many of them, some of them you have dissected previously
I don;t suffer fools gladly
Especially when they want to come and trample on my space
I admit it
And I have worked with venture capital funds – it makes sitting in the dentists look like fun
I too know whatI am talking about
Only I was not doing tax – I was trying to make money against the odds they set
Andrew says:
“As Anth says above, I rather suspect the real problem was the underlying performance of the operating business compared to its cost base, which included £21m of rents and £40m of staff costs in the year to March 2017.”
You don’t think that perhaps the real problem might have something to do with running the business without regard to its raison d’etre, which was to provide goods and services, rather than merely to be exploited as a profit source by people who didn’t and don’t understand what businesses are for ?
Spot on Andy
Odd how some can spot that
And others can’t
Fundamentally the investors in pe funds are pension funds. All this talk of asset stripping and inflated returns are largely going back to pension funds. I think it’s fair to say that in excess of 75pc (probably more like 90) of investors in pe funds are pension funds. Is this good or bad?
And who runs pensions funds?
Oh, the same City types who want excess returns for their own lack of insight….
Given Rutland our a secure creditor, they’ll come out of this just fine……
Anon says:
“Given Rutland [are] a secure creditor, they’ll come out of this just fine……”
If that’s from a position if knowledge, Anon, Thankyou.
It confirms my own suspicions.
As Mervyn King points out ‘bankers’ don’t do risk. They price for the perception of risk but ensure that someone else carries the can. The GFC was the result of a sector wide failure to see that there was a risk – that of participating in a gigantic pyramid selling scheme trading bogus ‘assets’, of ultimately diminishing value at each transaction stage. The risk factor in a pyramid scheme is pretty close to 100%.
The VC model has some marked similarities. Essentially it works only as long as there is value to extract from the host/victim. It is alleged that there are benevolent VCs but I think they belong in the same category is fire-breathing dragons. They make for a good story….
Their equity ranks last in the chain of all claims. The shareholder loan will be behind the bank debt so doubt they will get any of their money back. Anon is wrong
Maybe he’s wrong
Anth says:
“Their equity ranks last in the chain of all claims. The shareholder loan will be behind the bank debt so doubt they will get any of their money back. Anon is wrong”
Sure as hell you can’t both be right.
Is what they’ve got a common or garden shareholder loan ? Call me cynical, but I’d expect they have a better deal than that. And bear in mind who will have written the contracts. 🙂
Couldn’t edit the our/are error.
Loan notes are just a joke, in value. Rutland are secured creditors for acquisition debt, check the charges placed on Companies House. Wells Fargo are also secured creditors, again charge is made against the stock holding. Both will walk away just fine. Rutland have paid the acquisition debt off once they get the last bit from the receiver PWC.