In 2023, the UK is expected to face many challenges that will impact economic performance and business trends. Where possible, we have applied these issues to our portfolio, a cross-section of mid-market businesses, to consider the ‘real-world effect’ of these issues.
UK businesses will be hoping for a greater degree of political stability in 2023, this will enable better strategic thinking, to inform longer-term investment decisions, which will help businesses stay competitive and profitable.
#1 Risk of recession
Economists are predicting that the UK will face a recession in 2023, several factors are contributing to economic uncertainty, including high inflation and concerns about energy supply. The risk of a recession is the biggest issue facing our portfolio, and in our property-related companies, we saw the impact of this threat very early, with the transactional business slowing down quickly, as confidence reduced. This impacts the timing of new projects, and the funding of existing projects. Interestingly, in businesses like Patrick Parsons, Cluttons and Avonside, we benefited from an uplift in confidence in early 2023, with project start dates being reaffirmed, and some clients pushing on with projects they had paused at the end of last year.
“The most significant issue that is likely to impact our business in 2023, is a slowdown in the house-building market. Despite the underlying chronic shortage of housing in the UK and a buoyant jobs market, higher interest rates and the general cost of living squeeze are impacting affordability and confidence.” Bill Rumble, Managing Director, Avonside Energy.
“The cost of borrowing driven by increasing interest rates is the most significant factor influencing our business right now. Our clients are developers in the commercial and residential construction sector, increased borrowing costs on top of supply chain cost inflation will make debt funded investment less attractive. This will create space in the market for emerging, forward thinking organisations or funds to get ahead and capitalise creating new client opportunities for us.” Neil Hobbs, Managing Partner, Patrick Parsons.
To mitigate the impact of a recession, our businesses have been focussed on building resilience and being prepared for different scenarios. This includes diversifying revenue streams, reducing costs, strengthening cash reserves and enhancing client relationships.
#2 Energy costs
As the ongoing war in Ukraine continues, with no clear end in sight, supply chains remain under pressure, resulting in prices for raw materials and energy soaring, trigging the knock-on effect in the UK’s rate of inflation.
Every business in the portfolio has been impacted to a greater or lesser extent by rising energy costs. In many cases, customers were initially open to passing through the rising costs, but this is now meeting much fiercer resistance, meaning margins are inevitably squeezed. Our high-energy consuming manufacturing businesses such as Heat Exchange Group, Nasmyth, Trac Precision Solutions, have in some cases, benefited from long standing fixed price contracts, and in other cases, we have been pleasantly surprised by the amount of Government support. There will undoubtedly be further change in Q2, and therefore the cost of energy is the second out of the top three issues facing our management teams.
“Supply chain and energy costs continue to impact the print industry – from shortage of paper through to running costs of the presses, and distribution costs continuing to rise. Packaging is also causing pressure with some countries now banning plastic poly wraps. With so many of our clients still printing magazines and distributing them to customers’ homes, we expect to be working closely with them throughout 2023 to manage these increasing cost pressures and re-model where appropriate. This will include examining optimum paginations, paper stocks and frequencies – as well as considerations around alternative sustainable packaging – while still delivering engaging products for customers that meet our clients’ expectations and objectives.” Zoë Francis-Cox, Managing Director, Dialogue.
“Aerospace manufacturing is still ramping back up to pre-covid demand levels and therefore the supply chain, and material supply in particular, remains challenged due to capacity constraints (labour shortages, loss of skill, raw material allocations, energy costs etc) and increased financial costs to support business growth.” Tony Upton, CEO, Nasmyth Group.
#3 Workforce renumeration, recruitment and retention
Issues around the workforce and our businesses’ employees rank as the third of the top three challenges. Remuneration is undoubtedly a key issue, the private sector cannot escape the same pressures affecting the public sector and the obvious industrial action, namely relating to pay. Typically pay awards in many of our businesses are more clearly linked to business performance, but mindful of inflation and the rising cost of living, various one-off payments have also been made where deemed necessary.
Skills shortages across most of the businesses in our portfolio remain acute, and this is often blamed on Brexit. We have some evidence of this, but it also reflects a longer-term decline in training in some specific sectors, and seemingly many people withdrawing themselves from the working population. This was made worse in the early part of last year by high staff turnover and many people leaving to take new roles, sometimes for increased pay but also for other factors such as a changing work life balance.
This seems to have slowed in the latter part of 2022, and continuing into this year, as job security probably runs stronger while there is talk of recession. This undoubtedly will reappear later in 2023. Looking after your workforce and employees has probably never been more important.
“We rely on sub-contract labour and our own white- and blue-collar staff. Finding the right people with the right skills and attitude without busting the budgets is difficult.” Rob Barling, CEO, Trios Facilities Management.
“The cost-of-living rise will no doubt continue to put pressure on wage expectations and in turn increase churn in job markets.” Mark Buchan, CEO, Richard Irvin FM.
Other noteworthy events impacting the Rcapital portfolio companies include; international freight costs have reduced markedly, particularly the cost of shipping from the Far East, which has positively impacted a number of our businesses importing from overseas including Cablenet. Conversely, the cost and complexity of trying to sell products into the EU for small and medium sized businesses is a challenge that means that many will refrain altogether. This will continue to be an issue unless a viable work around can be achieved to justify the time, cost and complexity.
“Two-years of trading post Brexit and we’re still grappling with EU trading arrangements and red tape. Businesses that trade internationally have faced a triple blow with global covid-lockdowns, a cost of living crisis, and a change in trading arrangements with our biggest partner, the EU.” Peter Pearson, CEO, Cablenet Trading Limited.
In summary, UK businesses are expected to face a number of challenges in 2023, including the risk of a recession, high inflation, concerns about energy and issues relating to the workforce. Businesses that focus on building resilience and being prepared for different scenarios will increase their chances of weathering the challenges and coming out on the other side in a stronger position.
