The Labour Party’s victory in the 2024 general election after 14 years of Conservative rule, heralds a transformative period for UK businesses and the insolvency landscape. New economic policies and priorities are set to reshape the business environment. Revised taxation policies, promised financial support for SMEs and renewed insolvency procedures mark a significant political shift. Distressed business buyers must understand these changes to navigate the evolving market and seize new opportunities.

Market Overview

The Labour Party has won a decisive majority in the 2024 general election, making Sir Keir Starmer the UK’s new prime minister. This outcome, anticipated by financial markets, saw a slight rise in the FTSE 100 and the pound, while government borrowing costs remained stable.

The Conservatives faced severe backlash for the highest inflation in 40 years, increased mortgage rates following Liz Truss’s premiership, and declining living standards. City analysts are suggesting that this win could bring stability to British politics after years of Conservative turmoil post-Brexit, positioning Britain as a “safe haven” for global investors amid political instability in the US and France. 

The initial rise in the FTSE 100 was driven by housebuilders, anticipating changes in planning law. However, Labour’s economic plans remain modest, ruling out significant increases in spending and taxes, and adhering to strict borrowing rules.

At the same time, the US services sector has contracted for the first time since May 2020, with the PMI index dropping to 48.8 from May’s 53.8. A PMI below 50 signifies contraction. The business activity index fell sharply to 49.6 from 61.2. Meanwhile, in the UK, growth in the service sector slowed last month due to a “seize-up” in activity as companies paused projects ahead of the general election.

Data from S&P Global revealed that the UK’s service sector growth, encompassing transport, IT, finance, communications, property, and business services, slowed to its lowest level in seven months in June. The survey of around 650 businesses, closely monitored by the Bank of England, showed continued expansion at the end of the second quarter, marking eight consecutive months of growth.

This slowdown in the service sector, both in the US and the UK, has implications for insolvency rates. A contraction in business activity and project delays can lead to financial strain on companies, increasing the risk of insolvency. Businesses in the service sector, already facing economic uncertainties, may struggle to maintain cash flow and meet financial obligations, potentially leading to a rise in insolvencies.

Impact on Distressed Market: Changes to look out for

Some key economic policies that will impact distressed acquisition potential include:

Corporation Tax and Business Rates: The proposed capping of corporation tax at 25%, the lowest in the G7, throughout the parliament, is aimed at stabilising long-term investments. Overhauling the business rates system aims to create a fairer tax environment that benefits high street retailers and small businesses while reducing the burden on commercial properties.

For financial services firms, this could mean higher tax liabilities and a need for more transparent accounting practices. While these reforms aim to create a fairer tax system, they may also reduce profitability for some firms and necessitate a reevaluation of their financial strategies,

These proposed changes enhance the attractiveness of investing in distressed businesses by providing a more favourable tax landscape and reducing financial burdens, thereby increasing the potential for successful turnarounds and long-term profitability.

Fiscal Responsibility: Labour’s emphasis on sound money and balancing the current budget is an effort to reduce debt as a share of the economy. This approach ensures sustainable public finances and allows for prudent investments in infrastructure and public services.

Improved infrastructure enhances the operational efficiency of businesses. This increase in efficiency often makes distressed assets in underdeveloped areas, which stand to benefit from new infrastructure projects, more appealing on the market.

When looking for profitable assets, consider those with strong fundamentals like real estate in rapidly developing urban areas, technology with scalable applications, renewable energy projects supported by government incentives, and healthcare services in growing demographics. Each of these sectors can offer substantial returns depending on market conditions and strategic execution.

SME Support: Support for SMEs is crucial as they constitute the backbone of the UK economy, facing heightened insolvency risks in the wake of the pandemic and Brexit. It is also worth noting that SMEs have formed the majority of business insolvencies in the last two years amidst high interest rates and little action from the government to help. 

Over the past year, over 140,000 people have lost access to banking services. Approval rates for loans are declining sharply, pushing more business owners to use their personal assets as collateral.

Here, the party’s efforts include tackling late payments to bolster SME cash flow through stricter payment terms and enhanced support from the British Business Bank. The restructured institution will foster regional growth and innovation under an expanded mandate. The strategy prioritises economic stability and SME assistance, aiming to alleviate financial strains that could precipitate insolvency. 

For individuals eyeing distressed assets, especially in sectors benefiting from infrastructure enhancements, such as real estate, manufacturing, or logistics, these initiatives could signal opportunities. It suggests potential for acquiring assets at lower valuations with the prospect of leveraging future growth spurred by infrastructure investments. However, careful due diligence and a strategic approach will be crucial to navigating the complexities of distressed asset acquisitions effectively.

Insolvency Support: Labour plans to review and potentially reform insolvency laws to ensure distressed businesses have access to necessary support and can restructure effectively. This may include simplifying procedures and providing robust support for businesses facing financial difficulties.

National Infrastructure Strategy: The ten-year infrastructure strategy will focus on improving transport, energy, and digital infrastructure across the UK, boosting regional development and providing certainty for long-term private sector investments. Key projects include enhancing rail connectivity, especially in northern England, and ensuring comprehensive gigabit and 5G coverage by 2030.

Businesses involved in transportation, construction, telecommunications, and technology could see increased demand or valuation potential as infrastructure projects progress. Distressed business buyers can leverage these developments by targeting assets in sectors aligned with the infrastructure upgrades, potentially acquiring them at advantageous prices and positioning them for growth as regional development accelerates.

Focus on Ethical Investments: Labour’s economic policy promotes ethical banking and investment practices. The party aims to incentivize financial institutions to increase investments in sustainable projects and ethical businesses. This shift towards socially responsible investing mirrors global trends but demands substantial adaptations from firms accustomed to prioritising short-term profits. Financial institutions may need to review their investment portfolios and devise new strategies to align with the government’s focus on environmental, social, and governance (ESG) standards.

The emphasis on ethical banking and sustainable investments could influence distressed business acquisitions in several ways. Firstly, there may be a greater focus on acquiring distressed businesses that align with ESG criteria and sustainable practices. Investors and acquirers, including financial institutions, may prefer assets that demonstrate a commitment to environmental and social responsibilities, potentially increasing the valuation and attractiveness of such businesses.

On the flip side, distressed businesses that do not meet these ethical standards may face greater scrutiny or reluctance from ethical investors and financial institutions. This could lead to reduced interest and possibly lower acquisition prices for non-compliant businesses. Moreover, the need for distressed businesses to adapt to more stringent ethical and sustainable criteria could pose additional challenges during the acquisition process, requiring thorough due diligence and strategic planning to navigate effectively.

 The distressed business sector must navigate heightened regulation and ethical investment standards, while also capitalising on potential advantages like tax reforms and better SME support. Keeping abreast of real-time opportunities in this evolving landscape can offer significant advantages for distressed business buyers. For the latest updates and insights in this sector, stay tuned to Administration List.