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Archive for September, 2015

Is the UK now in a longer cycle of strongth growth?

Following a series of revisions to past data, the ONS said Britain is now 5.9 per cent larger than its pre-crisis peak. It was previously estimated to have been 5.2 per cent bigger.

The revisions showed that Britain enjoyed the strongest recovery of any G7 leading nation in both 2013 and 2014. On OECD forecasts, the UK is on track to top the G7 again this year, equal with the US. On a per-person basis, the UK is 0.6 per cent larger than ever.

From today’s Times.

The key question for me is whether this is a trend which is firmly established over the medium term? Topping the charts for one year maybe seen as a blip especially if in context with a previously heavier than g7 average downturn but when we are talking about three years maybe this is a fundamental and significant shift?

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My background and how Mayking made me

This is a fascinating piece from Management Today the early nineties. This was where I developed my cash flow management  and credit assessment skills to quite a high level. Why? Because cash was tight and this fabulous industry was probably as high risk but equally rewarding as you could hope to experience

Enjoy the read and soon I will explain how the story ended

One minute you can be at the top, the next you have hit the bottom. Mayking Records has experienced both in the fast-moving, action-packed audio and video zones of the entertainment industry.

Why should you want to start a business, especially one which manufactures things? You can probably look forward to spending the rest of your days pushing a heavy cart up a steep slope strewn with boulders. That’s if you’re lucky. And you stop pushing at your peril. But suppose you’re exceptionally lucky. You might even – given an abrupt change of metaphor – be borne along on the crest of a wave. Suppose that you’re in a rapidly developing industry and, quite soon after you take the plunge, the whole sector surges forward. Suddenly you’re surfing. Everybody’s expanding, and investing, at an incredible rate. It’s turmoil. Various rivals are taken over, but not you because you own your company. You scarcely have time to worry, you’re concentrating too hard on keeping going and staying upright. It’s exhilarating, like nothing else. It’s good spectator sport too, watching one competitor flying along the face of a comber while another gets himself “dumped” – as they say on Bondi Beach.

Brian Bonnar has been surfing for most of the past dozen years. To be more precise – and prosaic – he has been pressing gramophone records and duplicating tapes, both audio and video (and filling much the same role in relation to the distributors as a printer does vis-a-vis a publishing house). This, too, is a young man’s game, being fast-moving and action-packed. And as anyone with just one eye and half an ear knows only too well, the audio and video parts of the entertainment industry have exploded during the past dozen years.

Bonnar’s business has more than kept pace with the sector, growing from one man (himself) in 1980, into a group employing more than 300 people – and turning over upwards of £30 million – today. His video duplication company is confidently claimed to be the third biggest operation of its kind in Britain, if not the second biggest. And the group as a whole is “the only organisation in the UK able to handle the pressing or duplication of all formats of disc and tape”. Until the recession set in, it was growing not only at a good lick but also profitably, making more than a million pounds of pre-tax profit in successive years. Bonnar is in sole charge of this lively surfboard, and has so far managed to prevent anyone else from sharing the ride. He is the company’s only director, and owner of all the issued capital. But Mayking Records, as it’s called, is so heavily borrowed that he can’t yet count himself rich.

Many another entrepreneur would never snatch a moment’s sleep under the weight of debt that Bonnar carries with apparent ease. But then, the business could never have reached its present size had the former record plugger not learned to be confident about handling large sums of borrowed money. He has had plenty of opportunity to practise. Mayking is by nature capital-intensive, and, while profits have almost all been ploughed back, the company has remained capital-hungry since the early days. Being a young and modern man – though he reached the dangerous age of 40 this summer – Bonnar appears quite laid back about most things; including the danger that inevitably looms when bank borrowings climb to more than twice shareholders’ funds in a time of recession. (They were £5 million against £2.2 million in the last published accounts, to June last year). He still complains that “The main problem I have is access to finance”.

Being laid back is the Mayking style. The lone director arrives for work at the company’s factory in York Road, Battersea, south west London, wearing a sports shirt. Pop music permeates the offices. Occasionally pop stars amble in through the swing doors, causing ripples among members of staff – few of whom can imagine an age as great as 40. But, then, pop music is an important part of the business. And, make no mistake, the business is no less important to Bonnar than it is to his bank creditors. It provides both his livelihood and a vehicle for self-expression.

The notion of setting up on his own account occurred to Bonnar sometime in the mid-’70s. About a year after leaving York University he had been taken on by Decca, to work in TV and radio promotions. He knew his popular music, having mixed with artists, even arranged performances as chairman of the university entertainments committee. And being extrovert and articulate, he might have seemed cut out to plug records. But it wasn’t for him: “It turned out to be a soul destroying job.” Besides, after decades of domination by the major companies – which controlled both production and distribution – the record industry was showing the first signs of flux. There were new names about, offering “compilation albums” of earlier hits that they promoted via TV advertising. “I began to pick up the fact that the TV merchandisers had difficulty in getting their product made,” Bonnar recalls. “It gave me the idea of going into custom record pressing.”

Unlike most graduates of his generation he had no prejudice against manufacturing industry. But how to get started? By chance he found himself in a hospital bed, where he was nursing an injured leg, reading a full-page advertisement inviting budding entrepreneurs to discuss their projects with Industrial and Commercial Finance Corporation (ICFC, now 3i). He pumped £5 worth of 10p pieces into a pay phone and explained his proposition at length. ICFC listened.

No longer plugging records, Bonnar spent the next two years on a feasibility study while doing a variety of other jobs. He thought of building a factory in Wales, with a soft loan from the development agency. It began to look as if things might soon happen. But then came the late 1970s oil crisis and his principal backer pulled away. ICFC had temporarily lost confidence in UK manufacturing.

This disappointment brought about a sudden change of plan. One of the people Bonnar had approached about fund-raising suggested that he should look abroad, and introduced him to Bank Hapaolim, which referred him to Paris, which put him in touch with a company called MPO which pressed records near Le Mans in northern France. MPO had “a fabulous plant”, and it was agreed that this should also act as production department to Bonnar’s company in the UK. Given the volatility of the record industry, and with the British economy in recession, it seemed the wisest choice.

The French link has endured. “But how can you import from France?” Bonnar gets asked. In the record industry a customer is liable to ring up and demand x thousand copies, pressed, packed and delivered by next day. Bonnar claims that – such is the co-operation of the French – he can give as good a service as if the factory were based in London. In any case the arrangement has obviously worked. Mayking Records was incorporated in early summer 1980, and began operating out of the back door of an ad agency in Holborn where Bonnar was employed part-time. At Christmas he moved into his own premises, a large open-plan office in Portobello Road, west London. He was still alone – despite the royal “we” – but not for long.

This was right at the start of a period of rapid and continuous growth in the industry that went on for the next 10 years. In addition to the TV merchandisers, new independent labels were beginning to spring up, which further undermined the power of the big companies. “There was a great explosion of creativity.” New groups were forming every week, and the first thing they wanted was to get a number recorded and the disc on sale at their Saturday night gig. Bonnar decided he would “do whatever the customer wanted”. He began to act as a “production hot-shot”, advising on recording studios as well as getting the records pressed. “I was the guy to come and see,” he boasts. He had records made for street musicians, sometimes as few as 500 at a time. But it was the burgeoning independents that were the making of Mayking.

The venture expanded very fast for a couple of years. Then Bonnar suddenly went off on a different tack. While leafing through Businesses for Sale in the Financial Times one day, he came upon a small company which specialised in the duplication of video tape. Videoprint was actually looking for a partner, but in the end Mayking bought it, which made Bonnar a proper manufacturer at last. Here was an opportunity for horizontal integration, he felt. Did the client want a vinyl record or a music video? He could have either or both. In fact the markets turned out to be different. But after a slow start Videoprint forged ahead to become Bonnar’s biggest and most prosperous possession, earning a gross margin of over 30% at the end of the ’80s. That was before it overshot the mark, and became a major cause of concern in the ’90s, to both Bonnar and his bankers.

Meanwhile there were other formats to be developed. During 1984 MPO introduced plant to manufacture compact discs, egged on by Bonnar who sold his first CD (featuring Shirley Bassey) that November. The annual trade fair at Cannes the following January was “absolutely alive”. There were just two or three companies in Europe (including MPO/Mayking) capable of doing CDs; and the Americans, who were committed to defending their investment in vinyl, were “absolutely f****d”. For a while CD was “a glitzy product – akin to owning a gold card”. Then the shine wore off as more and more people, from outside as well as inside the record industry, attempted to capture some of the magic. But CD remains important to Mayking. Indeed it is the current focus for investment. This summer, at a cost of £2.5 million, Bonnar installed a CD line of his own at Battersea, and space has been cleared for more to follow. The new line make singles. Albums and other less time-critical products are still brought in from France.

The move to Battersea in 1988 was partly for the sake of symbiosis – or “gestalt effect”, as Bonnar says. Although the video cassette and audio markets overlapped only to a limited extent, he thought that bringing the operations together would encourage cross-fertilisation. Besides, the accounts function – along with computer, transport, security and all the other services that the two businesses had by that time sprouted – could more easily be shared if both were in one building. The same services would also support the record label which Bonnar had begun to develop (under the name One Little Indian) and the audio cassette duplication business that he had decided to launch in preference to importing product from France. This was incorporated as Mayking Cassettes the following year.

Relocating Videoprint had in any case become a matter of urgency. After acquiring the company in 1983, Bonnar spent a couple of years mastering the processes of tape duplication. Then, just as the parent company had done, Videoprint began to take off, powered by significant developments in the market. Until the mid-’80s video cassettes had almost invariably been rented. But that changed when Video Collection (now part of Strand VCI) pioneered retail sales. “Sell-through”, as it’s called, gave viewers the option of buying big feature films on cassette at a fraction of their former price.

Video Collection came to Videoprint, which at that time occupied a couple of small units in a Hammersmith back street. Bonnar remembers “ramping up production, to cope with volumes to put on the market at £5.99”. He inserted a mezzanine floor. Nevertheless “broom cupboards were overflowing with product”, and there was a lot more standing in trailers in the yard. The pressure was relieved for a while when the company moved to York Road with 800 real-time duplicating machines. But still the market continued to grow mushroom-fashion, and not just because of sell-through. Every record company needed to have its label on music videos, as well as on cassettes and CDs. And the corporate sector added to the fun with a plethora of promotional and training films.

Outside the door it was dog eat dog. Companies were constantly being swallowed by their competitors, which were often big groups. Carlton Communications bought Technicolor and edged past Rank – itself no mean performer in the acquisition stakes – to become industry leader. Videoprint meanwhile went on growing organically and exponentially, increasing turnover by an annual 50% or more five years in a row. But the cost, in terms of investment, was massive. There are now 2,000 real-time machines at Battersea. They stand in racks, one upon another, and in serried ranks like crates in an automated warehouse. But the big hike came in 1990 when Videoprint spent £12 million on a brand new factory in Ipswich. Equipped with the latest technology (Sony sprinters which run several times faster than real-time machines), it is, according to Bonnar, “the most advanced duplicating plant in Europe”.

Ipswich was chosen with an eye to sales on the Continent. “This worked out reasonably well, more so initially than now,” says Videoprint general manager Simon Valley cautiously. But if foreign fields were a disappointment, the home front has been a disaster area. The company ran slap into a recession that was exacerbated by special factors. In particular, the collapse of Parkfield Group (a newcomer to the video industry), with an unknown quantity of stock on its hands, devastated the market from mid-1990 on. It contributed significantly, Bonnar believes, to the fact that Videoprint lost well over a million pounds in the year to June 1991.

The loss in the subsidiary dragged down the parent. Mayking Records itself showed a modest profit on trading, but the consolidated figures reveal Videoprint’s (lack of) performance together with a huge increase in charges. The accounts were qualified for the second year running: to the effect that, with net current liabilities amounting to £3.5 million, the company’s continuation depended upon the goodwill of its bankers. That meant Barclays in the case of the overdraft, and 3i as providers of medium-term money.

Having drawn back from Bonnar’s original start-up plan, the “venture capitalists” later put up £3 million for the long lease at York Road. But they continued to support Mayking over the Ipswich plant and subsequent investment in CD manufacture. Bonnar points out that 3i increased its exposure by a million pounds as late as 1990 – after the recession was under way-“and on a non-equity basis”. But it may have been for the last time. “There is a limit to what he can now do on debt,” says Alistair Morrison, local director of 3i and Bonnar’s angel. “He can either limit the rate of expansion, or he may look more favourably on some form of risk sharing.”

At least Bonnar is still perceived as an acceptable risk. One reason given by Morrison is that, even though Bonnar enjoys absolute control, “he has an adequate management structure in place” beneath him. They are young men all. Technical chief William Armes, currently running-in the CD line, is a lively-minded engineer. Robert Barrs-James, Bonnar’s financial lieutenant, is in the front line when it comes to dealing with the banks. Other senior men include Valley and Chris Marksberry, in charge of Mayking Cassettes. “I tend to trouble-shoot,” says Bonnar.

He has recently had plenty of trouble to shoot at but he now insists that the crisis is past, that even Videoprint should make a small profit this year. He also claims that he’s learned his lesson over gearing. Anyway he’s always been careful to pay up on time. As he says in another context, “If you don’t deliver, you don’t exist”.

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$12million dollar stuffed shark

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This is a quite fascinating read examining the art market and what drives the remarkable growth in prices over the past thirty or so years. I would guess that there is no comparable market for pure inflation and it would appear that this will simply continue.

Although the authors only touch lightly on the true economic driver behind this on going boom, the factors involved are clear to see. Simply put we are talking about supply and demand. The number of genuine extremely rich people is growing faster than the amount of good available work.

The key question is what determines “good” or “great” work. Few would argue with the status of a Picasso or even a Warhol but On Karwara is given as a prime example of high value and sort after work which may leave many judges a little baffled.

Of course this should come down to taste but who determines taste? Quite often there is the simple driver of ‘must have’ competition driving up auction prices but often the arbiter of taste is simply the attachment to a particular dealer. Its a stamp of authority. Certain collectors such as Charles Saatchi immediately increase the value of a work simply by buying. Their judgement is considered an added value asset in itself. As a business model that is pretty hard to beat

As an art enthusiast and in the very unlikely event of me buying into this market, I could never really imagine buying work which I simply couldn’t relate to regardless of value and quality. For instance, Francis Bacon was a fine artist but difficult to imagine on my wall whilst Agnes Martin is a recent artist displayed at the Tate who would leave many cold but who’s work I found entrancing

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Lloyds and Allder King

This story is somewhat disturbing but would easily be dismissed if we felt that we could trust the banks and their cohorts in various professional services. Unfortunately I believe that that trust has broken down

The accusation is that Allder King worked with Lloyds Bank to “undervalue” various properties held by certain borrowers who had particularly good low cost pre 2008 deals. The effect of this was to breach the loan covenant and effectively send the business to the wall. True or not? Well Allder King have been cleared by their institute and Lloyds have stated the claims are “baseless” to which one might say, they would do that and they would say that, wouldn’t they?

I actually believe that this is probably quite a straightforward case to judge and I suspect the detail will be outed soon enough. Undervaluing properties is surely not difficult to pinpoint.

I would also like to believe that this accusation is unfounded and the industry can breath easy. In fact I wish I could make that assumption and certainly it is no reflection of Lloyds in isolation that I cannot. But the fact is that I feel uneasy

The relationships between many lenders and “professionals” is very unhealthy. There is an often an attitude that businesses are cash cows to rip fees out of regardless of the consequences. There is also too frequently an underlying contempt for businesses and their issues and this is somewhat ironic coming from a sector which is, to put it politely is not held in great esteem

Many business owners are rightly suspicious of the “men in suits” that appear to be just a little too friendly with each other and give the impression of being “a mafia”, as one client of mine put it. Their concerns are not always unfounded with reciprocal passing around of sometimes unnecessary work not unheard of. During my time, drinks have loosened tongues at various events and I have certainly not been impressed by some of what we I have heard

My view on this is clear. I believe that if bankers have experience of the real world and an understanding of what it takes to commit to an enterprise, then there may just be a little more respect. Certainly if the Allder king story does stand up, then contempt rather than respect is the word that springs to mind. Often though this is pure laziness with both the “professionals” and bankers too often working in a bubble

Perhaps unusually in the finance brokering world, I am not from a banking background but do have extensive experience on the “other side of the fence” in sectors such as music, advertising and manufacturing. I believe I have empathy and certainly respect for those that struggle and commit to build a business from scratch. Certainly more respect than I could hold for those bailed out after making catastrophic mistakes which were borderline criminality

Which perhaps brings me back to the above case. I cannot call the judgement and the finer points of the law in this case are not my specialist area but the very fact that these alleged cynical practices do not come as a surprise, is the biggest issue of all

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Business “pay day” loans

Payday-LoansI think this image is appropriate. The neon lights of a seedy clip joint

Everyone is fully aware of the rather nasty little sector of “payday” loans exploiting the less than wary members of the public struggling with their finances. Wonga are of course the prime example and their use of fake solicitors letters summed up their values.

But its not just individuals who have fallen prey to extremely high cost loans. I recently assisted a client who was paying an apr of around 70%. How did it come to that?

The key is in how these loans are presented to the client. Generally they will quote a daily rate of interest in monetary value and this may well sound manageable but frankly it doesn’t take much effort to translate that into a APR

There is also the issue of default. For some lenders it is more profitable for the client to default and of course there may well be charmless relationships with insolvency practitioners.

The key as ever is knowing your lender. Premium lending does have a role and will always be required. Borrowers want flexibility but they also require a professional approach and a lender who sees the borrower as a client rather than a source of short term exploitation

That is why I have taken care to know the lenders well and research their reputation in the market.

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