Warning of 80,000 'zombie' firms that are living on borrowed time

BRITAIN could have 80,000 "zombie" companies that are only surviving because of low interest rates and deferrals in tax payments, according to one of Britain's leading businessmen.

Jon Moulton, the chairman of Better Capital, also warned that the UK will struggle to cope with the massive public deficit because we consume a lot more than we produce.

He was speaking on the subject of Our Children's Debts at Leeds University Business School's Corporate Wisdom lecture, which was attended by dozens of Yorkshire's leading entrepreneurs.

Hide Ad
Hide Ad

Mr Moulton was one of the few commentators to anticipate the scale of the financial crisis which led to the banking bailout. His private equity company recently rescued Reader's Digest from administration in a 13m management buyout deal.

Mr Moulton said the financial bubble had been driven by "grossly over-bonused youths" and inexperienced, inadequate management.

He condemned the banks for rewarding aggression and warned that many companies were living on borrowed time.

In his presentation, Mr Moulton said: "The long run average liquidations rate, based on the years from 1980 to 2004 is 1.3 per cent of active companies.

Hide Ad
Hide Ad

"Over the past five years the liquidations rate has been 0.7 per cent.

"Companies have been supported by low interest rates, covenant resets, debt for equity swaps and deferral of payments to HMRC.

"If the long run rate were applied to the past five years, more than 80,000 additional companies would have been liquidated. These companies may be operating as zombies."

Mr Moulton also set out a 'Three Pillar Strategy for Consolidation'.

Hide Ad
Hide Ad

He said the Government must stabilise age-related spending relative to GDP (gross domestic product), reduce non-age related spending relative to GDP and raise extra revenues in an "efficient and equitable" manner.

Mr Moulton criticised the forecasting skills of the former Chancellor Alistair Darling.

He asked the audience: "For what year did he project a budget surplus of 4bn? The answer is 2009 to 2010. The actual out-turn was a deficit of 158bn.

"It is believed to be the largest error in the history of British financial forecasting."

Hide Ad
Hide Ad

He described Prime Minister David Cameron and Deputy Prime Minister Nick Clegg as "two ex-public relations men" and said they had made a "sensible start" in Government.

His lecture also compared the UK's economy today with the mid 1970s, when the Government had to seek a 2.3bn IMF bailout.

He highlighted the fact that the pound was in crisis then and now. Unemployment rose from 3.5 per cent in 1975 to about 12 per cent in 1984. The jobless figure today is 8 per cent, compared to around 4.7 per cent in 2005.

Speaking to the Yorkshire Post before delivering his speech, Mr Moulton said: "We did have a serious morality issue. Anything was justified to make money.

Hide Ad
Hide Ad

"What we are doing is living better today, by leaving debts for our kids and grandkids to settle."

He had words of praise for the steps taken by Mr Cameron and Mr Clegg to tackle the deficit: "They've wrecked my after dinner speech, so far they are threatening to have the guts to deal with the issues."

He added: "People will continue to make mistakes, the interesting thing this time is that we've had a relatively painless disaster.

"Unemployment has gone up, a bit, not lots. People have been able to continue paying their mortgages. People haven't been bankrupted on their credit cards. All because of the low interest rates."

Hide Ad
Hide Ad

However, he warned that base rates, which are currently 0.5 per cent, "can only go higher".

Recession prediction that hit the mark

Jon Moulton, the chairman of Better Capital, was one of the first people to warn that the European private equity sector had overheated.

He is well known for delivering hard-hitting, and frequently gloomy, messages about economic prospects which often challenge commonly-held assumptions.

Speaking about private equity at Leeds University Business School in 2008, he said: "People got used to the idea that if they paid a lot for things they made a lot of money. But then it all drops off a cliff."

Hide Ad
Hide Ad

In April 2008, he told the Yorkshire Post that Britain was facing the prospect of "quite a serious recession".

At the time, many pundits believed the UK would avoid a slump.

Mr Moulton has got a CV that includes past chairmanships and directorships with the likes of Parker Pen, Sheffield Forgemasters and RJB Mining.

He is arguably best known for the big deal that got away – he led an abortive bid for the MG part of the MG Rover business in 2000, losing out to Phoenix partners.

Hide Ad
Hide Ad

He is a member of the British Venture Capital Hall of Fame. He is also non-executive chairman at FinnCap, the UK based specialist growth company adviser and broker.

Between 1997 and September 2009 Mr Moulton was the managing partner and founder of Alchemy Partners.

During his time at Alchemy, 13 turnaround investments were made.