Poundland’s owners have questions to answer
Poundland’s uncertain future is a serious matter. Thousands of employees face anxiety about their livelihoods, and communities face the prospect of losing a familiar high street retailer. The decisions that have brought the business to this point deserve close examination.
Some media reporting and discussion about the situation by parliamentarians attributed the difficulties faced by Poundland to private equity owners. However, this is not the case.
Conflating Gordon Brothers’ restructuring and asset-services business with the private equity fund managers that invest in and build portfolio companies is a regrettable misapprehension.
The distinction is not a technicality. It concerns how the different approaches to owning businesses affect how they act as custodians of much-loved businesses, what they seek to achieve, how they deploy capital and the standards that guide their decisions when a business is in difficulty.
Private equity managers raise funds from investors to acquire stakes in companies. They work alongside management teams over several years to improve performance and grow the value of those businesses. Private equity firms invest for an average of six years, giving them time to improve business performance. This approach has helped the industry build a strong track record of delivering returns to its investors, with private capital firms averaging annual returns of 15.8% over the last ten years. The investment is in the company’s development, rather than simply the realisation of its assets. The proof of the model is its growth potential – Has the business been built in a way that will offer the next owners the same or enhanced growth potential? In this model, you can’t asset-strip your way to a return.
Gordon Brothers’ core business is restructuring and asset services, including asset financing and trading. Its model can involve acquiring distressed businesses, but it is not the same as raising and managing private equity funds to build portfolio companies. The fact that both types of investor can acquire a retailer does not make their business models interchangeable.
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Purpose |
Invest in a promising business to grow its value and generate investment returns |
Find value in businesses and their assets, where conventional finance or ownership structures are not working, to support business recovery or restructuring |
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Typical situation |
Businesses with growth or operational improvement potential |
Distressed, underperforming or transitioning businesses |
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Ownership |
Typically acquires an equity stake often with a controlling interest, which they hold for an extended period. |
May own assets, acquire businesses or act as an adviser |
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How value is created |
PE funds typically invest in companies for an extended period, often using leverage to generate growth and long-term returns. This ownership gives it control of the board, strategy, management and operations of the company. Management teams are then supported as they run the business and generate sustainable, medium/long-term equity returns. |
Finance day-to-day trading and deliver a recovery plan using asset expertise and specialist capital |
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Time horizon |
Typically 3–7 years before selling the stake or pursuing an exit |
Often short to medium term, depending on mandate. – often between 18 months to three years. |
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Focus |
Revenue growth, EBITDA improvement, strategic transformation and multiple expansion |
Liquidity, restructuring, asset values, operational turnaround and monetisation |
There is also a clear distinction in the standards expected of UK Private Capital’s members. Our member code of conduct includes a turnaround code: members engaged in turnaround activity must aim at business rescue, rather than closing a business to realise its assets. They must carefully consider the effects on employees, customers and creditors, and communicate clearly where people’s lives will be adversely affected. Gordon Brothers is not a member of UK Private Capital. The approach set out in our code is the benchmark for our members, not a description of Gordon Brothers’ conduct at Poundland.
Turnaround Code
UK Private Capital Code of Conduct for Turnaround Investors and UK Private Capital Members Encountering Turnaround Situations
Every year many businesses are saved from collapse by turnaround investments made by private capital firms who provide a critical injection of capital, ideas and execution skills to underperforming or failing companies. UK Private Capital has a voluntary code of conduct for members engaged in turnaround activity. Members of UK Private Capital who sign up to the Turnaround Code agree to the following commitments:
- UK Private Capital members aim at business rescue rather than closing a business to realise its assets.
- The positive and negative impact on lives of employees, customers and creditors will be carefully considered before investment. To the extent that the investment results in a negative impact on these lives, the investor will ensure that communication is clear to ensure that the affected people can make alternative plans where necessary and due process is followed.
- Interest rates charged on any debt funding will be set commensurate with the risk. Investment will be made with the dual aims of improving business and saving, or better, growing, where possible employment whilst also generating an acceptable return for investors who have funded the turnaround.
- Insolvency procedures should not be considered the default option. Alternatives which may achieve a better all round outcome (e.g. agreeing compromises with creditors or a pension scheme outside of formal insolvency) should be considered carefully before insolvency routes are adopted. However in some circumstances, where for example a business is exposed to large and uncertain liabilities, insolvency will be the only route to save a business.
- In the event of pre pack administrations, investors will request Insolvency Practitioners to ensure compliance with Statement of Insolvency Practice 16 as issued by the Insolvency Regulatory Body, R3.
- The investors will annually provide feedback to UK Private Capital on their turnaround activities to ensure that UK Private Capital can properly communicate with key stakeholders such as government bodies and the press about the turnaround activities of its members.
We have engaged directly with the media and politicians to explain this distinction and draw attention to our turnaround code. Our purpose is not to deflect scrutiny of Poundland’s owner, but to ensure that the debate distinguishes its restructuring and asset-services model from the business-rescue approach our members are required to pursue.
Private equity plays a substantial positive role in the British economy. Private capital backs around 13,000 UK businesses, nine in ten of which are small or medium-sized enterprises.
These businesses support more than 2.5 million jobs and generate economic activity equivalent to 7 per cent of UK GDP. In wholesale and retail alone, private capital-backed businesses support 474,000 jobs.
That is a considerable contribution. And at a time when Britain urgently needs more investment, greater productivity and stronger businesses, it is a contribution we should be seeking to grow.
On the high street, that contribution takes practical form: investing in stores, supporting expansion and helping preserve businesses and jobs through periods of difficulty.
Take B&M, a competitor of Poundland, where investment from Clayton, Dubilier & Rice helped transform the business into a major value retailer, with its store estate doubling during the investor's involvement.
Or Poundstretcher, which faced the closure of around half its then 270 stores before being bought by Fortress. It now has more than 300 outlets.
McColl’s also illustrates the role private equity can play in rescuing a retailer. When the convenience chain collapsed in 2022, private equity-backed Morrisons acquired the business, taking on its stores, employees and pension schemes.
What is happening at Poundland must be properly scrutinised, particularly the actions of its owner. That scrutiny should establish whether decisions have prioritised the survival of the business and the interests of those whose livelihoods depend on it.
But Gordon Brothers’ actions should not be treated as representative of private equity’s approach, because Gordon Brothers IS NOT a private equity firm. At UK Private Capital we work on behalf of an industry that operates to high standards and makes a positive contribution to the economy.
Michael Moore
Chief Executive, UK Private Capital
