September 12, 2013 12:15 am

Swimming against the tide brings its rewards

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Ryan Lochte of the U.S. swims in the men's 200m individual medley semi-final during the World Swimming Championships at the Sant Jordi arena in Barcelona July 31, 2013©Reuters

Speedo, owned by Pentland Brands, supplies kit to the US swimming team, including Olympic champion Ryan Lochte

Andy Rubin is in a strong position to discuss the relative merits of public and private companies.

The chief executive of Pentland Brands, part of the Pentland Group that owns a host of leading sports and leisure labels including Speedo, Hunter Boot and Berghaus, has experienced life on both sides of the divide.

The company was founded by his grandparents in 1932 as the Liverpool Shoe Company, floated on the stock market in 1964 but reverted to private family ownership in 1999.

Mr Rubin’s verdict: “All the evidence shows that family-owned companies outperform public companies over time. They might be more conservative in a boom, but they do better in a downturn.”

The company, he notes, resisted cutting marketing or staff development costs when the financial crisis set in from 2008 onwards.

“We are working on a strategy until 2020,” Mr Rubin says. “When you are listed [on the stock market] you are just focusing on the next quarter’s results.”

Pentland has no debt and takes a paternal approach to its 2,000-strong workforce. Its London base has a gym, swimming pool and football pitch, while staff days out have included trips to the London Olympics.

Total revenue rose 14.2 per cent last year to £1.74bn and the brands business (excluding shops) earned £531m. Non-European sales accounted for half of all sales for the first time. In 1991, the UK accounted for four-fifths of all sales.

Pentland’s Speedo swimming brand is an example of its approach. After a big design and research push, sales have doubled in the past decade. At the Beijing Olympics in 2008, more than 90 per cent of gold medallists in the pool wore its swimsuits.

Rubin believes that securing the investment needed to achieve this would have been extremely difficult on the public markets, while noting that institutions have been reluctant to invest in the company because it is controlled by a family.

When Margaret Thatcher, the late Conservative prime minister, pushed through the sale of state-owned companies such as British Telecom and British Gas in the mid-1980s and hailed the UK as a nascent shareholder democracy, the victory of the public markets over private companies seemed to be assured.

The number of shareholders and listed companies grew inexorably, with almost 10m people in the UK owning stock directly prior to 2008, according to the University of Bath.

Yet as funding has dried up since the financial crisis, and banks have hoarded money rather than lend it, the spotlight has shifted towards the UK’s backbone of private companies.

While two-thirds of the UK’s 4.8m businesses operate as sole traders, 36,000 employ 50 people or more.

There are, by contrast, about 2,500 quoted companies, while the number of companies on Aim, the small-cap exchange set up to allow growing companies to list, has fallen from 1,694 in 2007 to 1,086 last month.

Sir Richard Lambert, chancellor of the University of Warwick, former CBI director-general and former editor of the Financial Times, says a market listing is no longer a badge of honour for many businesses.

“The stock market has not been a source of capital for British companies for a long time,” Sir Richard says. “They spend more buying their own shares than they raise.”

Sir Richard says that during his time at the CBI, he found “a load of companies out there doing a good job and making a lot of money, who want nothing to do with the [stock] market”.

There has been a rise in established companies raising further finance for development on Aim. While new issuers raised just £707m last year, secondary fundraising reached £2.4bn in 2012. That said, it is still well short of 2007’s £16.2bn record fundraising total.

Yet, Sir Richard adds, the short-termism of the markets means that UK investment as a percentage of GDP currently ranks 159th in the world, according to a report in The Economist. Sir Richard’s warning is blunt: “If companies are not building new plants in the UK and putting money into research and development then we are stuffed.”

Quorn, the meat substitute maker, is another business that has prospered since going private. Sales were shrinking when it was part of Premier Foods, so Kevin Brennan, chief executive, led a buyout in 2011 backed by Exponent, the venture capital group.

“It [Quorn] was lost inside a large group,” says Mr Brennan. Quorn grew sales by a fifth in 2012 to £131.6m, and is spending £30m to boost capacity.

Quorn may have benefited from VC backing, but many others start with more basic funding.

Nica Burns, a stage actress and producer, remortgaged her house to buy four West End theatres – the Apollo, Lyric, Garrick and Duchess – with Max Weitzenhoffer, her US business partner.

“It was every penny I could scrape together,” she says. Ms Burns has since bought two more, and her company, Nimax Theatres, will have net revenues of £14m this year.

The theatre trade is unlike other industries in that a few huge successes are expected to make up for the many lossmakers.

As only one in five West End shows makes money, it would be difficult to run Nimax as a listed company.

“There is no magic formula,” Ms Burns says. “We need 15-16 shows a year [and] it depends on me to get it mostly right.”

She adds: “We have no desire to float. We love being a private company.”

At Dr Martens, the lesson is that private businesses can be highly adaptable. After running up losses in the 2000s, the bootmaker has enjoyed a recent resurgence thanks to endorsements from celebrities such as singers Rihanna and Jessie J. Sales rose in the 12 months to March for the fifth consecutive year.

That is not to say that everything in the garden is rosy. Simon Derrick, brands and communications manager at Blue Skies, which produces fresh-cut fruit and other products from its network of factories in developing countries, including Ghana, admits that raising money is harder as a private company.

The UK government has moved to help stimulate non-bank lending with £300m from its new £1bn business bank going to alternative lenders. It has also persuaded high street banks to set up the Business Growth Fund to invest in private businesses.

Yet more will need to be done if Britain’s private business are to rival Germany’s famed, globally successful Mittelstand small and medium-sized private companies.

According to a report by GE Capital, the UK’s mid-sized businesses make up about a third of private sector GDP, while the Mittelstand companies account for more than half of German economic output.

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