How your Vendor Due Diligence and buy-side engagement can address the prospect of a Labour government

A Labour-led government from next Autumn is the most likely scenario and is now the main political and regulatory focus for investors.

Known policy risks (i.e. those derived from Labour’s public commitments) are relatively limited and arguably decreasing, as Starmer and Reeves increasingly ensure that Labour does not commit to anything that might present fiscal or electoral challenges before an election.

A much bigger concern is policy uncertainty. Some of this is because of a lack of detail in many policy areas – and we do not expect much more detail before an election. There are also question marks about what Labour might do after its first year or two in power when electoral concerns will weigh less heavily than they do now.

This growing importance of anticipating policy uncertainty is explored in Why and how political regulatory due diligence will change over the next five years.

Labour has indicated an appetite for a more actively interventionist, dirigiste state, with regulatory and fiscal changes designed to address sector-related problems (e.g. proposed windfall energy taxes and imposing VAT on school fees.)

But the flip side is the prospect of more tax incentives, government funding and scope for public-private partnerships.

Recommendations for sell-side

To reassure potential investors, and to provide a compelling case as to how the asset could thrive under a Labour government, below we set out how the sell-side can best prepare for a sale in advance of a Labour government, by ensuring that its IM, VDD and messaging:

1. Show how the asset’s management understands the risks and opportunities and how it is preparing for a Labour government and plausible policy scenarios.

The sell-side should show how the asset can mitigate key risks, e.g. through product and market diversification, as well as enhanced advocacy and engagement (with the Labour Party and its stakeholders.)

Evidence of inclusion in risk registers or board discussions can also help persuade potential investors that political and regulatory risks have been proactively managed and anticipated.

It should also show how it has embraced policy-driven opportunity in the past and has worked with stakeholders to improve the regulatory and fiscal environment.

2. Show how the asset has successfully addressed policy challenges in the past, as this is an important indicator of how well it is likely to adapt and succeed under a future Labour government (vs. competitors who may not have the size, resources, or flexibility to adjust to new policy regimes.)

The sell-side should present plausible and compelling narratives as to how the asset has managed and will manage external risk and opportunity successfully.

3. Distinguish between Labour policy trends and secular ones.

There is a tendency to over-attribute policy developments to the preferences of whichever party or minister is in office, but in practice, domestic policy developments often reflect general trends in policy-making communities at national or global levels (e.g. in monetary policy, public health, and urban planning.)

VDD should therefore not overly focus on what separates Labour and Conservatives, as the gaps can often be small and even these variations typically reflect slightly different political takes on powerful secular trends. (But there are some important areas of potential divergence - see point 4.)

An analysis of secular trends, and differentiating them from political ones, also helps to credibly establish the degree to which the policy environment will be broadly business as usual. It can also address (unwarranted) anxiety about existing policy areas being upended by a Labour government.

Related investor concerns around Labour policy risk are examined in Addressing investor concerns about a Labour government.

4. Be clear on genuine areas of significant divergence between a Labour government and the current one – but don’t regard them as set in stone.

Environment, energy, and employment policy are three areas where Labour policy statements to date indicate significant divergence from the Conservatives, and the divergence may be greater in practice once electoral pressures have faded.

Furthermore, many commentators underplay the Labour leadership’s appetite for transformative change, not just in the aforementioned areas but in public sector reform, childcare, skills and training, and the ‘greening’ of the economy.

In practice, some of these changes may be limited in the first two years of a Labour government, due to fiscal and legislative constraints: for example, an ambitious employment bill – covering everything Labour has committed to – would take up a huge amount of legislative time and require extensive consultation. But such constraints – and associated delays - should not be taken as indications of reduced Labour ambition over the longer term.

5. Clearly distinguish between measures regarding major legislative change and those that don’t.

Some reforms require major legislative change (involving complex bills that need a lot of parliamentary time) but many reforms do not and can be achieved through slim, targeted legislation or through existing ministerial powers (that do not require new legislation.)

A Labour government is likely to support an expanded brief for regulators (e.g. the CMA), to take a more active role on consumer, ESG, and sovereign capability (sectors of strategic importance) grounds.

Stroke-of-pen risks are likely to increase in impact and number under a Labour government.

The sell-side should be clear on the extent of these risks, how they might present themselves (i.e. conditions under which a Labour government or regulators might intervene) and how they mitigate them.

6. Place the policy areas of relevance for the asset in the context of Labour and ministerial and existing departmental priorities.

In most cases, your policy issues are unlikely to be a top three No.10 or departmental priority (as all issues have to compete for political attention, civil service time, and funding.)

The relative priorities can be established with reference to how much the relevant shadow ministers and advisors have mentioned your issues vs. others in public. They also need to be established with reference to existing departmental priorities and programmes (the scale of which can severely restrict departmental capacity for new initiatives.)

But this is no substitute for your VDD reflecting intelligence on what these ministers, advisors and officials are actually spending their time on and where their views are undeveloped. (Labour’s policy teams are typically small – just one or two people – so many policy areas are inevitably undeveloped and will only be developed once in government and with civil service input.)

This is where a due diligence specialist like Flint can provide invaluable insight into current Labour thinking and, crucially, under which conditions a Labour government is likely to intervene further or raise concerns.

7. Be clear on timing.

An assessment of the timelines for possible change is crucial as this will indicate how much time the asset might have to anticipate, influence, and adapt to change.

Many non-priority areas of Labour policy will have to wait, especially where new legislation is required, giving businesses time to help influence the policy debates and operationally adapt in advance.

However, government decision-making during COVID has shown that rapid and significant change is possible.

We typically use three timespans for our assessments: short-term (to Autumn 2024 and a new government); medium-term (2024 – 2026) and long-term (2027 +). The risk profiles are often very different for each time scale, with greater scope for leftfield risks or major policy change in the longer-term scenarios (as may be the case with some of the current net-zero commitments.)

8. Explain how the asset will cope under much greater political scrutiny.

Labour’s determination to be seen as open to the concerns of business also means that it can’t be seen to be soft on business where it identifies irresponsible practices or profiteering.

In sectors where Labour has been highly critical and has indicated an appetite for intervention (e.g. social care and children’s services), the asset should demonstrate that it does not undertake or condone such practices - and it should recommend how such practices could be eliminated while advocating for such change.

An asset in such a sector, particularly if it is one of the 2-3 largest providers and hence likely to be put under the spotlight, should establish itself as a thought & practice leader, demonstrating responsible behaviour and high ESG/social value credentials, as well as constructive ideas on policy.

It should be noted that Labour’s concerns typically relate to B2G businesses, where changes to public procurement decision-making and guidance can be done rapidly at local and national levels with significant impact.

9. Recognise that the fiscal position in the first few years (2024-6) of a Labour government would severely restrict its ability to spend much more than the current government, unlike when Labour came to power in 1997.

But there is a greater likelihood of fiscal expansion in the second half of a Labour government when the fiscal situation may be better and there will be less need to reassure voters and the markets.

B2G businesses – or those indirectly dependent on public spending – can therefore not expect to see much overall uplift in funding until 2026 at the earliest.

Tax increases are also more likely, beyond those that have already been flagged (e.g. windfall taxes on energy companies), as many of Labour’s plans require substantial additional expenditure (beyond current government spending) and it is pledged that all its manifesto policies will be fully funded.

This blog was written by directors in the Funds team, Martin Summers, Joe Jones and James Hill, who advise big and mid-cap PE, infra funds, and hedge funds, as well as investor-backed businesses. They have worked on over 200 transactions. For more information contact us or visit the UK Labour Party page.