Addressing investor concerns about a Labour government

Labour’s recent Business Conference and commitment to not increasing corporation tax shows it wants to reassure business it will pursue largely centrist, business-friendly policies in government. 

But Labour has also challenged business in areas like employment reform and there is policy uncertainty and risk in others. The sell-side needs to get potential investors comfortable with these risks when selling an asset.  

Much policy uncertainty derives from Labour’s appetite for a more active state. We can expect more regulatory and fiscal interventions, like the proposed extended windfall tax on oil and gas producers and VAT on private school fees.  

As the election nears, Labour’s focus is shifting away from policy development and towards campaigning. Its manifesto will be slim and focused. In areas where it does not have detailed policies,  Labour will be influenced by civil servants and third parties in government.

Below we set out recommendations for the sell-side to incorporate into pre-exit planning, vendor due diligence, messaging, and sales process. 

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

The sell-side should show how the asset can mitigate risks. For example, through product and market diversification, or enhanced advocacy with the Labour Party and its stakeholders. 

Evidence that political and regulatory risks are included in board discussions or risk registers can help persuade potential investors that they have been anticipated and managed. 

2. Show how the asset has successfully addressed policy challenges or opportunities in the past 

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

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

This is an important indicator of how well a firm is likely to adapt and succeed under a future Labour government (particularly vs. competitors). 

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.  

In practice, domestic policy often reflects wide trends in policy-making communities at national or global level supported by most parties. We call these secular trends (e.g. broad developments in monetary policy, public health, and urban planning). 

Analysis distinguishing secular trends from political difference helps to credibly establish where there will be continuity to address (unwarranted) anxiety about existing policy being radically reformed under Labour. 

4. But be clear on genuine areas of divergence, and how they will evolve 

Some commentators underplay the Labour leadership’s appetite for more radical change in areas like employment policy, public sector reform, childcare, skills and training, and the ‘greening’ of the economy. 

For example, while Labour’s significant dilution of its green energy plans – reducing a £28bn per year commitment to £23.7bn over five years – indicates its determination to avoid electorally damaging policies, it does not reflect desire to converge with the Conservatives on energy policy. 

It is important to assess and explain whether an asset in one of these sectors is likely to be subject to reforms, how it might be affected, and how it could mitigate risk.  

5. Clearly distinguish measures requiring legislative change  

Some reforms require major legislative change involving complex bills passing through parliament. This gives a long lead time to reforms affecting assets.  

Others can be achieved through slim legislation (statutory instruments) or existing ministerial powers. Labour is also likely to support greater regulatory action on consumer, ESG, and sovereign capability grounds. Stroke-of-pen risks will therefore increase in number and impact. 

The sell-side should be clear on which risks are low given the need for legislative change. Sell-side should also explain the conditions under which stroke of pen risks could present, and how the asset could mitigate them. 

6. Place the relevant policy in the context of Labour’s overall priorities 

In most cases, your policy issues will not be a top priority for No.10 or the relevant department (as all issues compete for political attention, civil service time, and funding). 

VDD can establish how much of a priority your issue is, and therefore how likely reform will be, by referencing shadow minister and adviser interests, stated department priorities and budgets, and through insight into what ministers, political advisors and officials are actually spending their time on and where their views are undeveloped. 

7. Recognise that the fiscal position in the first few years (2024-6) of a Labour government will restrict its ability to spend large sums, unlike when it came to power in 1997 

Sell-side can explain how the UK’s tight fiscal position will impact policy and political risk. 

Spending by a Labour Government will be limited in the first two years by fiscal and legislative constraints. But Labour’s goals require additional expenditure to achieve. This dynamic may encourage greater use of private capital and the private sector, and make some policy interventions less damaging. Unfortunately it also makes tax increases more likely. 

There may be greater political space for fiscal expansion in the second half of a Labour government if the economic situation has improved, although Labour will still be conscious of the need to reassure voters and the markets that Labour can be trusted to manage the public finances. 

8. Be clear on timing 

Taking account of the above factors, it’s possible to assess the timelines for possible changes impacting any asset. This will indicate how much time management might have to anticipate, influence, and adapt to policy debates. 

The risk profiles across the short, medium, and long term are often very different, with greater scope for leftfield risks or major policy change in the longer-term scenarios. 

9. Explain how the asset would adapt to political scrutiny 

Labour’s aim to be seen as open to the concerns of business doesn’t mean Labour won’t be critical of business, either where it thinks there’s political advantage, or where it thinks business is seen to be engaging in  irresponsible practices or profiteering. 

In sectors where Labour has been critical and has indicated an appetite for intervention (e.g. social care, children’s services) the asset should demonstrate that it does not undertake or condone poor practices.  

It should establish itself as a thought & practice leader recommending how such practices could be eliminated, particularly if it is one of the largest providers. 

10. Anticipate how competition and security clearance under Labour would affect a buyer 

Sell-side should consider whether a deal is expected to attract political and regulatory scrutiny and work constructively with a buyer to prepare for these processes.  

The UK government has an increasingly strong toolkit for intervening in inbound M&A. Some tools are direct – via public interest interventions and national security screening – some indirect, via competition policy. Labour will be balancing its instinct for interventionism with a strong desire to signal a pro-investment agenda in its approach to using these tools.  

We expect Labour to be broadly consistent with the current government in its approach – but it could go further. Shadow Business Secretary Jonathan Reynolds has pledged to “strengthen the public interest test on takeovers”.  

Flint has deep experience managing these processes. 

This blog was written by Directors Martin Summers, James Hill and Joe Jones.

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