Eighth Anniversary

Where has the time gone? It seems like only a few years ago that it all started but, also, so much has happened in the eight years since Kepstorn was founded that it sometimes seems like a good deal longer.

With the economy now powering ahead (overtaking the German economy in the speed of its recovery from the recession), everything in the garden looks rosy – or does it? Without wishing to pour cold water on the current optimism, we should all still remember that interest rates are at an historic low; are at a rate that cannot long be sustained in any sensible expansion of the economy; and are leading to some bizarre results, such as Italy (which has still not made any recovery from the recession and whose GDP actually continues to fall) being paid by lenders to take their money, which must all be harbingers of a return to “common sense”.

If, however, we factor in the fact that most retail loans are not on anywhere near as generous terms, we can gain some comfort that an increase of 50 or even 100 basis points (0.5% and 1%) in interest rates is not going to break the back of a struggling camel. To say that an increase of 0.5% in base rates is a doubling of the interest charged to borrowers is incorrect. Other than the borrowing of nations, most lenders are charging substantially more than 0.5% on their retail lending. If you are lucky enough to be paying 5% interest then an increase in the base rate to 1% is, in actual fact, an increase of one-tenth in your interest costs – clearly more manageable than a doubling of the rate.

What an increase in interest rates would cause, however, is the long-awaited realisation that the “panic measures” of late 2007 and 2008 are now a thing of the past. Whilst interest rates remain at 0.5%, the spectre of the crash is still all-too apparent and there remains a certain “comfort” that the full workings of the market will not be allowed to exert themselves. The withdrawal of quantitative easing was the first indication that markets were returning to normal but the continued restriction on interest rates continues to deny the assertion that we are out of the woods.

Obviously, a major influence on interest rates in the short-term is the world economy, broken down into Europe (as our biggest market), the US, the emerging economies and, of course, China. The collapse in the Shanghai stock markets that I highlighted in early July, soon took the world by storm and by late July was in all the headlines. This weakness and the resulting fall in confidence were merely evidence of what was an underlying recalibration of the Chinese economy and that the engine of growth that helped to bail out many nations during the recession had now returned to “ticking over” rather than continuing to “rev up”. The emerging economies looked as if they could help replace the gap left by a slowing China but with their main source of income being the export of raw materials to China and the resultant collapse in petrochemical and mineral prices, this hoped-for benefit has not materialised. With only India of the BRIC nations showing resilience, it is a lot to expect that nation to replace the last eight years of Chinese consumption.

Enough of the doom and gloom. The macro-economic view may be a bit daunting but on a micro level, things have never been better. Corporate Finance at Kepstorn is now looking very positive indeed. Funds are returning to the market, expectations amongst vendors, purchasers, investors and lenders all seem to be aligning and we are involved in a number of fairly chunky deals with more on the stocks.

We are currently looking at the potential for a new entrant to the Scottish VC market with bond listings to finance a structured portfolio with a plan for several more to follow – hopefully there will be more news of these soon. Inward investment into Scotland from the Middle East is also now a feature, with the desire to diversify being a strong driver for high net worth individuals in this area. In the City, we are also seeing increased activity as funds recently extracted from the Emerging Markets are put to “better” use, but still with a willingness to adopt a “pro-risk” approach. All-in-all, the future is looking positive and hopefully we will continue to see this trend develop.

Many thanks to all who have supported Kepstorn over the years, I hope that you have seen a reciprocal commitment and I look forward to continuing to build, and to deepen, these relationships.

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