My client was considering investing a large capital sum into a portfolio company. The owner was planning his retirement and needed to divest his shareholder and the PE firm needed to identify the value proposition. A capital sum of £250 Million was being considered. The market for the products was uncertain and staff reward systems were complex. Lead generation was opaque and quarrels between product leads resulted in high attrition rates. I was asked to lead a review of the business and present findings of my study to the board and PE partners together with recommendations for a change programme.
Key Problem Summary
My analysis of the business revealed it was earning just over £400M 3.5% on assets. This is more than most of the larger UK challenger banks. The cost of debt ratio was slightly above 1.7%. To put this in context it is above that of the smaller challenger banks and more than double the funding costs of the bulge bracket banks. The prime cause was primarily the leverage ratio of more than 20 times shareholders equity. This put the bank in the category of the bulge bracket banks without their scale advantages.
How We Helped
We deployed a small but dedicated team of analysts to map out the current state of finances, processes and operating model. Lacklustre operations and excessive use of expensive debt was costing the bank margin. The cost of funds being near the top end of their peer group. My recommendation was to recapitalise, reduce excessive leverage and focus activities on a narrower more economically profitable portfolio..
Results Delivered - £1.983Bn of new value created
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ROE improved from negative (2%) to a positive 3%. The bank thus went from being a net destroyer of value to a net creator of value. The Operational Expense ratio went from 1.82% to 1.62% within one year. This took just over 6% off the operational expenses saving just over £1.4M
Leverage was brought under control dropping to a more respectable 16% which was still as high as some of the larger challenger banks but a vast improvement nonetheless. The asset position expanded slightly by just over 1.4%. Improved liquidity and less reckless investing reduced the earnings ratio to 2.8% which is more in line with peers of a similar scale and a good result overall
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Cautionary Note:
This case study is based on a real business and its real numbers as assessed by us. We do of course alter some details to protect client confidentiality... Capability Maturity Analysis was used as one tool in assessing and supporting this project. Obviously performance in any organisation can be attributed to many people and factors and consultants are just one part of that effort. We do not claim that applying any one tool will yield the same results on your project. So whilst we do believe in the value adding capability of our products we advise you to read the cautionary note on the use of these management consulting tools before you attempt to apply them. As with all consultants we provide opinion based on our situational assessment. Management may or may not act on our advice. They may also be in receipt of advice that we are not privy to. Many external factors influence business performance, including markets, regulators and the economy. We make our recommendations in the light of the prevailing economic and regulatory climate. To this extent we cannot be held liable for any reliance on information and case material which is provided for educational purposes only.
