Prisons, pylons, and hopefully some hope?

I never thought I’d write a newsletter with that title, but in the last few years we seem to have entered a sort of political twilight zone where nothing is too bizarre. Of course, “Prisons and Pylons” is what the Telegraph picked up on from the PMs Conference speech. I appreciate that a Labour PM may not get the most sympathetic reception in the Telegraph, but as far as leadership goes, the speech was hardly Churchill. In my experience, good leaders deliver hard truths, but they also deliver hope - and I can’t think of anything I’ve heard for years from a politician which has had me skipping out of bed in the morning. I’m worried, very worried. I wrote about brain drain in the summer of 2023: https://www.dhirubhai.net/pulse/im-worried-simon-roderick/?trackingId=4jIY3CpZQCqooeGTUa83cA%3D%3D If anything, I’m even more worried now about brain drain than I was last year.

On the whole, we think financial services is in a better place than it was last year. As you may know, we run polls from time to time, and 8% of capital raisers in asset management feel conditions have “significantly improved”, with 54% feeling the asset raising environment has improved “a bit”. Asset management, like many sectors, is often hard to comment on in an overly meaningful way, as you can’t compare passive funds to hedge strategies, and so sales teams can have very different experiences. However, the mood is generally better. There has been a huge amount of right sizing and bashing firms into shape within DFMs, Asset Managers, and Private Markets firms in the last 18 months. McKinsey reported that in 2023, there was a profit margin difference of 28 percentage points between the best and the rest in asset management (top vs. bottom quartile). The top-quartile players managed to grow their revenues while actively managing costs. The bottom quartile firms experienced a profitability decrease to higher cost increases than revenue growth. The vast majority of firms are through this re-adjustment cycle and the slightest upturn in the markets and activity could see many understaffed. There are a number of firms who have combined functions under senior leaders to reduce costs, but in reality, this is a temporary measure which isn’t serving anyone particularly well and isn’t sustainable if business volumes improve. ?

VC and PE are also in a better place and therefore it’s a shame that the Budget is hanging over us. This may include changes to pension rules and carried interest, and the Workers Rights Bill. While it’s not possible with Budget cycles to make immediate change, nor would it be possible politically (they need to test the mood), it would be better just to implement these changes than to leave them lingering over everyone. Anecdotally, some firms are already struggling with hybrid working. Friday afternoons – and again I stress at some firms (don’t shoot the messenger, etc) – are a problem with productivity dropping or offices being empty. This may have always been the case (City pubs used to be bustling on a Friday afternoon), but building culture and brainstorming is hard when teams get together only a couple of days a week - and that’s if everyone is in when they are supposed to be. An immediate right to flexible working may not suit some employers.

A review of working practices occasionally is often a good thing in my view. Within the last 100 years it wasn’t unusual for people to work 6.5 days a week and productivity didn’t reduce only working five days. However, reductions in working hours were often mirrored by improvements in technology. It may be that AI gives us the productivity gain we need to accommodate a better work/life balance, but we don’t yet know its impact. Jobs are created by someone taking risk and needing extra help, or skills, in their business. For the most part, the UK doesn’t have bad employment conditions, and generally speaking I think it’s better the job creator decides where and how the job is performed, and for workers to vote with their feet if the employer is dreadful (in fact most people won’t even accept a role with an unfair employer). Most employers are normal, good people trying their best, they don’t want to exploit anyone. Unemployment is also sufficiently low for bad employers to lose good people.

I also confess that there are some elements of the Workers Rights Bill I don’t have any experience of, e.g. Zero Hours Contracts. However, Day-One Employment Rights and Flexible Working as a default will be a concern for many firms, including those in the City. Of course, we will all learn to adapt, but the timing and uncertainty of the announcements couldn’t be worse. Looking to other sectors, a number of retailers have reported they have taken a big hit to profits due to an increase in the living wage, and their response? To invest in tech to reduce their reliance on staff. Public sector has been a strong employer of late, and the private sector relatively weak. Hope, clarity, and timing, are all very important things for politicians to consider. As I write this, 80% of people who have responded to my poll would consider a role overseas. Talented, hardworking, skilled people – that’s brain drain.

Parts of financial services continue to consolidate, and this will continue for the foreseeable future (there will be new start-ups too as confidence returns). Don’t underestimate what valuable skills anything related to acquisitions are the in the market. If you have experience of target identification (directly and not via brokers), M&A, and in particular post-acquisition integrations, then write it all over your Linkedin profile and CV. It may just get the attention of the research team at a search firm or recruiter, and help you secure that dream role. Acquisitions are really interesting for us. Being acquired often isn’t a fun experience from what we hear, but being the acquirer is great fun, it’s full of hope (that important word again), energy and possibility.

Equity markets are expected to increase as rates fall, which doesn’t mean they will, but in my experience financial services is also a lot more fun and vibrant when equities are soaring. There are headwinds, but nothing insurmountable and the worst maybe behind financial services now.