The Bank of England is warning of the worst and sharpest UK recession in centuries. The Covid-19 virus has ground our economy to a halt and brought insolvency to the forefront.
One in 10 SMEs have already closed for good, found an April study by the Corporate Finance Network. It says 39% of businesses will not be able to access the cash they need to survive two more weeks of lockdown.
In the coming UK recession I believe insolvency companies will profit massively.
FRP Advisory (LSE:FRP) could hardly have chosen a better time to IPO, at the start of a UK recession. And the market agrees with me. Its shares, starting at 80p on 6 March 2020, are already up 60%.
CEO Geoff Rowley said his company’s debut on AIM was “a significant milestone“, as the business seeks to expand its profile and market share. Operating from 19 UK offices, its business is in corporate restructuring, company and personal insolvency, refinancing debt, and advising on pensions.
FRP is very new to the market. It was only founded in 2010. It has not yet released financial reports, so we can’t see its profitability or earnings. An investment here would be for the more adventurous among us, betting on the sector profiting in general.
The two other publicly listed insolvency companies I’m going to cover make more robust investment cases. They are both highly profitable, for one.
Manolete Partners
Manolete Partners (LSE:MANO) revealed high pre-tax profits of £5.9m on £13.7m revenues for the year ending 31 March 2019. It is a market leader in its particular field, which I always put significant weight on when I’m looking for strong long-term investments.
Manolete doesn’t just fund insolvency litigation. It buys 90% of the cases it deals with from other insolvency companies further down the chain. This allows it to work at lower costs and on much higher margins than other companies in the sector.
As such it has a 67% market share, giving it a wide economic moat. This is a favourite metric of Warren Buffett when seeking the best investments.
Like the most agile companies working under Covid-19, it has moved to a remote-working model and CEO Steven Cooklin said business had been little impacted by the pandemic.
A trading update for the year to 31 March 2020 shows a 131% increase in new cases, with 54% more claims completed.
Begbies Traynor
Begbies Traynor (LSE:BEG) is one of the best-known insolvency business operating in the UK. I particularly like that the Manchester firm still has its original founder Ric Traynor at the helm. Begbies has built a strong reputation for turning around failing companies. Its most recent results showed £3.5m pre-tax profits on £60m revenues.
And its in-house Red Flag Alert report showed record numbers of British companies — some 494,000 — in financial distress even before the coronavirus changed our lives forever.
That’s a broad market to approach, and one which could provide significant profits. The firm’s buyouts of profitable rivals has both boosted its balance sheet and given it greater market share, which is good.
Pre-Covid, City analysts said Begbies earnings would jump 18% in 2020. With the harshest UK recession in the record books now approaching, I think those those figures could rise significantly.
It’s clear to me that these businesses will profit the most from the British economic shutdown and the coming UK recession.