Wednesday 20 September 2017

We need more mid-tier firms – big isn't always best

Richard Curran

Richard Curran

THE forced takeover of a small credit union in Kildare, by Permanent TSB, highlights the lack of mid-sized lenders in Ireland's post-crash financial services.

Permanent TSB's takeover of Newbridge Credit Union was inspired by a Central Bank that wants to re-shape the credit union sector into something more financially stable. But surely, the best way to do that is to have fewer, but larger credit unions.

This would be better than having a relative giant, and a struggling one at that, gobble up failing tiny players in financial services.

There is no mid-tier level in post-crash financial services in Ireland. At the top, the big banks are too big and too few. At the bottom, the credit unions are too many and too small.

Building societies should have been there to take up the slack as long-term sustainable mid-sized players.

Instead, they fell into the old Irish trap, of wanting to become too big, once they had reached a certain size.

Both Irish Permanent Building Society and First Active floated on the stock market and were then taken over. EBS deliberately stayed mutual, but was lured by commercial property. Irish Nationwide was effectively "on speed".

The presence of a range of solid mid-sized companies would not only have brought greater stability to the banking sector, it would have ensured better competition in the post-crash era.

What is it about the Irish psyche or our approach to business that when the best companies reach a certain size, they sell up or are driven beyond reasonable risk to become huge companies?

We don't do mid-tier very well. We hardly do long-term mid-size at all. There are a number of reasons for this. As a small economy, to be really successful, you have to start exporting relatively quickly.

We prefer the American corporate dream of: succeed, expand, float and sell off. We are firm believers in the maxim that if you snooze you lose – sit still and you will die.

Instead of interpreting that maxim as being about innovating and re-thinking how you do things, we see it as expand by acquisition, keep getting bigger or you will get smaller.

Businesses in other countries take a different view. Germany has its "Mittelstand" of mid-sized companies that are world leaders in what they do.

They tend to be family-owned but externally managed. They might have a turnover of €250m to €400m but don't IPO, don't necessarily do acquisitions or mega-mergers and rarely sell up. They also tend to be in manufacturing rather than services.

This core group of around 1,400 Mittelstand firms have become big drivers of Germany's economic firepower. They might employ 600 people, but don't aspire to employ 3,000. They tend to stick to their own niche areas of innovation and drive market share from there.

They don't become conglomerates, holding companies, or diversified investors.

Irish entrepreneurial success was often founded in the past on a small group of people who set up successfully in Ireland and then took on the UK.

Neil McCann did it when his Fruit Importers of Ireland bought Fyffes in the UK. The Murtaghs did it with Kingspan. Beef barons like Larry Goodman, the Queally brothers or Kepak became successful in Britain after building businesses in Ireland.

But traditionally, Irish entrepreneurs were more likely to gamble big and implode. Many come back but not all. It has happened to the best of them – Larry Goodman, Sean Quinn, Xtravision, Kentz Group, even Tony Ryan at GPA.

Few were candidates for the German Mittelstand of the year award. Sean Quinn was brilliant at one thing (cement), and then went into multiple industries: insurance, hotels, pubs, wind energy, glass-bottle manufacture and, finally, CFDs. It was the purchase of high-risk financial instruments in a bank that did for Sean Quinn, not cement.

Goodman International collapsed in 1990, partially due to losses on shares in Berisford, a British group quoted on the stock market involved in commodities trading, sugar-processing and property, not beef processing.

The Irish model tended to be built around the cult of the personality at the helm. Often family businesses were run exclusively by family members.

In contrast, when it comes to governance, the German Mittelstand has been described as "enlightened family capitalism." Hire outside management, build a proper non-executive board and adhere to the highest corporate governance standards.

In Ireland we have a number of highly successful firms which match the profile of a German Mittelstand. Unfortunately, we don't have enough.

Kepak is a family-owned meat processing business that has been very well managed from within and outside the family for decades. Martin Naughton's Glen Dimplex is another. Larry Goodman's second coming with ABP Foods is another.

Interestingly, Mincon, a predominantly family-owned firm and an international market leader in making drill parts for mining, is about to float on the stock market. It fits the bill, right now, of a potential Mittelstand company, but needs access to capital markets that will allow it to move on to the next level.

This is another issue. The domestic market is tiny. Access to EU markets is easy in principle, but often tricky. Irish companies need to raise money for expansion from outside Ireland.

This pushes them down the flotation road. If they go for private equity, the investors want to see the exit strategy before they walk in the front door. Mittelstand is over before it gets going. Developing a real Mittelstand firm takes about 30 years.

Deirdre Somers, Irish Stock Exchange chief executive, said last week that government policy was ignoring mid-size companies in favour of multinationals and start-ups. She has a point.

At the same conference, Department of Finance secretary general John Moran said there needed to be a change in the culture "right through schools and university" for people to have the belief they could set up a company and have it succeed, IPO and go global. But it took the entrepreneur in the room, Openet founder Joe Hogan, to make the most interesting point. He said Ireland needed to have incentives for companies to become mid-sized and not sell out too early or at the first offer.

Irish Independent

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