Is the City Link verdict a win for the industry?

The outcome of a trial of City Link directors was a win for turnaround firms, including the company’s former owner Better Capital, but is unlikely to lift public suspicion of the industry.

Former City Link directors must have breathed a sigh of relief. Last week a UK court found them not guilty of failing to notify the government of upcoming redundancies following the collapse of the company.

Non-executive director Thomas Wright, who was Better Capital’s representative on the board, along with the former managing director of the parcel delivery company and its former finance director, could have been convicted of criminal charges.

Better Capital’s ownership of the company was troubled enough. It included more than 2,300 employees losing their jobs last Christmas, a parliamentary inquiry and public outrage fanned by the British press.

The firm’s founder Jon Moulton told Private Equity International that the episode was “pretty tragic” and “terrible from a PR viewpoint, and terrible on a human level”.

It should be some relief then that Judge David Goodman said in his verdict, that with a £17 million ($26 million; €24 million) rescue package on the table, the directors genuinely believed a sale was possible.

“A director cannot be expected to put a crystal ball on his or her desk at a time of huge shock and turmoil, and predict the likely consequences of an action, unless a consequence is either the only foreseeable one or is the only consequence that can be reasonably envisaged,” Goodman said.

His statement should be encouraging to turnaround firms that are, after all, investing to reverse the fortunes of failing businesses with the benefits to growth and jobs that that entails. City Link was already struggling when Better Capital bought it from pest control company Rentokil in 2013 for £1 after years of losses and with jobs at risk.

Restructuring a business is already a difficult enough proposition operationally and financially without the political intrusion and public outcry that feeds on a fundamental suspicion of private equity.

“There’s a reason why there’s not lots of turnaround funds,” Gary Wilson, founding partner at turnaround firm Endless told PEI in January. “You get a turnaround wrong, it’s a public failure. It’s a tough thing to cope with.”

The amount of turnaround fundraising is already low relative to other private equity strategies given the specialisation and the often small size of the investments made. This year to date, $6.6 billion has been raised by just seven funds globally, according to PEI Research & Analytics. The figure was almost the same last year, with 12 funds raising $6.4 billion. Perhaps it would grow further if given regulatory or political encouragement.

The ruling on City Link was an important and impartial voice in the public debate over the treatment of companies and the role of private equity in that.

While it should give the industry heart that its goal to build companies rather than dismantle them is understood as genuine at one level, it’s unlikely to make any difference to public perception.

However, if the ruling had gone the other way, the reputational damage to the industry would have been worse and created a further disincentive for firms to take on distressed or ailing enterprises. It would also highlight the risk to limited partners that things can go terribly wrong.

And it’s not over for City Link, or Better Capital, or the industry at large. About 260 former employees have launched employment arbitration hearings claiming unfair treatment over the company’s failure to properly consult them on their redundancy. Staff at its Belfast depot have reportedly already won their claim.

Whether further City Link rulings take into account the difficulties of predicting the future at a struggling company remains to be seen. Once again, private equity looks like an easy target.