Three pieces of advice for growth companies

30th November 2023

Against a tough economic backdrop, high-growth companies may get limited help from external sources of capital.

Mark Summerhayes

Since the last Fast 100 Awards, the environment for growth companies appears to have changed only moderately.

The Australian economy has again been resilient in the face of sharply higher interest rates, talent shortages and ongoing challenges offshore, especially in China which economically retains its strong regional influence.

Locally, our well-capitalised big four banks remain as ever reluctant to fund riskier smaller companies – although private credit providers have stepped up.

Equity funding has been harder to raise especially for earlier stage businesses but funds with capital to deploy have supported higher-quality established growth companies.

A tentative reopening of the US IPO market for high-growth companies was a good sign but has not really translated to anything broader at this stage of the cycle.

I have consistently in the past year expressed a fair bit of caution about the outlook. I don’t mind admitting that I have also found myself regularly having to explain my lack of “soft landing” optimism to friends and colleagues.

While optimistic for Australia on a relative basis, I remain more convinced than ever that significant challenges lie ahead for the broad economy overall, with some pockets of growth for select companies

Inflation remains elevated globally, and higher interest rates have done little to slow economies and bring wage and price pressures down.

What economists call the “transmission mechanism” from higher rates to lower inflation has been blunted by fixed rates and interest rate hedges, and cushioned by strong household and corporate balance sheets. That all explains the “so far, so good” climate that has developed.

The big unresolved challenge ahead is that food and energy prices, full employment-driven wage and rent inflation, and currency weakness will keep inflation outside the United States higher for longer.

A long war in Ukraine and instability in the Middle East will maintain high energy prices going into the northern hemisphere winter. A very strong US dollar adds to these global energy costs and exports inflation from the US to the rest of the world.

The key point, though, is that the longer interest rates stay up, the more government, corporate, commercial property and household debt will need to be refinanced at higher rates. It’s this “re-set” that has been delayed and the amount of debt in the system globally is simply unprecedented. So all of this remains to be resolved.

My advice for growth companies in this environment is three-fold. First, be sure to plan on the basis that you may get limited help from external sources of capital. Focus on cash generation and have a solid Plan B to moderate spending and expansion plans, and fund them internally rather than relying on external capital.

Second, reevaluate the strength of your customer and supplier networks and focus your drive for growth on the most defensive and resilient counterparties.

Finally, be conscious that the silver lining of any slowdown in Australia is that the talent market will soften. So be robust in resisting wage pressures and plan to make key hires in what should become an easier labour market.

I am optimistic that well-run Australian growth companies that have positioned in this way will still be able to thrive.

Technology and innovation remain huge disruptors that are driving more secular value creation opportunities. As we pass through the global rate “re-set” phase and lower quality credit gets washed out of the system, what should emerge is a simpler, stronger and more sustainable global outlook.

My personal perspective, though, is that this next phase may last some years so plan for this brighter clearer future while tempering near term expectations.

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