Last week, I played tennis at my club in London. In the court next to me was a man whose business collapsed not long ago, after it had borrowed billions of pounds. He was laughing and seemed relaxed. Somehow I doubt he had given any personal guarantees to the banks.
Following his example, whenever I give advice to would- be entrepreneurs I tell them the single most important thing to remember is never, ever to give any lender a personal guarantee. Do not put your house on the line: there is always another way to find the money. But it seems quite a few borrowers forgot the vital rule.
A friend who works in property tells me the Irish banks were unable to extract such undertakings from British developers; it seems their property clients were scarred so badly after the bust in the early 1990s that they learnt not to risk all their assets by signing a bit of paper. But in Ireland many of the super-bullish, newly rich housebuilders and wheeler- dealers were happy to provide
a personal guarantee. Now, a bit like Satan coming to claim Faust's soul, the banks are reminding dozens of former high-flyers of their legal obligations. And for someone who is on the hook, that single commitment changes everything.
Will many be bankrupted? In my experience, institutions bother to do this only if they believe they have been deliberately misled or defrauded. A little like executing deserters in war, such brutal treatment can serve as a visceral lesson to others. But apart from that purpose, the true proceeds from declaring someone insolvent are usually negligible, and pursuing someone for the sake of it costs money and creates huge ill-will.
The gruesome mathematics of leverage in reverse, combined with personally guaranteed debt, mean there are now plenty of minus millionaires around. In rising markets, it makes sense
to use as much debt as possible. And with banks providing 80 per cent plus loan-to-value facilities, you could buy buildings putting as little as a fifth down.
But if the property has fallen by a third or more, you haven't just lost your equity; you have lost another 15 per cent of the total price – which you now owe the bank. So some players have gone from being worth £500m to very little in two years.
These situations are characteristic of the property market, where gearing is so integral and where the participants can't resist rolling the dice every time. Clearly, those markets are shattered and full of distress of various types. In most cases, as a senior restructuring expert told me, the banks are simply putting sticking plasters over the problems. Often, syndicates cannot agree on the solution, so a proper fix is simply deferred.
But in other fields, such as digital media, the behaviour and mood are different. Online entrepreneurs fund deals with venture capital, where there is never recourse to their home. At the Founders Forum, an annual conference for entrepreneurs held last week, the room was full of European technology pioneers who have sold their companies for tens or even hundreds of millions. Almost all are under
45 and are working on their second, third or even fourth internet start-up. Each time they risk some cash, but obviously keep most of their gains socked away in a bank somewhere. Debt is never an issue because senior lenders refuse to get involved where there is no tangible security or even revenues to service the interest.
For them, the golden age may be over because many old media buyers have discovered they overpaid massively for their dotcom diversification. So the mega-exits to big corporates are no longer an option. But no one from this industry is being threatened by the bailiffs. And, meanwhile, the online world is still stealing customers, advertising and market share from traditional retailers, publishers and others. So there remains plenty of confidence and a fair amount of capital ready to seize the opportunities.
Spending much of my time dealing with hard choices in stagnant sectors, it is refreshing to hear the optimism still apparent in the web world. Long may it continue.
