The recent liquidity crisis in the financial markets has the potential to force a significant increase in corporate restructuring and insolvencies because the ease of raising cash during the past two decades has masked a huge number of poorly performing companies.

Risk consultancy firm Kroll commissioned Penn, Schoen & Berland to research FTSE-250 companies and their European equivalents, for 20:20 Vision: Boom, bang or bust?

The report looked at the key trends of the past 20 years ­ since the 1987 crash ­ and recognised six key trends which have revealed sources of strength and vulnerability.

Economic stability
“The outstanding feature of the British economy since the mid-1990s is its stability,” the report says. “The economy has been expanding without interruption since 1993, a longer period than any previously recorded.”

However, lower inflation and interest rates have naturally resulted in higher gearing within companies ­ in many cases, excessively so. “Failure is being masked by the increased liquidity that is available in today’s capital markets,” said one FTSE-250 managing director.

Financial innovation
Both financial and technological innovation have made the world a much smaller place over the past 20 years and complex financial instruments have acted as lubrication to a vast number of deals. The risk, however, is that no one really knows who owns what financial asset, leading to the potential of financial volatility, the likes of which was experienced this summer.

Globalisation
The massive amount of inwards and outwards foreign direct investment has helped to prop up western economies. “The exportation of deflation through low-cost wage regimes in China and India has had a significant impact on the way European companies do business,” said the CFO of a FTSE-250 financial services company. “As production is moved to Asia, firms find themselves competing with businesses that invest sparsely in R&D and rely on duplication for product development. The impact of this has been a reduction in R&D spend in order to generate competitive margins.”

Technological potential
Advances in technology have had a huge impact on the corporate world over the past two decades, and the spread of the internet and mobile communications have been at the forefront of developments. As one finance director said: “Many global competitors are on the cutting edge of technology… and those that are not reinvesting in technology are doomed to fail.”

Complexity
Following on from technological developments and much easier access to funding, complexity is now far more of an issue than 20 years ago. New technology and easy money allows access to new markets ­ both geographical and vertical ­ and this, in turn, leads to huge levels of complexity. As one director of internal audit said: “Understanding the totality of operational risks that a business is exposed to is quite difficult… Recognising and managing those risks is key to avoiding failure.”

Enterprise culture and M&A
The culture of the past 20 years has been unashamedly pro-business. And while this has resulted in a more entrepreneurial spirit in businesses, this has both positive and negative impacts. “It’s easier for risks to be unnoticed and, therefore, unmitigated,” said one chief risk officer.

The past 20 years have provided a platform for huge amounts of change. The next 20 years are likely to be even more of a challenge, concludes the report. Go to www.kroll.com/2020vision forum to download the report in full.