What does future hold for LDV?

LDV's dramatic administration-and-takeover starkly highlights both the intense challenges facing local manufacturers, and the genuine strengths of LDV in being an attractive target for hard-nosed venture capitalists.

Like MG Rover, LDV is a small firm which competes with much bigger rivals. It has struggled with the costs of developing and producing new models and has relatively small production runs over which to recoup costs.

Unlike MG Rover, though, LDV's management did succeed in finding a partner, Daewoo, to develop a new product, the Maxus van. And despite Daewoo's collapse, LDV successfully brought the class-leading Maxus to market on its own.

But producing without a partner has meant higher production costs than originally planned, hence the recent cash-flow problems which led ultimately to administration and takeover.

So what does the takeover by the US private equity group Sun Capital Partners now mean for LDV?

First the good news. Sun Capital has invested in hundreds of firms across the world, with these firms having a combined turnover of $22 billion.

And with more than $2.5 billion of equity capital under investment, it's no minnow in venture capital terms.

According to Sun itself, it normally invests in "market-leading companies that can benefit from its in-house operating professionals and experience".

Having Sun on board at LDV can be seen as a vote of confidence in a great local firm with good growth potential.

In other words, Sun and its junior partner European Acquisition Capital wouldn't be investing around £75 million (including any bank facility) if it didn't think the firm was a market leader with a profitable future.

All of this is way better than the main bank overdraft financing on offer to many manufacturing firms.

Indeed, the new investment will speed up development of new mini-cab and chassis-cab versions of the Maxus and get them to market sooner.

Output should rise over the next 18 months, which will in turn benefit the supply chain.

This will be much needed after the pain of the last few weeks where suppliers have so far gone unpaid in the indecent haste of the deal.

Yet big questions remain about what happens next, where LDV goes and what impact this will have locally.

For a start, how long does Sun intend to stick around?

Florida-based Sun was set up in 1995. It simply hasn't been around long enough to establish a long-term track-record.

Industry observers distinguish between 'vulture' and 'venture' capitalist. At one end of the spectrum, 'vulture' capitalists aim to slash costs dramatically, sweat assets and sell off the firm pretty quickly in whole or in bits to raise cash.

At the other end, venture capitalists provide patient equity finance (even over 20 years) to build a successful business which ultimately pays them back.

A good example is 3i which worked with LDV after the 1993 management buy-out.

Quite where Sun fits on this spectrum is not yet clear but the commitment to develop the Maxus range and increase output is surely good news.

Secondly, how hands on will Sun be?

The management and workforce at LDV have been widely acknowledged as having done a terrific job over the last 12 years. Their skill and motivation have kept the firm going.

Sun clearly has a strategy for the firm, but will it make this clear at the outset and let management get on with the job, or will it appoint directors and in effect run the firm in a hands-on way?

Thirdly, what about refinancing? A venture capital investment is usually the start of a relationship, not the end. How does Sun intend to re-finance LDV as it develops?

Getting the Maxus to market cost hundreds of millions of pounds and LDV has struggled to recoup this off a lower than planned output base since the collapse of its Korean partner Daewoo.

Stage one of any strategy has to be developing the new Maxus derivatives but beyond this there will need to be new models.

This will require cash and/or partners or a completely new owner. Does Sun intend to find such partners or prepare LDV for a sale down the line?

Last, and most importantly for all involved locally, how many workers will be kept on and what happens now to the pension fund?

With the immediate closing of Convoy and Pilot production, job losses will be inevitable.

Some 230 job losses are now thought likely but a clearer indication to workers, unions and Birmingham City Council is needed so that the necessary help and support can be mobilised in an area of the city already affected by the Alstom closure.

And the pension fund? In buying LDV out of administration, Sun has effectively dumped the fund and its apparent deficit.

Workers will now pin their hopes on a rescue by the Pension Protection Fund, but whether this will pick up the tab is yet to be seen as this is uncharted territory for the Fund which has only been in operation since April.

Whilst welcoming Sun Capital to LDV and Birmingham, with global shifts taking place in manufacturing, perhaps we need an early warning-system that alerts councils and the RDA so that we can better prepare for such changes.

* Dr David Bailey works at the Birmingham Business School and Coun John Clancy (Lab Hodge Hill) is a Birmingham City councillor and ex-venture capital lawyer.