A Phoenix, Black Swan and a Unicorn walk into a bar…

What is a Phoenix?

In mythology, the phoenix symbolises rebirth from the flames of its demise. Phoenix companies are created out of the remnants of their former self, fulfilling the same purpose as before but no longer carrying the burden of debt. The process of phoenixing transfers the assets of a loss-making company to a new entity so it can trade in its place. The insolvent company then gets liquidated.

Phoenixing is perfectly legal in certain situations, such as a pre-packed administration where the company’s assets are purchased by its former management. This generates a dividend for creditors and allows the business to trade on under a new identity. With enough preparation, a Phoenix company can be created months before any sign of financial difficulty, allowing the seamless transition of assets and staff from old to new. Whilst Phoenix companies are good for employees and customers, they leave debt behind as the slate gets wiped clean. It’s not unheard of for creditors to initiate their own rebirth as a result.

What is a Black Swan?

Right up until its discovery in 1697, it was thought the black swan did not and could not exist. It has since become a metaphor for an unpredictable event of historical importance. Nassim Taleb developed the black swan theory to explain how humans try to rationalise the occurrence of hard-to-predict events. Examples include World War I and the internet.

Typically, black swan events are associated with the financial markets. The post-mortem of every market crash is littered with missed opportunities to change course. Hindsight is a brutal teacher.

Regulation and trader integrity can only go so far as to mitigate the risk of carnage on the trading floor. Unlike the weather, markets are entirely manmade systems of commerce with built-in flaws. Just because a system is faulty doesn’t mean it will immediately fail; just ask anyone who routinely drives with the check engine light on! Black swans also create opportunities to invest in devalued assets, reprice inflated commodities, and sell a fix for that check engine light.

What is a Unicorn?

Aside from being Scotland’s national animal, the unicorn is symbolic of something unique and difficult to obtain. The term unicorn company was first coined by Aileen Lee in 2013 to describe an elite club of privately owned tech start-ups achieving a valuation of $1bn within ten years. That definition is now applied to any business reaching that magical number. Today, over 1,100 unicorns exist worldwide, amounting to 0.00073% of all start-ups.

Unicorns start with a single good idea which can be scaled up and developed faster than more established firms. They are customer service-obsessed market disruptors. A company is only worth what someone is willing to pay for it, which, in layman’s terms, means if you can generate enough hype and convince enough people, you can feasibly value anything at ten digits. As an investor, buying shares based on a future valuation is foolish. As a competitor, spending a billion dollars on a company to turn an existential threat into an asset is clever. Companies like Meta and Google have a history of strategically buying start-ups to protect and grow their market share.

Feel the Phoenix!

Some of Britain’s best-loved and most recognisable brands have risen from the ashes of insolvency. Mothercare is one such brand. After struggling to return to profitability, Mothercare shut its UK stores in 2019. Unsecured creditors received 68 pence in the pound. Today, Mothercare products are sold in the UK through a high street reseller. The only brick-and-mortar stores are operated through franchises in Asia and the Middle East. Following Mothercare’s example, Toys R Us relaunched online sales and concession stands after collapsing in 2021. BHS, Debenhams and Comet have all become online phoenix businesses, leaving behind an estimated £2.2bn in unsecured debt between them.

When Thomas Cook Group collapsed in 2019, the CAA launched the biggest repatriation of British tourists in peacetime. Although the stores and airline were sold to fund liquidation, the Thomas Cook name lives on under new owners Fosun. British short-haul airline FlyBe first ceased trading in 2020, sighting fuel prices, competition, and Brexit. They returned as a phoenix later that year, only to cease trading again in 2023. Six years after it collapsed in 2017, leaving an estimated deficiency to unsecured creditors of £446m, fellow British flag carrier Monarch Airlines has announced a return from the flames of insolvency ahead of a planned relaunch in 2024-25.

Talk Black Swan to me!

Black Monday in 1987 was primarily caused by overpriced stock, computerised trading and investor panic, resulting in a global stock market crash. The Black Wednesday crash of 1992 was caused by a British government blunder two years prior, which entered the pound into the European Exchange Rate Mechanism at an inflated value. Short seller George Soros bet against the pound and made over $1bn in profit from Black Wednesday.

Low-interest rates in the late 1990s made starting up a dotcom company attractive to people with more ideas than business acumen. The dot-com bubble burst in 2000 when a string of firms burnt through investor capital and failed without ever turning a profit. The failure of crypto trading firm FTX in 2022 was a black swan event because most people in the industry were blindsided by the $8bn of misappropriated funds. Speculation as to motive ranges from Robin Hood style philanthropy to embezzlement. In its wake, at least six other crypto institutions failed in the resulting market crash, including Silicon Valley Bank.

Show me the Unicorns!

Monzo and Revolut are prime examples of challenger banks seeking to disrupt the more established old guard and forego the traditional brick-and-mortar branches. Monzo was founded in 2015 and set the record for the quickest crowdfunding campaign in 2016, when £1m was raised in 96 seconds. It reached unicorn status in 2018. Revolut was also founded in 2015 as an app-only bank and, within five years, achieved a £4.2bn valuation. Deliveroo went from start-up in 2013 to unicorn in 2019. Just Eat and Uber Eats obtained unicorn status through a mixture of organic growth and acquisitions.

Unicorns are not just about banking and fast food. Going from zero to unicorn in three years and on a mission to cut renewable costs, Massachusetts-based Electric Hydrogen became the green industry’s first unicorn in 2023. Firms like Spotify and Airbnb have progressed to decacorn status with valuations breaching $10bn, and SpaceX is now a centicorn worth over of $100bn. Greensill Capital is a testament to the fact that unicorns can and do fail. Admittedly, it’s an oversimplification, but their unconventional reverse factoring business became overexposed to customers and lenders, resulting in the firm’s demise.

Debt Collection Animals  

Here at Advocate Commercial Debt Recovery, we see Phoenix companies all too often. Clients are understandably dejected when a phoenix won’t pay the old invoices but wants more of the same. Black swan events send shockwaves up and down the supply chain, making debt collection a race against time. Unicorns also grace Advocate’s case files, with clients understandably eager to get paid, knowing the hourglass sand is about to run out. As we’ve seen, the phoenix, black swan and unicorn are more than just tokens of mythology and quirky clickbait. Their prevalence in commercial debt recovery is not to be underestimated!