1. The prioritisation of resilience over pure efficiency maximisation may end up boosting the demand for warehouses
The chastening experience of a pandemic during which stocks of everything from face masks to toilet paper ran short has shifted the way a range of businesses operate. Their priorities are now orientated towards building supply-chain resilience rather than pursuing maximum efficiency at all costs. That is creating demand for more local warehouse storage to guard against future shortages. “Every single person we talk to from an occupational perspective is talking about this: pharmaceutical companies, retailers, everyone,” says Preston. His company, Tritax EuroBox, has leased a vast warehouse in the southern Netherlands to food retailer Lidl. The shed is packed full of non-perishable goods that Lidl has no immediate intention of selling. “It’s a resilience package for them, full of pasta, tinned tomatoes, goods that won’t go off. Because when Covid came along, shelves were emptied, they learnt their lesson,” he says.
2. The private equity industry buys out Senator Krysten Sinema who blocked a bipartisan legislative effort to remove the so-called carried interest loophole that allows PE and hedge fund managers to have their investment gains taxed at a lower 20% compared to the marginal income tax rate of 37%. Sinema forced the dropping of the change in the tax provision in return for her support for the Inflation Reduction Act, a wide-ranging climate, health care, and tax bill.
3. Despite the government's efforts to increase local manufacturing, the share of Indian companies in the smart phone market fell from 21% in 2017 to just 1% in 2021. Indian companies like Lava, Micromax etc have struggled to fight the Chinese competition.
4. NYT article about the efforts in the US to regulate the container shipping industry
The ocean carriers have multiplied their shipping rates and imposed a bewildering assortment of fees. The container shipping industry is on track to make $300 billion in profits before taxes and interest, according to Drewry, an industry research firm. The White House has seized on these two realities — soaring prices, and record profits for carriers... Three alliances of shipping companies control 95 percent of routes across the Pacific, according to the International Transport Forum, an intergovernmental body based in Paris. As shipping prices have soared, and as delays have besieged ocean transit, retailing giants like Amazon and Walmart have chartered their own vessels, prompting complaints from smaller importers that they are at an unfair disadvantage.
5. More on the strange recession this time around in the US,
Typically, in recessions, the problem is that businesses don’t want to hire and consumers don’t want to spend. Right now, businesses want to hire, but can’t find the workers to fill open jobs. Consumers want to spend, but can’t find cars to buy or flights to book. Recessions, in other words, are about too much supply and too little demand. What the U.S. economy is facing is the opposite... To most people, of course, this doesn’t feel like a boom. Measures of consumer confidence are at record lows, and Americans overwhelmingly say they are dissatisfied with the economy. That perception is grounded in reality: High inflation is eroding — and in some cases erasing — the benefits of a strong job market for many workers. Hourly earnings, adjusted for inflation, are falling at their fastest pace in decades...There is also a subtler consequence: uncertainty. No one knows how long the boom will last, or what the economy will look like on the other side of it, which makes it hard for workers, businesses and governments to adapt... Businesses have now spent two and a half years in a state of constant adjustment. In early 2020, practically overnight, Americans traded restaurant meals for home-baked bread, and gym memberships for socially distanced bike rides. Those shifts caused huge disruptions, in part because businesses were reluctant to make long-term investments to address short-term spikes in demand... Instead, the lingering disruptions of the pandemic, uncertainty over what the post-Covid economy will look like and fears of a recession have made businesses reluctant to make bets on the future. Business investment fell in the most recent quarter. Employers are hiring, but they are leaning heavily on one-time bonuses rather than permanent pay increases.
See also this.
6. FT long read on the changing face of private equity investing. From being small mercenary takeover specialists in the 1970s to early nineties, PE firms today manage nearly $10 trillion in assets. Their new area of focus is private debt,
Firms that once bludgeoned opponents now nurture complex business relationships with their competitors. Private equity has become just a fraction of their overall assets under management, with credit investing businesses now managing hundreds of billions of dollars, including providing loans for leveraged buyouts... With private equity deals now accounting for over 25 per cent of global M&A activity — a record market share — the collective power of the leading groups is starting to attract the attention of regulators...The modern day private equity buyout traces to Michael Milken’s Drexel Burnham Lambert, the investment bank that popularised the “junk bond”. Drexel financed small teams of dealmakers targeting corporate giants such as Disney, Texaco and then RJR Nabisco, the signature LBO of the go-go 1980s. Milken, and many of Drexel’s clients, were considered aggressive outsiders, unafraid to gatecrash Wall Street... By the 2008 crisis, private equity had become part of the financial mainstream as it pulled off a string of ever-larger takeovers. These so-called “club deals” hinted at the willingness of some firms to co-operate out of self-interest...
Investment banks, hamstrung by new regulations like the 2010 Dodd Frank Act, were curtailed from holding risky assets such as low-rated debts, which has limited their ability to finance many deals. As a result, corporations and private equity buyers have had to seek new ways of issuing debt. Blackstone, Apollo, KKR and Carlyle stepped into the void. They bought billions of non-performing loans from banks in the US and Europe, betting that the portfolios would stabilise. As markets recovered, they shifted to originating new loans, underwriting midsized private equity takeovers that banks would not finance. It set off private equity’s march into new businesses such as lending, insurance-related investments, real estate and infrastructure, which were far from their original speciality in buyouts... These private financings have continued as interest rates rise — just as many investment banks have been refusing to make new lending commitments until loans from deals struck earlier in the year have been sold on.
Another trend is the rise of sales from one PE firm to another, or "GP-led secondary transactions",
The fastest way for buyout firms to deploy their nearly $2tn in “dry powder,” or funds they have raised that have yet to be invested, is to buy companies directly from other private equity firms. A record 442 of such deals worth $62bn were struck last year, according to Refinitiv. These deals can close in less than three months, say bankers, versus as long as nine months to acquire a public company. They can also be expedient: sellers sometimes look to quickly lock in gains and show strong returns as they raise their next fund, notes one private equity firm executive... There has also been a surge in so-called “GP-led secondary transactions,” where one private equity firm sells a large stake in an existing investment to another firm at a higher valuation.
7. The pandemic induced surge in demand for goods is tapering off,
Consumer goods retailers and ecommerce companies who profited amid lockdowns and mistakenly expected the good times to continue rolling have been hard hit. Big box retailers Target and Walmart, which won last year by scooping up inventory and paying extra for air freight, are now having to slash prices and cancel orders to clear excess stock. Ecommerce companies such as UK fast fashion site Asos are similarly coming down to earth, as it becomes clear that pandemic-related online buying marked a one-time jump rather than a permanent shift to faster growth. Overall US online prices for goods fell in July for the first time since May 2020, with price drops recorded in 14 of 18 categories tracked by Adobe. Electronics, the largest ecommerce category, saw a 9.3 per cent year-on-year decline, as the bulge driven by home office upgrades begins to recede.
But the demand in services shows no signs of abating,
Now it is the service providers who are struggling to keep up. After two grim years marred by closures and limited demand, their sales are climbing. Walt Disney reported record revenue in its theme parks division, hotel chain Marriott bragged of “outstanding” results and both American and United Airlines returned to profit for the first time since the start of the pandemic.
8. Unintended consequences of private equity in housing
Right to Buy was a remarkable success in that it led to the sale of more than 2mn homes and resulted in an immediate transfer of wealth. But one of its direct, longer-term consequences has been that, rather than increasing home ownership, it contributed to the rapid growth of an under-regulated and precarious private rented sector. In 1979, more than a third of people in England lived in council housing built, owned and administered by local government. Now, more than 40 per cent of the council homes bought under Right to Buy have been sold on to private landlords, who rent them out at three or four times the price of an equivalent property in the social housing sector. The result is that, in many parts of the country, private renting is unaffordable for those on lower and even middle incomes, excluding people from the market and leading to a continuous cycle of eviction.
9. From FT about couple of graphics about the shipping industry. Interesting that the global LNG capacity has been more or less stagnant over the past five years.
10. Don't know the source of these numbers, Arun Maira quotes about India's labour market growth,
The gap between where our economy is and where it needs to be is increasing. Between 1980 and 1990, every one per cent of GDP growth generated roughly two lakh new jobs; between 1990 to 2000, it decreased to one lakh jobs for every per cent growth; and from 2000 to 2010, it fell to half a lakh only.
But it's most likely in some similar range.
11. Satyajit Das points to the private markets being the faultline for the next financial crisis. Investors have poured $9.8 trillion into unlisted equity, private debt, and seed and venture capital. The illiquidity, opacity, and diffusion of risks have led to valuation bubbles. Consider this recent example,
After being valued in 2021 at $46bn, a 2022 $800mn funding round valued Klarna at $6.7bn (an 85 per cent fall). As the disappointing initial public offerings of Uber and WeWork highlight, the case is not isolated.
Das points to the faultlines,
First, as private investments are inherently illiquid, investors cannot cauterise losses easily. Monetisation, largely reliant on initial public offerings and trade sales, is now difficult, especially at previously anticipated prices... Second, the lack of market prices means opaque valuations, which frequently misstate investment or fund values... Third, private equity originally focused on long holding period investments purchased with substantial borrowings in traditional industries that offered undervalued shares, strong cash flows, low operating risk and the potential for business improvements. Today, many of these elements, other than leverage, are frequently absent... Fourth, for non-profitable or cash-flow-negative enterprises, availability of follow-on funding necessary for operations is presumed... Finally, private markets exhibit complicated layers of risk... Today, investments are frequently held through tiers of funds, some with borrowings from banks or private providers. Securitisation of private equity loans and non-bank credit display familiar opacity and exacerbate leverage in the system. Falls in asset value anywhere can create instability elsewhere within the financial system.
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