Private equity might be the hero Jeremy Hunt is looking for
The UK needs more companies that want a London listing
When the FTSE was celebrating its 40th birthday, we took a deep-dive into its mid-life crisis. The problem, in essence, is that UK companies are fed up with being cheap. They are either seeking a more opportunistic listing (typically stateside), or being taken private by private equity firms that can spot a good deal when they see it.
Were the pipeline for new listings strong, this wouldn't be a problem. But the pipeline isn’t strong. So, for his recent Budget Statement, Jeremy Hunt figured he has just one option, and it's to make UK companies less cheap, by strongarming the market to buy them. The market didn't seem to enjoy this approach:
For example, Hunt has announced measures to track UK investments by pension funds, indicating potential further actions if domestic allocations linger. This week, the government's own top infrastructure adviser publicly criticised the push for UK pension funds to invest more domestically, rather than seeking the best returns possible.
The 'British ISA' didn't go down well either. Industry leaders lambasted the measure as expensive and unhelpful, and none more so than AJ Bell chief exec Michael Summersgill. He argued that customers already heavily favor UK assets. And since few investors max out on their current ISA allowance, the move will be both pointless and expensive to implement.
The other way to try and fix the market is by sourcing more companies to list. As we said at the time, the government is already tinkering with this approach:
“Last July, nine UK pension schemes agreed to allocate 5% of the assets in their default funds to unlisted equities by 2030. Currently, they allocate less than 1%. When these unlisted companies do list, maybe having a large UK investor base will nudge them to choose London?”
2030 is a long way away. Ideally, what Jeremy Hunt would like is a solution like this, but that could work right now. Could such a solution be hiding in plain sight?
Over in another corner of the market, private equity has been facing a situation. Private equity funds are sitting on 28,000 unsold companies at a combined valuation of $3.2 trillion. Companies held for four years made 46% of this total, the highest level since 2012. On top, buyout funds are also holding $1.2 trillion unspent capital, over a quarter of which is over four years old.
Toddler-aged capital dampens the returns, so private equity is keen to dispose of some of those companies. Admittedly, not all are in great shape: 36% of companies acquired six years ago are barely breaking even, and 70% of the companies that have been held for at least four years are 'doing just OK or worse'.
No need to feel sorry, private equity has a knack for taking care of itself. Bain, which provided the stats above, also released a press release declaring 'green shoots' are around the corner. Because even if they're not, you can still say it; worst case, you'll just say it again next year. But according to Strategic CFO 360, a consultancy that has been monitoring holding periods for over twenty years:
"Recovery from major economic downturns requires 4–6 years for the PE industry collectively but varies greatly across individual portfolio companies...Portfolio companies acquired just prior to Covid are entering the Recovery phase, resulting in the recent uptick in holding periods."
They add that, for portfolio companies acquired at peak valuations (Yup.), just before an economic shock (Yup.), the holding period for that specific portfolio company might increase an additional 3-5 years, stretching the holding period on that investment to 8-10 years, a significant shift in expectations for the fund.
Asset managers have been all over private equity recently. Private equity needs to ditch old companies to buy new ones. And at least some of them can be packaged into listings? I'm not sure anyone (other than private equity, naturally) would be making money, but everyone would appear be busy fixing, and that's something too.
If this all sounds preposterous, consider how something similar was happening this week with a different type of illiquid investments: real estate.
Portfolios of private assets are being dumped by so-called defined benefit pension schemes — funds offering members a set amount in retirement — as they try to prepare themselves for a buyout by an insurance company. Insurers don't like illiquid investments, so other UK pension funds are seizing the moment by snapping heavily discounted real estate and private assets.
Who's to say this can't be used as inspiration to solve the UK's dwindling stock of exciting listings?
Treasure Corner: How ‘greenwashing’ became a thing
Don't you feel like you're seeing this term, 'greenwashing', more than before? Like it's come to dominate the conversation on ESG?
You're not wrong.
New research, published just this month, constructed a ‘greenwashing index’, based on climate coverage in paper-based Wall Street Journal articles, dating back to 1986. We'll get into the details in a second, but first, fun fact:
"The word ”greenwashing” became widely used only recently: it was used in less than 10 articles before 2007, and in less than 35 articles before 2020. In contrast, it was used in nearly 40 articles between January 2020 and June 2022."
In the study, titled A Greenwashing Index ,(by Elise Gourier and Hélène Mathurin, at ESSEC Business School) the researchers crunched the text to identify which articles were covering climate-related news, and of those which were mentioning greenwashing. They started out with over 800,000 articles (1986-2022), but only about 2.4% were climate-risk related.
Since the term is new, they identified articles discussing the activity by other names using technique called 'Embeddings' and 'Topic Modelling'. (Deutsche Bank once did something similar, and FinText wrote about it. But they didn't do it to construct an index.)
A few interesting insights:
There are three waves during which greenwashing accounted for more than 5% of the text on climate risk: The first wave was from 1990 to 1992, the second from 2006 to 2010 and the third from 2018.
The first two waves coincided with accusations of greenwashing involving mostly companies in the oil and gas industry (e.g., Exxon Mobil) and the consumer goods industry (e.g., Proctor & Gamble).
The most recent wave, though, was dominated by financial services companies. When they dug further they saw that the financial sector is the main theme in greenwashing-related articles: it accounts for 17.3% of the text in these articles.
More specifically yet, it is composed of three topics: Asset management (specifically, ESG funds), ESG ratings and green bonds.
The paper’s authors state:
“Since 2018, the greenwashing index has consistently been above 8%. We conclude that in the past five years, greenwashing has substantially affected the discussion on climate risk, in a way that is unprecedented.”
Also happening
Speaking of washing, the SEC fined two firms for lying about AI. Two investment firms were hit by regulatory fines for making claims about about using artificial intelligence when they actually weren't. With that, SEC Chair Gensler christened a new label, "AI washing".
We talked about AI use cases in investment management, and quoted a survey of financial companies where no less than 75% considered their company’s AI capabilities to be industry leading or middle of the pack. Seems like the SEC has found how AI can be useful!
Just 17% of active managers were able to outperform the market over the last decade, Morningstar reports. (They looked at 26,000 funds.) Limited to just 2023, the success rate climbed to 31.2%. They go into this whole internal debate on how it was easier to beat an index if the market is concentrated and a manager can be overweight on key stocks (like the US and the 'Magnificent Seven'). But I'm struck by how boring this type of headline has become. Isn't it weird, how we all just got used to the fact most active managers underperform?
Amundi launches ‘lowest cost’ all-country equities ETF. Amundi's newest offering claims the title of the 'lowest-cost' global equities ETF in Europe with a 0.07% management fee. Back in December we talked about State Street aggressively cutting its S&P 500 tracker fees to become the cheapest, and was pretty much instantly rewarded for it. They were able to do it by passing securities-lending upside back to customers. I feel at least some investment firms, Amundi being one, saw that and figured this tactic might be worth a shot.