TheChek News Flow

Grok AI might be coming to Microsoft’s Azure AI Foundry service.

Microsoft has been instructing engineers working on its AI infrastructure to get ready to host Elon Musk’s Grok AI model, according to a trusted source familiar with the plans. In recent weeks Microsoft has been in discussions with xAI to host the Grok AI model and make it available to customers and Microsoft’s own product teams through the Azure cloud service. The move could prove controversial internally and further inflame tensions with Microsoft’s partner OpenAI.

I’m told that if the deal proceeds, Grok will be available on Azure AI Foundry, Microsoft’s AI development platform that gives developers access to AI services, tools, and pre-built models in order to build AI applications and agents. This will allow developers to tap into Grok and use it within their apps, and for Microsoft to potentially use the AI model across its own apps and services. Microsoft refused to comment for this story.

Microsoft has been steadily growing its Azure AI Foundry business over the past year, and has been quick to embrace models from a variety of AI labs that compete with Microsoft’s partner OpenAI. DeepSeek, the Chinese startup that shook up the world of AI earlier this year, forced Microsoft to move quickly to embrace its supercheap R1 model. The DeepSeek deployment on Azure AI Foundry was unusually fast for Microsoft, as I reported previously in Notepad, with Microsoft CEO Satya Nadella moving with haste to get engineers to test and deploy R1 in a matter of days.

I understand Nadella has been pushing for Microsoft to host Grok, as he’s eager for Microsoft to be seen as the hosting provider for any popular or emerging AI models. Microsoft’s Azure AI teams are constantly having to onboard new models or procure hardware that unlocks even more AI capabilities, in Microsoft’s bid to build an AI platform and turn AI agents into a digital workforce.

“All of the systems that we’ve built for 50 years need to apply to AI agents,” said Asha Sharma, corporate vice president of Microsoft’s AI platform, in an interview with The Verge last month. “For Azure AI Foundry we’re thinking about how we evolve to become the operating system on the backend of every single agent.”

Making Grok available to developers through Azure is part of Microsoft’s goal to become that important infrastructure and platform behind AI models and AI agents, but it doesn’t mean AI labs are turning to Microsoft for their AI model training needs. xAI chief Elon Musk reportedly canceled a potential $10 billion server deal with Oracle last year, and posted on X at the time that xAI would be moving to train its future models “internally” instead of relying on Oracle servers.

It’s not clear if Microsoft will secure an exclusive deal on hosting the Grok AI model, or whether competitors like Amazon will also be able to host the model. I understand that Microsoft is looking at only providing capacity to host the Grok model, and not the servers for training future models.

Microsoft’s move to host Musk’s Grok AI model could create some tension internally at the company, particularly given his involvement in the controversial Department of Government Efficiency (DOGE) project. Musk has said he will step back from his work at DOGE at some point this month, and an announcement of Grok on Azure may well come at Microsoft’s Build developer conference on May 19th.

Beyond DOGE concerns, hosting Grok could also further inflame tensions in Microsoft’s partnership with OpenAI. The ChatGPT maker countersued Musk earlier this month over claims that the Tesla boss is using “bad-faith tactics to slow down OpenAI.” Elon Musk and OpenAI have been in a rather public spat, stemming from Musk’s messy breakup with the AI lab he helped to co-found.

At the same time, there have been multiple reports of tensions between Microsoft and OpenAI over capacity requirements and access to AI models. Just this week, The Wall Street Journal reported that Nadella and OpenAI CEO Sam Altman are “drifting apart,” and that Nadella’s hiring of Mustafa Suleyman last year was an “insurance policy against Altman and OpenAI.”

Suleyman and his Microsoft AI team have reportedly been working on building AI models that can compete directly with OpenAI, but without much success. That’s led to Microsoft continuing to rely on OpenAI for most of its AI features in Office and Copilot. I understand Microsoft had also been anticipating OpenAI’s GPT-5 model this month, but OpenAI’s schedule has been all over the place in recent weeks with delays to new model announcements and capacity issues after the success of its upgraded image generation. It’s now unlikely that GPT-5 will appear this month, I’m told.

Hosting Grok on Azure is another clear sign that Microsoft is willing to look elsewhere for AI models. Microsoft-owned GitHub Copilot already supports models from Anthropic and Google, in addition to OpenAI. So, it’s not inconceivable that one day the main Copilot will also let you pick from a variety of competing AI models, especially if it helps further Microsoft’s ambition to become the number one destination for AI developers and users.

Among tech companies, robotics companies are particularly vulnerable to tariff hikes, given that many robot parts come from China. The import taxes mean higher costs that robotics firms will have to either absorb or pass on to customers—a setback to their business either way.

But a number of startups that employ overseas workers to control robots in U.S. facilities are hopeful the changes could actually boost demand from U.S. manufacturers. That’s because these remote-controlled robots could still cost less than hiring U.S. factory workers.

Reflex Robotics, for example, employs workers in the U.S., Latin America and South America, who can take over control of the three-year-old company’s wheeled humanoids, said chief revenue officer David Schwebel. The New York-based firm’s human-operated robots are already moving packages for logistics giant GXO.

Even if costs go up for some imported robot parts, companies like Reflex could still be able to profitably price their robots below the wages for humans performing the same jobs. Eventually, these robotics companies plan to use the data they collected from human operators to train their robots to work autonomously, which could bring costs down further.

Ultra and Deft Robotics are pursuing a similar strategy. Ultra’s legless robots package e-commerce orders for multiple paying customers at logistics firms, said co-founder and CEO Jon Miller Schwartz. The one-year-old company hires workers outside the U.S. who wear VR headsets and motion-capture gloves to direct the robots.

That approach “has basically allowed us to deploy these robots rapidly in a way that actually adds value for our customers,” said Schwartz. Ultra went through Y Combinator last summer and raised $4.5 million in a seed funding round led by NextView Ventures in September, he said.

Deft plans to hire workers in Mexico who can operate its robots to place items like t-shirts and cosmetics in boxes at e-commerce facilities, said co-founder and CEO Shane Lee. The one-year-old company raised $100,000 from Founders, Inc., an accelerator, and is now talking to venture capitalists to raise a further $1.5 million, Lee said.

If the tariffs squeeze the profit margins for Deft’s customers, the San Francisco-based company can pitch, “let us help you adopt my solution and then we’ll help you bring your margins back up,” said Lee, who pointed out that warehouses already face labor shortages. “Especially Gen Z and onwards” are not interested in those jobs, he said.

These robotics makers could offer manufacturers negotiating tariff hikes the best of both worlds: continued access to overseas workers while producing the goods on U.S. soil. But this solution will surely disappoint Americans hoping trade levies will bring home factory jobs.

The contrast with these firms is a startup like Chef Robotics. The six-year-old company has robots assembling food packages for seven companies in the U.S. and Canada, including at an Amy’s Kitchen facility in California, where the robots scoop rice into plastic trays for frozen food packages.

A couple of months ago, Chef ordered from China two shipping containers full of the metal frames it uses for mounting robotic parts, as well as extra Lenovo chips and cameras used in the robots, said founder and CEO Rajat Bhageria. The frames should last the company for multiple months, he said, “but in hindsight we should have done a lot more.”

Before the tariffs set in, each of those frames cost $1,400, including shipping costs. With the tariffs, the prices could more than double. But that would still be cheaper than ordering frames from the U.S., Bhageria estimates. Its previous San Francisco-area supplier charged $18,000 and a Midwest supplier in 2023 quoted $13,000 for each frame. Chef is now considering ordering parts from machine shops in Taiwan instead.

Ken Griffin’s main hedge fund is now up for the year after losing money in the first quarter

Key Points

Citadel’s flagship hedge fund, Wellington, gained 1.3% in April, outperforming the broader stock market.

Wellington is up 0.5% this year through April, after a challenging first quarter.

Ken Griffin urged his team to invest opportunistically during the market selloff.

Citadel navigated April’s market chaos and generated a 1.3% gain in its flagship hedge fund last month, a person familiar with the matter said, outperforming the broader stock market.

The details

Citadel doesn’t disclose much to investors about where its multistrategy Wellington fund makes its money, but the performance of other funds it manages offers some clues of what worked for the firm in April. Citadel’s stocks-focused hedge fund gained 2.2% last month, while its tactical-trading fund and global fixed-income funds were up 1.9% and 1.2%, respectively, the person said.

April’s gains pushed Wellington into the green on the year after a challenging first quarter. Big hedge funds were whipsawed when a broader flight from risk hurt some go-to investing strategies and revealed how many of them held similar positions that came under selling pressure. After losing 0.8% in the first three months of 2025, Wellington is now up 0.5% this year through April.

Ken Griffin, Citadel’s founder and chief executive, has urged his team to play offense and invest opportunistically during the market selloff. The firm allocated more capital to invest to around a quarter of its U.S. stock-picking portfolio managers, the person said.

“As I’ve always said, an opinion without a position is still just an opinion,” Griffin said at a recent firmwide meeting. “This is a job that each and every day you have to act with conviction. You need to lay it on the line and translate your opinion into a position.”

The context

Griffin has been one of Wall Street’s most outspoken critics of parts of President Trump’s economic agenda. Griffin said at a recent event hosted by Semafor that the trade war the White House kicked off has devolved into a “nonsensical place” and was “eroding [the U.S.’s] brand.”

“We’re moving too haphazardly and we’re breaking a lot of glass in trying to solve some very real problems,” Griffin said at the event. “With the policy volatility, you actually undermine the very goal you’re trying to achieve.”

The market uncertainty prompted by Trump’s on-again, off-again tariffs and his complaints about the Federal Reserve pummeled stocks for most of last month, though a recent rally trimmed April’s losses. As of Wednesday, the S&P 500 is down 4.9% for the year on a total return basis.

Spain and Portugal blackout blamed on solar power dependency

Electricity experts point to dangers of grid instability when renewables dominate output

The inability of Spain’s electricity grid to manage an unusually high supply of solar power was a key factor in Monday’s catastrophic blackout, former regulators and experts have said.

About 55 per cent of Spain’s supply was from solar sources when 15GW of electricity generation disconnected from the grid within just five seconds on Monday afternoon, triggering a wide-ranging shutdown of power systems in Spain and Portugal.

Several European experts said that Spain appeared to lack enough firm power — readily available, reliable energy supply from sources such as fossil fuels or nuclear that can be reduced or raised — to kick in when the grid’s frequency dropped sharply at 12.33pm on Monday. Frequency, the rate at which electrical current alternates, must be kept stable for the grid to function.

Spanish grid operator Red Eléctrica has said that it still does not know the exact cause of the outage. Chief executive Beatriz Corredor denied that renewables “made the system more vulnerable” in an interview with El País on Wednesday.

But André Merlin, the founder and former chief executive of France’s grid operator RTE, told the Financial Times: “Two-thirds of [Spain’s electricity] production was made up of non-controllable resources. These non-controllable resources . . . don’t contribute to the stability of the internal electrical system.”

Jorge Sanz, a leading former Spanish energy official and International Energy Agency board member, told Spanish television on Wednesday evening that an oversupply of electricity may have initially caused the problem. Normally, the grid operator would have managed this by asking traditional plants to moderate their output but this was not possible because so few plants were on line, Sanz said.

This would have been followed by a disconnection of electricity generation to avoid damage to equipment, leading in turn to an outage.

Sanz said: “There was an imbalance of supply. [The grid operator] needed to reduce electricity supply, but when it resorts to firm facilities to reduce load, it can barely do so because they were barely connected.”

Last month, transport minister Óscar Puente revealed via his X account that “an excess of voltage in the network” had caused a failure that left some high-speed rail lines out of operation for several hours.

Meanwhile, one energy adviser close to the European Commission also said experts were exploring if the country’s high renewable reliance and lack of firm power to balance out intermittent supplies contributed to the blackout.

Grid operators must constantly balance supply and demand of electricity to keep the frequency of the grid stable, and avoid damaging equipment or outages. This stability is easier to achieve with turbines powered by fossil fuels, hydroelectric or nuclear energy than with renewable technologies such as solar. Spain’s grid frequency dropped sharply below the optimal 50Hz rate at 12.33pm on Monday.

The reliance on solar energy at the time of the outage has led to criticisms of Red Eléctrica. Normally about a fifth of the country’s supply comes from solar power.

Sanz, a former adviser on the energy transition to the Spanish government, said that there was “poor management” of the grid, by not having enough nuclear, hydroelectric or fossil fuel energy scheduled to balance the system. Of the scheduled 26GW of electricity supply on Monday, just 5GW came from non-intermittent sources.

The Brussels-based adviser pointed to Red Eléctrica’s own 2024 annual report, which said that disconnections caused by “high renewable penetration” without enough “necessary technical capabilities for an adequate response to disturbances” was a risk to the system.

Merlin was less critical of the operator but said that renewables policy should be reviewed in the light of the incident. “I don’t think there’s been bad management from the Spanish or Portuguese operators. Simply put, we need to be careful about the policy of maximum development and maximum use of intermittent renewable energy to the detriment of more conventional means.”

Some experts say a cascade of events, rather than a single problem, could have been responsible for the outage. “What we normally find is a couple of things that went wrong at the same time,” said Kristian Ruby, secretary-general of the industry body Eurelectric.

Merlin suggested that solar plants may have been the first to fail. He offered a different theory to Sanz’s idea of solar oversupply, suggesting that heavy cloud cover could have prompted production to drop rapidly at some solar plants, directly affecting grid frequency.

Corredor of Red Eléctrica, who is under intense pressure to explain what happened, said the company had yet to identify the cause of the outage and could not say solar plants were behind the disconnection. She said the operator had observed a sudden disconnection in the south-west region of Spain, where many solar plants are located.

But she launched a stern defence of Spain’s renewable systems and pointed to unreliability of other energy sources, including nuclear. “[Renewables] are not insecure technologies. The proof is that the system operates with renewables every day . . . It’s not true that higher penetration of renewables has made the system more vulnerable.”

As well as reducing carbon emissions and the production of nuclear waste, Spain’s renewable energy network has contributed to lower energy prices than many other European countries, thus helping industry and economic growth.

Pedro Sánchez’s government has set out plans to raise renewables production to 80 per cent of electricity generation by 2030, compared with more than half in 2023.

But Sánchez has come under fire from opposition politicians for plans to phase out Spain’s costly nuclear network, and several experts including Merlin have advocated for greater use of nuclear power in Spain to ensure energy security.

Iberdrola’s executive chair Ignacio Galán told analysts on Tuesday that nuclear was “the least expensive solution to secure system stability”.

Another solution is an accelerated rollout of battery technology or storage systems, or improving connections with other countries to import more power.

“More storage capacity should be a main focus for the country at the moment,” said Pratheeksha Ramdas, an analyst at Rystad Energy.

The Hollywood powerbroker has created a global events company to acquire the fair and publishing group

Hollywood powerbroker Ari Emanuel is buying the Frieze global art fair and publishing group from Endeavor, the entertainment group he co-founded, in a deal valued at $200mn.

The sale is likely to close in the third quarter of the year, according to a statement by Endeavor on Thursday. While the terms of the acquisition have not been disclosed, people with direct knowledge of the deal said it would value Frieze at $200mn, putting it above expectations.

It is the first purchase by Emanuel’s global events company, which is backed by a consortium of investors including the investment companies Apollo Global Management and RedBird Capital Partners.

“Frieze has always been a source of inspiration for me — both professionally and personally,” Emanuel said. The fair group “represents a strategic cornerstone in our new global events platform”, he added.

The consortium is in the running to buy Endeavor’s tennis assets, which include the Miami and Madrid Open tournaments, Bloomberg News previously reported.

Endeavor — the US-based entertainment group that was bought for $25bn earlier this year by the private equity firm Silver Lake — first bought a 70 per cent stake in Frieze in 2016 under Emanuel’s leadership and then took full ownership in 2023. It said last year that it was exploring a sale of Frieze.

Emanuel left his role as Endeavor’s chief executive in the wake of the takeover and he is the executive chair of WME Group, Endeavor’s Hollywood talent agency.

Frieze was founded as a contemporary art magazine in 1991 and launched its first fair in London in 2003. The group now runs seven events around the world, including one in Seoul and four in the US, as well as a gallery hub in London. Next week, Frieze New York opens its 13th edition.

Frieze chief executive Simon Fox remains in his role, with the rest of the leadership team, and promises “a seamless transition”. Fox told the Financial Times that “with the support of new ownership, we’re well placed to accelerate our creativity, collaboration and growth.”

Emanuel’s purchase comes as the art market endures a multiyear slump, even before the uncertainty prompted by Donald Trump’s tariffs. In 2024, global sales fell 12 per cent to $57.5bn, their lowest level for eight years, excluding 2020, when the Covid-19 pandemic and lockdown hit sales, according to the latest Art Basel / UBS Art Market Report. MCH Group, which owns Frieze rival Art Basel, made a slim net profit in 2024 after years of losses.

CMA finds lack of transparency around treatment options and costs for consumers

Vets could be banned from setting financial incentives that influence how pets are treated, as the UK’s main consumer watchdog reviews measures to tackle soaring prices and weak competition in the sector. 

The Competition and Markets Authority has been investigating the veterinary market amid concerns over the “roll-up” of thousands of small clinics by large companies and private equity forcing up the price of drugs and treatments.

The watchdog said on Thursday that it could ban “any practices . . . which limit vets’ clinical freedom to provide a choice of treatments suited to the pet owner and animal’s requirements”.

In a working paper outlining potential remedies, the CMA said that larger vets businesses have key performance indicators, including on how pet treatments are sold.

The CMA’s probe, launched last year, found that many vets reported feeling pressure to deliver on targets, however, only a few said that performance monitoring influenced their clinical decision-making.

Sixty per cent of veterinary practices are owned by large companies, up from 10 per cent in 2013, according to the watchdog. 

Six vet chains — CVS Group, IVC Evidensia, Pets at Home, VetPartners, Medivet and Linnaeus — have bought 1,500 of the UK’s 5,000 practices over the past decade.

The watchdog also said it was considering introducing a freeze on prescription fees and medicine prices, after it found that businesses were adding huge mark-ups on medicines, sometimes up to three or four times the purchase cost. 

Pet treatment prices increased by more than 60 per cent between 2015 and 2023, compared with general inflation for services of 35 per cent, according to CMA research.

From its consultations with the sector and pet owners over the past year, the watchdog found there was a lack of transparency around treatment options and costs for consumers.

The CMA concluded that few pet owners are aware that they could purchase prescriptions for considerably less online.

The watchdog suggested creating a comparison website for veterinary treatments, or making it compulsory for clinics to inform owners if cheaper prescriptions are available elsewhere.

It said that a provisional report on what measures it would take will be published this summer, with a final decision by November this year.

US energy storage industry makes a $100bn commitment — but will it be enough?

The sector faces fierce competition from China, which is much further along in its battery manufacturing process

The US economy contracted by an annualised 0.3 per cent over the first quarter, as companies rushed to import goods ahead of Donald Trump’s sweeping tariffs.

Gloomy economic data and reports that Saudi Arabia is unwilling to prop up the oil market with further supply cuts caused crude prices to slump on Wednesday.

Brent crude, the international benchmark, settled 1.7 per cent lower at $63.12 a barrel while US West Texas Intermediate fell 3.6 per cent to close at $58.21. In April, Brent declined 15 per cent and WTI 18 per cent, the largest monthly declines in almost three and a half years.

Fears over a weakening economy and trade policy uncertainty have also rocked US companies. My colleague Martha Muir reported the Trump administration’s cuts to the clean energy industry have caused 20,000 job losses in the US and threatened almost $70bn in project investments.

Trump’s tariffs have threatened the renewable energy industry, especially the battery storage sector, which relies heavily on Chinese imports.

Today we take a closer look at the US energy storage industry’s $100bn pledge to manufacture and buy American-made batteries, which it expects to meet 100 per cent of domestic energy storage demand by 2030. But some industry experts say five years and $100bn is not enough time or money for a sector that faces an existential threat from tariffs and policy uncertainty.

Programming note: We’re taking a short break for the May 5 UK bank holiday. Energy Source will be back in your inbox next Thursday.

Is $100bn enough to power the US battery boom?

Donald Trump’s trade war and efforts to limit renewable energy development pose a threat to the US battery boom, which has been crucial to helping meet surging electricity demand from artificial intelligence.

The US has seen an explosion in battery deployment on its electricity grid, thanks to federal tax credits in the Inflation Reduction Act. The energy storage industry, which is dependent on imports from China, has helped meet power demand by storing renewable generation during times of excess and discharging it when supply drops.

Trump’s “reciprocal” tariffs and calls to repeal the IRA tax credits threaten to put an end to the industry’s rapid expansion. BloombergNEF estimated the president’s China tariffs will impose a 156 per cent duty on energy storage imports and “devastate” the sector.

On Tuesday, American Clean Power, the clean energy industry trade group, announced a $100bn commitment on behalf of the energy storage industry to manufacture and buy US-made batteries with the aim of meeting 100 per cent of domestic energy storage demand by 2030.

The announcement includes about $10bn to $15bn of previously announced active investments as well as an additional $85bn to $90bn of new commitments from manufacturers and buyers of grid batteries. The ACP said the investment is contingent on “stable tax and trade policy”.

But the endeavour will be hard to achieve as US battery makers — still in their infancy — struggle to compete with China, which produces nearly 90 per cent of the world’s batteries for energy storage systems at a fraction of the cost.

Wood Mackenzie estimated only 30 per cent to 40 per cent of US domestic energy storage demand will be met by American-made batteries by 2030.

Yayoi Sekine, BloombergNEF’s head of energy storage, said: “The US doesn’t currently have enough battery cell manufacturing capacity to meet domestic demand, and isn’t expected to ramp up enough even with existing facilities and plans in the works.”

The industry faces fierce competition from China, which is much further along in its battery manufacturing process and has years of experience perfecting and scaling the technology. Five years may not be enough time to compete with China.

Robert Greskowiak, chief commercial officer at energy storage developer Lightshift Energy, said the cost of US-made battery components is more expensive than international products. He added 100 per cent of the battery cells and containers that Lightshift purchased in 2024 were sourced from China.

“The reality, though, is domestic [battery] manufacturing in the US today is very limited in supply,” Greskowiak said. “These supply chains just take time to set up and so that’s been in progress, but we’re not there yet.”

US battery makers have faced delays and cancellations because of tough market conditions and the lack of competitiveness with China. Kore Power and Freyr Battery cancelled battery plant projects this year in Arizona and Georgia, respectively.

Alexei Andreev, co-founder of venture capital firm Autotech Ventures, said it would require “enormous heavy lifting” for the US to start manufacturing its own battery cells because the country would have to start from “scratch”.

“There is a lot of engineering knowhow and so it’s one thing to produce a few cells here and there,” Andreev said. “It’s a completely different story to have high-yielding low-cost, very repeatable manufacturing flow.”

Attempts from Chinese battery makers to localise US production, however, have become a political flashpoint in US-China relations. Gotion, a Chinese battery company that was scheduled to build a $2.4bn factory in Michigan, has sued the local government for allegedly halting the development of the plant.

American Battery Factory, which aimed to build the country’s largest battery gigafactory in Arizona, had delayed its launch and recently announced it would partner with Chinese company KAN Battery to develop a pilot line of battery cells.

John Kem, the president of American Battery Factory, said at the time of the announcement that the US was “10 years behind the leaders of battery cell production”. He added that in order to develop a domestic supply chain, “we must work together with the best in the world”.

Some analysts and industry experts have also said $100bn may not be enough to jump-start the industry in the US.

Mujeeb Ijaz, founder and chief executive of battery manufacturer Our Next Energy, which has invested $1.6bn to build a factory in Michigan, said establishing domestic battery manufacturing is going to “take a lot more than $100bn”.

Andrew Waranch, chief executive of battery energy storage system Spearmint Energy, agreed.

“I don’t think that $100bn is enough,” he said. “The $100bn doesn’t go far if you’ve got to build all parts of the supply chain at once.”

China committed about $100bn in energy storage and electric vehicle battery investments in the past two years, compared to only $44bn that had been announced over the past two years in the US, according to Wood Mackenzie.

While tariffs may help level the pricing between domestic products and imports, many US manufacturers import raw materials. Higher prices are also leading developers to rethink their balance sheets and building plans.

Waranch said the tariffs, if implemented, will raise prices and cause the company to downsize their plans to build battery storage systems. More than 90 per cent of the batteries his company used are made outside the US.

“The tariffs, at least when it comes to batteries and renewable energy, are rather harmful,” he added.

The American Clean Power Association said the plan for US-made batteries to meet 100 per cent of domestic energy storage is feasible so long as it is supported by “stable tax and trade policy” and “streamlined” permitting.

A person familiar with industry efforts around manufacturing and deployment said the organisation’s goal is also contingent on the industry’s removal from “reciprocal” tariffs.

Political support is crucial for scaling the industry. Projects are contingent on federal tax credits in the IRA, which Trump vowed to “terminate” on the campaign trail and is currently on the chopping block as Republicans draft a budget in Congress.

Pensions and endowments turn to ‘net asset value’ loans to fund cash payouts as deal markets seize up

Large pension funds and other big institutional investors have started to borrow against their private equity portfolios to raise cash after a slowdown in dealmaking activity and public offerings has dimmed their hopes of exiting trillions of dollars in ageing deals.

Investors have begun to turn to so-called net asset value loans in recent months to boost liquidity at a time when big chunks of their portfolio are locked up in private equity, venture capital and property assets that have returned very little cash, according to people involved in the deals.

The tactic, in which borrowers pledge their fund stakes as collateral for loans, is mostly used by private equity groups to unearth cash to fund acquisitions or dividends. However it is being adopted by investors in buyout funds as a way to generate cash without fire selling assets at unfavourable prices.

Investors in private equity are short on cash because distributions paid by their funds over the past three years are about half of historical averages, causing the stockpile of unsold private equity deals to hit a record $3tn last year. There is now a $400bn-to-$500bn shortfall of cash that should have been returned to investors, according to Cambridge Associates.

At the start of the year, dealmakers were forecasting a rebound in M&A and public offerings that would cut into the stockpile. Donald Trump’s trade war, however, has frozen activity and private equity executives are now predicting IPOs could be on pause through this year.

“It’s not like suddenly flicking a switch,” said Michael Hacker, the global head of portfolio finance and partner on the secondaries team at Carlyle AlpInvest. “A lot of the current market activity has been in the works in one way or another going back to last year when a lot of the projected exit activity didn’t materialise.”

NAV loans are often considered as an alternative to selling private equity stakes on the secondary markets, another route that investors have taken to raise cash in recent months. By borrowing instead, investors can get cash without selling their stakes at a discount and realising a loss.

The loans are typically for four or five years and have loan-to-value ratios of about 20 per cent, causing buyers like insurance companies and private credit funds to deem them safe assets.

NAV loans are controversial on Wall Street because they require investors to cross-collateralise their fund assets: in essence, to secure a loan with a broad pool of assets, putting their entire fund investments at risk. Last year, an industry trade body issued guidelines surrounding the use of NAV loans to pay dividends after the Financial Times reported on the growing use of the tactic.

Niche player 17 Capital and bigger firms Carlyle and Ares Management are among the most active providers of NAV loans.

Investors first started taking out NAV loans a couple of years ago, as the use of financial engineering tools like fund securitisations became a more mainstream way to extract cash from the logjam of unsold assets.

Other investors that have taken out NAV loans are family offices and sovereign wealth funds, according to people involved in the deals. So far, the biggest loans have reached around $800mn in size, although people familiar with pending transactions said that they will soon eclipse $1bn in size.

“It’s a liquidity management tool that not everybody is using, but the largest, more sophisticated limited partners are using to help manage their balance sheet,” said one lender who has provided financing for these loans. 

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