TheChek News Flow

Some turn to bonds or private markets after major indexes’ run to records

Stock portfolios at large pension funds had a blockbuster run. Now, managers are cashing out.

Corporate pension funds are shifting money into bonds. State and local government funds are swapping stocks for alternative investments. The nation’s largest public pension, the California Public Employees’ Retirement System, is planning to move close to $25 billion out of equities and into private equity and private debt.

Like investors of all kinds, the funds are slowly adapting to a world of yield, where they can get sizable returns on risk-free assets. That is rippling throughout markets, as investors assess how much risk they want to take on. Moving out of stocks could mean surrendering some potential gains. Hold too much, for too long, and prices might fall.

For pension funds, which target specific investment returns to fund future obligations, this is a welcome change: It means they can take less risk and stay on track toward those goals. They can sell stocks, lock in price gains and move the money into bonds without sacrificing too much return. Or they can continue to push for higher returns without taking on much more risk.

While stocks have slumped recently, the S&P 500 remains just 4.4% below its record close. The index’s 10% gain through the end of March marked its best first-quarter performance since 2019. Meanwhile, a persistently strong economy has pushed interest rates to multidecade highs.

The combination is leading large retirement funds to rotate their positions. Goldman Sachs analysts estimate that pensions will unload $325 billion in stocks this year, up from $191 billion in 2023.

“You don’t want to give away all of those hard-earned gains,” said Zorast Wadia, a principal and consulting actuary at Milliman. “You don’t want to give it back if stocks fall.”

Pension funds for workers at companies and state and local governments together held about $9 trillion at the end of 2023, according to Federal Reserve data. Many have been trying for years to come up with enough money to cover promised future benefits.

Big companies have mostly switched new hires to 401(k)-style retirement options, and have built up pension savings over the past two decades. Last year, they reported having enough to cover their liabilities for the first time since the 2008-09 financial crisis, Milliman found. As a result, corporate pension managers are investing less aggressively, with stocks making up less than one-quarter of investments.

State and local government pension plans mostly remain open to new workers and have around three-quarters of the money they need to cover future pension promises. They keep around half of their investments in stocks and more than 15% in other risky assets such as private equity, according to median figures from Wilshire Trust Universe Comparison Service.

The California Public Employees’ Retirement System board voted in March to reduce its target stock allocation to 37% from 42% while ramping up investment in private equity and private debt. The fund expects those two asset classes to return 7% to 8% over the next two decades, compared with 6% to 7% for stocks. The $494 billion fund had about 72% of assets needed to cover future pension promises as of June.

The $260 billion New York State Common Retirement Fund, which serves police, firefighters and other public workers, is almost fully funded. But officials still decided earlier this month to shift money into private equity, real estate and real assets after a change in state law increased the cap on private market investments. The fund is reducing its target stock allocation to 39% from 47%.

“The model projected very slightly higher return for very slightly lower risk” on the new asset mix, said director of asset allocation Michael Lombardi.

A different kind of state investment fund, the $80 billion Alaska Permanent Fund Corp., is cutting back on equity risk. The APFC invests mineral revenue and other state money and has no benefit payment obligations.

The fund is in the process of reducing its stock portfolio from 36% of assets in fiscal 2023 to 32% in 2025, and canceled a plan to lower bonds to 18% from 20%. Higher rates mean APFC can still expect enough income from bonds to meet its investment target, returning 5 percentage points more than the consumer-price index, said Marcus Frampton APFC’s investment chief. Stocks’ high prices relative to corporate earnings leave him concerned about losses.

Companies in the S&P 500 trade at around 24 times their past 12 months of earnings, above the five-year average of 22 times, according to FactSet.

“When it’s a very expensive stock market, bad things can happen,” Frampton said.

APFC’s reduction in stocks last year—and a decision to invest less money in shares of large, fast-growing companies—resulted in some missed gains in the fiscal year ended June 30, 2023. But APFC’s move helped free up enough money for the fund to keep around $350 million in gold exchange-traded funds. As of Wednesday, gold futures have gained 31% since October.

Corporate pension plans, too, are embracing higher rates as a chance to lower risk without sacrificing as much income.

These plans often assemble bond portfolios that will pay out as promised pensions come due. Over the past two decades, they have moved more money into those bond portfolios and out of stocks.

Johnson & Johnson, the pharmaceutical and medical technology company, dropped the target stock allocation for its $34 billion pension fund to 58% in 2023 from 62% in 2022. The company planned to put the additional money into bonds.

Aerospace and defense company RTX reported that public equity investment made up 19% of assets in 2023, down from 26% in 2022.

The move out of stocks bodes well for the long-term health of pension systems, said Timothy Braude, managing director and co-head of multiasset solutions at Goldman Sachs.

“It is very easy to say you want to take risk down at moments when you have no ability to actually do so,” he said.

France led calls to revive financial integration project to help fund Europe’s rearmament and green transition

More than a dozen smaller EU states are mounting a fightback against efforts to unify Europe’s fragmented capital markets, highlighting the torturous politics around the decade-long financial reform effort.

France recently led a push — backed by Italy, Spain, the Netherlands and Poland, some of the EU’s biggest economies — to revive reforms to deepen market integration and centralise supervision.

Paris argues the overhaul of financial markets would help tap private capital for Europe’s huge investment needs in defence and the green transition, which run to hundreds of billions of euros a year.

But the steps have been staunchly opposed by a majority of the EU’s 27 member states, who are wary of ceding national control and handing more oversight powers to Brussels.

It sets the stage for a heated debate among EU leaders gathered in Brussels, who seized the matter of how to advance the so-called Capital Markets Union (CMU) from finance ministers after more than a decade of work led to underwhelming results.

“The leaders are going to argue about this, and it’s useful to get the truths of these positions out there in the open,” said a senior diplomat involved in the pre-summit negotiations. 

One country that could tilt the balance is Germany. Although Berlin has traditionally opposed further centralisation of supervision, it recently backed a revival of the CMU project, suggesting at least some part of Germany’s ruling coalition are in favour.

Finance minister Christian Lindner, a liberal, remains opposed to giving Brussels oversight powers on the grounds that it would create additional costs for its financial industry.

But Chancellor Olaf Scholz, a socialist, said at a recent EU summit that integrating capital markets should be a top priority to try and reverse Europe’s capital outflow to the US, according to two people briefed on leaders’ talks.

“This is the first time that there has been strong political will. This is a necessity to be able to finance our transition, productivity, defence and social needs,” said one EU diplomat, who backs the reforms.

Draft summit conclusions, which are still under negotiation, call for moving “without delay” on measures to “create truly integrated European capital markets”. Listed actions include giving the EU financial markets supervisor, the Paris-based Esma, direct oversight over “the most systemic relevant cross-border capital and financial market actors”.

They also call for harmonising insolvency and corporate tax laws, developing an EU-wide investment product to leverage Europeans’ private savings, and encourage securitisation by tweaking prudential regulation.

Such measures were elements of the vision for Capital Markets Union outlined almost a decade ago and remain highly contentious.

At a meeting of EU ambassadors on Wednesday, Luxembourg led a group of states raising objections that included Austria, Bulgaria, Cyprus, the Czech Republic, Ireland, Croatia, Baltic countries, Malta, Romania and Slovenia, according to five people familiar with the discussion.

These countries fear centralising supervision would create additional cost for their national financial industry, and give larger markets a competitive advantage. Some also oppose harmonising taxation law, a thorny issue in the EU which requires unanimous backing.

Luc Frieden, Luxembourg’s premier, said the EU capital market reforms needed to avoid over-regulation and over-centralisation, “which some countries endorse”. “We want a pragmatic approach,” he added as he arrived at the Brussels summit on Wednesday.

“We don’t agree with this top-down approach. We have a number of capital markets across Europe, we support bringing them together and growing them up, rather than throwing them all in together right away,” said another diplomat representing a state with reservations. “You can’t just do that in one whole swoop.”

Charles Michel, who as European Council president is responsible for chairing the summit, acknowledged that centralising supervision is likely to be the most controversial point among leaders, who need to act unanimously to endorse a way forward.

“The only way this moves forward is if we get a true sense of where people really stand,” said the senior diplomat.

Experiential art gets new support; Hong Kong sales reflect downbeat market; Government Art Collection to buy at London Gallery Weekend

Sotheby’s is set to make an auction record for the British-born Surrealist painter Leonora Carrington with “Les Distractions de Dagobert” (1945), estimated between $12mn and $18mn. The work has been in the same American collection since 1995, when it was bought for $475,500, and is re-offered, guaranteed, in New York next month. Her current record stands at $3.3mn, for “The Garden of Paracelsus” (1957), which sold in 2022.

The 1945 painting’s title references seventh-century king of the Franks Dagobert, “whose taste for sexual excess was matched by a love of luxury”, Sotheby’s says. The fantastical work combines Carrington’s knowledge of the Renaissance, notably Hieronymus Bosch, with ghostly imagery and biomorphic forms inspired by Celtic mythology and the cosmic beliefs that she encountered once she moved to Mexico during the second world war. Carrington died in Mexico City in 2011.

Julian Dawes, Sotheby’s head of Impressionist and Modern Art, describes “Dagobert” as “the best of works by an unquestionably important and wildly talented artist”. The auction house has priced it according to levels on the private market, he says, noting too the growing institutional and collector demand for female Surrealists, including Carrington, her friend Remedios Varo and their contemporary Frida Kahlo. The work was most recently on show in the 2022-23 Surrealism and Magic: Enchanted Modernity exhibition at the Peggy Guggenheim Museum, Venice, and Museum Barberini in Potsdam.

The auction house has another 20th-century female artist in the spotlight at its May sale with a collection of four paintings by the Abstract Expressionist Joan Mitchell. These span her key periods between 1954 and 1990 and have a combined estimate of $36mn-$51.5mn (guaranteed). The Mitchell works are topped by her colourful “Noon” (1969, est $15mn-$20mn), bought in 2016 for $9.8mn.

This month is the soft launch of VIV Arts, a sales platform to support artists and collectors of a more experiential bent. Founded by Carlota Dochao Naveira and Oliva Sartogo, both previously at the immersive art outfit Superblue, VIV Arts aims to raise money for artists to create in-person experiences through sales of their other works. Their first partnership is with Transmoderna, a collective rooted in electronic music, which has already crossed into the art world with work shown at institutions including the Pompidou-Metz and the Max Ernst Museum. VIV Arts is privately offering their digital work, “Mycoforest” (2024, edition of 35).

“We are betting really big on the future of art being experiences as collectors become active participants rather than passive viewers,” Dochao Naveira says. But she adds, “The whole ecosystem is costly, from the research and development phase to production.” Future projects are still under wraps, with VIV’s official launch due later this year, but the pair aims to offer work from $100 to $30,000 through vivarts.io.

April’s Hong Kong sales totals for Modern and contemporary art at Sotheby’s and Poly Auction were down considerably this year. Sotheby’s sales on April 5 made a total HK$673mn including fees ($86mn), below estimate and nearly half of the 2023 equivalent of HK$1.1bn. Poly’s main sale of Modern and contemporary art was within estimate at HK$68mn (including fees) on April 7, though its equivalent sale last year made HK$148mn.

“There are signs that the overall decline in sales in 2023 and in London’s marquee sales in March has spilled over into the sentiment in the Hong Kong market,” says Anders Petterson, founder and chief executive of research business ArtTactic. He says, though, that news this week that China’s gross domestic product growth performed better than expected in the first quarter of the year could improve the mood ahead of sales at Christie’s and Phillips in Hong Kong next month.

Top lot at Sotheby’s was Yoshitomo Nara’s “I Want to See the Bright Lights Tonight” (2017), reportedly sold by the Hong Kong property tycoon Joseph Lau, for HK$96mn with fees (est HK$80mn-HK$120mn). Poly Auction’s total was boosted by its top lot, Yayoi Kusama’s acrylic “Red Pumpkin” (1989), which sold for HK$18mn with fees, far above its HK$7.5mn-HK$8.5mn estimate. Among the younger artists making their mark was Chris Huen Sin-kan, whose “Treasure Hunting 2” painting from 2016 sold for HK$900,000 (with fees; est HK$240,000-HK$320,000). Huen currently has a sold-out show at Matt Carey-Williams in London (until May 25).

The UK’s Government Art Collection (GAC) has committed to buy work on display at this year’s fourth edition of London Gallery Weekend (May 31-June 2). Run by the Department for Digital, Culture, Media and Sport and with an annual capital budget of £330,000, the GAC plans to spend a low five-figure sum during the event, though this could be on a series of works, says its director, Eliza Gluckman.

The GAC, a soft-power player, displays its collection of nearly 15,000 works across 365 government buildings in the UK and overseas, so “we have a lot of walls to fill”, Gluckman says. London Gallery Weekend’s partnership with the Art Fund, which includes supporting travel and accommodation for curators from the UK’s regional museums and galleries, added to the event’s appeal, she says. This year, more than 130 galleries have signed up to the weekend and GAC will announce its chosen acquisition on May 31.

“Young collector groups assume that new collectors are young, but they could easily be in their fifties or sixties,” says the art adviser Josh Baer, who writes The Baer Faxt, a popular newsletter for the industry. He is now launching Collectors Circle, which for $1,200 a year (or $2,000 for a pair of subscribers) gives deeper guidance on how to navigate some of the art market’s quirks and offers the promise of an international network of similar-minded individuals. “I appreciate that my business as an adviser builds on [proprietary] knowledge and not being transparent, but as insiders we can help on how to break down some of the walls,” Baer says.

Foreign investor in Ukraine accuses officials of corruption

Anglo-German businessman makes extortion claims against figures in security services and presidential administration

One of the largest private western investors in Ukraine has claimed that corrupt officials in the country’s security services and President Volodymyr Zelenskyy’s administration are trying to extort tens of millions of euros from him. 

Arnulf Damerau, an Anglo-German businessman and a former adviser to Glencore and Trafigura, told the Financial Times he was being blackmailed by a clique of senior Ukrainian officials.

Western governments have become increasingly concerned over government corruption in Ukraine but have largely held back from making their criticism public as they rally support for Kyiv to shore up its faltering defence against Russian aggression. The war has given space for many of the corrupt networks linked to former president Viktor Yanukovych to reassemble, European security officials say.

Damerau has since August been the co-owner of Cosmolot, a large online gaming and gambling website and the country’s 10th-largest taxpayer.

After being raided in October by the Economic Security Bureau of Ukraine, which accuses it of violating gambling laws and evading €560mn in tax, a series of legal cases and agency-ordered measures have frozen the company’s accounts.

Damerau says the claims against the company are fabricated. Cosmolot only began operating in 2021, after the Ukrainian government changed gambling laws, he noted, and last year had total revenues of €208mn, up from €4.8mn in 2022 and €250,000 in 2021, which are publicly disclosed. 

The company, which offers themed small-stakes games online, paid €60mn in taxes last year, official tax filings show. The state tax service signed off on its accounts in August, Damerau said. 

According to Damerau, a Ukrainian individual met him in Vienna in December and said the legal challenges to Cosmolot would be dropped if Damerau was willing to transfer control of half of the company to an offshore trust. 

Damerau said he had shared photographs and details of the meeting, as well as the names of the individuals involved, with security agencies in Europe and Washington. 

“These are statements I don’t want to make. I don’t want to say these things about what is happening to me as a businessman trying to invest in Ukraine because the people responsible are in a minority, and they are betraying a young generation of Ukrainians who are giving their blood to try and give their country a European future,” Damerau said.

“This is a country which aspires to be part of Nato and the European Union, but what’s happening there right now — by a small minority — gives me déjà vu of the darkest Yanukovych times,” he added. 

Damerau said he had lost €25mn investing in Ukraine under Yanukovych, having financed a wind farm in Crimea that at the time was the largest onshore project of its kind in Europe, and that corrupt officials had made an almost identical approach to him then as they have with Cosmolot.

He said the wind project was hit by legal obstructions before he was approached by a man claiming to represent the Yanukovych administration, who demanded half the project’s shares be transferred into an opaque offshore entity. Damereau was involved in a legal case to get it back when Russia seized Crimea, making his claims impossible to enforce. 

He said he would raise his experiences at the Ukraine Recovery Summit in Berlin in June, which he has been invited to attend as a major foreign direct investor. 

A spokesperson for Zelenskyy declined to comment. 

Special administration might limit fallout for other utilities and provide a chance to tackle unwieldy structure

A swift demise is better than a slow one. That would certainly be true for Thames Water. 

A period of temporary public stewardship is generally framed as a worst-case scenario in discussions about the future of Britain’s biggest privatised water utility. But putting Thames Water into a special administration regime — and quickly — would have its benefits.

To be clear, a scenario where Thames is run temporarily by a special administrator on behalf of the UK government remains, at present, hypothetical. 

Its parent company, Kemble, has defaulted on its debt. Thames’s plan remains to pursue “all options” to secure new equity investment so it can keep operating its assets and deliver much-needed upgrades. It is also reportedly hoping to raise further debt.

Thames’s ability to raise much-needed new equity, though, will depend on a draft determination in June from England’s water regulator. This will set out the returns investors can hope to make during the five years from April 2025.

The risk is that if new equity is not forthcoming — and it is far from clear that it will be — Thames will have to turn its attention to slashing costs.

At the end of February the utility had £2.4bn of cash and committed debt facilities. On current spending, that would only take it up to about May or June next year. Already-poor service levels would deteriorate further. In the meantime, there is a risk of Thames’s toxicity starting to pollute other water companies. 

True, a SAR would not be popular with bondholders, assuming they were forced to take a haircut. But some investors in other water companies would welcome the move — and soon — to limit fallout for the wider sector. Contagion risks include greater regulatory scrutiny for other firms, debt becoming more expensive and short sellers zoning in on the shares of publicly traded water groups. 

Special administration would also mean a chance to hack back Thames’s unwieldy structure. Dieter Helm of Oxford university has long argued it is too large for any one management team and should be broken up. Thames could pursue asset sales now. However, the example of the German conglomerate Bayer shows that creditors can be an obstacle to carve-ups.

The comparison often made with Bulb, the energy retailer that required taxpayer backing when forced into a SAR in 2021, is a false one. Thames’s operating unit remains an asset-rich company with a steady income stream. As with Bulb, any taxpayer funding required during a SAR process could be largely recovered.

It will take time for Thames’s fate to become clear. But a period of national stewardship no longer looks the worst outcome.

Co-working group is seeking hundreds of millions of dollars to exit bankruptcy without a sale

Adam Neumann has made a fresh push to regain control of WeWork even as the co-working pioneer races to raise hundreds of millions of dollars to emerge from bankruptcy and avoid a sale, according to two people familiar with the matter.

The company has attempted to restructure in court since filing for bankruptcy in November, primarily by renegotiating hundreds of leases. However, it was running short of cash and needed as much as $400mn in fresh funding to have a chance of emerging viably, the people said.

The figure required remains in flux but if WeWork was unable to raise new money, then it would have to pivot to selling itself, according to one of the people.

Neumann stepped down as WeWork’s chief executive officer in 2019 after a failed attempt to take the company he co-founded public. Flow, his new property company, has already made a conditional offer of about $600mn for WeWork.

In a statement to the Financial Times on Wednesday, Alex Spiro, an attorney for Flow, said the company and its financial partners were prepared to beat any other offer that WeWork has received by 10 per cent. Once Flow signs a confidentiality agreement, it could perform due diligence on the deal within two weeks, he added.

WeWork said earlier in April that it expected to emerge from Chapter 11 by the end of May, and another person familiar with the talks said switching to an auction would be a last resort.

“We are committed to emerging from Chapter 11 next month as a strong and sustainable company, and that is where our undivided attention lies,” a WeWork spokesperson said on Wednesday. “Any new financial investment would serve to further strengthen the company as we exit from bankruptcy.”

WeWork was in discussions about raising the funds with existing lenders including SoftBank and Yardi Systems, a real estate tech provider that has partnered with it on various projects, the person added. Yardi, which did not respond to requests for comment, has only been named in court filings under a pseudonym of “Cupar Grimmond”.

While WeWork has attracted unsolicited interest from potential buyers, none of them have yet signed a confidentiality agreement, which would be the first step towards any official bid.

Rithm Capital and the real estate business of Leonard Blavatnik’s Access Industries have had preliminary discussions with Neumann about backing a bid for the firm, the people said. A person at Access said the real estate division was not formally involved at this point, while Rithm declined to comment. A spokesperson for Flow, Neumann’s company, said: “The identities of our world-class financial institution backers are all known to WeWork.”

Neumann had previously proposed a $200mn financing, but his chequered past running WeWork has left some of the company’s biggest lenders and advisers sceptical of a return.

In Spiro’s statement, he also accused WeWork of “seeking to rush an insider deal” with a company WeWork has worked closely with.

WeWork has cut its long-term lease obligations by more than $8bn by cancelling about 150 leases and renegotiating a similar number, leaving only about 150 untouched. WeWork has done this, in part, by withholding post-petition rent, a relatively novel tactic in bankruptcy, according to bankruptcy experts. It still has about another 50 leases that have not been settled.

“It’s aggressive, but it was really do-or-die for WeWork,” Daniel Gielchinsky, an attorney at DGIM who specialises in bankruptcy but who is not involved in WeWork’s proceedings, said of the strategy of withholding rent. “If you get a critical mass of landlords who want to make it work, that puts pressure on the other landlords to also negotiate.”

WeWork expects to have more than 20mn square feet of office space globally after emerging from bankruptcy, compared with the 43.9mn sq ft it operated as of December 2022, according to court papers.

While the case largely hinges on its ability to bring down its rent payments, WeWork also needs to ensure it has enough cash to emerge from the costly bankruptcy process.

Renegotiating leases has also proved thorny. In the deals WeWork has struck with landlords, it has often paid out rent it had previously withheld, creating a cash shortfall.

The search for cash has complicated matters for WeWork’s creditors, who hold about $4bn of pre-petition debt. According to the agreement they struck with the company at the time of its bankruptcy filing, creditors are set to swap their loans and bonds into equity in a reorganised WeWork. However, the providers of the funds it now needs may take the bulk of the value in the company that emerges from bankruptcy, forcing existing creditors to be the source of the additional money if they want to preserve their stakes.

At the same time, the cash needs have opened up a window for Neumann and any other potential bidders.

“No one wants to put in a new money [loan],” said one lawyer involved in the case.