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A new way to measure energy transition risks

As proxy season kicks off, activists and some asset managers are calling on companies to disclose carbon emissions in ever greater detail, and to show progress on trimming them.

But year-on-year variations in headline emissions can be a poor measure of whether a company is making the right investments to clean up its operations in the long term. Emissions might shrink because a company is improving the energy efficiency of fossil fuel infrastructure while extending its lifespan.

For instance, a steelworks typically relines a blast furnace every 20 years — a major capital expenditure. Re-lining the furnaces that use coking coal to treat iron ore can bring down emissions, but can also lock in polluting infrastructure at a time when climate activists are urging steelmakers to switch to alternative processes that don’t use coal at all.

Moreover, how exposed a company is to the energy transition — including rising energy costs or uncertain supply — often has little to do with its emissions. Likewise, in banking, while a big footprint of financed emissions is sure to draw the ire of climate activists, it may be only a fuzzy measure of climate-linked risk.

The Center for Active Stewardship, a non-profit research organisation backed by Bobby Jain’s Jain Family Institute, is today launching a tool called Splice, which breaks out the causes of changing emission levels, with sometimes surprising results. And Unwritten, a start-up making software to show how climate-related risks could affect clients’ cash flow, today announced that it raised $3.5mn in seed funding. Both tools aim to look past headline carbon emissions to give a clearer picture of threats and opportunities posed by the energy transition.

Looking under the bonnet of carbon emissions

“Emissions are a vanity metric. They tell you little about what a company is actually doing to invest in decarbonisation,” Nolan Lindquist, director of the Center for Active Stewardship, told me.

Lindquist, who was previously a research analyst in equities at asset management giant Fidelity, argued that green-minded shareholders need tools to assign more value to durable investments, and strip out transient factors beyond their control.

For example, emissions can rise due to temporary changes in the grid’s energy mix. Recall the summer of 2022, when drought-stricken France saw a drop in hydropower generation and nuclear output, which led to greater reliance on gas- and coal-fired power.

Mark Campanale, founder of the Carbon Tracker Initiative, acknowledged that carbon tracking alone was “not helpful” to pension trustees, for example, evaluating green credentials of companies in their portfolio.

“What the investors really need to know is capital expenditure in new processes to remove those systems. Things like improved efficiency in the burning of a fuel may sound like good news, but often, all they do is delay,” Campanale told me.

CAS’s new tool, Splice, looks under the bonnet of major companies to identify how, exactly, they are achieving emissions reductions.

Take four big-box retailers in the US with similar business models. At a glance, CAS found, it appears that Walmart and Target have done more to cut emissions than competitors Costco and Kroger.

But, by breaking the emissions into its drivers, CAS shows that in 2022, Costco drove the largest energy efficiency gains, offsetting more sales growth than its competitors.

Conversely, the two companies that saw big headline emissions reductions, Target and Walmart, both relied heavily on trading activities — buying power purchase agreements and renewable energy credits — to do so. PPAs are long-term energy supply contracts, and RECs are certificates bought in lieu of direct renewable energy generation, typically representing savings of 1 tonne of C02-equivalent elsewhere. Lindquist said CAS treated both of these as “often but not always a lower-quality source of emissions reduction”.

PPAs and RECs can help companies reduce on-paper emissions. But RECs have come under criticism as failing to drive new clean energy supply. And, while some technology companies have used PPAs to secure cleaner energy for their operations — such as Amazon’s recent acquisition of an existing nuclear-powered data centre — adding new demand without adding new supply can increase the grid’s overall emissions.

A complex challenge

In 2022, the former heads of a climate data initiative at US tech company Palantir founded a start-up to evaluate companies’ exposure to the energy transition — both positive and negative.

With seed funding from London-based Connect Ventures and Berlin-based Planet A Ventures, Unwritten says it can help companies price climate risk and opportunity. It uses modelling based on the scenarios of the Network for Greening the Financial System, a group of central banks and financial supervisors, to translate long-term changes into company-level “cash flow” impacts.

In a case study, Unwritten analysed BHP, an Australian mining group with significant coal and copper holdings. Its exposure to materials critical for the energy transition, such as copper, could outweigh the risks of fossil fuel holdings, Unwritten suggested, making BHP “positively exposed to climate change in the coming decade”. As a result, Unwritten found, “An orderly and rapid transition could offer more than a 10% uplift in BHP’s EBITDA and free cash flows”.

Obstacles to such analysis abound. Predicting how climate change will feed through to companies’ balance sheets is enormously complex, and there are risks in suggesting false precision.

At Palantir, Unwritten co-founder Amos Wittenberg told me, “we were talking almost exclusively about carbon emissions.” While it remains an important metric, he said, there has been “an evolution in maturity, a sense that we’ve pushed this carbon emissions thing really pretty far, and how much more can we get out of it.”

Wittenberg argued that carbon emissions are a poor proxy for measuring the financial materiality of climate change. Whether or not Unwritten proves that it can render transition risks as company-level cash flows, we are likely to see more tools attempting to translate emissions data into decision-relevant information for executives.

Of course, the greenhouse gas emissions driving record-busting global temperatures will necessarily remain at the centre of this conversation. But as investors decide how to vote on shareholder proposals this spring, critics such as Lindquist argue that shifting the focus to the underlying drivers of emissions could help climate activists “keep emissions on the agenda, at a time when the climate-first framing is under a lot of pressure”.

“Headline emissions is really important, it’s great that companies are disclosing it, but it’s an output, not an input,” Lindquist said. “People talk about it as though management teams have a big emissions dial in their C-suite.”

Stocks are still trading near record levels, but some investors say further gains may be more difficult

Expectations that the Federal Reserve would aggressively cut interest rates this year have helped propel stocks to repeated records. Now that the case for rate cuts is weakening, scrutiny of the bull market is intensifying.

The S&P 500 has added 7.4% this year and is off a mere 2.5% from its all-time high, set March 28. Stocks have marched higher since 10-year government-bond yields peaked at 5% in late October. That also fueled an “everything rally,” driving up prices for other asset classes from gold to bonds.

But some investors are beginning to worry that future gains in the stock market may be more difficult to come by. Wednesday’s hotter-than-expected inflation report raised questions about whether the Fed can deliver cuts this year without signs of an economic slowdown. At the beginning of the year, Wall Street penciled in six, or even seven, interest-rate cuts through 2024, but now some investors are beginning to doubt that the Fed would lower rates at all.

That could spell trouble for stocks. The yield on the benchmark 10-year Treasury note ended the week at 4.499% after posting on Wednesday its biggest one-day rise since 2022.

Higher yields make stocks less attractive than holding Treasurys to maturity, and they increase borrowing costs across the economy for everything from corporate debt to mortgages to car loans.

“It changes the math,” said Quincy Krosby, chief global strategist for LPL Financial. “You have to recalibrate, you have to adjust, and the rate regime must be in concert with where the valuations are.”

Here are some areas of the stock market that are vulnerable to higher rates:

The small-cap focused S&P 600 index tumbled 3% last week. That included a 2.9% drop on Wednesday after the inflation report, the largest one-day percentage decline since February. Small-caps, which tend to derive most of their revenue from inside the U.S., are especially sensitive to the trajectory of the economy.

One big reason: Small stocks generally devote a much larger share of operating profit to covering interest on debt than larger ones do. The ratio of operating income to interest expense within the S&P 600 was 2.3 times as of March, according to Dow Jones Market Data. That compares with 7.6 times for S&P 500 companies.

They generally issue more floating-rate debt than bigger companies, so their loan payments fluctuate with benchmark interest rates. When rates go up, that means higher interest expenses dent their bottom lines and leave them more at risk of defaults.

About 44% of debt among companies within the Russell 2000, another small-cap index, was floating-rate at the end of last year, compared with 10% for the S&P 500, according to data from Lazard Asset Management.

Adding to the crunch: About 40% of the companies in the Russell 2000 didn’t turn a profit over the past year, compared with 10% in the S&P 500, according to J.P. Morgan Asset Management.

Tech stocks have led the market’s advance since early 2023, powered by a surge in investor enthusiasm for artificial-intelligence technology. The largest companies have strong balance sheets and big cash piles that should insulate them against the effects of higher rates. But some investors worry that their popularity could begin to work against them if sentiment darkens.

The S&P 500’s information-technology sector accounts for nearly 30% of the market-value weighted index, more than twice the size of any of the other 10 sectors. If investors decide to take profits, tech stocks are a natural place to look.

“Looking at the actively managed mutual funds that are out there, cap-weighted index funds, it’s all the same stuff. Is Microsoft or Nvidia the largest holding; is it Amazon?” said Emerson Ham III, senior partner at Sound View Wealth Advisors. “If you did get a bad cycle in the market, large tech stocks could have a problem.”

When the Fed started its interest-rate-increase campaign in 2022, the tech sector closed the year down 30% and the consumer-discretionary sector, home to the likes of Amazon.com and Tesla, declined nearly 40%.

Cyclical stocks that are sensitive to the performance of the economy, such as utilities, consumer staples and industrials, lose their appeal when interest rates are higher, in particular because they are often seen as dividend plays.

The S&P 500’s utility sector boasts a dividend yield of 3.4%, consumer staples pays 2.4% and industrials has a 1.4% yield. Those all seem measly when compared with the 4.5% risk-free rate on government bonds. Besides, the stocks aren’t offering enough extra yield to compensate for the risk of a slowdown in business activity from higher interest rates.

Industrial conglomerate 3M offers a dividend yield of 6.6%, and its shares are down 0.1% this year; consumer-staples company Walgreens Boots Alliance has a yield of 5.6%, and its shares are down about 30%; and American Electric Power pays 4.3%, and its shares are up 1.1%. All three are underperforming the S&P 500.

Around 40 stocks in the S&P 500 have a dividend yield above that of the 10-year Treasury note, according to FactSet. Two years ago when the Fed had just started its interest-rate campaign, there were 94 stocks that offered a higher yield.

Higher interest rates propel depositors to move money to Treasurys and money-market funds for higher returns, contributing to lower deposits at banks. Meanwhile, banks have had to shell out more interest to yield-hungry depositors, particularly hurting the bottom line at small and midsize banks. Wells Fargo said Friday it expects net interest income, or profit from lending, to decline by 7% to 9% in 2024.

Delinquency rates could also creep higher if interest rates remain high, which could increase loan losses for banks.

Higher interest rates have also pushed up mortgage rates back toward 7%, a level they haven’t seen since December. That has kept many would-be home buyers on the sidelines, leading to sharp declines in mortgage activity at the big banks, a source of revenue.

The S&P 500’s real-estate sector is down 7.2% this year, the worst performer of the 11 segments and the only group in the red.

The rate whipsaw has hit smaller banks harder than big ones. The KBW Nasdaq Bank Index, which includes heavyweights such as JPMorgan, has advanced 2.1% this year, while an index of regional banking stocks is down 13%.

Shares of oil-and-gas companies are making another run after being among the top performers in 2022. Rising oil prices boost revenue for oil-and-gas providers, while big companies in the sector trade at a discount to the overall market. Exxon and Chevron trade at about 13 and 12 times their earnings over the past 12 months, respectively; the S&P 500 trades at roughly 20 times.

The S&P 500 energy sector is up almost 10% over the past month, beating every other corner of the broad index by at least 3 percentage points.

Private investments in public equities, or PIPEs, are all the rage in biotech, but some investors resent the sharing of nonpublic information

There’s a hot new trend for healthcare investors, but it’s generating quite a bit of controversy.

Publicly traded biotech companies are increasingly turning to PIPEs, or private investments in public equities, to help them get through a volatile period in equity markets. In the first quarter, U.S. biotechs raised a record $5.7 billion using the approach, according to Jefferies data.

PIPEs have been around for a while. They were once seen as a funding option used mainly by distressed companies frozen out of the public capital markets, but now they are being used by highly respected investors and companies.

The PIPE boom has proved symbiotic for cash-starved companies as well as for a few dozen specialist biotech investors such as Adage Capital, RA Capital, Logos Capital and Janus Henderson. For biotech companies, it is a cost-effective way to raise money and attract experienced investors while avoiding the choppier public markets. For fund managers, it is an opportunity to invest at an attractive price and band together to salvage companies they often already are invested in.

The problem, though, is that the PIPE boom is leaving out many investors, some of whom complain that it is essentially a form of legal insider trading. That is because many PIPEs give a select group access to nonpublic information, such as data from a cancer study that is about to be published. Once the deal is locked up, PIPEs are announced to the public, often alongside the information, leading to major share gains.

“These deals make generalist investors feel like the deck is stacked against them,” said Daphne Zohar, founder and chief executive officer at privately held biopharmaceutical company Seaport Therapeutics. “As a CEO, I’d prefer not to use this mechanism because I want to do what’s best for all of my shareholders.”

The dirty secret is that unequal access to information has always been an aspect of capital markets. But the sheer volume of PIPEs is upsetting generalist investors, who are being left out. As it transforms from a niche feature of the biotech market to a more prominent financing option, it could lead to regulatory backfire.

“You have a situation in which the access to these deals is extremely limited; it seems like there are a dozen to two dozen parties that are kind of controlling the vast majority of the deal flow,” says Jared Holz, a healthcare equity strategist at Mizuho. “We’ve never in the history of the sector seen PIPEs being done at such a velocity.”

Anger about the way information and shares are being parceled out is leading some investors to voice their disapproval. In some cases, it is also leading to legal action. Earlier this month, Bloomberg reported that an investor sued senior leaders of Taysha Gene Therapies TSHA -8.70%decrease; red down pointing triangle saying its board and top executives manipulated the timing of positive disclosures and a PIPE to maximize profits for themselves and a group of investors tied to them.

According to the shareholder complaint, Taysha deliberately sat on positive early-study results for its gene therapy. Then, on Aug. 14, Taysha publicly announced both the promising data and the $150 million PIPE transaction, the lawsuit says, per Bloomberg. Participants in the stock placement “realized near immediate gains of $205 million,” the suit says. Taysha declined to comment.

Another concern is that, while there are strict rules around trading the information shared during PIPEs, these deals could be leading to what is known as shadow insider trading—a pervasive problem in biotech whereby an investor learns information about Company A and then uses it to make an investment in Company B. One such case, which wasn’t tied to a PIPE, is now at the center of a high-profile Securities and Exchange Commission lawsuit, which alleges that Medivation executive Matthew Panuwat purchased options tied to the shares of Incyte INCY -1.95%decrease; red down pointing triangle, a rival drugmaker, because he knew they would pay off when the market heard Pfizer was buying his company in 2016.

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Seo Salimi, a partner at law firm Paul Hastings LLP, which advises biotechs on financing deals, said that when a company puts together such deals, it isn’t always sure how the market will react to news.

“There are plenty of instances where companies, especially in oncology, have put out data which hits the primary and secondary endpoints, but the stock price goes down,” he noted.

Investors in PIPEs say that picking on the funding method is missing the broader point: Without them, many companies would struggle to raise cash in the current environment of high interest rates.

“You have companies that spend years running a clinical trial, taking big risks to get these drugs to patients, then watch it all come crashing down because of the volatility in public markets,” says Oleg Nodelman, founder and portfolio manager at EcoR1 Capital, a biotech investor. “This approach gives biotech companies an opportunity to meet their funding needs in difficult times.”

PIPEs are likely to carry on for a while, but their attractiveness might decline due to market forces. In February, large PIPEs led to over 40% average stock-price increases immediately after the deals were announced, according to Jefferies. But as PIPE volumes surged in March, the average stock increase declined to over 16% following the announcements. “Perhaps companies are draining this well too rapidly,” the analysts noted.

PIPE deals aren’t going away anytime soon, and neither is the controversy that surrounds them.

Lawsuits contend that software company enables landlords to set prices illegally

Legal pressure is mounting on a property-management software company facing allegations that it illegally fixes apartment rent prices at buildings across the U.S.

State and district attorneys general in Arizona and Washington, D.C., are suing RealPage, and more than a dozen of its landlord customers. North Carolina’s attorney general is also investigating whether the company’s technology breaks antitrust laws.

The Justice Department in November said a civil lawsuit in Tennessee alleging that RealPage illegally fixes rents should go forward. Justice officials have been considering their own civil enforcement action and opened a criminal investigation into the company, according to people familiar with the matter.

The department is investigating whether RealPage is facilitating price-fixing, these people said.

RealPage’s algorithmic pricing system analyzes huge troves of information about the apartment rental market. It then recommends to landlords how much to increase rent for each lease renewal, or what to ask for newly vacated apartments.

At issue is whether the use of this pricing system amounts to an illegal rent-setting cartel among landlords, artificially boosting the rents paid by apartment tenants over many years.

RealPage denies any wrongdoing.

The legal heat on RealPage and apartment building owners is part of a government effort to police business practices it deems anticompetitive and that result in higher prices for consumers.

The Justice Department and Federal Trade Commission have brought antitrust charges against tech companies such as Amazon and Google, while pursuing price-fixing cases in more obscure corners of the American economy, such as poultry processing and vehicle exporting.

But President Biden has made rental building owners a particular focus. “We’re cracking down on big landlords who break antitrust laws by price-fixing and driving up rents,” he said last month during his State of the Union address.

In the U.S. Senate, meanwhile, Sen. Ron Wyden (D., Ore.) introduced the Preventing the Algorithmic Facilitation of Rental Housing Cartels Act in January.

Any rulings against RealPage could have legal ramifications for other business sectors, such as online retail, where companies also use algorithms to make pricing decisions.

Wider business implications

“The amount that this could impact consumers, you’re looking at billions of dollars potentially,” said Maurice Stucke, a former federal antitrust prosecutor and a law professor at the University of Tennessee, Knoxville.

Arizona Attorney General Kris Mayes alleges that, in Phoenix and Tucson, RealPage pooled nonpublic pricing data from competing building owners, then fed the data into an algorithm that told landlords to push rents higher than they might have otherwise. RealPage then discouraged landlords from deviating from the algorithm’s suggested rents, according to the attorney general’s filing.

“There is no competitive rental market in Arizona anymore, ” Mayes said in an interview. “Because RealPage sets the price.”

In a statement, a RealPage spokeswoman said its pricing systems were designed to be compliant with federal laws.

Any nonpublic rent data, RealPage said, isn’t tied to any particular firm and plays a secondary role in determining rents. The company said its algorithms sometimes recommend lowering rents.

“A severe shortage of supply in the rental market has led to rising housing costs,” the spokeswoman said, “not the use of revenue management software.”

Texas-based RealPage was founded in 1998. It acquired the YieldStar pricing platform from publicly traded landlord Camden Property Trust in 2002. Private-equity firm Thoma Bravo purchased RealPage in 2021 for nearly $10 billion.

RealPage’s legal troubles began with more than two dozen class-action lawsuits brought by renters from Seattle to New Jersey. Other tenants have since sued a competing software firm, Yardi Systems, making similar allegations, which Yardi also denies. The lawsuits seek monetary damages for renters.

Federal charges could prove disastrous not only for RealPage but also for the many landlords and property managers who use its technology. That includes some of the largest real-estate companies on Wall Street.

Publicly traded apartment owners, such as Equity Residential and UDR, are among the companies named in the complaint brought by the Washington, D.C., attorney general. Equity, UDR and other landlords have denied participating in a rent-setting cartel.

It is unclear which landlords the Justice Department might be targeting in its investigation. RealPage said its software is used to price about 4.5 million rental apartments nationwide.

Landlords pulling the plug?

RealPage’s assurances that its technology complies with federal laws might not ease the fears of property owners open to litigation. Some apartment developers are now weighing the new risks of using the technology at recently constructed buildings, said Parker Miller, an antitrust attorney representing corporate clients at the Alston & Bird law firm.

“We are certainly advising clients to be prepared for a world without RealPage-style revenue management,” he said.

In a class-action lawsuit brought by tenants in Tennessee, three real-estate companies recently made preliminary settlement agreements, though the terms aren’t yet public. Another large property firm, publicly traded AvalonBay Communities, was dropped from the lawsuit because its contract with RealPage had prohibited the use of nonpublic pricing data.

In Colorado, a state bill would ban landlords from using certain algorithmic pricing systems to set rents. Drew Hamrick, general counsel for the Apartment Association of Metro Denver, a landlord group, says he could see a compromise in which software companies would make the same information they use to set rents available to prospective tenants.

“You’ve got a situation where the housing provider has more sophisticated information about real-time pricing than does the consumer,” Hamrick said. “Disproportionate information is not good for a free market.”

In 32 years since privatisation £78bn has been paid out of utilities

Water companies in England and Wales paid £2.5bn in dividends and added £8.2bn to their net debt in the two financial years since 2021, according to research by the Financial Times.

The updated figures mean that the 16 water monopolies have paid out a total of £78bn in dividends in the 32 years between privatisation in 1991 to March 2023, according to the research, which is based on regulatory data and then adjusted for inflation.

The £78bn payout is nearly half the £190bn the companies spent in the same three decades on infrastructure. The utilities meanwhile chalked up more than £64bn net in debt over the same period, despite being sold at privatisation with no borrowings.

The research comes amid fears that the financial crisis at the UK’s largest water utility, Thames Water, may spill over to other companies. Its parent company defaulted on debt earlier this month after its investors baulked at having to plough more money into the utility.

Other debt-laden water companies are wrestling with higher financing costs on borrowings, as well as historically steep construction, energy and labour prices. Meanwhile, a political and public outcry has erupted over service quality and pollution.

“Thames Water is a canary in a gold mine,” said one water company investor. “You’ve got the biggest water company teetering on the brink and we are all watching. It’s all the investors are talking about.”

South East Water, SES Water and Southern Water are all under close watch by regulator Ofwat over their financial stability. Southern Water was rescued from the brink of bankruptcy in an Ofwat-brokered deal with the Australian infrastructure manager Macquarie in 2021 but the utility was forced to suspend external dividends until at least 2025 following a credit rating downgrade last year.

Investor jitters come as Ofwat is pushing them to inject more cash into the utilities. It is not clear whether investors — which include sovereign wealth funds, private equity firms and pension funds — will play ball. Few equity injections have been made since privatisation.

Thames Water, for example, had received no new equity since privatisation until it received £500mn in the form of a loan bearing 8 per cent interest from parent company Kemble.

“It’s just not the model they’re used to,” said Adam Leaver, professor of accounting at Sheffield University. “They invested in a company they thought would use borrowed money. They weren’t expecting to inject cash of their own. Now the companies have too much debt, they haven’t invested enough in infrastructure and some of the more recent shareholders are screwed.”

Ofwat wants to lower utilities’ debt. It is pushing them to reduce gearing — a measure of debt to assets — from a sector average of around 68 per cent to 55 per cent by April 2025. 

Peter Hope, head of regulatory finance at Oxera Consulting, said water companies will need to change how they run their finances in the next few years, given the step change in investment that is expected. “In broad terms, the industry will have to go from a situation of not having retained any earnings since privatisation, to having to retain for the next 25 years almost all of the earnings.” 

In addition they will have to inject £5bn equity by 2030, and £8bn in the five-year period following, according to his calculations based on the 55 per cent gearing ratio assumed in Ofwat’s modelling. “Even this does not take into account the need for future increases to replace aged assets and deal with resilience and climate change,” he added.

Northumbrian Water, Yorkshire Water, Thames Water and Southern Water declined to comment. Dŵr Cymru, South East Water, SES Water, United Utilities, Affinity Water, Anglian Water, Bristol Water, Portsmouth Water, Severn Trent, South Staffordshire, Sutton & East Surrey Water and Wessex Water did not reply to requests for comment.

Water UK, which represents the industry, said investors have pledged to inject £6.5bn in new equity as well as raising debt as part of their £96bn investment plan by 2030. Investors’ willingness to finance the plan relies on a decent regulatory settlement, it added.

Ultimately, costs are paid for by customers through bills and companies have asked for these to be increased by as much as 70 per cent by 2030.

An additional issue for investors is that rules introduced by Ofwat in March last year restrain dividend payouts if they put companies’ financial resilience at risk or if they underperform on social or environmental metrics.

The restrictions to dividends are an obstacle to investors, whose primary duty is to satisfy their shareholders, some of which are pension funds with thousands of retirees depending on the income.

The water companies tend to have corporate structures with multiple layers, many of which exist to raise finance. Ofwat only regulates the operating company and counts all payments out of that as dividends, even though investors argue that these are often used to service debt at the other entities rather than to directly enrich shareholders.

Leaver said: “In the absence of dividends, which are often used to service the debt at the holding companies, the financial companies will go bust pretty quickly.”

The FT’s research is based on data provided by Ofwat, inflated to 2023 prices using the financial year average CPIH.

The regulator does not adjust dividend figures for the 32-year period for inflation, giving it a nominal cumulative total for the period of £52bn.

The prospect that Thames Water may face temporary renationalisation has put the utilities in the public and political spotlight.

All 16 companies have been criticised for service failures, including tipping unknown quantities of sewage into waterways, high leakage rates or water outages. The Environment Agency is conducting its largest ever criminal investigation into potential widespread non-compliance by water and sewerage companies at more than 2,200 sewage treatment works, while Ofwat is also running its own investigation into the issue.

“The government needs someone to come in and be prepared to put some money in,” said one water company investor. “But it’s not an attractive environment at the moment . . . there’s every risk that you’ll lose your shirt.”

Transition, as in Rubrik’s case, complicates the financial picture and could weigh on valuations

Lossmaking young tech start-ups are advised to approach IPO roadshows with an eye-catching tale of future growth and some flattering numbers to back it up. In 2024, that is not happening. The tech companies attempting to rekindle the US IPO market are not particularly young. The stories they have to tell about growth are complicated.  

Cybersecurity company Rubrik, based in Palo Alto and backed by Microsoft, is hoping to list shares while in the midst of a business model transition. Founded in 2013, it reported a loss of $354mn on $628mn of revenue in its last fiscal year. 

Revenue growth was less than 5 per cent. But the company waves aside such uninspiring figures by explaining that it is in the process of moving from short-term contracts to longer, cloud-based security subscriptions for larger clients. It points investors towards subscription annual recurring revenue. This increased by 47 per cent over the same period. 

Rubrik boasts an advisory board chaired by Chris Krebs, the former director of the US Cybersecurity and Infrastructure Security Agency who was fired by president Donald Trump for contradicting claims about election fraud.

The company’s gross margins exceed 77 per cent and customer retention rates are high. But transition complicates the financial picture. That could weigh on the valuation.

PitchBook notes that cyber security valuation multiples topped 9 times sales at the end of last year. On that basis Rubrik might expect a market cap close to $6bn. But Reddit’s recent IPO suggests it might be wise to consider pricing close to, or below, its last $4bn valuation.

Reddit’s IPO also came in the midst of a transformation. Its revenue growth dropped from 37 per cent in 2022 to 21 per cent in 2023. The company is attempting to move away from its reliance on digital advertising and is selling data licences to companies training artificial intelligence models, such as Google.

The IPO was hailed as a success and a sign of confidence in listings. But Reddit met its fundraising goal by opting to join markets with a market value of $5.4bn — about half its last private valuation. It was rewarded with a gratifying price jump on the first day of trading. 

Down round IPOs may put off big listing candidates such as Databricks, Stripe and Plaid. The IPO pipeline for 2024 is likely to be filled by smaller names with more pressing funding needs.