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In an era of austerity on Wall Street, apparel businesses are more likely to be valued on their profits rather than sales, which usually means lower payouts for founders and investors. That is, if they can find a buyer in the first place.

KEY INSIGHTS

When Milan-based private equity firm Styles Capital announced it acquired the sneaker brand Autry earlier this month, it seemed to signal a reawakening of fashion’s deal market.

Styles Capital paid about €300 million ($327 million) for 50.2 percent of Autry, valuing the company at an impressive six times its sales last year. It wasn’t quite the sort of valuation a hot direct-to-consumer brand might have commanded at the height of the boom – Allbirds’ market capitalisation of $4 billion following its 2021 IPO was roughly 15 times its annual revenue at the time. But it was a surprising splash of good news amid a drought in fashion dealmaking.

Today, there are a number of brands on the auction block, but few interested buyers. Last year, there were 118 acquisitions globally in the category, the lowest count in at least a decade, according to Dealogic. Ganni, A.L.C., Proenza Schouler and Isabel Marant are just some of the brands that have courted buyers or investors in recent years without securing a deal. It’s not just contemporary and luxury labels facing an uphill (though not impossible) climb to seal the deal; the activewear brand Alo Yoga and t-shirt start-up True Classic are among the direct-to-consumer brands currently in the market.

Unfortunately for them, the Autry deal and its revenue-based valuation was the exception that proves the rule, investment bankers and investors with expertise in the fashion space said. When offers are made, they are more likely to follow the more conservative measure of multiples of EBITDA, or earnings before interest, tax, depreciation and amortisation.

Last month, Rag & Bone was acquired by a joint venture between Guess Inc. and brand management firm WHP Global. Guess will pay $56.5 million for its half, which values the brand at $113 million — about six times Rag & Bone’s adjusted EBITDA of $18 million in 2023, but just under half its 2023 sales of $250 million. Or take True Religion, which is currently exploring a sale. With about $80 million in annual EBITDA, it can feasibly sell for $400 million to $600 million, according to a source familiar with the business. If, that is, it can find a buyer in the first place.

Those are the lucky ones, in a sense. Last year, Parade and Tamara Mellon were acquired by manufacturers in what bankers said were likely fire sales last year; sleepwear startup Lunya filed for chapter 11 bankruptcy in June.

“It’s the absolute worst time to sell right now,” said Elsa Berry, founder of Vendôme Global Partners, a fashion M&A advisory firm. “It’s impossible to say where the buyers are … And you’re not going to get a top price unless you are an exceptional brand.”

Today’s market is a return to a sleepier era, before the days of ZIRP, or zero interest rate policy, a period lasting roughly between 2008 and 2021, when central banks globally slashed borrowing costs as a form of economic stimulus. Investors and large companies borrowed billions of dollars, which they poured into fast-growing, often unprofitable brands, such as Allbirds, or retail start-ups like Farfetch and The RealReal, in the hopes of generating big returns down the line as those businesses matured.

Many of those investments did not pan out. Allbirds’ market capitalisation currently hovers around $100 million.

Founders and investors who came of age during the ZIRP days are confronting a harsh reality where the paths to an exit are mostly blocked. On the public markets, even growing, profitable companies like Birkenstock and Amer Sports have failed to command premium valuations, which has had a mirroring effect on valuations in the private market too, bankers said.

For brands the options are stark: accept a lower price and a wider potential pool of buyers, or wait and hope today’s market conditions are temporary, and not the new norm.

“Two years of the pandemic followed by the last 18 months of a reset in the global economy has changed a lot of the calculus of how we start getting liquidity in our portfolio,” said Bill Detwiler, managing partner at Fernbrook Capital Management, an early-stage investment firm that has purchased stakes in Tory Burch, La Ligne and Universal Standard. “We feel that the [market] will open up once we get the election out of the way and interest rates come down.”

Fewer Buyers

The fashion M&A space can quickly shut down in challenging times because the category is particularly vulnerable to shifts in the wider economy. Brands that appeared to be cruising to a multi-billion-dollar exit can suddenly lose momentum if trends shift, or price-conscious consumers pull back on discretionary spending. Case in point is Matchesfashion, which was acquired by private equity giant Apax Partners in 2017 for over $1 billion, and sold late last year to Frasers Group for £52 million ($63 million), amid a broader slowdown in online luxury spending.

Matt Leeds, a former partner at L Catterton who launched his own private equity fund, Forward Consumer Partners, last year, said he sets an especially high bar when considering investing in an apparel brand, as opposed to food or other categories. Start-ups that might have a few years of rapid growth, and zero profits, need not apply.

“I would be interested in brands with a proven track record of success over decades and are still relevant today,” he said.

Tapestry’s $8.5 billion blockbuster acquisition of Michael Kors-owner Capri Holdings is a prime example of this thesis in action. Capri’s brands, which also include Versace and Jimmy Choo, have struggled to resonate with consumers in recent years, their name recognition has the potential for massive scale under the right management.

Higher borrowing costs and unpredictable consumer spending have also kept large retail holding groups on the sidelines. VF Corp. has historically grown through acquisitions of hot brands like Supreme; now it’s looking to sell some assets. Kering, which bought a stake in Valentino last year, as well as the fragrance brand Creed, is also unlikely to add to its portfolio in the near term as it integrates those acquisitions and focuses on reviving Gucci, said Berry of Vendôme Global Partners.

Other luxury groups may be distracted by new dynamics in the sector, such as challenges around wholesale, as well as a volatile macroeconomic environment, she added. Some houses in healthier positions have other priorities; Puig, for instance, is preparing for an upcoming IPO.

“I don’t think there is a large number of strategic buyers in the short term,” Berry added. “But of course LVMH can always make a move, given their sheer scale and diverse businesses.”

Exceptional Players

Well-run, appealing brands will still find buyers at premium valuations.

A buzzy business that’s growing both in terms of sales and profitability can command EBITDA multiples of 12 to 15 in their valuations, according to Matthew Tingler, managing director at Baird’s consumer investment banking group. Larger brands showing growth, profitability and a strong brand DNA across multiple geographies and product categories can be valued at mid-teen multiples of EBITDA or higher, said Berry.

At brands with major cultural heat, topline growth can still be an important metric when it comes to formulating valuations, Tingler said. For those lucky few, the sky’s still the limit.

Alo Yoga was reportedly seeking new investment at a $10 billion valuation last fall, almost certainly at a higher ratio to EBITDA than publicly traded category leader Lululemon merits. While it remains to be seen if the brand will hit its target, Alo’s faster growth should allow it to command higher multiples, Tingler said.

The same goes for Skims, which was valued at $4 billion last year on estimated annual sales of $750 million and 27 times its EBITDA; it’s an unusually high multiple, but still possible in today’s environment — that is, if you’re Skims.

Survival Mode

Skims aside, most brands have little choice but to harness a sense of financial discipline: Operate a lean business and generate cash flow to fund capital expenditures. If possible, brands should tap into their base of existing investors for necessary cash infusions.

“If someone is selling today, it’s either because they’re distressed, or their investor wants to get out and doesn’t want to keep putting money in,” Berry said.

For the most part, dealmakers don’t anticipate current market conditions to change anytime soon.

“The investment climate will stay the same,” said Tingler of Baird. “For [valuations] to go up again, interest rates will have to go down and there needs to be a more peaceful geopolitical environment. I don’t think it will change anytime soon.”

But being forced to run a scrappy business isn’t a bad thing. A high profit margin, after all, will be a major asset for fundraising or acquisitions down the road. And the more investors a business takes on, the fewer exit options there are, according to Jenny Gyllander, a venture capital veteran and founder of Thingtesting, an online platform for discovering online brands. Not to mention, diluted equity.

“People have been unable to raise funds for a while now, and that’s pushed them to be really creative,” Gyllander said. “Everyone’s now like, ‘Let’s be profitable from day one,’ and they want to be in control of how they’re growing.”

Government and industry will invest £760mn towards critical skills and infrastructure

The UK government will launch a “national endeavour” to reinforce the country’s nuclear deterrent, including a promise to invest more than £760mn with industry over the next six years into critical skills and infrastructure.

Rishi Sunak, the prime minister, will on Monday also announce a separate £200mn investment into a “transformation fund” for Barrow-in-Furness, the Cumbrian town where Britain’s nuclear submarines are built by BAE Systems for the Royal Navy. Barrow has suffered from health inequalities, poor housing and some of the most deprived neighbourhoods in the country despite multiple attempts at lasting regeneration. 

The investments come as the government prepares to set out how it plans to sustain and modernise the UK’s nuclear deterrent in a new Defence Command Paper. It follows concerns that ageing infrastructure and a lack of investment were undermining the effectiveness of the deterrent, a cornerstone of Britain’s defence posture.

Ministers were forced last month to declare that the deterrent remained “safe, secure and effective” after a nuclear missile test failed when the Trident weapon crashed into the sea near the submarine that fired it. Adding to the embarrassment, defence secretary Grant Shapps was on board HMS Vanguard to witness the test launch which took place in January.

The Defence Command Paper will detail the government’s plans to bring new Dreadnought-class submarines into service in the early 2030s. The Dreadnoughts are due to replace the current Vanguard-class vessels which were commissioned into service in the mid-1990s. 

“Safeguarding the future of our nuclear deterrent and nuclear energy industry is a critical national endeavour,” Sunak will say on a visit to Barrow on Monday. 

“In a more dangerous and contested world, the UK’s continuous at-sea nuclear deterrent is more vital than ever. And nuclear delivers cheaper, cleaner homegrown energy for consumers.”

Investments into Britain’s nuclear capabilities and skills — both defence and civil — are seen as vital if the government is to build a new fleet of atomic power stations to bolster its energy security, as well as deliver on the new Dreadnought programme. The government is also committed to building a new generation of attack submarines under the trilateral Aukus pact with the US and Australia.

Aukus is seen by ministers as a key part of the government’s “levelling up” agenda to narrow regional economic differences. Cabinet minister Michael Gove name-checked Barrow in a speech in July, promising to make it a new “powerhouse of the North”.

Under the Barrow Transformation Fund the government will commit £20mn towards immediate projects, including supporting people towards work. This will be followed by a minimum of £20mn a year over 10 years to build more homes, develop the transport network and support local schools.

Britain’s nuclear industry will need an additional 123,000 people by 2030, according to the government. The £763mn investment, which includes more than £400mn from industry including BAE, Rolls-Royce, Babcock International and EDF, will create around 5,000 new apprenticeships over the next four years.

Customers ‘making a lot of money’ as appetite for luxury cars outpaces China and Hong Kong, says chief

Sales of Ferraris in Taiwan have doubled in the past four years, bolstered by the growing wealth of the country’s chip entrepreneurs and a return of capital as global supply chains diversify away from China.

Ferrari’s chief executive Benedetto Vigna said demand in Taiwan was growing faster than in China or Hong Kong because of a sharp rise in supercar sales to the country’s increasingly wealthy citizens.

“China is growing but . . . less than Taiwan,” he told the Financial Times. “In Taiwan you have more entrepreneurs, and the chip industry is booming”. He added: “You have a lot of people that are making a lot of money.” 

Ferrari last month reported record annual earnings, driven by customers paying for personalised add-ons. Although the bulk of its sales come from Europe and the US, the carmaker said shipments to mainland China and Taiwan increased from 5 per cent of the total in 2020 to almost 11 per cent last year.

Ferrari is tapping into a surge in private wealth that has made the island the fifth-richest country in the world, with €141,600 per capita, according to last year’s Allianz Global Wealth Report. The uptick in wealthy citizens has been driven in part by a booming industry for semiconductors, a sector dominated by Taiwan.

But it has also been boosted by Taiwanese manufacturers shifting their operations away from China, which has brought many entrepreneurs and wealthy executives back home.

“We have won a lot of new customers over the past four years,” said Vincent Liu, general manager of Modena Motori Taiwan, Ferrari’s official dealer in the country. “Ferrari played a major role in the growth of the supercar market here, which grew 30 per cent to 1,300 units last year,” he said, adding the brand now held 40 per cent of the two-door segment.

Along with the US, Taiwan has long had the highest ratio of private wealth to the size of its economy in the world. The country’s net financial assets increased 45 per cent between 2018 and 2022, according to the Allianz report, the latest year for which figures are available.

According to Modena Motori, 70 to 80 per cent of Ferrari buyers in Taiwan are entrepreneurs.

“The exotic car scene has really taken off here,” said Ryan Yeh, owner of a Ferrari Pista and one of only three Ferrari 360 Modenas in Taiwan. Yeh runs a car club and frequently participates in street races in the mountains that dominate the island’s geography.

“[For] my generation who have some financial freedom, these brands are much more recognisable [compared with] our parents’ [generation], where anyone who was successful would just buy a Benz or BMW,” he said. “I guess this generation is flashier, more keen on displaying wealth. And there is no better way of displaying wealth than driving that kind of car.”

Jeff Hsu, a board member of satellite company Aerkomm, who bought an Aston Martin four years ago, his first luxury car, said: “It’s very simple: Taiwanese are rich, and there’s only so many places you can put your money: you can buy property and you can buy cars.”

Goratty Zhang, a marketing manager at Gama, Lamborghini’s dealer in Taiwan, said Lamborghini sales in the country had greatly expanded since the brand’s launch of SUVs in 2017 broadened its appeal to a larger group of buyers.

The worldwide growth of wealthy motorists has also led to pockets of expansion for Ferrari in countries such as Poland and the Czech Republic, according to Vigna. He added that the brand had still only tapped a tiny portion of its potential global buyers.

In order to retain its luxury status, Ferrari suppresses production, often forcing buyers to wait for several years for its cars. This drives scarcity and increases both its prices and the resale value of its cars, helping the company enjoy the best margins in the auto industry. Last year, Ferrari reported €1.26bn of net profits on car sales of just 13,663. 

The company has sold only 300,000 vehicles in its history — the same number produced by Volkswagen’s Porsche brand every year.

Early movers profited from unloved assets, but higher interest rates and more competition mean windfalls will become harder to achieve

The turbulent years that followed the global financial crisis were not an ideal time for Michael Dorrell and Trent Vichie to be seeding a new infrastructure fund. 

Potential investors were reluctant to back new funds and they had little appetite for deals that offered less lucrative returns than large buyouts. At many points, it seemed the end was nigh for their nascent venture.

A dozen years later Stonepeak, the New York-based infrastructure-dedicated investment group they created, is a colossus in the private investment world, with $60bn under management.

Companies it controls transport about 10 per cent of the world’s seaborne natural gas, own over 120,000 kilometres of fibre networks and produce enough renewable electricity to power 200,000 households. 

The group recently drew a $2bn investment from a minority investor that valued it at nearly $15bn, according to people briefed on the matter. Dorrell, the Australian-born dealmaker who fought to keep Stonepeak alive in its early days as its chief executive, is now a billionaire. 

Stonepeak’s speedy rise has surprised many on Wall Street, but it is a story shared by a small circle of dealmakers who entered infrastructure investment in the US in the early 2000s. 

Adebayo Ogunlesi, for example, who in his days as a top Credit Suisse banker often sat opposite Dorrell and Vichie during negotiations, created Global Infrastructure Partners with the support of the Swiss bank in 2006. 

After building up a portfolio of over $100bn, this year Ogunlesi agreed to sell to BlackRock for $12.5bn in a cash-and-shares deal that will make him and his partners the second-largest shareholders of the world’s largest asset manager.

In the early days, Ogunlesi, Dorrell and Vichie and others bid against each other for mundane assets like toll road concessions and parking meter networks. The deals often carried high levels of debt and many quickly soured during the financial crisis.

“Infrastructure investment came to the US in the early 2000s and it was dominated by a handful of people who were mostly project finance, utilities and municipal bankers,” says one senior industry executive. “They saw it as a trend and capitalised by making big early bets around the crisis. Many of the people who didn’t get washed out became billionaires.” 

Today’s infrastructure market is more crowded. The success of entities such as Stonepeak and GIP, along with a decade of rock-bottom borrowing costs, prompted asset managers like BlackRock, CVC and General Atlantic to enter the fray by acquiring large infrastructure managers. A further wave of deals is brewing, according to bankers and private equity executives.

Once an investment backwater, infrastructure became a favoured area for pension funds looking for yield and protection against market volatility. Infrastructure assets under management worldwide have soared beyond $1tn, more than six times their level in 2008, according to data provider Preqin. 

The increased competition for assets has led big players to widen their definition of infrastructure; it now includes assets such as gas export facilities, the transmission masts that mobile phone networks are increasingly selling, or the data centres that will provide the computing power needed for artificial intelligence projects.

Their business is starting to face more scrutiny; politicians and consumers in some countries are starting to ask how desirable it is to have pieces of infrastructure key to the public realm owned by highly indebted and secretive private companies.

As asset prices and interest rates rise, windfalls have become harder to achieve. “There is always tension on how far you can push the frontier and what is infrastructure,” says Hamilton James, the former vice-chair of Blackstone Group, which initially backed Stonepeak. 

“My guess is we are in a part of the cycle where returns will be lower. Rising rates and high stock prices make it harder to do interesting deals and there is a lot of capital chasing after investments.”

Dorrell and Vichie, both native Australians, were sent by Macquarie to the US in 2000 to replicate the Sydney-based infrastructure group’s past successes in the world’s largest economy. 

During the 1980s and 1990s, Macquarie underwrote a wave of privatisations across Australia, Europe and Canada, countries where governments were looking to sell state monopolies such as utilities, airports and toll roads. It then began investing directly in the businesses that were being privatised.

But translating that strategy to the US was initially challenging. Federal and state governments were less likely to sell assets, fearing a political backlash. The existence of large municipal debt markets, which carried tax advantages for domestic investors and generated funding for public bodies, meant there was less financial incentive to privatise.

Dorrell and Vichie soon wondered whether they should just return to Australia. “Infrastructure wasn’t even a backwater in the US. It didn’t exist,” says Dorrell. “We almost didn’t bother.”

But the duo came to realise that many other pieces of infrastructure, like communications networks, pipelines and logistics assets, were owned privately and often neglected and undervalued on corporate balance sheets.

“We quickly worked out that the sectors available in the US have dwarfed the other asset classes,” says Dorrell. “Over time you started to realise that the US was different, and different in a good way. It makes it the most interesting infrastructure market in the world.” 

A small number of deals sparked investors’ interest. In 1999, the provincial government of Ontario sold a lease on 407 ETR, a toll road around Toronto, for about $3bn — a price that in Dorrell’s eyes wildly undervalued the highway. Macquarie quickly became a large investor and by 2019, 407 ETR was valued at around $30bn. “It is arguably the most successful infrastructure asset ever,” says Dorrell.

Canadian pension funds and those in Europe and Australia began pouring money into infrastructure and US municipalities started to sell assets such as the Chicago Skyway Bridge, acquired by Macquarie and Cintra for $1.8bn in 2004. Before long, large investment banks including Goldman Sachs, Credit Suisse, Citigroup, Morgan Stanley and Deutsche Bank were building their own dedicated investment teams. 

But the 2007-08 financial crisis brought the boom to an abrupt end and left many institutions nursing big losses. “The early deals were all levered to the gills,” says one senior executive involved with many transactions, who estimated some were priced at between 40 and 60 times annual operating cash flow. “They weren’t bad assets. They were a story of too much leverage and not enough time,” he adds. “It was the ultimate winner’s curse.” 

It was around this time that Dorrell and Vichie were headhunted by US investment group Blackstone to build an internal infrastructure investment unit inside the world’s largest private equity group.

But after failing to make much headway, their unit was quietly spun out in 2011. They used their savings to rent Manhattan office space for their venture, Stonepeak, and scoured the US for investment from large pension funds and endowments. The response was lukewarm.

By the summer of 2012 they were racing to secure $250mn of investment in the fledgling Stonepeak that would help them land a $400mn cornerstone commitment from a large US teachers’ pension fund.

Their best hope was a Washington state pension fund, but one Friday near the end of summer, it notified Stonepeak that it was putting its potential investment on hold. Both Dorrell and Vichie feared it was the end. “I have never been so nervous in my life,” says Dorrell.

The fund changed its mind the following Monday and ultimately invested $250mn, setting Stonepeak on the way to raising over $1bn for its first fund. “The investment put us in business,” says Dorrell. Vichie retired from the company in 2021 to pursue other projects.

Stonepeak, along with rivals like GIP and Canadian asset manager Brookfield, would soon have investors flocking to their doors as the era of low or even negative interest rates forced asset managers to look for returns from unlisted investments.

Another beneficiary was Sadek Wahba, an Egyptian-born banker who began his career as an economist at the World Bank before building up Morgan Stanley’s internal infrastructure unit.

That entity, spun out of the US bank in 2012 and now called iSquared Capital, manages nearly $40bn in assets. Antin Infrastructure, one of Europe’s most valuable listed asset private investment groups, followed a similar path after being seeded inside BNP Paribas.

The growth of private infrastructure groups bore similarities to previous structural changes in finance that gave rise to the private equity and credit markets that now manage assets of over $14.5tn.

The now expansive buyout and private credit industries were also pioneered by small teams of former bankers from groups like Bear Stearns, Lehman Brothers and Drexel Burnham Lambert, who devised new financial structures and underwriting techniques for corporate assets.

GIP, Stonepeak and iSquared helped to push the infrastructure industry away from auctions of government-owned assets and towards a strategy that more closely resembles that of private equity. Last year, iSquared agreed to acquire UK-based bus and train operator Arriva from Deutsche Bahn.

Dorrell and Vichie even recreated the culture they had observed inside Blackstone, recruiting dealmakers from private equity and hedge funds with expertise in restructuring financially distressed assets. 

Jack Howell, one of Dorrell’s early recruits, is now co-president alongside Luke Taylor, another Macquarie veteran. Under Howell’s direction, Stonepeak invested heavily in the US pipeline sector in the early days of the shale gas revolution but embedded financial protections such as enhanced seniority for its equity investments. 

That helped it avoid losses during the sector’s cyclical downturns. “Your structure doesn’t matter until it does,” says Dorrell. “It can really save your capital.” According to pension fund documents published publicly this past January, the group has not yet realised a loss on any of its deals.

Ogunlesi’s GIP has arguably been an even greater success, attracting over $100bn in assets using a strategy of making incremental changes to large businesses to improve their profitability and valuations before selling them on.

At London City airport, GIP reworked the take-off and landing schedules to allow for an increase in flight numbers, eventually selling its 75 per cent stake at a huge profit. At Gatwick, another London airport, it more than halved the time taken for security screening — allowing passengers to spend more time and money in the retail and catering outlets that pay revenue-based rents to the airport.

There have been misfires along the way. GIP acquired UK waste management company Biffa in early 2008, only to see the financial crisis expose its vulnerability to competition and economic downturns. It salvaged just $93mn of its $600mn investment. 

Stonepeak put $3.6bn of equity — its single largest cheque — into Astound Broadband in 2021, but the New York company wilted under intense competition from larger broadband operators. Profits evaporated and rating agencies cut its debt ratings, raising the cost of its borrowings. 

The diversification into investment areas previously dominated by private equity and real estate trusts, such as fibre networks, cellular towers and data centres, could bring more blow-ups. The sharp rise in interest rates is also putting pressure on many deals done in 2020 and 2021, say industry executives.

“So much capital had been chasing wind and solar energy it became heavily mispriced,” says Dorrell. “The music stopped and there has been real distress.”

Stonepeak has looked to capitalise on that; last month, it agreed to take a 50 per cent stake in a package of US wind energy projects from Danish renewables group Ørsted.

Data centres have been another area of almost unbridled optimism as investors gush over prospects for artificial intelligence. But some deals have already soured; Canada’s Brookfield Infrastructure Partners has been forced to inject more equity into Evoque, a data centre business it bought from AT&T in 2019 whose revenues have since declined. Evoque itself recently acquired a private equity owned rival out of bankruptcy.

Last week short seller Hindenberg warned that so-called hyperscalers such as Amazon, Google and Meta were changing the dynamics of the industry and stripping pricing power from smaller operators. It has also accused Equinix, a listed data centre operator, of manipulating the accounting treatment of capital spending to flatter its profitability. Equinix says it is investigating the claims.

“The data investment theme to me feels super, super toppy and the thing everyone is chasing,” says one infrastructure executive. “People are making huge commitments and huge bets.” 

Some early privatisation efforts have also backfired after being overloaded with debt. Water utilities privatised by the UK in the 1990s were taken off the stock market by infrastructure investors in a series of deals during the mid-2000s. 

But many of these heavily indebted operators have attracted public and political opprobrium for delivering poor customer service, polluting waterways and failing to invest in new assets — all while showering their overseas owners with dividends. 

“If you pay too much for the assets, the regulator will lower the regulated return,” says one infrastructure executive. “If the deal goes wrong, it goes wrong really quickly.”

When GIP and Stonepeak began they had few competitors, but large private equity groups Blackstone, KKR, EQT and Brookfield have built increasingly deep pockets of capital to invest in the sector. Ogunlesi believes trillions of dollars will still need to be invested in infrastructure, for instance, to reshore manufacturing supply chains, build modern digital networks and secure traditional and renewable energy supplies.

Furthermore, he says large public companies will struggle to deliver the revenue growth that investors demand and will look to release capital for investment in faster-growing niches by selling infrastructure assets or forming joint ventures with specialist investors. GIP’s investment portfolio now includes partnerships with many of the world’s largest companies, including Abu Dhabi’s state oil producer Adnoc, Shell, TotalEnergies and Vodafone.

Ogunlesi says the infrastructure boom has much further to run. “You are going to see a huge amount of investment activity going forward.”

But he also acknowledges that in the current economic and geopolitical environment, managers “are going to have to work much harder to earn their keep than they’ve had to do in the past”.

Government involvement in Petrobras and Vale alarms investors as president calls market ‘voracious dinosaur’

President Luiz Inácio Lula da Silva’s government has been accused of political interference in some of Brazil’s biggest companies, prompting alarm among investors who fear a repeat of heavy-handed interventions from the last period of leftwing rule.

Shares in state-controlled oil major Petrobras fell 10 per cent in a single day this month after it opted not to pay extraordinary dividends, contrary to analyst expectations, in a decision that its chief executive said came from Lula and his ministers.

Mining company Vale has also been affected after the administration faced accusations, which it denied, of improperly seeking to get a controversial ally of Lula appointed as its next chief executive.

In addition, Brasília has pushed to reverse an element of the privatisation of power utility Eletrobras by previous far-right president Jair Bolsonaro.

In a still unresolved case, last year it petitioned the Supreme Court to overturn a legislative clause capping the government’s voting rights at 10 per cent, below the roughly 40 per cent of equity it still owns in the listed group. 

The controversies have raised the spectre of state activism that often failed or proved costly when Lula’s party was previously in power earlier this century, which following a boom ended in a deep downturn for Latin America’s largest economy.

Eduardo Figueiredo, head of Brazilian equities at the UK asset manager Abrdn, said: “Given past experiences of undue political pressure did not end well, we see these incidents having an impact beyond the companies mentioned . . . ultimately making it harder for Brazil to attract investments.”

A former trade unionist who governed for two terms between 2003 and 2011, Lula’s election manifesto in 2022 called for a bigger role for the state and higher public spending, with the goal of boosting living standards in the nation of 200mn. 

During the campaign he promised to manage the economy with moderation, but recent antagonistic remarks by the 78-year-old veteran politician have dismayed the business class.  

“Brazilian companies need to agree with the Brazilian government’s development thinking. That’s what we want,” he said last month, after saying Vale — a private-sector multinational — “belongs to Brazil”.

After Petrobras’s share price drop, Lula described the market as a “voracious dinosaur” that “wants everything for itself, nothing for the people”.

The noise around Brazil’s two most internationally successful enterprises has caused concern in corporate circles, where executives had hoped that Lula’s pragmatism would dominate his second stint in office.

The leftist’s earlier presidency was characterised by steady growth and a widening middle class, with millions lifted out of poverty. He largely stuck to economic orthodoxy during his first four-year mandate, before shifting towards fiscal expansion and interventionist policies.

This more statist approach was turbocharged by his chosen successor, Dilma Rousseff, who was blamed by many Brazilians for dragging the country into its worst recession on record a decade ago, contributing to her 2016 impeachment.

Over 13 years in office, Lula’s Workers’ Party, or PT, lavished cheap public loans on favoured industries and companies to create “national champions” such as meatpacker JBS, with mixed results. Many big infrastructure projects went unfinished. 

Investor sentiment towards the South American nation has recently “deteriorated”, said Thierry Larose, emerging markets bond portfolio manager at Swiss bank Vontobel.

“These random statements by Lula are absolutely counterproductive,” he added. “It’s a shame because he’s done well in the past and the current state of the economy is not so bad.”

With robust gross domestic product growth of nearly 3 per cent last year and a strong trade balance, the country risked wasting a favourable moment by “trying to re-implement old toxic policies”, he added.

Mario Marconini, managing director at political consultancy Teneo, said the various episodes “all align with Lula’s antiquated view of how the government can and should intervene in ‘Brazilian champions’, since they somehow ‘owe it’ to the population.

“It also reveals the president’s increasing need to resort to catchphrases that might restore decreasing popularity,” added Marconini.

The presidency insisted there had been no political interference in any of the cases. It said Petrobras’ ordinary shares had gained more than 60 per cent since the start of Lula’s third term, while the company recently posted the second-highest profit in its history.

Lula’s backers have insisted the government has the right to influence Petrobras, given it is the controlling shareholder with just over half of voting power. 

However, opponents fear a repeat of the mismanagement of the PT years, when fuel subsidies enforced by the government to tame inflation cost the company an estimated $40bn. Petrobras was also at the centre of a massive bribery scandal revealed in the vast “Car Wash” investigation.

While Bolsonaro fired a series of Petrobras chief executives in anger at high fuel prices, he otherwise left the company to pursue its strategy of divestments as it focused on petroleum production and profits. 

By contrast, Lula wants it to reduce shareholder payouts in favour of greater investment in areas like renewables and refineries, aiming to stimulate economic activity. 

In the case of Vale, corporate governance experts said there was no legal basis for government involvement in chief executive selection at the group, which was privatised in 1997 and is one of the world’s largest iron ore suppliers.

An independent board member at the miner resigned this month alleging “nefarious political influence” in its leadership succession process.

Officially Brasília only has a dozen special “golden shares” in the company that grant veto rights such as blocking a change in name or relocation of headquarters, but in practice it can exert sway through the pension fund of a state-controlled bank that is among Vale’s top investors. 

The government has now ditched attempts to place Guido Mantega, a former PT finance minister, at the helm of Vale, according to people familiar with the matter. 

Energy and mines minister Alexandre Silveira denied there had been intrusion at either Vale or Petrobras. “This doesn’t stop us, as policymakers and regulators, from keeping a firm hand on the companies with regard to the country’s interests,” he told the Financial Times.

Lula supporters say his industrial policy to revive Brazilian manufacturing is already bearing fruit, with investments totalling $14bn announced so far in 2024 by global carmakers. 

With Brazil’s congress dominated by conservatives, analysts said the president could encounter a backlash if he shifted in a more radical direction. 

Jive Investments chair Luiz Fernando Figueiredo said: “Without a doubt, the [government’s] impulse is terrible. Once again, we’re going to test our institutions to see how much they can resist.”