TheChek News Flow

The private capital overhaul arrives

The SEC argues sophisticated investors need protection, too

The SEC vs private funds

As private credit enjoys its “golden moment” and private equity’s biggest player hits $1tn in assets, regulators aren’t standing idly by. Last week, the US Securities and Exchange Commission passed sweeping new rules aiming to, as one commissioner put it, “recalibrate the baseline” for private fund disclosure.

The rules, passed under the Investment Advisers Act of 1940, fall into four buckets:

Standardised quarterly disclosure of performance, fees and expenses.

Limits on “side letters”. These are arrangements giving certain fund investors preferential terms. A pension investor with regular obligations might ask for shorter redemption windows, for example. Side deals that have a “material negative effect” on other investors are forbidden, unless the arrangement is available to all the fund’s investors.

A ban on fund managers passing through to investors legal expenses connected to Advisers Act violations.

Mandatory audits for private funds. Also, certain asset sales will require a third-party valuation opinion.

The final rules are more modest than the SEC’s initial proposal last year. Areas of particular heartburn for the private funds industry have been rowed back, including a lower liability standard for suing fund managers.

But there is still consternation. The biggest complaint is that the rules would raise compliance costs, hitting smaller funds the hardest. The limits on side letters (bucket 2 above) are harder to assess, and will depend on how the SEC enforces the law. Scott Beal, a partner at Barnes & Thornburg who represents both private funds and investors, says the change may disrupt the customised reporting templates many institutional investors currently use.

Brian Daly, a partner at Akin who also advises private funds on regulation, notes that the ban on passing through certain legal expenses (bucket 3 above) is more punitive than it might first look. He says that minor violations of the Advisers Act are routine parts of settlement deals, including no-admit-no-deny settlements, and are a cost of doing business for many fund managers. But the new SEC rules would result in funds having to internalise the costs of such settlements, even when settling is in the best interests of the fund.

Underlying all this is a familiar debate about sophistication. Put simply, do institutional investors need regulatory protection in the first place?

Investor advocates say smaller institutions need more disclosure to be on even footing with clever private fund managers. The industry replies that it already gives investors plenty of disclosure, in large part because funds must compete for investors, who employ legions of lawyers and MBAs to evaluate prospective investments. Tight-lipped fund managers with shady fee structures are hardly going to attract boatloads of capital, goes the argument.

“If an investment is too complicated or if an investor can’t really understand the fee structure, they should not be investing in that asset or that asset class,” adds Daly.

This disagreement (or, perhaps, clash of interests) on Wall Street is on display at the SEC. The libertarian-minded commissioner Hester Peirce wrote in her dissent that the private funds rules “will irreparably mar the regulatory landscape”:

Private funds have grown up, as Congress planned, outside of the requirements that govern registered investment companies, which are designed for the general public . . . 

Private fund investors are . . . well represented by highly qualified professionals in their search for and negotiations with private fund advisers . . . . investors’ negotiation leverage is high — if they choose to use it. The regulatory regime reflects the sophistication of the parties . . . 

Today, we are gearing up to impose a retail-like framework on this very institutional marketplace . . . . While the prescriptions being recommended for adoption today are less constricting than those originally proposed, they are nevertheless unnecessary government interferences in, and sometimes outright bans of, well-established practices. As long as investors understand the terms on which they are investing, why should the government care what those terms are?

Commissioner Caroline Crenshaw pushes back, calling arguments like Peirce’s “the sophisticated straw man”. SEC commissioners “have the unfortunate distinction of learning that investors of all stripes are the victims of fraud,” she writes, citing FTX (backed by, among many others, BlackRock and Third Point) and Theranos (backed by Fortress Investment Group and Walgreens). Even setting that point aside:

Informational and bargaining asymmetries flow to the advisers in this industry, to the detriment of investors . . . [For example, fund structure complexity makes it] difficult for investors to ever know (and therefore potentially remedy) the true extent of hidden conflicts of interest, or hidden fees and expenses. Moreover, despite the growing number of private funds, the space is in fact highly concentrated . . . Those largest advisers (including advisers to the aptly coined “mega funds”) have extreme informational and bargaining advantages . . . Even sophisticated investors accept suboptimal contractual terms for a number of reasons, including the fear that if they push for higher quality terms, they will lose access to current or future fund allocations.

The empirical question here is: just how competitive is the private funds market? Is it, as Crenshaw suggests, full of competition-busting information asymmetries, or is it, as Peirce writes, characterised by dynamism? (Readers with direct experience are invited to write in.)

Rory Callagy of Moody’s points to recent experience in the UK, where in 2017 the Financial Conduct Authority published a study of actively managed funds that demonstrated weak price competition. Since then, new fee disclosure rules (and the rise in passive investing) have improved value for investor money, the FCA found. “We’ve observed that when there’s more disclosure around fees that asset managers are charging, that typically leads over time to fee pressure on the industry, because investors are able to make a better assessment of whether they’re getting value for their money,” says Callagy.

UK active funds aren’t the same as US private funds. But the example shows that even in a well-lit market, barriers to competition remain. In more shadowy private markets, those barriers are surely higher. The SEC’s rules may have rough edges that need sanding off. But their core aim seems right.

London’s reputation as divorce capital could be tested by legal shake-up

The Law Commission’s review is expected to take a hard look at the favourable treatment given to the spouse of the main breadwinner

There seems to be a raft of striking London divorce settlements that have cemented the city’s reputation as the world’s divorce capital, especially for the very wealthy.

In top position was the £554mn that Sheikh Mohammed bin Rashid al-Maktoum, the billionaire ruler of Dubai, was ordered to pay his former wife Princess Haya, in December 2021.

Not far behind was the £454mn that Russian oligarch Farkhad Akhmedov was required to hand over to his ex-wife Tatiana Akhmedova. And in third place was the £350mn awarded to Kirsty Bertarelli, a former Miss UK and writer of a hit song, after splitting with her Swiss-Italian billionaire husband Ernesto Bertarelli.

These settlements are exceptional but are no surprise to legal scholars: for decades, London has been gaining momentum as the go-to place for divorce, especially for financially weaker partners of ultra-rich breadwinners.

But, this may now be changing following an announcement by the UK government earlier this year that the Law Commission will be reviewing the way in which a couple’s finances are dealt with upon divorce.

“While the courts have done a good job of moving with the times, the rules are 50 years old and each judge still has a lot of discretion as to how assets can be split,” says Renato Labi, partner at Hughes Fowler Carruthers, in London.

While the Law Commission, the independent agency that reviews legislation, deliberates in private, lawyers say it is likely to take a hard look at the favourable treatment given to the spouse of the main breadwinner — often, though not always, a non-working wife.

The commissioners are also expected to give weight to the growing importance of prenuptial and postnuptial agreements, which are increasingly used by richer partners to limit potential future claims from the less-well-off spouse. Also, amid rising public unease about the costs of litigation, divorce lawyers’ bills are likely to come under increased scrutiny.

The English (and Welsh) legal system is particularly attractive to the financially weaker person in a couple because it focuses on splitting the combined marital wealth of divorcing spouses equally, even if one partner is the moneymaker.

The approach is different to Scotland and other European countries where financial awards are far less generous and maintenance is often given only for a limited number of years, with the expectation that both parties will become financially independent.

These discrepancies often result in a “race” to file for divorce, in which the financially weaker spouse — usually the wife — looks to London, while the main breadwinner heads elsewhere.

Jaqueline Julyan, barrister and advocate at 5 St Andrew’s Hill, says: “When an international couple’s marriage breaks down, there is likely to be a rush to secure jurisdiction in the form most favourable to that spouse. A Russian husband will try to secure jurisdiction in Russia, while a Russian wife will want to secure jurisdiction in England. This is what’s known as ‘forum shopping’.”

While London divorce court rulings are often based on decades of precedent and important legislation such as the Matrimonial Causes Act 1973, spouse-friendly divorce awards are of more recent origin. Julyan says the attractiveness of England and Wales in this area accelerated only after a case called White vs White, in 2000, which changed the law and allowed wives to claim 50 per cent of marital assets.

“Before then, wives were limited to only being able to claim their reasonable needs,” she says. “This ushered in an era of increasingly big money cases with huge payouts to wives where enormous amounts of money had been made over the marriage.” 

Deborah Jeff, partner and head of the Family Department at London law firm Simkins, says that the driving force was equality between the spouses: “White vs White swept away this discriminatory approach in England, but it still exists in some other jurisdictions around the world.”

However, critics of the current 50-50 approach say it is now outdated. Nicky Hunter, partner at Stowe Family Law says: “It is hard to think of any other rules that were modern and relevant to our grandparents that we would still consider relevant and applicable today.”

She says that society has undergone dramatic changes over the past few decades: “Many more women go to university and work full-time now, and couples tend to marry and have children at an older age.”

In today’s world, women are more financially independent and dual-earning couples are becoming the norm, so there is less emphasis on a need for women to be supported by their ex-husbands for the rest of their lives.

New legislation could tighten up the definition of marital assets and exclude certain assets from any split. Jennifer Dickson, a partner in Withers’ international family law team, says that, for example, Scotland defines matrimonial property as all assets acquired during the marriage but before a relevant date, plus any house used as the family home, but with certain exclusions including premarital assets, inheritance and gifts from third parties.

But, this is delicate territory. As Dickson says: “A move away from the starting point of a 50/50 division of marital assets is likely to be considered discriminatory.”

The law as it stands is already quite flexible on how couples divide their finances. Emily Brand, head of family law at Boodle Hatfield says: “The vast array of variables; financial circumstances, age, children and cultural differences, to name a few, mean that the way couples approach their finances is as unique as any relationship.”

She says this variation is a strength of the current divorce legislation and explains: “It offers bespoke solutions and is malleable to the inevitably unique and complex circumstances that emerge as two people extricate themselves from their married lives.”

However, this flexibility can trigger uncertainty as some aspects are open to debate where the factual matrix of the case to be decided does not “fit” the facts of an earlier case with comparable but different circumstances. 

Moreover, the outcome is dependent on a judge’s discretion. “Each judge is a human being with their own subjective views of what is fair and reasonable, and often overworked with limited court time,” says Hunter.

Although people can appeal against a decision, many parties will not have the appetite or financial resources to risk making an appeal. And most lawyers will warn their clients at the outset of their case of the litigation risk of an uncertain and potentially unfavourable outcome before embarking on an appeal. 

Hunter says: “It can be extremely difficult to challenge and overturn an unfavourable decision on appeal. Unless it can be shown that the judge has wrongly applied the law or the decision was unjust because of a serious procedural or other irregularity.”

Brexit has made English courts less attractive

Not every wealthy international couple facing difficulties in their marriage can file for divorce in London. For an individual to file for divorce in the capital they must be able to demonstrate a connection to the UK. 

Patricia Astley, managing director at Julius Baer International, says: “International families often travel through or own properties in the UK. Wealthy divorces involve properties held in the UK, which allow the parties to commence divorce proceedings.”

Also, just because people are able to secure London as their preferred jurisdiction that does not mean it always delivers the best outcome. If assets are held overseas, the ability to enforce any divorce settlement needs to be considered.

Brexit has also created an additional layer of complexity. EU legislation meant that EU nationals could choose any jurisdiction in the EU and file for divorce if they got there first. While England and Wales (like Scotland and Northern Ireland) are no longer bound by those rules, EU states are.

James Riby, a partner at law firm Charles Russell Speechlys, says: “Brexit has already made English courts less attractive for wealthy international couples than any of the proposed reforms, because there is now a real risk that English judgments will not be recognised and enforceable abroad, and enforcement against foreign assets is often crucial in wealthy cases if the court’s award is to have any hope of actually being implemented.”

Many cases have racked up large legal costs

Another driver for change is the rise in legal costs — which have been so striking that they have occasionally come under attack even from judges.

“While these cases are a minority they grab the headlines,” says Hunter at Stowe, “It’s generally only [about] the cases which involve wealthy parties and complex assets heard at the upper levels of the family court system.”

When a judge heard, in 2021, that a Russian businesswoman and her Greek ex-husband had run up lawyers bills of £5.4mn in their divorce battle at London’s High Court with “vast amounts of future costs in the pipeline” he described the amount as “apocalyptic”. Mr Justice Mostyn said the legal expenses from the dispute between Russian retail executive Alla Rakshina and her ex-husband Lazaros Xanthopoulos were “hard to accept even in a conflict between the über-rich”. 

The judge added: “In my opinion, the lord chancellor should consider whether statutory measures could be introduced which limit the scale and rate of costs run-up in these cases.”

Legal guidelines in need of reform

High-profile figures support the calls for reform. Conservative peer Baroness Shackleton of Belgravia, who has represented royalty and celebrities including Paul McCartney, told parliament earlier this year that she and her legal colleagues “make a fortune in arguing”, because the guidelines are 50 years old and in need of reform. 

Baroness Deech, a crossbench peer in the House of Lords is also demanding change. She pointed out that the law was “lagging 50 years behind nearly every other country in the western world”.

Under her bill, pre-and postnuptial agreements would be binding provided certain conditions are met. Matrimonial property (essentially, all property acquired after the parties were married, save for gifts and inheritances) would be divided equally, and spousal maintenance limited to five years unless the spouse would otherwise suffer serious financial hardship.

However, even if the rules change, lawyers say they expect the financially weaker spouse to keep choosing London as a divorce destination. At Withers, Dickson says with the English court’s increasing willingness to respect prenuptial and postnuptial agreements, and the trend away from making “meal ticket for life” joint lives maintenance awards, London is not quite as generous as it used to be. “But in my experience, it is rare for another jurisdiction to be more generous to the financially weaker spouse.”

She adds: “England also has strict disclosure obligations, and so if you are worried about your spouse not disclosing assets, England can feel like a secure place to be.”

Others agree, Labi at Hughes Fowler Carruthers says: “Even if there is reform, London remains a wealthy, world-class and cosmopolitan city, which attracts people and money from around the world. Some of those people will marry and divorce and I suspect that the divorce courts in London will remain busy for a long time to come.” 

US oil pipeline boss ties future to natural gas in pursuit of Oneok merger

Chief of Magellan Midstream sees ‘challenging’ petroleum outlook but strong demand elsewhere

The head of one of the biggest US oil pipeline companies said there were better growth prospects in shipping natural gas as he steps up a campaign to convince investors to back a $19bn merger with a gas-focused peer. 

Aaron Milford, chief executive of Magellan Midstream Partners, said that the “opportunity to invest and grow” as a company focused on crude oil and refined products, such as petrol and jet fuel, had become increasingly “challenging” after a construction boom over the past decade ran its course.

But by hitching the company to Oneok, a fellow Oklahoma-based pipeline company that primarily ships natural gas and natural gas liquids, it would create a “more powerful growth engine” with more room to expand as an energy transition drives demand for gas at power plants and other sectors. 

“When you look at just the fundamentals of NGLs and natural gas, the growth in demand for those is very high,” Milford told the Financial Times in an interview.

“There’s just more growth in those particular commodities . . . than there is in refined products and crude oil — which [will be] very stable, we think for a very long time.”

The proposed deal comes against a backdrop of accelerating natural gas demand in the US and abroad as economies shift away from coal to cleaner-burning gas in electricity generation. Oil demand, while hitting new records globally, is increasingly expected to peak as motorists switch away from petrol-powered cars to electric vehicles.

The US Energy Information Administration forecasts that domestic gas production will reach a new high of 104bn cubic feet a day next year, while its long-term projections call for continued growth.

The US added 897mn cu ft/d of interstate gas pipeline capacity last year, the least amount of new annual capacity in this century, according to the EIA.

After a decade of prolific pipeline building across the US, the necessary oil infrastructure was now largely in place, Milford said, providing fewer opportunities to build new lines.

“It’s really much more of a market that is mature and maturing in this moment and doesn’t have the same growth rate,” said Milford. “The infrastructure that’s been built is plenty — so to speak.”

TC Energy, the pipeline operator behind the aborted plan to build the controversial Keystone XL crude pipeline, said last month it was spinning off its oil transportation business to focus on shipping gas. It said the shift would leave it “uniquely positioned to meet growing industry and consumer demand for reliable, lower-carbon energy”.

But Magellan’s plans for an $18.8bn merger with Oneok have come under fire from some investors, leaving Milford working to win unit holders’ support before a vote on September 21.

Energy Income Partners, the fourth-biggest unit holder in the group with a 3 per cent stake, has blasted the combination as a recipe for “diworsification”, arguing the deal undervalues Magellan’s “industry-leading” returns and that any premium is outweighed by the tax drag it would trigger.

Milford said EIP’s argument dismissed the cost savings of $200mn-$400mn a year that the deal would create as the combined group could ship oil such as crude and refined products and natural gas liquids like propane on the same pipeline systems. Any tax payment would come due regardless, he said.

“It’s not ‘diworsification’. It’s diversification with growth,” he said. “There’s a higher growth profile for this company going forward than we have standalone.”

He added: “You combine that high cash flow generating business that we have with a faster-growing potential of NGLs and natural gas, and you obviously create a much more powerful growth engine over the next few decades.”

Fighter jet project on course for 2035 deadline despite Saudi overture

Riyadh’s request to join trilateral project will not hold up development of next-generation aircraft, BAE executive says

A landmark project involving the UK, Italy and Japan to develop a next-generation fighter aircraft by 2035 will stick to its current timetable despite Saudi Arabia’s request to join the initiative, according to one of the project’s industrial partners.

Herman Claesen, managing director of Future Combat Air Systems at BAE Systems, the British industrial group, said 2035 was a “fundamental requirement” of the programme for all three nations.

“They are absolutely committed to that requirement,” he told the Financial Times.

Asked whether there was a risk that the 2035 date might slip given Saudi Arabia’s request, Claesen said “absolutely not”.

The FT revealed earlier this month that the Gulf kingdom had pushed to become a full partner in the Global Combat Air Programme. Under the project, launched last December, the UK, Italy and Japan agreed jointly to build a next-generation fighter jet by 2035 to address increasing security threats from China and Russia.

But Riyadh’s request has created tensions in the alliance, with Japan opposed to its membership while the UK and Italy are open to the idea.

Tokyo is concerned that having a fourth member in the alliance could delay the already-tight deadline. The countries are aiming to develop the aircraft in roughly half the time it took to build the Eurofighter Typhoon, by using advanced manufacturing methods and digital tools.

Claesen said the talks on Riyadh’s bid were being held at government level and that BAE’s focus was on delivering the programme on time, although it was “supporting the UK government with their conversations”.

Saudi Arabia has been a leading purchaser of combat aircraft from the UK since the mid-1980s, including the Eurofighter Typhoons built by a consortium including BAE Systems, and has been looking to build a domestic defence industry. UK defence officials have previously told the FT the kingdom is viewed as a “key partner” in GCAP. Saudi Arabia could also bring money and engineering expertise to the project.

Japan’s defence ministry said in a statement to the FT that the door was open for the involvement of another country in GCAP, but on condition there would be no delay in the development schedule. It also said Japan would make efforts to strengthen defence ties with Saudi Arabia, which is the country’s biggest oil supplier. The ministry declined to comment on whether Tokyo would support or oppose Saudi involvement.

The UK defence ministry said it was “committed to delivering this world-leading fighter jet alongside our partners by 2035”.

The Saudi government did not respond immediately to a request for comment.

Claesen said other nations were also interested in involvement in GCAP. While securing export orders was a key part of the programme, the question of how and whether other nations could join was getting more difficult given how much work had already been done, he added.

“You start to look more at a tiering system or other mechanisms, where at the minimum people could have observer status, all the way to being a full-blown partner,” he said.

Japan’s defence ministry said the UK and Italy had emphasised the export potential of GCAP and that it was discussing a review of the country’s policy on exporting arms.

Sweden, which launched a joint study with the UK in 2019 to collaborate on a joint combat air development programme, is no longer involved, although Claesen said that did not mean the “door was firmly shut” to Saab, the country’s lead defence contractor.

GCAP is being developed at the same time as a rival Franco-German programme that has been plagued by political and industrial tensions between the partners. Claesen played down suggestions of either France or Germany joining, noting that “there was no talk about that”.

Berlin’s tough stance on military exports would also be a stumbling block, he added: “The position that the German government is currently taking [is] making it harder [for it] to be attractive to any partner.”

John Elkann describes company’s latest deal as part of natural adjustment of carmaking dynasty’s portfolio

John Elkann, scion of Italy’s Agnelli dynasty, has said its €2.6bn investment in Dutch conglomerate Philips was part of a natural evolution for family holding company Exor as it focuses investments on the health, technology and luxury sectors.

This month’s acquisition of a 15 per cent stake in the Amsterdam-based medical devices group was Exor’s biggest deal since selling US reinsurer PartnerRe for €9bn in 2021 and marks a further push into healthcare by a family long considered European car industry royalty.

Elkann, great-great-grandson of Fiat founder Giovanni Agnelli and chair of both sprawling motor group Stellantis and luxury car brand Ferrari, told the Financial Times the expansion of Exor’s portfolio was part of an evolution after two decades spent placing the holding company on the right footing.

He added that Exor felt “a strong affinity for healthcare”, and that “early learnings” from its more than €800mn investment last year in privately held French healthcare group Institut Mérieux had “reinforced our conviction about the importance of this industry and its growth potential”.

Under Elkann’s grandfather Gianni Agnelli, who led Fiat for half a century from the late 1950s and was one of 20th-century Italy’s most influential figures, the family’s business became heavily skewed towards the car industry, expanding across eastern Europe and South America and acquiring brands including Lancia, Maserati and Ferrari.

However, Exor’s forerunner Istituto Finanziaro Industriale also held stakes in companies across the food, financial, consumer and real estate sectors, owning Turin’s daily newspaper La Stampa and Juventus football club, both of which Exor has retained. 

Although the transformation of the family’s business had already been under way before Gianni Agnelli’s death in 2003, by the time Elkann joined the family holding company that year Fiat was debt-ridden, relations with its US partner General Motors had soured and the group’s future was in peril.

During 47-year-old Elkann’s leadership, Exor has increased its net assets from roughly €4bn in 2009 to €33bn this year while Exor shares went from single-digit figures to the current €80 per share.

Elkann now says the first decade after his grandfather’s death was one of conservation: “We focused on divestments, simplification and debt reduction to make sure that what we had could be saved.”

The decade that followed “was one of stabilisation” that he said had placed Exor on a steady growth trajectory.

Important changes within its portfolio companies over that period included the creation of agriculture equipment manufacturer CNH Industrial from the merger of CNH Global and Fiat Industrial; Fiat’s takeover of US rival Chrysler to form FCA; Ferrari’s spin-off from Fiat and its listing in Milan; the merger between FCA and Peugeot to create Paris-listed Stellantis; and finally, the acquisition and sale of PartnerRe.

“The portfolio was managed well over the last decade,” according to Equita analyst Martino De Ambroggi.

Stellantis, in which Exor is the largest shareholder with a 14 per cent stake, reported record first-half revenues of €98bn this year. Meanwhile, Ferrari shares have risen 40 per cent to €286 over the past 12 months.

However, analysts note that the Amsterdam-listed Exor is still trading at a 45 per cent discount to its net asset value.

“The current discount is a historical peak and it is very unusual for Exor,” said De Ambroggi, adding that “more clarity on the strategy for the non-listed assets in its portfolio might also help, but as John Elkann repeats, increasing the net asset value is the number one priority”.

Exor vowed to reinvest the proceeds of the PartnerRe sale across tech, luxury and healthcare and has taken a 24 per cent stake in luxury shoemaker Christian Louboutin, a majority stake in Chinese lifestyle label Shang Xia and a 45 per cent stake in Italy’s Lifenet Healthcare.

“We’re clearly looking to sectors that have the wind behind them,” said Suzanne Heywood, Exor’s chief operating officer and chair of CNH Industrial. “We have grown but we are still a lean, tight team [which] leads us to be very focused on where we want to invest.”

The group holds board seats on all its portfolio companies. “We describe ourselves as critical friends,” said Heywood. “We aren’t activists but we are active.”

Exor this year also made a return to financial services with the launch of Lingotto, a London-based investment firm chaired by former UK chancellor George Osborne to which it allocated an initial €1.5bn from the PartnerRe sale. The firm, in which PartnerRe’s new French owner Covea is also invested, has $3bn under management.

However, it has not been all smooth sailing. The sudden death of longtime Fiat chief Sergio Marchionne in 2018 was a “defining moment” which required multiple interventions “to see the companies right”, said one person close to Exor.

Juventus, meanwhile, which the Agnelli family has owned for 100 years, was hit by a series of indictments on charges including market manipulation and false accounting that led to the resignation of its board and a management reshuffle last year. Insiders say the issues were dealt with swiftly.

“John has emerged as someone who has taken on the doubters — and there were many back when his grandfather died — with actions rather than words,” said the person close to Exor. 

With €2bn from the PartnerRe sale still left to spend, analysts expect the investment spree to continue and for Lingotto to grow in scale, alongside divestments of a few smaller non-core holdings.

“Of course, there’s no certainty about what lies ahead”, said Elkann. “What is clear for us is our purpose, which is to build great companies with great people.”

Shionogi chief warns companies are deserting the field to focus on more lucrative areas

The head of Japanese drugmaker Shionogi has called on G7 governments to lead on fixing the market for infectious disease medicines, or run the risk that more drugmakers will leave the critical field.

Isao Teshirogi, chief executive of the company, which has invested in an antiviral for Covid-19 and novel antibiotics, said infectious disease treatments were a “very challenging business”, despite their importance. 

Teshirogi warned that an increasing number of companies were leaving infectious diseases behind to concentrate on relatively lucrative areas such as oncology or rare diseases. It can be hard to predict demand for infectious disease medicines and each treatment typically uses fewer drugs than are used in the management of a chronic condition. 

“Now’s the time for G7 countries to show leadership, to say, OK we lead the world in supporting the very capable antibiotics and short-term, acute phase antivirals,” Teshirogi said.

He added that, without support from wealthy countries, people in low and middle-income countries were likely to suffer disproportionately from a reduced investment in tackling infectious diseases. Pathogens resistant to existing antibiotics killed about 1.3mn people in 2019, a figure that forecasts suggest could rise to 10mn a year by 2050. 

Shionogi’s call for more global action on infectious diseases comes after the company devoted a large part of its resources and personnel to develop a treatment and vaccine for Covid-19 over the past three years.

Some analysts have questioned the strategy since the group’s outlook is uncertain. It has a thin pipeline of drugs under development and an earnings structure that is heavily dependent on royalty income from HIV drugs. Its shares have declined 1.5 per cent in the last five years, while the Nikkei 225 Index has gained more than 40 per cent over the same period.

For the fiscal year to March next year, the company expects to generate sales of ¥105bn ($720mn) — roughly a quarter of its expected annual revenue — from its Covid franchise. In the first quarter, it reported sales of just ¥6bn from its Covid pill Xocova, prompting analysts to criticise its full-year target as too bullish.

Kazuaki Hashiguchi, analyst at Daiwa Securities, said that, in light of rivals’ withdrawal from infectious disease research, the social value of the company’s activities had increased. But he warned it was proving difficult for the company to turn that into financial returns. 

“Shionogi does have a point and it’s understandable for them to argue that infectious diseases are very important and more resources should be distributed to this area,” Hashiguchi said. “But whether there is a social consensus for that is debatable.” 

Policymakers in the US, EU and UK are looking at ways to increase investment in antibiotics. But Teshirogi said he was “surprised and disappointed” that the US had not yet passed its Pasteur Act. The legislation is designed to encourage investment in new antibiotics and tackle the threat of antimicrobial resistance. 

“To me, the first impression was, what’s wrong with the US?” Teshirogi said.

He added that the US should be willing to lead the world with a so-called “pull incentive” that tackles problems with the financial returns on new antibiotics.

A pull incentive would address the challenges presented by the traditional financial model that rewards drugmakers according to the volume of any newly developed drug sold. That model is problematic because clinicians should use any newly-developed antibiotics as sparingly as possible to manage the risk that new drugs will generate yet more resistant bugs.

However, Teshirogi praised the UK’s “world leading” subscription model for antibiotics, which the country’s health service is planning to expand to pay drugmakers up to £20mn a year per new drug. The scheme pays the same sum no matter how many or few antibiotics are sold. Shionogi participated in the pilot.

Superbugs: why it’s so hard to stop the ‘silent pandemic’

Antimicrobial resistance already kills millions and is projected to get worse. But there is little incentive for Big Pharma to tackle the issue

In the summer of 2021, researchers at MIT and McMaster University in Canada fed an algorithm 7,000 chemical compounds in the hope that it would identify one that could kill Acinetobacter baumannii.

Described by Jonathan Stokes, one of the scientists involved, as a “notoriously challenging” pathogen, strains of Acinetobacter have become resistant to antibiotics over the past few decades, allowing them to prey on weakened hospital patients and leaving doctors powerless to treat them.

It took just an hour and a half — a long lunch — for the AI to serve up a potential new antibiotic, an offering to a world contending with the rise of so-called superbugs: bacteria, viruses, fungi and parasites that have mutated and no longer respond to the drugs we have available.

After the AI identified the compound, the researchers refined it to make it more powerful. Then they tested it in mice, finding it could suppress the bacteria in wound infections. (Compared to traditional methods, the algorithm is better at finding compounds that work in animals; it has already found several other candidates.) It will take years to test the drug in humans and find out if the AI really has hit gold. But Stokes is enthusiastic. “I’m really excited about this compound. I love this compound,” he says. 

Antimicrobial resistance (AMR) — which encompasses all microbes and not just bacteria, which are targeted by antibiotics — is sometimes referred to as a “silent pandemic”. Resistant pathogens killed 1.26mn people in 2019, according to an analysis published in the medical journal The Lancet. “All of modern medicine is upheld by our ability to control infectious disease. If we can’t control infection, we can’t administer chemotherapy, do invasive surgery, and preterm birth becomes really, really challenging and risky,” Stokes says. 

The problem is getting worse with time. In 2016, a UK review led by Lord Jim O’Neill, an economist and former Goldman Sachs banker, forecast the number of annual deaths from antimicrobial resistance would rise to 10mn by 2050 — approximately the number of people who currently die from cancer. But based on more recent data, he now believes that up to twice as many could die. 

The pharmaceutical industry and governments are failing to invest enough in replacing the older antibiotics with newer drugs that bacteria aren’t resistant to, risking crises where clinicians — whether they are treating one patient or a pandemic — find the medicine cabinet is in effect bare. 

Technologies such as AI could help combat resistance by cutting the time and cost of the initial phase of drug discovery, while portable genomic sequencing technology could help doctors choose the right antibiotic for each pathogen in the clinic or hospital.

But even when a promising new antibiotic is discovered, it enters a broken market. To avoid spurring yet more resistance, new antibiotics should be used sparingly, so they are unlikely to be bestsellers for drug companies. Governments and health systems accustomed to cheap generic antibiotics will not spend enough on novel drugs to make antibiotic development pay off. The cost of bringing a new antibiotic to market is approximately $1.5bn.

Few venture capitalists or large drugmakers want to fund the costly clinical trials required by regulators. Investors have lost about $4bn on biotechs developing antibiotics, according to the impact investor the AMR Action Fund. The start-ups have either gone bankrupt, been sold off cheap, or pivoted to more lucrative areas. 

As with climate change and future pandemics, no one is taking enough responsibility for the ever-present global threat of antimicrobial resistance, scientists say. The UK, US and EU are working on ways to incentivise drugmakers to create better antibiotics, but so far, their efforts have lacked co-ordination and urgency.

O’Neill says the Covid-19 pandemic demonstrated how “devastating” uncontrolled infectious disease can be. But as people try to return to normality, he says it has become a “tough sell” for policymakers to “bombard people with dreadful views of the future all the time”. 

“Unless it gets on the 10 o’clock news, one of the top stories each day of the week, which policymakers are really going to put it right at the top of the agenda, including putting money behind it as needed? And the answer is, I can’t think of any,” he says. 

Overuse and resistance

When British scientist Sir Alexander Fleming gave his acceptance speech for winning the 1945 Nobel Prize for discovering penicillin, he warned of the dangers of rising resistance. “The time may come when penicillin can be bought by anyone in the shops. Then there is the danger that the ignorant man may easily underdose himself and by exposing his microbes to non-lethal quantities of the drug make them resistant,” he said. 

Fleming had foresight. Overuse of antibiotics is a large contributor to antimicrobial resistance, particularly in the developing world where the drugs are often available without a prescription, and in the US, where doctors frequently prescribe them for infections that may not be caused by a bacteria, such as a cold. Even in the UK, where the NHS is more cautious about doling out prescriptions, the former health secretary Thérèse Coffey admitted handing leftover antibiotics to her friends. 

The more bacteria are exposed to antibiotics, the more they evolve ways to avoid their killing mechanisms and survive. As well as overprescription in humans, bacteria are exposed to antibiotics in the food supply chain, where animals are pumped with the drugs to avoid disease in cramped conditions and, in some cases, to boost their growth. Other factors are emerging: a separate recent study in The Lancet also suggested that air pollution may be a vector for superbugs, as resistance rises in tandem with levels of small particulate matter. 

But even clinicians who are aware of the problem, and want to give antibiotics in a more targeted way, struggle because of a lack of diagnostics — tests that can identify precisely what the pathogen is. They tend to rely on so-called broad spectrum antibiotics, which should be able to tackle a range of bacteria, but have the serious side effect of building resistance even in bacteria they are not targeting.

At London’s St Thomas’s hospital, on the banks of the river Thames, microbiologists are trialing a new approach to speed up diagnosis and alert doctors to when their patient has a bacteria that may be resistant to an antibiotic.

Instead of waiting three to five days for scientists to grow the bacteria in a Petri dish and examine it under a microscope, they are using a genomic sequencer developed by Oxford Nanopore. The size of a printer, it can give its first view on what the pathogen is within half an hour, and a full report in two hours.

Previously the reports from the microscope observations had been “close to being completely unhelpful”, says Jonathan Edgeworth, a consultant microbiologist at St Thomas’s and the vice-president of medical affairs at Nanopore. They were viewed by doctors as a public health tool to track disease, not diagnose it. Now, they can use the sequencer to select the right treatment, and eventually, the data could also point drugmakers to which resistant pathogens to target and how. 

Ian Abbs, chief executive of the hospital’s trust, says they have already seen an impact in intensive care patients, where the potential financial savings of treating patients more quickly are significant. “Each day costs about £2,500, depending on the complexity of the patient. For my sickest patients, it could be £10,000,” he says. The scheme is being expanded to five other hospitals and Abbs hopes to quickly spread it across the NHS.

Incentivising research

To keep research labs open and looking for new antibiotics, philanthropists and impact investors have tried to fill the gap that venture capitalists have left.

In 2016, a US-based consortium called CARB-X launched with government and foundation money to accelerate development of new antibiotics, vaccines and rapid diagnostics. That year, the World Health Organization and the Drugs for Neglected Diseases Initiative created GARDP, a partnership to accelerate the development of treatments for drug-resistant infections. In 2020, drugmakers invested about $1bn in the AMR Action Fund, aiming to launch two to four new antimicrobials in the next decade. 

The researchers at McMaster and MIT have given their potential drug to Phare Bio, a social venture that has raised $25mn from The Audacious Project, which combines funding from TED (of TED Talks fame) and other non-profits. It is testing the drug candidate in animal studies and hopes to partner with Big Pharma to get it through clinical trials. 

“Because we have philanthropic investment to help us get through this highest risk phase, we feel that will enable us to succeed and in ways that companies that are only commercially funded even at the earliest stages may not be able to,” Akhila Kosaraju, a doctor who is now Phare Bio’s chief executive, explains. 

But for all the optimism, Henry Skinner, chief executive of the AMR Action Fund, says AI is “helpful, certainly, but not transformative” because it does little to address where the real costs lie: in clinical trials. He thinks even his fund is “at best, a stop gap, partial solution”.

“We feel a huge amount of responsibility. One billion dollars sounds like a lot of money but it is not nearly enough for the very expensive last-stage work,” he says.

To create better incentives, attention is turning to changing how health systems buy antibiotics. This year, the UK has proposed expanding its novel subscription model, so drugmakers would receive up to £20mn a year for selling innovative antibiotics, no matter how many — or how few — are prescribed. 

The pilot started with drugs developed by Pfizer and Japan’s Shionogi last year. Mark Hill, Shionogi’s global head of market access, believes it is a “very promising model” that encourages more investment, because you can prove to shareholders that you will get a return. “Unless you can get governments to think about this in a more creative way than the traditional supply, pay on demand per unit model, you can really struggle with your cash flow,” he says. 

Patrick Holmes, global innovation ​policy lead at Pfizer, praised the UK for trying to value new antibiotics partly based on how they would affect resistance rates in the future. 

The EU is planning to give drugmakers who bring a new antibiotic to market a voucher that can be used to extend the years of market exclusivity on another, presumably more profitable, drug, which it estimates will be worth about €440mn. Large drugmakers could use this for one of their own drugs, while smaller companies could sell the transferable voucher on. 

But much is riding on whether the US, the world’s largest pharmaceutical market, can push through its Pasteur Act, which would also establish a subscription-style model, with contracts valued between $750mn and $3bn. Holmes says it is the only incentive large enough to drive a significant change in where drugmakers spend on research and development. 

The act’s passage has not been smooth. It was originally introduced in 2020 and the budget has already been cut, from $11bn to $6bn. But after it was reintroduced in April this year, Mark McClellan, director of the Duke-Margolis Centre for Health Policy, is hopeful that the bipartisan bill could be tacked on to a bill on defence spending in the second half of this year.

“We’re aiming for a multibillion-dollar programme here, which might seem like a lot, but it’s actually low compared to the current and projected costs of not having antibiotics around that can treat the most important resistant organisms that are around today,” he says.

Yet even if western countries do find ways to fix their antibiotics markets, companies will still not be incentivised to launch novel antibiotics in developing countries. The problems of overreliance on broad spectrum antibiotics and a lack of diagnosis are likely to persist in regions without state of the art healthcare, and the resulting resistant superbugs are unlikely to respect national borders. 

Jayasree Iyer, chief executive of the Access to Medicines Foundation, says she wants to see global action that will help the countries that struggle with the highest need and the biggest drug resistance problems. She says antimicrobial resistance is a global problem that you cannot tackle country by country, arguing that an incentive like the UK’s subscription model is not significant enough for drugmakers to then prioritise India, Thailand or South Africa. 

“Everybody’s problem becomes nobody’s problem,” she says. “This has been on the political agenda for years now. Very little has been on the political agenda for this long.”

The UK recently announced an investment of £210mn in labs, technologies and people to track resistant pathogens across Asia and Africa. But neither western governments nor companies are significantly investing in making new antibiotics available in these countries.

An antimicrobial resistance expert at the World Health Organization says the agency is trying to promote a global approach. He warns that accessibility is becoming a problem, just like it was in the Covid-19 pandemic, when vaccine makers prioritised high-income countries, leaving developing countries behind.

O’Neill, the author of the UK review, cautiously welcomes the progress that has been made in the field in the past six months, with “some slight amazement” after years of little momentum. He believes the expansion of the UK subscription scheme, the EU proposal, and especially the size of the potential Pasteur Act, could encourage venture capitalists to support early research again. 

But he called for more urgency. “It’s not like policymakers can sit around, trotting out these ideas and never following through,” he says. Otherwise, he warns, antimicrobial resistance may cause a crisis that will make Covid-19 look like a “garden party”.

Corporate updates document worries about weak post-pandemic recovery of world’s second-largest economy

China’s gloomy business outlook threatens to have global repercussions as the world’s second-largest economy recovers weakly from strict Covid-era lockdowns, western companies have warned.

Corporate reports from a disparate array of companies around the world have documented their worries about China, which has for decades provided a booming market for everything from chemicals to cars, healthcare and travel.

“Demand in China is sluggish,” lamented Joel Smejkal, chief executive of US semiconductor manufacturer Vishay Intertechnology.

José Ferreira Neves, chief of UK ecommerce fashion group Farfetch, agreed: “The recovery is not as explosive as everyone thought it would be.”

“The major drive” behind Agilent’s revenue drop in the latest quarter was the Californian lab instrument maker’s business in China, said chief executive Mike McMullen, prompting the company to lower its annual growth targets.

China’s economy lost momentum in the second quarter of this year, data published last month showed, as falling exports, weak retail sales and a moribund property sector weighed on growth. 

Gross domestic product expanded by 0.8 per cent in the three months to June, down from 2.2 per cent in the first three months of this year. The difficulties facing the world’s second-largest economy are posing a drag on global growth.

In a bid to stimulate the economy Chinese authorities announced a package of financial market reforms earlier this month and have cut interest rates, but by less than expected. Spending has failed to pick up, exports are down and consumer prices fell last month.

Qi Wang, chief investment officer of MegaTrust Investment, which specialises in domestic Chinese stocks, said he could not remember a time when consumer, real estate and business confidence had been so low. “This isn’t just a simple, cyclical issue. It looks like something secular and structural.”

“Chinese people are not so happy and confident with their own government,” commented Martin Brudermüller, boss of chemicals group BASF, one of the largest foreign investors in China. “They spend a lot of money for the education of their kids. They have a 20 per cent unemployment rate of young people now. They have lost a lot of money in real estate. And they are simply cautious on spending money.”

He added: “The fundamentals for the next decades are not changing, but . . . [the recovery] is not kicking in, in the second half.”

Maike Schuh, chief financial officer of Evonik, another German chemicals group, described China’s recovery as “very slow”, noting construction was “still in crisis” and “unemployment, especially for younger people, seems to be a real issue”.

Markus Steilemann, chief executive of Covestro, a rival, reported a profit drop of nearly one-third on the year before, warning that a “quick recovery in China in the second half” was “not to be expected”.

Chinese tourists are going abroad less, travel company Booking Holdings said this month. “China is still not producing significantly,” said chief executive Glenn Fogel. “I don’t expect a recovery in China for us for some time, [a] significant time, probably.”

There are exceptions among consumer-facing companies including Apple, where chief executive Tim Cook talked of an “acceleration” in China as it turned a 3 per cent sales decline in its second quarter to 8 per cent growth in the third.

Starbucks, which counts China as its second-largest market, said the weak recovery had “no noticeable impact” on its sales, while Walmart reported a 22 per cent increase in its sales in the country last quarter and Ralph Lauren said its sales there had grown by more than half compared with last year, when Shanghai was locked down.

“Looking ahead, we still expect China to remain one of our fastest-growing markets,” said Patrice Louvet, chief executive of Ralph Lauren.

Netherlands-based insurance group Aegon said it had higher outflows in its asset management joint venture in China, citing what the chief executive called a “quite wobbly economy”. But its life insurance sales in the country — through a separate business partnership — rose by 80 per cent after lockdowns were lifted.

German industrial conglomerate Siemens said there had been a sharp drop in new orders in China, particular in its factory automation business. But chief executive Roland Busch said that “in the long term, we can say that China is certainly one of the major markets, and there will be profit generated”.

Mining group Rio Tinto remained “cautiously optimistic” about the Chinese economy, Jakob Stausholm, its chief executive, said. “They have demonstrated again and again, if there is a setback, they’re able to stimulate the economy and manage the economy in an effective manner.”

But others admitted they simply did not know: “It’s very difficult to call the timing and the magnitude of these turnarounds,” said Nicholas Anderson, chief of UK engineering group Spirax-Sarco. “In the case of China, my crystal ball is very hazy — [there is] a lot of fog around.”

Israel's price levels were 38 percent higher than the OECD average in 2022, but the damning numbers are part of a trend that began in 2009

According to figures published last week by the Organization for Economic Cooperation and Development (OECD), Israel topped the organization’s cost of living index for 2022. The figures may represent a year in which the Bennett-Lapid government was in power, but they are also part of a long-term trend.

The index compares cost of living with purchasing power in each member state. According to the index, price levels in Israel were 38 percent higher than the OECD average. In comparison with tourist destinations popular among Israelis, such as Greece, Portugal and Turkey, the gap is even greater, reaching, and sometimes exceeding, 60 percent. The price differentials perhaps explain why 5.75 million Israelis traveled overseas between January and July, while only 2.24 million tourists came to Israel.

The cost of living began to sharply rise in Israel in 2009, when price levels were still similar to other OECD countries. That year, Netanyahu was elected to his second term in office, after his first term in the 1990s.

There are several factors behind the dramatic increase in prices since then, among them the highly centralized Israeli economy, particularly in sectors such as food and agriculture, government services and a range of others, such as hotels and restaurants. And due to the many exclusive importers, imported goods are also expensive in Israel.

Another factor has been the strength of the shekel, even though this was caused by positive developments – namely the massive influx of foreign investments into the country.

The soaring cost of living led to social protests in 2011. This begot the establishment of the Trajtenberg Committee, which made a number of recommendations to reduce the cost of living. Some of these recommendations were implemented. For example, credit card companies were split from the banks, digital banking took hold and it became easier to switch banks in the banking sector; restrictions were eased to get small suppliers' products into major supermarket chains and the bigger conglomerates' influence was curbed in the food industry. Import duties and customs costs were also reduced. But none of these measures led to a major shift, and Israel continued to climb up the cost-of-living rankings.

The hardest hit

Over the past year-and-a-half, Israelis have had to deal not only with the ever-increasing cost of living, but have also taken another blow, as rising Bank of Israel interest rates have translated into higher mortgage payments. Underprivileged Israelis, who spend most of their income on private consumption, have been hit the hardest. The upper deciles can compensate by making purchases overseas – an option that is not accessible for the lower deciles.

According to a December 2022 report from the Knesset research committee, Israel is particularly expensive when it comes to the most basic consumer goods. Milk, cheese and eggs, for example, cost some 70 percent more than the OECD average; bread and cereals 54 percent; soft drinks 49 percent; meat 43 percent and health services 31 percent. In fact, the only thing where Israel is cheaper on international comparisons is communications services. This is not at all surprising, as the communications industry is the only sector in which the government dared to make a major reform to introduce competition.

Even in housing, in which the government could take drastic steps as most land is state owned, it has not managed to reduce prices. We have seen prices fall in the past months, but this has been the result of interest rate hikes and higher mortgage payments. Renters are also paying the price of the failed handling of the housing market, with rents rising sharply.

The shocking cost of living raises questions about why the public has remained silent – particularly the weaker segments of society. In many countries, the sharp price hikes of the past two years have led to heated protests, but in Israel, the crisis has not brought the public into the streets.

There are two possible explanations for this. One is that the public focus has been on the judicial overhaul, and the protest movement has been seen by many as the establishment versus the government. The lower classes, among whom support for the government is high, have therefore not joined in attempts to pressure it.

A second possible explanation is the measures that the government has promoted to compensate its constituents – such as handing out food vouchers, shuffling the national priorities, increasing the benefits allocated to the ultra-Orthodox population and benefits for residents of Judea and Samaria – have quelled the masses.

However, moving forward with the judicial overhaul has exacted a price in the form of the weakening of the shekel, which in turn has led to price increases for imported goods and increased inflation. According to the research by the Bank of Israel, a 10 percent devaluation in the shekel leads to a 1.5 percent rise in inflation. Since the establishment of the government, the shekel has devalued by 11 percent against the dollar, which hit 3.8 shekels to the dollar on Friday.

The exchange rate can change Israel’s ranking as the most expensive country in the OECD, but all calculations show that Israel is a horrifically expensive nation, and one that has not managed to make the fundamental changes in its economy that it needs, and suffices with compensating the government's constituent communities.