TheChek News Flow

FT : Brookfield raises $28bn for largest-ever infrastructure fund

Investors seeking shelter from inflation plough money into airports, toll roads and pipelines

Canadian private capital group Brookfield has raised a record-sized $28bn infrastructure fund as institutional investors plough cash into strategies they expect will benefit from higher interest rates and a shift away from globalisation.

The fund, raised by the group’s Brookfield Infrastructure Partners arm, is the largest-ever dedicated to investing in assets such as airports, toll roads, pipelines and natural gas export plants. It is also the biggest fund ever raised by Brookfield, which manages $850bn across sectors spanning real estate, credit and insurance, renewable energy and corporate buyouts.

The record haul comes as other large asset managers including Blackstone and KKR, and specialised infrastructure investors such as Global Infrastructure Partners, have raised substantial new funds or are setting ambitious goals for new funds. GIP is targeting $25bn for its latest infrastructure fund, while Blackstone has set a goal to manage more than $100bn in infrastructure.

Since last year, when central banks began to drive up global interest rates in an effort to tamp down inflation, many institutional investors have treated infrastructure as a haven from rising price trends. The assets often generate revenues indexed to inflation, even as they are financed with fixed-rate debt.

By contrast, higher interest rates have created new challenges for traditional corporate buyouts. Leading private equity firms have recently pared fundraising goals for such deals as investor enthusiasm weakens.

Sam Pollock, chief executive of Brookfield’s infrastructure investment arm, told the Financial Times that he believes a “deglobalising” world, where large companies are bringing production closer to home and sourcing their energy needs from geopolitical allies, has dramatically expanded the pool of potential infrastructure investments.

“I think there’s a huge amount of opportunity to deploy capital that should soak up any money coming in.”

The reshoring of critical industries such as energy and semiconductors to the US, Pollock said, “requires a ton of new capital to reinforce supply chains and energy infrastructure”.

Pollock also said $1tn will be need to be invested to “rewire all of the digital infrastructure around the world” with new data centres and fibre and tower communications networks.

Alternative asset managers have increasingly been helping companies to hive off large infrastructure assets in need of heavy new investment outside of their balance sheets. Brookfield has struck infrastructure investments with groups including Intel, Deutsche Telekom and Reliance Industries to build assets ranging from semiconductor fabrication plants to fibre networks and cell towers.

In the fundraising, Brookfield took in $28bn for its fifth flagship infrastructure fund, more than a $25bn goal it set when it began to raise money last year, and 40 per cent more than a prior fund raised in 2020.

Roughly 200 large institutional investors such as pensions and sovereign wealth funds contributed $21bn to the fund, while Brookfield will invest $7bn through cash on hand and the issuance of new stock. It also raised $2bn from separate vehicles that will co-invest alongside the fund, bringing the total amount of capital raised to $30bn.

The nuclear power renaissance has some way to run

EDF is vowing to build one reactor a year but challenges range from funding to a lack of skilled workers

When France first hosted a nuclear power trade fair about a decade ago, in the wake of the Fukushima disaster, it was a low-key affair. Two years ago, organisers’ main worry was to avoid anti-nuclear protesters marring proceedings. 

This week, the buzz at the vast salon on the outskirts of Paris was unequivocal. Miss America 2023, a nuclear engineering student, was on hand to help the event court the limelight, and champagne flowed on the stands displaying radioprotective gloves and designs for cutting-edge small reactors. 

The message was clear: nuclear power is back, and France, Europe’s atomic power champion with its 56 reactors, intends to be at the heart of this revival.

“We’re coming out of a period of taboos [over nuclear],” said Sylvie Bermann, a former French ambassador to China and Russia who heads the Paris show.

The industry and its low-emission technology would also have its moment for the first time at the COP28 climate summit in the United Arab Emirates, with a dedicated event, she added.

After years in the doldrums, mindsets over nuclear have shifted, spurred by climate worries and an energy crisis last year when Russia launched its full-scale invasion of Ukraine and cut gas supplies to Europe. Even Japan, home to the Fukushima meltdown of 2011, has restarted idled reactors, while a host of other nations are considering new plants, giving suppliers reasons to feel more optimistic.

What is less obvious will be the move from aspirations to reality, in a sector where building reactors is costly and slow, especially after decades without projects drained the industry of skilled workers. 

Part of the promotional push by France and other pro-nuclear nations is aimed at solving some big obstacles. Chief among them, according to the head of the UN’s nuclear watchdog Rafael Grossi, is the financing, including from multilateral bodies. 

Paris, which is riding high on recent EU wins to gain some subsidies for its existing plants, originally opposed by staunchly anti-nuclear Germany, has campaigned for instance for the European Investment Bank to help fund the construction of new reactors.

“Nuclear has been constructed very fast when the money’s there,” said the International Atomic Energy Agency’s Grossi, citing the United Arab Emirates, which had gone from “zero to champions” in roughly eight years with a $20bn-plus project for four Korean-built reactors. They are almost all now online. 

There’s also a lot to prove on the industrial front. France’s state-controlled nuclear power operator EDF aims to build roughly one 1.6 Gigawatt reactor a year once it gets going with its new orders for at least six new ones in France by the mid-2030s, according to chief executive Luc Rémont. 

Considering its prototype in northern France known as Flamanville 3 has been 16 years in the making, it is an extremely ambitious goal. Rémont argues that parallel projects (the state-owned group is bidding for projects in India and the Czech Republic) would help EDF become better and faster. 

There are other challenges. Many nations have long been dependent on Russian nuclear fuel, including the US reactor fleet, and finding sufficient alternative supplies could take years. 

Meanwhile, the IAEA forecasts that over the next 20 years the industry’s share in the global energy mix — roughly 10 per cent of the world’s electricity generation today — will remain flat, if not decrease slightly, unless there are even more ambitious construction plans.

Developers argue, however, that the hardest battle is getting political buy-in to give them the visibility they need. Judging by the upbeat messaging coming out of Paris this week, that part of the complex nuclear equation at least is some way towards being solved.

Thames Water owners pile group with debt

Shareholders structured a £500mn cash injection as a loan charging an 8% interest

The owners of Thames Water lent the £500mn that the utility later presented as “new equity funding”, in a move that will raise further concerns over the financial stability of Britain’s largest provider of water and sewage services.

The unregulated parent company of Thames Water in March received a £500mn loan from its shareholders — charging 8 per cent annual interest — in an arrangement that highlights the complicated structure of water company ownership.

Thames Water, which supplies water to about 25 per cent of the population in England, presented the loan in March as “£500mn of new equity funding from its shareholders” to improve “leakage and river health” and deliver a turnaround plan.

However, the recapitalisation involved the owners — which include sovereign wealth, private equity and pension funds — providing a £515mn convertible loan to Thames Water’s parent entity, Kemble Water, according to the company’s accounts.

Kemble then “cascaded” £500mn of this borrowed money down the chain of holding companies that own Thames Water into the regulated utility.

The £515mn increase in debt at Kemble has pushed the group’s consolidated borrowings to over £18bn, having risen from just over £15bn as of March 31 2022. While the loan could convert to equity in the future, it is treated as a liability in Kemble’s accounts.

The arrangement will add to concerns over the financial future of London’s water provider. The company was plunged into turmoil after Sarah Bentley, the chief executive, abruptly quit after a boardroom row in June. Cathryn Ross, a former head of regulator Ofwat, is acting as interim head until the company appoints a new chief executive early in the new year.

The utility is now under close watch by the government, which is on standby for a temporary nationalisation in case it collapses. It is also seeking approval from Ofwat to be allowed to increase customer bills by around 40 per cent — before inflation — by 2030.

Dr Kate Bayliss, research associate and water expert at Soas University of London, said it was “outrageous that both Thames Water and Ofwat led us to believe that the company was getting £500mn of new equity investment when it was in fact just a loan”. 

“It’s not surprising that shareholders want to protect their money but it makes it unclear how much — if any — is going to reach frontline services, and what is likely to happen to the additional funds raised from shareholder bills.” 

Kemble Water has no income other than dividends from Thames Water, meaning any interest payments on the loan may ultimately be borne by customers through their bills. Thames Water is already struggling with high interest rates on its debt, more than half of which is linked to inflation, as well as rising energy and staff costs.

The company says it will need more shareholder funding to deliver its turnaround plan, cut sewage, improve leakage and reduce the likelihood of water shortages during dry spells. Thousands of customers in west London were left without water for several days in September because of failures at water treatment works. 

The company says it has a conditional agreement from shareholders to invest an extra £750mn in equity by 2025, and says it requires a further £2.5bn by 2030. 

However, its largest investor, the pension fund Omers, took a 30 per cent write down on its Thames Water stake last year, raising concerns over investors’ willingness to put more cash into the business. 

Omers did not respond to a request seeking comment. USS, another large shareholder, declined to comment.

Investors, which include sovereign wealth funds, have asked for a number of conditions to be met in order for them to invest equity including restrictions on regulatory fines, improvements to the allowed rate of returns and increases to bills. 

Tim Whittaker, head of data at Edhecinfra and Private Assets, a research institute, said the “loans wouldn’t do anything to significantly de-lever Thames’ balance sheet, which has been one of the core risks investors have had to reprice recently”. 

Whittaker added that it is “unclear if these repayments would be blocked” by Ofwat under new licence agreements that take effect in 2025 and which are meant to restrict underperforming monopolies’ ability to pay dividends.

Thames Water said: “We are extremely fortunate to have such supportive shareholders. Their commitment to delivering Thames’ turnaround and life’s essential service is reflected in the largest shareholder support package ever proposed in the UK water sector, whilst taking no dividends out.” 

“Our audited 2022/2023 annual report and accounts record that £500mn was invested by shareholders into the business.”

 Ofwat said: “Thames Water must address their operational shortcomings and strengthen their financial resilience. The recent injection of £500mn new equity into the business is welcome in that regard. All dividends paid by the regulated company must be declared in accordance with company law and the terms of their licence. We have new powers to take enforcement action against companies that break the rules.”

Thames Water was formerly majority owned by the asset manager Macquarie, which raised its debt from £3.4bn in 2007 to £10.8bn when it sold the business in 2017. 

FT : Heathrow/infrastructure investment: Ferrovial departure looks well timed

New stakeholders may struggle to get take off on investment returns

Sellers of infrastructure assets can extract high prices from bidders. One reason is that motorways, airports, pipelines and the like usually have long-term, steady cash flows, often with an element of inflation protection, and buyers can load up their investment with debt. Adding debt amplifies investment returns and losses.

Perhaps Ardian, the private equity house that is buying part of Ferrovial’s stake in Heathrow airport alongside Saudi Arabia’s Public Investment Fund, plans to do the same. Without an added slug of debt, it is not easy to see how it might make the mid-teen returns on equity that it usually targets on infrastructure projects. 

Ardian and PIF are paying a healthy £2.4bn for Ferrovial’s 25 per cent of Heathrow. Other shareholders, which include the Qatar Investment Authority, Caisse de dépôt et placement du Québec and Singapore’s sovereign wealth fund GIC, can choose to keep their holdings, buy Ferrovial’s shares, or tag along and sell into the bid.

The bid implies an equity value of £9.5bn. Add in the year-end net debt, which Mediobanca Research pencils in at £16.3bn, and the enterprise value is just shy of £26bn. That is a near-30 per cent premium to Heathrow’s regulated asset base. This will reflect the accumulation of the net value of investment that its owners have made into Heathrow.

That price is also about 13 times next year’s projected earnings before interest, tax, depreciation and amortisation (ebitda), expected to be lower than this year given the cut in regulated landing fees. Listed competitors travel at around 10 times. Vinci, the French infrastructure and construction group, which bought 50.1 per cent of Gatwick in 2018, paid more. But that was for a pre-pandemic majority purchase. Ardian and PIF might end up stuck at 25 per cent.

Ardian will need to sweat the asset to achieve mid-teen investment returns. Assume, for the sake of argument, that over the next decade Heathrow increases its ebitda by 3 per cent a year and cuts interest costs gradually. Hold annual capital spending and tax steady at £800mn to £900mn. If Ardian then sold out at 12 times ebitda, it could achieve an annualised rate of return in the high single digits.

True, this might well creep into the double digits should the new investors leverage their own investment. And there may be room to nudge up Heathrow’s cash flows. Analysis by Citigroup suggests that it underperforms on retail revenues compared with Zurich and ADP. Lastly, none of these rough-and-ready numbers factors in the — increasingly remote — prospect of a third runway. Nevertheless, at this point, Ferrovial has extracted a good price for its holding.

ADP/green travel: French regulators move de Gaulle posts

In general, infrastructure investments are chosen for their predictable cash flows. But for airports that is not always the case. Witness what occurred during the pandemic. Also, changes in the regulatory landscape can spook investors. Just look at what is happening in France.

New regulators want to change the way airports are paid for their facilities. Legal changes are likely. The tacit approval of transport minister Clément Beaune is causing turbulence. Shares in ADP, whose properties include Paris’s two largest airports, fell as much as 6 per cent on Monday in response.

The jet lag from the pandemic is finally dissipating from the European travel industry. Traffic levels are almost back to 2019 levels. At ADP they might hit just over 90 per cent this year.

Paris Charles de Gaulle airport is not only mainland Europe’s busiest airport. It is also a nexus for international travel for France’s luxury industry. It is highly profitable for ADP. Those earnings have so far largely fallen outside the reach of regulators. That may change as France pushes ahead with efforts to green up its aviation industry.  

Regulators assess airport profits in two ways; dual till or single till. ADP has been mainly subject to the first approach. That means most of the money it makes from selling sandwiches and handbags goes to shareholders.

Regulators consider the whole take in single till systems, at London Heathrow, for example. That increases the amount of investment in green infrastructure they can mandate. This means lower returns for shareholders, notes Andrew Lobbenberg of Barclays.

ADP’s position is now uncertain. That explains the near one-fifth underperformance of its shares compared with peers this year. The shares previously commanded a premium. This has now all but disappeared.

The French government plans to move single till airports to a new hybrid model. Whether ADP will be moved from dual till to the new model remains unknown. But France is leading Europe’s push to green its aviation industry and someone will have to pay for it.

Restructure or liquidate? Deadline looms for China’s Evergrande

Heavily indebted developer must come up with a plan before crucial court hearing on Monday

In April, a group of international investors holding billions of dollars of Evergrande bonds backed a restructuring of the stricken Chinese property developer. Now, they are braced for a court hearing on Monday that could lead to the company’s liquidation.

It has been a tortuous road for overseas creditors of Evergrande, whose default in 2021 triggered a China-wide property crisis that continues to rock the world’s second-largest economy.

Monday’s hearing at Hong Kong’s High Court could prove a key moment in deciding what value can be salvaged from Evergrande’s bonds. It could also be an important test of the treatment of international investors when a mainland Chinese company fails.

The Hong Kong winding-up lawsuit, brought by offshore investor Top Shine Global last year, alleges Evergrande has failed to honour claims of HK$863mn ($110mn). At a previous hearing in October, Judge Linda Chan gave Evergrande “one last opportunity” to formulate a new restructuring proposal, warning that otherwise it was “very likely” to be subject to a winding-up order.

Bondholders’ advisers have said this order is likely to lead to the group’s “uncontrolled collapse” with a “catastrophic effect” on other developers in China and the ability of Chinese companies generally to raise money in international capital markets.

“If this goes to liquidation, the remaining options are likely to be far less palatable” to overseas investors, said Brock Silvers, chief investment officer at private equity firm Kaiyuan Capital in Hong Kong. Evergrande did not respond to requests for comment.

The international creditors had hoped for better in April when they backed Evergrande’s restructuring plan. The deal offered them various instruments depending on their holdings, including new notes with a 10- to 12-year maturity issued by the company and bonds that could be exchanged for shares in its Hong Kong-listed subsidiaries.

But in September, Evergrande cast doubt on the plan, saying it could not issue new notes because its mainland business, Hengda Real Estate, was “being investigated”. Days later the group said its chair, Hui Ka Yan — once Asia’s richest man — had been placed under “mandatory measures” on suspicion of involvement in unspecified “crimes”.

At October’s court hearing, Evergrande’s lawyer said it would look into “monetising” shares in two of its Hong Kong-listed subsidiaries, electric vehicle company Evergrande New Energy Vehicle Group and Evergrande Property Services Group.

It has since offered creditors a 30 per cent stake in each of the two units, and a nearly 18 per cent stake in Evergrande itself, a person with direct knowledge of the matter said. However, they added, it was not clear whether creditors would accept such a deal.

The combined market value of the two units is about $1bn against $30bn in total international bondholder claims based on a Bloomberg estimate.

In a blow to creditors ahead of October’s hearing, Dubai-based technology company NWTN said it was suspending a deal to invest $500mn in the electric vehicle unit, which was developed as part of Evergrande’s expansion out of the property sector before its default.

In April 2021 the electric vehicle company’s market value was almost $87bn — more than titans of the car industry such as Ford — despite never having produced a single vehicle.

Originally a healthcare company that was renamed in 2019, it raised funds from its parent and investors including Sequoia China — now known as HongShan — Chinese internet giant Tencent, Jack Ma-backed private equity firm Yunfeng Capital and ride-hailing group Didi. Nearly three years later, it is worth just over $400mn. As of May 2023 the EV unit said it had delivered more than 1,000 units of its flagship model since its launch last year.

The property services unit said this week it was suing its parent company to recover deposit certificate pledge guarantees for just under Rmb2bn ($280mn). A person close to that lawsuit said it was a sign the unit’s executives expected the parent company to be liquidated and were trying to protect their own interests.

Evergrande’s dollar bonds are trading at deeply distressed levels. One bond maturing in 2025, on which Evergrande has already defaulted, has fallen to less than two cents on the dollar.

If the Hong Kong court orders Evergrande to be wound up, bondholders’ attempts to salvage some returns would enter a new and perhaps even less predictable phase.

A liquidator could try to take control of Evergrande’s Cayman Islands holding company and its complex web of subsidiaries, including the property services and EV arms, a Hong Kong-based restructuring lawyer not involved in the case said.

In theory the liquidator could try to seize control of some Evergrande assets in mainland China under a 2021 mutual recognition agreement between Beijing and Hong Kong.

In practice, some lawyers doubt this would succeed. It is not clear mainland courts would accept a Hong Kong judge’s winding-up order, they said, and the onshore units would likely have to repay onshore creditors first.

“Even if you got lucky and found a Shenzhen judge, for example, to recognise your power over some assets in Guangdong somewhere, when it comes to enforcement, it’s not a level playing ground,” said a second Hong Kong lawyer who specialises in restructuring and insolvency.

“I don’t think anyone going in as a liquidator of Evergrande is going to be holding too much hope of making a recovery in mainland China.”

For years the offshore bondholders reaped high returns from their exposure to one of China’s biggest developers. Last month a lawyer for some bondholders said in court that in the event of a liquidation, they might expect to receive less than three cents on the dollar.

The outlook could be even worse. The process could take a decade or more, the second Hong Kong lawyer said, adding: “They may be looking at zero recovery.”

Foreign minister Annalena Baerbock says country will fulfil its international obligations

Germany’s foreign minister Annalena Baerbock has said Berlin will stand by all its international financial commitments to tackle climate change, despite a budget crisis that has thrown its 2024 spending plans into disarray.

“We will always be a reliable partner,” Baerbock told the Financial Times ahead of the UN’s COP28 climate summit in Dubai. “That’s why we agreed within the federal government that we will fulfil our international obligations.”

These included €6bn in international climate finance that Germany had committed to provide by 2025, €2bn for the UN’s Green Climate Fund, and Berlin’s contribution to a new global fund to address climate-related loss and damage in developing countries, she added.

Baerbock was speaking as the German government scrambled to plug a €60bn hole in its public finances created by a bombshell judgment by the country’s constitutional court on November 15 that plunged chancellor Olaf Scholz’s three-party coalition into crisis.

Judges struck down a 2021 move by ministers to repurpose funds earmarked for dealing with the Covid-19 pandemic to fighting climate change. The court ruled it violated the rules of the “debt brake”, a strict curb on new borrowing enshrined in the German constitution.

Baerbock said the most sensible solution to the fiscal problem was to reform the debt brake itself, which limits the federal government’s structural deficit to 0.35 per cent of gross domestic product.

It has been suspended since 2020, initially because of the pandemic and then later because of Russia’s war on Ukraine and the sharp drop in Russian gas supplies to Europe.

“Its original authors could not have anticipated that it would end up leaving us wholly unable to deal effectively with the kind of emergencies and crises we’re going through now,” the foreign minister said.

She added that it needed to be expanded to include an “investment component” that would allow for spending on big infrastructure projects.

The opposition Christian Democrats have said they would not co-operate in any attempt to amend the debt rule, a move that would require a two-thirds majority in parliament.

But Baerbock said that several Christian Democrat regional governors had “indicated that [reform] would be a good idea”.

“The regions are . . . asking if it’s a good idea to just patch up crumbling infrastructure or whether it might be better to really invest in the railways, the expansion of broadband, things that will make the regions strong,” she added.

Germany’s first female foreign minister and one of its most prominent Green politicians, Baerbock has long played a big role in international climate diplomacy.

She has been a strong advocate of the idea of a “loss and damage fund” to compensate developing countries for climate-related damage — an idea that finally came to fruition at the start of COP28 in Dubai on Thursday when Germany and the United Arab Emirates announced they were both contributing $100mn to the fund.

Baerbock called the announcements a “breakthrough”, adding she was “really hopeful that other big emitters like Saudi Arabia and China will also show responsibility at COP28 and contribute”.

The summit comes amid growing concern among scientists about the speed of climate change and the increasingly frequent extreme weather events it is causing.

According to a UN report released last month, the world is heading for a temperature rise of between 2.5C and 2.9C by 2100. That is far off the goal set in Paris in 2015 to limit global warming to 1.5C above pre-industrial levels. 

“With the war in Ukraine and the crisis in the Middle East, the international community is facing almost unprecedented challenges, and that’s why this COP is so unbelievably important in geostrategic terms,” Baerbock said.

“We’ve seen in this year alone how wounded the world is, with the forest fires in Rhodes, or the drought in the Amazon basin.”

Baerbock said Germany would use COP28 to press for agreement on a gradual phaseout of all fossil fuels, a position that is likely to encounter strong opposition from major oil and gas-producing countries such as Russia and Saudi Arabia.

She added that a phaseout was needed to achieve the Paris climate goals. “Fossil fuels make the biggest contribution to global warming,” she said.

Sultan al-Jaber, chief executive of the Abu Dhabi National Oil Company and president of COP28, has said he will seek support for an agreement to triple renewable energy capacity and double energy efficiency. But Baerbock said that was not enough.

Only by combining those two goals with a fossil-fuel phaseout “can we hold off the worst of the destruction”, she added. “Otherwise, we won’t be able to deal with the damage caused by climate change.”

Jaber has faced criticism over his closeness to the hydrocarbons industry, with allegations that he will use the UAE’s role as host of COP28 to discuss oil and gas deals. Jaber has said these claims were “false”.

Baerbock dismissed the criticism of the COP28 president. “Obviously countries which have built their wealth on fossil fuels won’t wake up one morning and give up that wealth — until they have an alternative,” she said, noting the UAE were also investing heavily in renewables.

Baerbock said she was in “favour of trying to overcome the old divisions in climate diplomacy”, pointing to Germany’s membership of the High Ambition Coalition, which calls for more aggressive action on climate change and brings together nations as disparate as France, Kenya, Jamaica and Fiji.

“We have to try to bridge the gaps that have always existed between north and south, between industrial nations and developing countries,” she added.

Many important tech breakthroughs originated in research organizations. But the innovations are most often commercialized elsewhere.

There’s much speculation about the reasons for the abrupt removal and subsequent return of Sam Altman as the CEO of OpenAI. Irrespective of who leads the company going forward, OpenAI faces a fundamental challenge in reconciling its mission with its choice of corporate structure and business model. To solve it, we can learn from the history of tech innovations.

Much of the discourse on OpenAI’s dysfunction has focused on tribal disputes—management against the board, AI safety advocates against business leaders and open source advocates against private innovation champions. OpenAI is too important of an initiative, and its people— whether working on research or commercialization—are too great to be trivialized by a focus on personalities or social media posturing. Instead, we should look at history.

Research organizations have developed many revolutionary technologies. But most often, these innovations have been commercialized and popularized by other, for-profit companies. Consider: Researchers at Bell Labs invented the transistor, but Fairchild Semiconductor commercialized it. IBM’s T.J. Watson Lab pioneered work on dynamic random access memory, but Intel made the first commercial DRAM chip. Xerox Parc invented Ethernet and the graphical user interface, but 3Com and Apple, respectively, commercialized them. Hypertext Transfer Protocol was invented at CERN and made broadly accessible by Netscape’s web browser. Most relevantly, the transformer architecture was invented at Google and popularized by OpenAI via ChatGPT.

There are many reasons why the businesses that nurture groundbreaking research have repeatedly failed to capitalize on those innovations commercially. They include misalignment of corporate culture, employee motivations and incentives, investors’ differing time horizons and return expectations and differences in risk tolerance.

A researcher motivated to do groundbreaking innovation and ensure it is both novel and safe may view a rush to commercialization as rash. Conversely, those who aspire to beat competitors to market with an innovative product don’t want to wait to ensure every corner case is accounted for; waiting to achieve perfection may allow others to reap the rewards. Those who are concerned about safety still may differ about the size of the risk and how to mitigate it. Is advanced artificial general intelligence akin to nuclear energy or the natural evolution of computer science? Governments, philanthropies and private investors that back research efforts measure their returns in different ways over different time periods. Aligning such differences in objectives and incentives under one roof has historically been very difficult if not impossible.

OpenAI created a for-profit commercial entity under its original nonprofit research parent. This experiment to have the best of both worlds under one roof might have been ingenious but clearly failed to resolve the misalignment between research and commercialization. The company should take heart that its predicament is not unique, rather a recurrence of a fundamental organizational conflict in tech innovations.

In its post announcing Altman’s firing, the previous board of OpenAI made clear that it is a nonprofit with the responsibility to advance its mission of ensuring that artificial general intelligence benefits all of humanity. History suggests that for this mission to have widespread impact, the company ought to reverse course, go back to its roots as a research organization and leave commercialization to others. Hopefully the new board will pursue that path.