FT : Zimbabwe to launch gold-backed digital token as currency concerns mount

Zimbabwe to launch gold-backed digital token as currency concerns mount
Move comes amid drop in value of local dollar and persistent inflationary pressures

Zimbabwe is launching gold-backed digital tokens as President Emmerson Mnangagwa’s government struggles to prop up the southern African nation’s inflation-wracked currency months before elections.

The Reserve Bank of Zimbabwe said the tokens would “expand the value-preserving instruments available in the economy”, a reference to a sharp drop in the value of the Zimbabwe dollar. But the planned launch throws a spotlight on another round of currency chaos driven by the ruling Zanu-PF party’s use of money printing ahead of elections this summer.

The Zimbabwe dollar has lost more than half its value since the end of last year to reach about 2,200 against the US dollar in the country’s parallel market, compared with an official rate of about Z$1,000 that is derived from foreign exchange auctions to importers.

Now Harare is betting on the success of the digital investment, hoping that its backing with gold will damp price pressures in a country that has suffered regular rounds of hyperinflation. The launch on Monday will follow the issuance last July of physical gold coins as stores of value.

Zimbabwe produced 35 tonnes of gold last year and the central bank is a leading buyer via a gold trading subsidiary. Last week, prices for gold futures matched an all-time high of $2,072 a troy ounce.

The central bank has said the digital tokens will be backed by gold in its reserves and will be redeemable at international prices after 180 days. But analysts have called the scheme a distraction from the root causes of the currency crisis.

The token issue “has absolutely nothing to do with what’s happening on the ground — it is a sideshow”, said Tinashe Murapata, an economist, who added that the central bank had given few additional details on the physical gold backing for the token scheme, such as storage or auditing.

As ordinary Zimbabweans turn away from the local currency, its slide “is the thing [the bank] should be worried about”, Murapata said. 

Inflation has continued to run at triple digits when measured in Zimbabwe dollars, though the central bank has adopted a “blended” rate that includes prices in both Zimbabwe and US dollars. This rate is about 87 per cent. Zimbabwe’s main interest rate is 140 per cent, having been as high as 200 per cent in January.

The central bank said gold coin sales, worth up to Z$25bn up to the end of March, had “aided the dissipation of domestic inflationary pressures”.

But because the digital gold tokens will be linked to the official currency rate, analysts have said the bank is propping up demand for the Zimbabwe dollar by effectively offering them at a discount to the parallel rate.

“There is a very clear arbitrage opportunity through participating in the forex auction or buying gold coins,” said Richard Honey of Harare-based Msasa Capital, an investment advisory firm.

Economists say the central bank is also not tackling a root cause of the currency slide: the printing of money to fund government spending, reflected in a surge in money supply this year. Harare is preparing for its second election since the 2017 coup that toppled Mugabe.

“They are printing — we are in an election period,” said Murapata. “Unfortunately, [the country’s] revenues are just not enough. We have an insatiable expenditure. It will take deep-seated institutional reforms to solve it.”

Zimbabwe has struggled with monetary chaos ever since hyperinflation under Mugabe obliterated the value of an earlier form of the Zimbabwe dollar in 2008-09. Money-printing and foreign exchange shortages before Mugabe’s downfall led to the rise of an ersatz “bond note” currency that shadowed the US dollar and which was reworked into a resurrected Zimbabwe dollar by the post-coup government in 2019.

The new currency has haemorrhaged value despite frequent attempts to impose its use. The switch to a blended inflation rate acknowledged the rise of US dollar transactions but Zimbabwean businesses said the move will damage accounting standards.

“The complexity of doing business in Zimbabwe continues to increase,” said Honey.

FT : Revolut boss blames UK licence delays on banking crisis

Revolut boss blames UK licence delays on banking crisis
Nik Storonsky says fallout from SVB and other lenders has made regulators ‘extra cautious’

Revolut chief executive Nik Storonsky has blamed recent banking turmoil for the latest delays to the fintech’s long-awaited UK banking licence, claiming the cause of the hold up “is really not us”.

Revolut has been locked in discussions with the Financial Conduct Authority and Prudential Regulation Authority about a UK banking licence for more than two years, far longer than the typical turnround time of less than a year.

Since the application was lodged in January 2021, Revolut has lost several of the most senior executives in its UK banking team. Regulators have also carried out a review of the fintech’s culture, which executives say has been improved.

Revolut’s chief financial officer Mikko Salovaara said a UK licence was coming “any day now” on March 1.

The fintech sees a UK licence as crucial to its hopes of offering loans and other services to the more than 5.8mn clients it already has in the UK. It would also act as a seal of approval to help win other banking licences in key markets.

“Ultimately it is not really us, it is generally the banking crisis we see at the moment that makes regulators extra cautious,” Storonsky told the Financial Times of the hold-up to the UK licence approval.

The FCA and PRA both declined to comment. The operational teams working on Revolut’s licence application are not the same officials who were overseeing the UK’s regulatory work on Credit Suisse and Silicon Valley Bank — two of the biggest victims of a banking crisis that shows no sign of abating — though there is some overlap at very senior level.

Two people familiar with the UK licence process said the recent turmoil “would not impact” Revolut’s application.

Regulators in the UK quizzed Revolut bosses about the qualification on their delayed 2021 accounts, which warned that there was a risk that revenues were “materially misstated”, a person familiar with the situation told the FT. Separately, the FCA ordered an independent review of Revolut’s policies to prevent and detect financial crime in 2020, under a process known as a section 166.

Fees from crypto trading were Revolut’s single biggest source of revenue in 2021, accounting for approximately a third of its reported £636mn. Other streams include subscription services for higher-tier cards and lending products in Europe such as a buy now, pay later service.

The FCA has faced criticism for being slow to process licences and other authorisation applications made to it generally.

In a recent interview with the FT, FCA chief executive Nikhil Rathi would not comment on Revolut’s case but said most of the delays in its licence applications were down to genuine regulatory concerns and said the regulator would be “much more forthright and public about saying that in future”.

Movement on Revolut’s banking licence appears to have slowed down, or almost halted, according to two people familiar with the approval process. In the meantime, the lack of a licence is preventing Revolut from competing fully in the US, Canada or Australia, because regulators there are watching the UK’s decision making.

Revolut said it does not comment on licence applications or its regulatory relationships.

“If you are a business and you want to build something, uncertainty is a thing that kills you because you don’t know what you can do, what you can’t do,” Storonsky added.

Two people familiar with the company said it has considered leaving the UK, in what would deal a blow to the UK’s fintech sector and at odds with prime minister Rishi Sunak’s aims to become a global tech hub.

The company said in a statement: “We’re a British company and London is our home.”

When asked about the government’s aspirations to encourage innovation and investment, Storonsky said: “The reality is pretty different.”

WSJ : Warren Buffett Retains Sense of Optimism at Berkshire’s Annual Meeting

Warren Buffett Retains Sense of Optimism at Berkshire’s Annual Meeting
The legendary investor confirms he won’t bid for Occidental, praises Apple

OMAHA, Neb.—It has been a tumultuous year since Warren Buffett last took the stage to talk to his company’s shareholders.

Markets swooned. Tensions between the U.S. and China rose to new heights. And three U.S. banks toppled in quick succession, raising fears about the potential for wider fallout in the financial system.

Through it all, Mr. Buffett retained his sense of optimism.

Sure, society has changed significantly since he bought his first stock at age 11 in 1942. But the basic rules of investing have stayed the same, he said.

“What gives you opportunities is other people doing dumb things,” he said at Berkshire Hathaway’s BRK.B 1.21%increase; green up pointing triangle annual shareholder meeting Saturday. “In the 58 years we’ve been running Berkshire, I’d say there has been a great increase in the number of people doing dumb things.”

Mr. Buffett, chairman and chief executive of Berkshire, addressed a crowd of thousands who gathered in an arena to hear him and his lieutenants speak. The famed investor has used his company’s annual meeting as an opportunity to muse on everything from share buybacks to activist investors to corporate taxes, as well as more philosophical topics, like the meaning of a good life.

This year, he addressed Berkshire’s big bet on oil stocks, which have made it the biggest shareholder of both Occidental Petroleum and Chevron and stoked speculation that it might ultimately try to acquire Occidental.

“We’re not going to buy control,” he said of Occidental. “We’ve got the right management running it, and we wouldn’t know what to do with it.”

Mr. Buffett also praised Apple, Berkshire’s biggest stock investment. As in previous years, the iPhone maker’s chief executive, Tim Cook, was in the audience attending the meeting.

“It just happens to be a better business than any we own,” Mr. Buffett said, adding that he believed consumers would sooner give up a second car than let go of their iPhone.

Mr. Buffett also expressed his faith in the U.S., a common theme of his letters to shareholders over the past few decades. The country isn’t perfect, he said. It faces huge challenges, including a government that appears to have become increasingly tribalistic, he said. Problems in the banking sector have also illustrated that there is a serious lack of understanding among both Congress and the broader public about lenders, he added.

Charlie Munger, Mr. Buffett’s right-hand man, went one step further. The industry itself needs to reckon with its morality, he said.

“Bankers should be more like engineers…avoiding trouble instead of trying to get rich,” Mr. Munger said.

Mr. Buffett maintained, however, that if he had the chance to start life all over and pick when and where he would be born, he would without a doubt pick the U.S. today, he said.

“The world is overwhelmingly short-term focused,” Mr. Buffett said. “I’d love to be born today and go out with not too much money and hopefully turn it into a lot of money.”

Audience members also asked the men what they thought of the rise of artificial intelligence. Programs such as OpenAI’s ChatGPT, which are able to generate humanlike responses to questions, have become increasingly popular—as well as controversial—in recent months.

Artificial intelligence will no doubt disrupt many industries in the years to come, Berkshire Vice Chairman Mr. Munger said. But Mr. Munger expressed skepticism of what he called the hype surrounding the field.

“I think old-fashioned intelligence works pretty well,” he said.

At age 92 and 99, respectively, Messrs. Buffett and Munger remain as sharp as ever, said Chris Bloomstran, president of Semper Augustus Investments Group, at a conference on value investing held by Gabelli Funds on Friday.

“We just take each of these years that we still get as a victory, because it’s been one of the greatest pleasures” in life to get to come to Omaha every year and hear them speak, he added.

The tone was less celebratory outside the convention center early Saturday, where pilots for Berkshire-owned NetJets held up signs in protest of company executives, who they say have failed to meaningfully address conditions leading to a shortage of workers.

“SLOPPY SCHEDULING = FATIGUED PILOTS,” one sign read.

Shareholders present for the meeting mostly strode past, seeming to have other things on their mind. This year, like in previous years, many lined up well before sunrise in the hopes of being able to secure the best seats inside the convention center.

Hotels closest to the convention center where the meeting takes place are frequently booked up months in advance. Last year, 90% of hotel rooms in the county were filled on the Friday and Saturday nights during the weekend of Berkshire’s meeting, according to Jasmyn Goodwin, vice president of marketing and communications for Visit Omaha.

Car rentals are scarce, too. At a Hertz counter in Omaha’s airport on Thursday, one couple was stunned when they were told the last remaining cars available for the weekend would cost them about $500 a day.

To many, the voyage is worth it.

“I’ve been coming since 2012, and I hope I’ll continue coming when I’m Charlie’s age,” Adam Mead, author of a book on the history of Berkshire, said at the value investing conference Friday.

Berkshire kicked off Saturday’s proceedings by releasing its results for the first quarter. The company reported net income of $35.5 billion, or $24,377 a class A share equivalent. That was up from $5.58 billion, or $3,784 a class A share equivalent, a year earlier.

Operating earnings, which exclude some investment results, rose to $8.07 billion from $7.04 billion last year, boosted by big gains in Berkshire’s insurance underwriting business. Mr. Buffett cautioned that the majority of Berkshire businesses would likely report lower earnings this year, due to an “incredible period” for the economy coming to an end.

Mr. Buffett has long told the company’s shareholders that they should ignore net income and focus instead on Berkshire’s operating earnings, which he feels are a better reflection of how Berkshire is doing.

Meanwhile, Berkshire ended the quarter with $130.6 billion in cash and cash equivalents, up slightly from around $128.6 billion at the end of 2022.

Berkshire tapped into that cash pile to go on a buying spree in the first half of 2022, but it has slowed down its pace of stock purchases since then. For the second straight quarter, the company was a net seller of stock, unloading $13.3 billion in shares while buying $2.9 billion.

FT : Air fares soar above inflation as carriers cash in on travel demand

Air fares soar above inflation as carriers cash in on travel demand
Passengers’ willingness to pay high prices underlines strong rebound in flying over the past year

Air fares are rising at more than twice the rate of inflation, as carriers cash in on soaring demand for travel that has defied broader economic headwinds.

Average ticket prices on more than 600 of the world’s most popular routes rose at an annual rate of 27.4 per cent in February, the latest month for which data is available, marking the fifteenth consecutive month of double-digit growth, according to a Financial Times analysis of data from aviation company Cirium.

By contrast, US inflation, a proxy for global inflation in developed economies, has grown at less than half that over the same period.

The data analysed prices on popular routes flown across the world and used average one-way fares in economy, excluding taxes and fees.

It found significant price rises across many routes this year, compared to pre-pandemic levels.

The average one-way economy class transatlantic flight from London Heathrow to New York’s JFK was $343 in February this year, 23 per cent higher than in the same month in 2019.


Fares between New York and Singapore were 45 per cent higher at $887, while Dubai to Frankfurt tickets were 51 per cent up at $360.

Sixty routes with at least one leg in North America out of a total of more than 300 routes have set new highs in the past 12-months, including seven setting a new peak in February.

Fares between Miami and Bridgetown, Barbados grew 126 per cent in the year to February and ticket prices between Los Angeles to Mexico City International almost doubled — the highest year on year changes in air fares since at least 2014, the first year for which data is available.

Passengers’ willingness to pay high fares underlines the furious rebound in demand for flying over the past year, and how airlines are enjoying a sharp turnaround in fortunes following the pandemic.

“Airlines are running out of hyperbole to describe demand strength,” Bernstein analyst Alex Irving said.

American Airlines reported record first-quarter revenue in its most recent results, while Lufthansa said it expects adjusted earnings to surpass 2019 levels this spring. British Airways owner IAG and Air France both also predicted bumper summer seasons this week.

The high demand for travel comes at a time when airlines are passing on elevated costs to customers, including fuel, labour and the strong dollar for non-US carriers.


Prices have also risen because many carriers have been slow in rebuilding their pre-pandemic flight schedules, in part because of a global shortage of aircraft.

Analysts said the comparatively restricted supply of seats at a time of high demand has helped support prices, and stopped a glut of new capacity flooding the market and driving down fares.

Luis Gallego, chief executive of IAG, said “it is in our interest to offer competitive pricing”. But he added that airlines needed to pass on rising costs in the “high inflation” environment.

Airlines typically forecast demand with “incredible accuracy”, meaning they know a year in advance which flights will be full, and can charge high fares from when tickets are first put on sale in response, said Oliver Ranson, managing director of consultancy Airline Revenue Economics.

But he said the pandemic has complicated this model as demand patterns are still in flux, meaning airlines have often gone back to a cruder model of raising prices in line with sales, and raising prices for people booking at the last minute.

Airlines were one of the worst hit sectors during the pandemic and are rebuilding their finances after losing a combined nearly $200bn between 2020 and 2022, according to industry body Iata.

The high ticket prices come amid growing scrutiny of companies using high inflation as cover to raise prices opportunistically, a phenomenon dubbed “greedflation”.

Rory Bolland, travel editor of UK consumer rights group Which?, said passengers must not suffer from a rerun of the widespread travel disruption seen last year.

“Prices and profits at many airlines are soaring, so the least passengers should receive in return is a competent service,” he said.

However, Hugh Aitken, vice-president for strategic flights and industry partnerships at price comparison website Skyscanner, said there were still “deals” to be had, as fares are not rising uniformly.

“Even during busy travel periods like summer, prices are not rising on all routes, nor at the same rate,” he said.

FT : Chatroom trade: inside the online marketplace for US secrets

Chatroom trade: inside the online marketplace for US secrets
Hackers and conspiracy theorists use platforms such as Telegram to exchange leaks for cash and bragging rights

On a Telegram channel with a handful of subscribers, a self-described hacker boasts that they have something they would like to show off.

Two messages later, they have posted what they claim to be a directory of thousands of FBI employees, from intelligence analysts to interns at the US law enforcement agency; classified manuals for US warplanes; and databases from police departments across the US.

What’s next, asks one awed subscriber. “The Feds,” jokes another, before posting a training manual for the Drug Enforcement Agency, saying: “Here’s something from the collection.”

This forum is just one venue in a raucous marketplace for America’s secrets, traded by low-level hackers and conspiracy theorists for cash and bragging rights, and accessible without passwords, special software or knowledge of the dark web.

Following leads from cyber security researchers who study hacker forums for a living, the Financial Times observed over two weeks several chat groups hosting tens of thousands of pages of documents, sometimes freshly harvested from recent security breaches, sometimes consisting of repackaged nuggets from previous hacks.

They ranged from the classified material US National Guardsman Jack Teixeira is alleged to have leaked to the recently extracted gigabytes of corporate secrets that unpaid ransomware groups unceremoniously dump when negotiations with their victims fail. There were also private communications between American law enforcement and tech companies.

Often on Telegram, but also on dark-web forums where hackers and ransomware criminals share tips and show off their exploits, the anonymous participants discuss world politics and give dating advice in addition to trading leaked data.

Recently, the greatest prestige has come from sharing as yet unreported details from the Teixeira leaks.

Within seconds of one subscriber on a Telegram channel asking for the documents, a link appeared to several dozen of the leaked slides, hosted on an open directory on Dropbox. When the FT saw them, several had been unreported by the world’s media — China building cyberweapons to take over western satellites and Russian mercenary group Wagner seeking weapons around the world.

The caches pale in comparison to what whistleblowers have described as the “avalanche” of data from Russian organisations exposed by pro-Ukrainian hackers.

But the variety of documents and the relative ease with which such forums can be accessed online make it seem “like you are [seeing] the tip of an iceberg”, according to one US diplomat. “Even old classified documents have operational value — they show how we approach problems, how we assess threats, how we train people.”

Hackers’ boasts, albeit uncorroborated, appear to confirm this. “This is not the best stuff,” said one member of a group observed by the FT, referring to documents on one Telegram channel. “You could spend years here [the dark web], and never get invited to the right room.”

In the right rooms, the “best stuff” is advertised as screenshots, and often traded for stolen US or European commercial data — credit card information, emails, social security numbers.

That so many of the briefing slides Teixeira is alleged to have leaked have become currency in pro-Russian online forums shows there is a lingering risk from the disclosure. Analysts said there remained a real possibility that some of the documents had yet to surface, or that new, doctored ones could appear in Russian disinformation campaigns.

“Once this kind of data finds itself on the highway of the internet, it doesn’t take long for a small group of people to stumble upon it — and once they do, it spreads on the internet like an epidemic,” said Osher Assor, head of the cyber security department at consultancy Auren Israel.

“Every day it becomes easier to get these classified files, and it puts the U.S government in very big trouble — on top of the originals, we see more fake or manipulated files being added to further confuse and divert,” Assor said.

As new documents become public, US officials have scrambled to assess the depth of the disclosures, with some releases catching them by surprise. Pentagon press secretary Brigadier General Pat Ryder said on Tuesday that the defence department was still assessing the scale and impact of the Teixeira leaks.

The FBI declined to comment on the scale and seriousness of the wider leaks. The Pentagon declined to comment.

The wide variety of US government-related material being shared underlines its value in the underground information economy in which hackers trade. Its relative scarcity compared with Russian data made fresh leaks exceptionally valuable, said two people involved in such online forums.

Of some comfort to US authorities is that few of these hackers breach the government’s most secure databases: the most damaging leaks have come from insiders — Chelsea Manning, convicted of leaking the Iraq war logs and state department cables; Joshua Schulte, convicted of leaking the technical details of how the CIA hacks high-value targets; and Edward Snowden, who leaked highly classified National Security Agency information.

“You get big ones, like [Schulte], once in five years — here, you move fast, collect everything, hide everything, sell quickly,” said one broker of these data sets. “But then you have little ones all the time — you find something here, something there, and then you have a file on a person that’s valuable to another person.”

He described selling to a French citizen the details of a US eavesdropping operation that he had learned about by hacking the emails of a European prosecutor who was being briefed on possible criminal activity. It was not possible for the FT to verify the broker’s claims, which included a screenshot of a $250,000 wire transfer to an Albanian bank account — allegedly the payment for the tipoff.

In many instances, the criminal groups have distant ties to the Russian state, providing opportunities to disseminate documents — doctored or original — that help with Russian propaganda.

One hacker showed off sample source code, settings and test data from an industrial process that was described as producing the alloy used to reinforce the armour on American-made infantry fighting vehicles. In another conversation observed by the FT, an unidentified buyer asked if anyone had for sale a more recent copy of the US no-fly list, which contains the names of people banned from travelling by aircraft into, out of or within the country. A 2019 copy of that list had already leaked on to the internet earlier this year.

“Check DM [direct messages],” replied one user in the Telegram group, promising that what he was sharing was the “most recent”.

FT : Barrick Gold boss hunts for takeover targets

Barrick Gold boss hunts for takeover targets
Serial dealmaker Bristow forecasts market rally in gold and copper that will lift mining stocks

Barrick Gold’s Mark Bristow is on the hunt for takeovers as rival Newmont tries to push through a mega-deal, forecasting a market rally in his company’s two key commodities.

The pugnacious chief executive of the world’s second-largest gold mining group expects gold and copper prices to rise, lifting mining stocks.

His comments mark a step up in the serial dealmaker’s M&A rhetoric after playing down the need to counter the world’s largest gold company Newmont’s $19.5bn all-share non-binding bid for Australia’s Newcrest.

He added that the group had the “luxury of picking and choosing M&A opportunities” after improving operations following its takeover of Randgold five years ago and a four-year effort to build a strong exploration team.

“Because of our broad footprint of exploration across all prospective tier-one gold and copper jurisdictions, we have our geologists on the front lines. We have a much better understanding of the M&A activity than most of our peers,” he said.

Newcrest granted Newmont, the industry leader, an exclusivity period to conduct due diligence that ends next Thursday.

Bristow brushed aside concerns about dealmaking at a time when the price of gold, which, at more than $2,000 per troy ounce, is approaching an all-time high.

Copper assets are fiercely desired by many mining companies because of the estimated demand growth due to the switch to electric cars, wind farms and for transmission cables, although prices have fallen since January on a disappointing rebound in China.

Bristow said “there’s significant upside risk for the gold price and the copper price” because of tightening supply for both and threats to US dollar strength as well as the shift by central banks to diversify their reserves by holding gold in place of the greenback for the precious metal.

Even so, Bristow has ruled out at this stage bidding for the base metals business of Canadian miner Teck Resources, which could be spun out. Teck Resources was the target of a hostile $23bn bid from London-listed Glencore.

In the markets, copper prices have fallen almost 10 per cent to about $8,500 per tonne since January after the fading of optimism over China’s easing of its zero-Covid policies.

However, mining executives and traders warn that historically low levels of inventory raise the risk of prices spiking later in the year.

In the case of gold, the sector is considered ripe for consolidation because it is relatively fragmented and companies have fallen out of favour in the past over investment decisions.

Barrick’s gold production dipped to 952,000 ounces in the first quarter, down from 990,000 a year ago, due to planned maintenance at its processing plant for its set of gold mines in Nevada and the start of plant commissioning at Pueblo Viejo in the Dominican Republic. That contributed to pushing adjusted net earnings down by almost half to $247mn.

Barrick is seeking to grow its copper business by developing Reko Diq in Pakistan’s Balochistan province, which borders Afghanistan, while focusing on exploration in the Americas, Saudi Arabia and Egypt.

It reached an agreement in late March to reopen the Porgera mine in Papua New Guinea, where production has been suspended since 2020 after a dispute with the government.

FT : Deals between European private equity firms halve year-on-year as rising ra

Deals between European private equity firms halve year-on-year as rising rates hit
Companies seeking to exit investments struggle to agree on prices in negotiations with rivals

Deals between private equity firms in Europe have plunged to their lowest levels since the Covid-19 pandemic as the buyout game of pass-the-parcel is hit by rising debt costs and investors’ concerns about the economic outlook.

In the first three months of this year the value of deals struck between rival private equity firms in Europe fell to its lowest point since the second quarter of 2020, according to data provider PitchBook, as buyout houses seeking to exit investments struggled to agree on prices.

Just €16.8bn worth of companies were traded between investment firms — less than half the value of deals struck over the same period last year. Initial public offerings had their second worst quarter over the same time period, PitchBook data shows.

“It’s a very tough time to exit anything and sponsor to sponsor deals are the most acutely impacted,” Hugh MacArthur, global chair of Bain & Co’s private equity team said. “You have the macro uncertainty and, by the way, debt costs a lot more, so unless you are willing to ignore that then it is very difficult to get these deals done.”

The practice of private equity firms selling assets to one another has boomed over the past decade as the era of low interest rates let firms raise record sums which they were under pressure to deploy.

The peak for intra-PE deals came in 2021 when, buoyed by the economic rebound of reopening after pandemic lockdowns, €173bn of companies were traded between buyout firms.

Some companies passed between PE hands four or five times at ever higher valuations. Vincent Mortier of asset manager Amundi likened the practice to a Ponzi scheme. Last June, Mortier warned that firms would face a reckoning in the coming years.

With PE firms now baulking at buying assets from each other, deals are at risk of falling apart as sellers are unwilling to compromise on price.

In recent weeks, two prominent auction processes for private equity-owned companies — veterinary clinic chain VetPartners and biometrics technology company IDEMIA — have attracted muted interest from rival firms, according to people familiar with the matter.

Both companies received fewer offers than expected as potential private equity buyers were put off by high pricing expectations and increased borrowing costs, the people said. Talks were ongoing with at least one prospective buyer of VetPartners, one of the people added. Both groups declined to comment.

Eurazeo’s sale of French insurance company Groupe Premium is facing similar difficulties, other people said. Eurazeo declined to comment. Groupe Premium did not reply to a request for comment.


The slowdown means buyout groups are struggling to cash in on their bets. As a consequence, firms seeking to raise new funds from their backers are having difficulty as investors typically like to have cash returned to them before backing managers again.

Investors in private equity funds have also been hit by the so-called denominator effect whereby publicly traded assets fall in value in real time but private assets are not marked down as much — so an increasing proportion of investors’ portfolios is held in private markets.

This phenomenon has amplified the need for investors to receive cash back from the firms they invest with, before they are able to make fresh commitments.

“There is no equilibrium on valuation,” said Simona Maellare, global co-head of the alternative capital group at UBS. “What limited partners are caring about is distributions and the easiest deals to do are deals to sell to another PE.”

“One of the biggest problems for sponsors now is the LBO math doesn’t work — valuations remain inflated and the cost of borrowing has gone up,” said Saba Nazar, co-head of global financial sponsors at Bank of America.

The need to return money to investors is forcing firms to get creative.

One tactic is so-called “continuation funds”. These enable firms to move assets from one fund they manage to another, without having to sell or list the asset.

Swedish firm EQT, for example, is building out an in-house team to help do these types of deals. This week European buyout firm Triton announced it had sold four portfolio companies it owned to a continuation fund in a €1.6 billion deal.

Private equity firms have also found some success in selling assets to corporate buyers or cash-rich sovereign wealth funds. Last month Bridgepoint sold its dialysis clinic chain Diaverum to a health venture backed by an Abu Dhabi sovereign wealth fund.

“A lot of sovereign wealth funds are awash with cash and they are keen to deploy it in the right businesses where they can make a clear return,” Nazar said.

Those without access to those pools of capital hope that the world’s leading central banks stop raising rates sooner rather than later, so that they can avoid crystallising losses by selling at lower valuations or losing out on deals completely.

“Everybody can survive a year without doing too much but [18 months] or two years is a long period of time,” MacArthur said.

>>> Barron’s Weekend Summary:

Barron’s Weekend Summary:

Cover Story:
-Bud Light is the latest casualty in a battle over whether companies are embracing too many progressive goals on everything from gender identity to climate change. Companies from BlackRock to Walt Disney are under siege as political attacks on progressive corporate policies heat up ahead of the 2024 elections. Some companies are fighting back—notably Disney—and there is scant evidence of firms retreating from environmental, social, and governance, or ESG, initiatives. At the same time, conservative calls to boycott consumer brands and financial companies accused of corporate “wokeism” have gained momentum, and several Republican-led states have passed laws or rules penalizing companies they view as hostile to their economic or social interests.

Interview:
Matthew went to work for Marty Whitman, the legendary value investor who founded Third Avenue Management in 1986. He started “about one step above the mailroom” in 2000 and climbed the ladder to portfolio manager of the firm’s flagship $900M Third Avenue Value fund, which he has overseen since late 2017. Last year, the fund returned 17.5%, including reinvested dividends, while the S&P 500 returned a negative 18.1%. That performance placed Third Avenue Value in the first percentile of its category, according to Morningstar, meaning that it delivered better returns than 99% of its peers.

Tech Trader:
-On Thursday evening, Apple reported March-quarter results above expectations. Revenue fell by 3% year over year, but iPhone sales were actually up. Apple stock surged 5% on the earnings and revenue beats. Overall demand for computers and smartphones has been in free fall, following a large pull forward in spending during the pandemic. Last month, IDC said worldwide shipments of PCs fell 29% in the first quarter from a year earlier. Similarly, Intel—the largest supplier of PC processors—recently reported a 36% decline in revenue for the March quarter. The mobile phone market isn’t much better. Canalys, a research firm, said first-quarter worldwide shipments for mobile phones fell 13% year over year due to difficult economic conditions. On Wednesday, Qualcomm, the leading maker of mobile processors and 5G wireless chipsets, posted a 17% revenue decline in the March quarter, while giving a markedly worse-than-expected forecast, citing softening demand for smartphones.

The Trader:
-Haters of Starbucks stock were out in force Wednesday, despite an earnings report that showed everything going the company’s way. But, rather than sell, this is a chance to buy the stock on the dip. Starbucks’ earning report had much to like. Sales grew about 14% year over year to $8.72B, better than forecasts for $8.41B. The company gained millions of new Starbucks Rewards members, and both store traffic and total spend per store visit increased. Even the beginnings of the recovery in China, still not fully reopened, drove a moderate sales gain in the region. Profit margins beat estimates as increases in the cost of food and wages moderated. That drove earnings up 25% to 74 cents a share, better than the expected 59 cents. What seems to have raised analysts’ concerns is that management only reaffirmed its fiscal 2023 same-store-sales guidance for 8% growth, without raising its forecast.
-One would expect the Federal Reserve’s likely pause in raising interest rates to trigger a bullish response from the markets. That’s not what happened—and for good reason. The S&P 500 index had gained 7.7% this year, partially on hopes that the Fed will take a break. Economic growth has been slowing, dragging down inflation with it, providing Fed Chairman Jerome Powell with a reason to stop tightening monetary policy, if he so chooses. That’s a relief to the market, which struggled last year with some of the fastest rate hikes in history. Yet the stock market dropped when the Fed raised rates by a quarter-point but indicated that a pause is, indeed, on the way. The S&P 500 fell 0.8%, while the Dow Jones Industrial Average dropped 1.2%.

Features:
-It’s the Berkshire Hathaway annual meeting in Omaha, Nebraska. Some 30,000 Warren Buffett fans and Berkshire Hathaway shareholders have descended on Omaha for the annual ritual often called the “Woodstock for Capitalists.” The weekend kicked off with a Shareholder Shopping Day on Friday, with many of Berkshire’s dozens of subsidiaries showing off their wares in an enormous hall at the CHI Health Center. The main event on Saturday is the annual meeting itself and hours of questions for Buffett and his partner Charlie Munger, plus vice chairmen Greg Abel and Ajit Jain.
-CNH Industrial, a peer of Deere DE and Caterpillar CAT +2.24% , posted record first-quarter earnings and raised full-year financial guidance. The stock was down in early trading, until the jobs report bailed out the market. Friday morning, CHN, a maker of farm equipment and heavy machinery, reported earnings per share of 35 cents for the quarter on sales of $5.3 billion. Wall Street had expected earnings per share of 32 cents on sales of $5.1B. A year ago, the company earned 28 cents per share on sales of $4.6B. The company now expects 2023 sales to grow 8% to 11% from 2022, up from a previous range of 6% to 10%, and kept a free-cash-flow estimate range from $1.3B to $1.5B.

European Trader:
-European banks are looking better than their US counterparts. And investors are bullish on European bank stocks. The iShares MSCI Europe Financials exchange-traded fund has lost 10% over the past 10 years, while shares of US peers doubled. European banks trade at an average of 0.8 times tangible book value, says Elias Chrysostomou, an analyst covering the sector for T. Rowe Price. The U.S. ratio is 1.2. The tables may be turning. As the U.S. wraps up its third big bank rescue in seven weeks with JPMorgan Chase absorption of First Republic Bank, the European Union and the United Kingdom have remained relatively undisturbed. The continent’s one financial implosion, Swiss-based Credit Suisse, had been building for years and could safely be called idiosyncratic.

Emerging Markets:
No update this week for this column

Commodities:
-Shares of Enviva, a producer of industrial wood pellets, dropped after the company said it would eliminate its quarterly dividend and provided a weaker outlook for this year. Enviva’s press release on Wednesday it now expects a net loss ranging from $136M to $186M for 2023—compared with its previous outlook for a net loss of $18M to $48M. Enviva shares tanked 65% to $7.57 in Thursday trading, as both investors and Wall Street appeared concerned about the company’s update. Shares traded as low as $7.50, a new all-time intraday low, based on available data back to April 2015, according to Dow Jones Market Data.

Streetwise:
-This week, Jack Hough (there’s only the podcast version of the Streetwise column) discusses individual bonds versus funds? We revisit a listener question special from February, 2023, with questions on passive investing, robo advisers and bond funds.