FT : Cost of UK plan to break Big Four stranglehold rises to £1bn

Cost of UK plan to break Big Four stranglehold rises to £1bn
Financial impact of proposals to make large companies hire two sets of auditors has risen fivefold

The cost of plans to break the dominance of the Big Four accounting firms by forcing the largest UK companies to hire two sets of auditors has risen fivefold to about £1bn over 10 years, according to the latest government estimates.

The impact of the “managed shared audit” proposal was put at £210mn last year as part of a public consultation on a long-awaited package of audit and corporate governance reforms but has increased sharply after further work by officials, according to four people briefed on the matter.

Under the proposal, FTSE 350 companies audited by one of the Big Four — Deloitte, EY, KPMG and PwC — would be required to hire a smaller firm to carry out up to 30 per cent of the work.

The policy is aimed at increasing the number of players at the top end of the audit market and minimising disruption if one of the Big Four were to collapse. The quartet currently check the accounts of 99 of the FTSE 100 and about 87 per cent of the mid-cap FTSE 250.

The increased costs of about £100mn a year would equate to about 8 per cent of the aggregate audit fees paid by the FTSE 350 last year, based on analysis by data provider Audit Analytics.

The bulk of those would be borne by roughly 150 companies in the FTSE 350 that use a Big Four auditor and have subsidiaries deemed suitable for inspection by a smaller firm. Many accountants expect shared audits would lead to duplication of work and higher fees.

The rising cost projections, which officials have yet to finalise, are likely to be seized on by opponents of the reform.

Deloitte, EY and PwC have come out against the proposal while KPMG has questioned whether the system would work in practice. BDO and Grant Thornton, the two largest challengers to the Big Four, have signalled they may prefer to win more FTSE 250 audits on a solo basis than to participate in a large number of shared audits.

“The challenge will be: how do you justify this amount of cost if you’re not going to get a radically different-looking auditor landscape?” said a senior Big Four partner.

The £1bn figure has alarmed supporters of shared audits, which include the Financial Reporting Council, the UK’s accounting regulator, which worked with the government on last year’s cost projections. The watchdog was expected to challenge the updated figures “quite strongly” once it was provided details of the underpinning assumptions, said one person with knowledge of the process.

The government has already watered down key elements of its proposed overhaul of boardroom rules, developed in response to corporate failures such as those at retailer BHS in 2016, outsourcer Carillion in 2018 and café chain Patisserie Valerie in 2019.

In May, ministers dropped plans to introduce a UK version of the US Sarbanes-Oxley Act requiring directors to sign off on companies’ internal financial controls and scaled back plans to sweep more companies into a tighter regulatory system for so-called public interest entities. The move followed pressure to avoid imposing additional regulatory costs on businesses.

The government said managed shared audits were “the best approach to reforming the market” but would not comment on the projected costs of the policy until it published a revised impact assessment alongside the draft legislation “in due course”.

It added that the wider reforms would include a new, strengthened regulator and would significantly improve audits and corporate governance in the UK. The FRC said it was working closely with the government “on progressing much needed reforms”.

>>> Fed's Bostic (non-voter): Ready to move away from 75 bps hikes; Believe anot

Fed's Bostic (non-voter): Ready to move away from 75 bps hikes; Believe another 75 to 100 bps of tightening will be sufficient to rein in inflation over a reasonable time horizon (implies peak rate between 4.75-5.00%)
- Given the inflation surprises of the last year, the landing rate could be higher than I anticipate, will have to be "flexible in my thinking about both the appropriate policy stance and the pacing."
- Fed will need to pause and "let the economic dynamics play out" at some point.
- Estimates it will take 12 to 24 months for the impact of Fed rate increases to be "fully realized."
- "Being more cautious as policy moves deeper into restrictive territory seems prudent," even if it turns out that rates have to be raised again later on.
- "We want the public and markets to clearly understand our aims, and the fact that we are going to be unwavering in the pursuit to bring underlying inflation back toward our 2% objective." Fed must not be tempted to cut rates before inflation is well on track to decline to the 2% target, even if the economy weakens appreciably.

CrunchBase : The Week’s 10 Biggest Funding Rounds: Health And Biotech Land Big W

The Week’s 10 Biggest Funding Rounds: Health And Biotech Land Big Week As DispatchHealth Leads
It seems like we say this every week, but again this week was big for biotech and health care. The majority of companies on the list fall into those categories and range from women’s health to cancer treatment to in-home nursing care. It seems like in a down market, investors are going big into anything related to health, knowing there will always be a market.

1. DispatchHealth, $330M, health care: At-home care is becoming more necessary as the population gets older and hospital costs soar. Denver-based DispatchHealth is looking to help people get that in-home care. The company locked up a $330 million round led by health care-focused Optum Ventures, according to Home Health Care News. The startup provides at-home nursing services for patients who require more care or a higher degree of observation and intervention. The company partners with health systems, insurance companies and employers to offer families a long-term at-home care resource. Founded in 2013, the company has raised more than $730 million, per Crunchbase.

2. Astera Labs, $150M, semiconductors: Santa Clara, California-based Astera Labs was minted a unicorn this week after raising a $150 million Series D led by Fidelity Management and Research that values the company at nearly $3.2 billion. The company last raised a $50 million Series C — led by Fidelity — that valued the company at $950 million in September 2021. Astera Labs provides data and memory connectivity solutions for some of the biggest chipmakers in the world including Intel and Taiwan Semiconductor Manufacturing Co. The company will use the new proceeds to expand its product lines, add to its workforce, and create two new research and design centers in Vancouver and Toronto this year. Semiconductor manufacturing has been in the news for the last several years as supply chain and manufacturing issues have played havoc with the market. Founded in 2017, the company has raised more than $200 million, according to Crunchbase data.

3. Weka, $135M, data: Even in a down venture market, investors will always put money into data. Campbell, California-based Weka locked up a $135 million Series D led by Generation Investment Management at a reported $750 million valuation. Weka helps companies move data between sources faster and more efficiently. The new cash will be used to get to profitability, fuel global expansion and scale the company. Founded in 2013, Weka has raised more than $290 million, according to Crunchbase.

4. CG Oncology, $120M, biotech: Cancer treatments will always attract investment until more and better treatments are found to combat its various types. Irvine, California-based CG Oncology, an oncolytic immunotherapy startup developing therapeutics for patients with urologic cancers, closed a $120 million Series E co-led by ORI Capital, Longitude Capital and Decheng Capital. The biotech firm will use the money to advance its clinical programs in bladder cancer further toward FDA approval. Founded in 2010, CG has raised more than $200 million, per the company.

5. MBX Biosciences, $115M, biotech: Indiana-based MBX Biosciences, a biopharmaceutical company developing therapeutics to treat endocrine disorders, closed a $115 million Series B led by Wellington Management. The cash infusion will be used to support MBX into early 2025 as it develops therapeutics known as “Precision Endocrine Peptides,” which are designed to overcome limitations of traditional peptide therapeutics. Founded in 2019, the startup has raised nearly $175 million, per Crunchbase.

6. Jnana Therapeutics, $107M,biotech: Boston-based Jnana Therapeutics, a clinical-stage biotechnology company, raised a $107 million Series C led by Bain Capital Life Sciences. Founded in 2017, the company has raised more than $200 million, according to Crunchbase.

7. Bonum Therapeutics, $93M, biotech: Seattle-based Bonum Therapeutics, a biopharmaceutical company creating conditionally active and less toxic medicines, closed a $93 million Series A, which included participation from Roche Venture Fund, RiverVest Venture Partners and others. Bonum is a spinout of Good Therapeutics, which Roche acquired in August 2022 for $250 million upfront plus potential milestone payments.

8. Maven Clinic, $90M, health care: New York-based teletherapy startup Maven Clinic raised a $90 million Series E led by General Catalyst. Maven has raised more than $300 million in total funding,

9. (tied) Contentstack,$80M, content: San Francisco-based content management system developer Contentstack closed an $80 million Series C led by Georgian and Insight Partners. Founded in 2018, the startup has now raised $169 million, per Crunchbase.

9. (tied) Metagenomi, $80M, biotech: Emeryville, California-based gene editing startup Metagenomi raised $80 from Ionis Pharmaceuticals in a drug development deal. Founded in 2018, the biotech startup has raised $357 million to date, according to Crunchbase.


Big global deals
Only one of the week’s top five rounds came from abroad.
  • Berlin-based blockchain and Web3 technology startup Matter Labs closed a $200 million Series C.

FT : FTX businesses owe more than $3bn to largest creditors

FTX businesses owe more than $3bn to largest creditors
Collapsed crypto group’s 50 largest creditors are all customers and are all due more than $20mn

Sam Bankman-Fried’s businesses owe more than $3bn to their largest creditors, according to court filings, as the cryptocurrency group’s huge bankruptcy process gets under way.

The crypto exchange FTX and linked companies founded by Bankman-Fried filed a list of their 50 largest creditors on Sunday, all of which are customers and owed more than $20mn, with two of them due more than $200mn. The companies’ total liabilities are estimated at more than $10bn, according to earlier filings, and it may have more than 1mn creditors.

Publication of the list as part of Chapter 11 bankruptcy proceedings in Delaware had been delayed as bankruptcy practitioners struggled to locate reliable records at FTX group, which collapsed earlier this month after a liquidity crisis and accusations it mishandled client funds.

John Ray III, the bankruptcy expert who has taken control of the business and who oversaw the liquidation of Enron, said in earlier filings he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information”.

FTX said it may need to update the creditor list as “investigation[s] continue regarding amounts listed, including payments that may have been made but are not yet reflected on the [company’s] books and records”.

The filings show 10 clients are owed more than $100mn by FTX. The top 50 creditors, whose names are redacted in the filing, are all owed more than $20mn. FTX said in earlier court filings that disclosing the names of its large account holders would be competitively damaging.

FTX’s clients included large financial groups that traded cryptocurrencies, such as hedge funds. Unlike traditional exchanges, cryptocurrency trading venues also typically take custody of client funds. Customers who were unable to withdraw their funds before the firm halted payouts now face a long wait to recover their assets.

In other recent cryptocurrency bankruptcy cases involving Voyager Digital and Celsius Networks, a key legal question has been determining whether account holders are unsecured creditors or have a higher priority status in determining who gets recovery payments first. Another question likely to arise is whether account holders who withdrew their money just before the bankruptcy filing are subject to clawbacks.

The collapse of the exchange, which until this month was widely viewed as among the most reliable digital asset venues, has stoked fears that other firms could be at risk from their exposure to FTX and a crisis of confidence in the market.

Shares in Silvergate, a US bank known for its involvement in crypto, fell around 30 per cent last week. The bank has said it has “the liquidity and the capital ratios to support the volatility”.

Hedge fund Galois Capital earlier this month told customers it had “roughly half of our capital stuck on FTX”. Based on Galois’s assets under management as of June, that could amount to around $100mn.

In another filing on Saturday, FTX said the company had 330 workers around the world but was experiencing “extraordinary attrition”. It asked the court’s permission to continue paying remaining employees it said were critical to the bankruptcy case.

FTX disclosed in court papers that new CEO Ray is billing his time at $1,300 an hour and had been paid a $200k retainer fee. It has also retained three new executives to assist in the bankruptcy including a chief financial officer.

An initial court hearing is set for Tuesday morning in the federal bankruptcy court in Delaware in front of Judge John Dorsey.

FT : European industry pivots to US as Biden subsidy sends ‘dangerous signal’

European industry pivots to US as Biden subsidy sends ‘dangerous signal’
Politicians warn of investment exodus across Atlantic, driven by US incentives and cheaper gas prices

Northvolt, Europe’s great hope in the global battery wars, began life as a start-up focused on the continent. Now the Swedish group, backed by Volkswagen, BMW and Goldman Sachs, is looking to the US to expand production.

The reason for the pivot is the Inflation Reduction Act (IRA). The US’s flagship green technology legislation, signed into law in August, would subsidise a factory in America by about $600mn-$800mn, according to Northvolt. That compares to €155mn in incentives on the table from Germany.

The IRA “is moving momentum a lot from Europe to the US”, Northvolt chief executive Peter Carlsson told the Financial Times, adding that it was not only affecting European companies. “There are new Asian players who are reallocating their strategic plans and investments to North America,” he said.

The combination of the Biden Administration’s $369bn package and high energy costs in Europe, where even after recent declines gas prices remain five times more expensive than in North America, is sounding alarm bells in EU capitals.

“I think we need a European wake-up on this point,” French president Emmanuel Macron told executives from domestic industrial companies such as glassmaker Saint-Gobain and cement maker Lafarge in a speech last week.

Germany’s economy minister, Robert Habeck, described the US support as “excessive” and “hoovering up investments from Europe”.

While she expressed “every confidence” of finding a resolution, it remains unclear what concessions the US could make without involving Congress, which is unlikely to reopen the act.

Carlos Tavares, head of Franco-Italian carmaker Stellantis which is also home to big US brands like Chrysler, is among executives who have publicly called for Europe to consider reciprocal measures or changing its rules. State-funded electric car purchase subsidies in France, for example, apply to all vehicles regardless of origin or manufacturer.

A speedy solution for electric vehicles is possible. Last week three members of Congress introduced a bill that would delay the IRA’s requirement for North American supply chains by three years, since many US carmakers will struggle to make the necessary changes before then.

EU officials are reluctant to match US subsidies or, according to one official, “do things that are incompatible with WTO and state aid rules”.

“We designed our rules to be open and not give preferences to European companies: now we are victims of our own purism,” they said.

German finance minister Christian Lindner told the FT: “We won’t prevent European companies disinvesting and moving to the US . . . by entering into a competition for subsidies, but by creating really excellent conditions for investment in Europe.” 

In contrast, France has been pushing for the EU to adopt its own “buy European act” as it seeks to tip the playing field back in its favour.

“Europe cannot be the only place in the world that doesn’t have a Buy European Act and the only place in the world where you still have a state aid system that sets rules as if there was no external competition,” Macron said last week.

The European Round Table for Industry, a business lobby group, argued that Washington’s carrot-based approach could help the US overtake Europe in its adoption of green technologies. It said that regulatory uncertainty in the EU was hindering green technology, calling for a “concerted effort” to speed up the permitting of renewable investments.

Spain’s Iberdrola, among the world’s biggest energy companies, is lifting US investment to almost half of its global total from 2023-25, compared with 23 per cent in the EU. Ignacio Galán, executive chair, told the FT that the US was now a “very much” more appealing place to invest.

For renewably produced hydrogen, for example, the US was providing about $100bn of support under the IRA while the EU was offering just $5bn, he said.

Compounding the pressure is the higher cost of energy in the EU. France’s Safran, a leading supplier of aircraft engines and other parts, is among the companies rethinking its investment plans.

It had been planning a second factory near Lyon focused on lightweight carbon brakes that was earmarked to become a research hub for the technology. But now it is shunting more of its landing gear production to Asia and the US as it puts off any decision on the new French plant for at least another 18 months.

“My duty is to ensure any investment is economically viable,” chief executive Olivier Andriès said recently. Despite efforts to hedge against price rises, Safran’s French power costs were on course to increase nearly fivefold between 2019 and 2023, Andriès said, while they had remained stable in the US and Malaysia, where the group also produces carbon brakes.

“It’s not just a question of getting through the winter. There’s a much deeper issue at play, it’s about the competitiveness of France and Europe,” he said.

FT : UK energy regulator accused of shifting costs to consumers

UK energy regulator accused of shifting costs to consumers
Consumer group Citizens Advice critical of measures taken by Ofgem it says have boosted supplier profit margins

Energy retailers are making higher profit margins because the industry’s regulator has shifted some of the risks and costs of running their business to household bills, UK consumer group Citizens Advice has said.

Ofgem, the energy regulator, introduced a series of measures this August that boosted profit margins allowed under the government’s energy price cap — which was instituted in 2019 and put a limit on how much power companies can charge per unit of energy.

Allowed profit margins under the price cap have almost tripled from around £24 per customer on an average dual fuel bill in October last year to £63 during the same month this year, according to Citizens Advice.

“Supplier profit margins are higher than they should be,” said Andy Manning from Citizens Advice. “We are concerned that consumers already faced with a cost of living crisis are being forced to prop up energy suppliers.”

The measures contributed to the 80 per cent increase in the price cap to £3,549 a year for an average household from October 1. Households have subsequently been protected by a government bailout — the energy price guarantee — which will limit costs for the typical home to £2,500 until April next year.

However, the guarantee also protects suppliers because they receive a guaranteed payment above that level, which is included in the wholesale price of power, said Citizens Advice.

Ofgem made the changes to stop more energy companies from failing after 29 of them collapsed last year. The cost of transferring the customers of failed suppliers to rivals is being spread across all household energy bills. The National Audit Office in June said that every household is already paying an additional £94 a year on their energy bill to cover the costs of collapsed energy companies.

But Citizens Advice said the protections introduced for suppliers in August were already adding to customer costs and that the regulator had either “transferred risk from suppliers to customers or provided separate remuneration” to companies, which is paid for by households.

Analysts at Investec have forecast that the energy price cap will rise to £4,211 from January — though the government price guarantee will still be in place.

Martin Young, analyst at Investec, said that “supplying energy had turned out to be a riskier business than expected and the industry needs well-capitalised suppliers who can bring forward innovation to assist the drive to net zero”.

Ofgem has flagged concerns that allowed profit margins under the price cap are too large and launched a stakeholder consultation on the question in August. “The current approach could provide unduly high returns to energy suppliers,” the regulator said.

“We are currently considering all representations. We intend to publish a statutory consultation soon.”

Measures introduced in August that have protected suppliers include a decision to allow companies to recoup the cost of “backwardation” from October — shielding suppliers from significant mismatches in the price of near-term power and gas and prices in the futures markets.

There is also a “market stabilisation” mechanism, which compensates companies — at consumer expense — if customers switch suppliers before using the energy that had been bought for them at high wholesale prices.

A cap on the price suppliers pay for the electricity system operator to balance the system has also been introduced with consumers paying the difference.