FT : UK energy suppliers call on government to scrap levies and charges on bills

UK energy suppliers call on government to scrap levies and charges on bills
Companies say quickest way to reduce costs for households would be to move burden to tax

Energy suppliers including British Gas, Eon and Octopus have called on the UK government to move a swath of charges from customer bills into general taxation as they face growing pressure to lower soaring costs for households.

With UK gas and electricity bills forecast to reach as high as £5,000 a year next spring, four times the level before the energy crisis, suppliers have argued that the quickest way to reduce the hit to households would be to strip out many charges unrelated to the rising price of wholesale gas.

Greg Jackson, chief executive of Octopus, the UK’s fourth-biggest energy supplier, said energy bills had become a “catch-all basket” for charges ranging from support for poorer homes to levies to support investment in renewables.

Wholesale gas and electricity costs currently account for just 57 per cent of the typical dual-fuel annual bill of £1,971 under the price cap, or around £1,077, according to regulator Ofgem. The rest — almost £900 — is made up of transmission costs, the standing charge and a plethora of other fees.

Companies have long argued that some of these extra charges are necessary but also regressive as they hit the poorest households hardest. They say that some would be better paid for through tax, which would put more of the burden on higher earners.

“For decades, whenever a scheme is announced, the cost is loaded on to bills,” Jackson said.

“These costs are now making high energy bills even higher, and need to be slashed as part of market reforms.”

Eon, which is also calling for an energy efficiency drive, has calculated that moving various charges into taxation and cutting VAT could lower bills by more than £420 in October, when the UK’s energy price cap is expected to rise to around £3,500 for a typical household, from £1,971 today.

That is more than the planned £400 in support being provided by the government to all UK households.

The £420 total includes £176 in VAT (if bills reach £3,500), £153 for social and environmental levies, and removing the £94 cost per household of transferring customers from dozens of failed energy suppliers.

The proposal would trigger an estimated £10bn-£15bn cost to the taxpayer.

Chris O’Shea, chief executive of Centrica, owner of the UK’s largest supplier British Gas, said it was “unfair” how charges were structured.

“Funding environmental costs through the bill means every customer pays the same amount, regardless of how rich or poor they are,” he said.

The total savings on bills could surpass £500 if the cost of the temporary nationalisation of Bulb, the biggest of the failed energy suppliers, was paid through tax rather than spread across all households as expected next year.

The call from suppliers, which have also backed additional government support to the poorest households, comes after electricity generators were summoned to an emergency meeting with prime minister Boris Johnson and cabinet colleagues this week, which sought solutions to an energy crisis that threatens to trigger a deep recession.

The meeting did not yield any decisions but people who attended have said there were “creative” proposals to be examined in the coming weeks. No decisions are expected until after the Tory party leadership vote in early September.

Electricity generators, particularly those not reliant on gas for power generation, are worried that they could be hit with a windfall tax on excessive profits to help fund additional support for households. They have seen revenues soar as gas has pushed up power prices, while the cost of generating electricity from renewables and nuclear has barely risen.

Wholesale gas prices, driven to about 10 times normal levels by Russia restricting supplies following its invasion of Ukraine, are by far the largest driver of soaring household energy bills.

They could make up around 80 per cent of the total by the spring if bills approach £5,000 as predicted.

Household bills also include around £300 of transmission and network charges, which the energy suppliers are not suggesting be moved into general taxation.

Campaigners such as Fuel Poverty Action are calling for the abolition of the so-called standing charge, which adds around £371 a year to bills for connection to the energy networks, regardless of whether any gas or electricity is used.

Both Tory leadership candidates Liz Truss and Rishi Sunak have indicated that they would suspend VAT from household bills. Truss has also said that she would remove environmental levies. Sunak has indicated that he believes that households will need additional support this winter.

Longer term, energy suppliers are pressing for the electricity price to be decoupled from the cost of gas to better reflect the impact of renewables on the market.

“The UK has a single wholesale electricity price every half-hour — usually set by the price of gas,” said Jackson. “So even if cheap renewables are in use this doesn’t filter through to consumers, which is bonkers.”

A government spokesperson said: “The high global gas prices and linked high electricity prices that we are currently facing have given added urgency to the need to reform Britain’s electricity market. We are already consulting on a wide range of options for reform — including decoupling clean energy from the marginal gas price — and will carefully consider the impact of options on consumers and suppliers.”

Barrons : 7 Companies at Risk of Liquidity Squeeze

7 Companies at Risk of Liquidity Squeeze

Amid rising interest rates and a tightening credit market, companies with weaker balance sheets are getting squeezed by higher borrowing costs.

Royal Caribbean Group RCL +1.56% (ticker: RCL) is a case in point. The cruise operator had $5.5 billion in short-term debt at the end of June, but $2.1 billion in cash. Royal Caribbean just issued $1.15 billion worth of convertible notes to cover some of its current debt, pushing their maturity from 2023 to 2025. But it comes with a higher interest rate—6% instead of the retired debt’s rates of 4.25% and 2.875%.

However, the firm’s operating cash flow turned positive last quarter and CEO Jason Liberty said he plans to get the company’s balance sheet back to what it was prepandemic. The company couldn’t be reached after multiple requests for comment.

To fight inflation, the Federal Reserve has raised its benchmark interest rates by 2.25 percentage points since March. That could spell trouble for higher-risk issuers that need to refinance debt or borrow more.

“Not only do these issuers generally have fewer funding options, but growing risk aversion amid market volatility and rapidly shifting financing conditions could exacerbate their refinancing risk and funding costs,” wrote S&P Global Ratings analyst Evan Gunter in a recent report.

Already, bond issuance for junk-rated issuers has dropped 75% in the first half of 2022. The amount of distressed debt—junk-rated bonds trading at yields 10 percentage points above Treasuries—jumped to $116 billion in July from $26 billion just two months ago, according to S&P. That suggests that the credit market is growing uneasy about debt repayment.

If the economy worsens, companies could see earnings wilt, further straining their cash flow. Companies that have trouble getting loans might be forced to sell equity, diluting shareholders. In a worst-case scenario, a company could become insolvent.

To find companies at risk of a liquidity squeeze, Barron’s screened for those whose cash balance has shrunk by more than half from a year ago. Among those, we looked for companies with short-term obligations—including debt and fixed rent payments—that are higher than their cash balance and one-year earnings combined.

After further narrowing, we identified seven companies worth watching: Royal Caribbean, party-supply seller Party City PRTY 0.00% (PRTY), home-goods retailer Bed Bath & Beyond BBBY +21.83% (BBBY), drugstore chain Rite Aid RAD +4.44% (RAD), fashion retailer Express EXPR +3.81% (EXPR), and footwear companies Wolverine World Wide (WWW) and Caleres (CAL).

The retail sector is a sore spot. Retailers depend heavily on consumer demand and often don’t have enough pricing power to pass the higher costs on to consumers, says Neha Khoda, head of loan strategy at Bank of America Merrill Lynch.

Bed Bath & Beyond faces declining sales and is posting losses as consumers spend less amid rampant inflation. It doesn’t help that the company has spent more than $1 billion on share buybacks since 2020. Bed Bath had $108 million in cash as of May, down from $1.1 billion a year ago.

While most of Bed Bath’s debts don’t mature until 2024, it needs to pay $335 million in rent next year. Bank of America analyst Jason Haas warned that the retailer could face a liquidity pinch if vendors ask it to pay for the merchandise on shorter terms.

Bed Bath still has $1 billion available in its revolving credit facility, a company representative told Barron’s. “We have already taken actions on many fronts—including a reduction of at least $100 million of [capital expenditure] against the company’s original plan,” he noted in an email.

Party City has $39 million in cash as of June, with $350 million in debt and rent payments due in a year. The retailer’s earnings for the past 12 months were $95 million, down 20% from a year ago.

“Despite the continued macroeconomic factors impacting our business, we feel comfortable with our current liquidity and feel it is sufficient to run the business,” said CFO Todd Vogensen on the latest earnings call.

Party City has $157 million available in its revolver and other levers at its disposal, said Vogensen, such as cutting capital expenditures and delaying projects. It also intends to raise $22 million from current creditors.

Rite Aid has little debt due until 2025, but its short-term lease obligations, at $574 million, loom over the $56 million cash balance as of May. In the past four quarters, the company’s earnings slid 18% from a year ago.

“Paying down debt is a top priority for our company,” said CFO Matthew Schroeder in the recent earnings call. The company is exploring additional sale-leaseback options on its owned stores and expects to have proceeds from them later in the year.

Rite Aid also plans to use up to $150 million of its $1.7 billion in revolver availability to buy back outstanding bonds at a discount. The move will bring some interest savings in the future, according to the firm, as the revolver loans have a lower rate.

Express, Wolverine, and Caleres also have high short-term obligations and low cash on account, but all have seen improving earnings in recent quarters. The three companies either declined to comment or didn’t respond to a request for comment.

If the economy goes into recession, more companies will face pressures. Says S&P’s Gunter: “The longer conditions remain this tight, the greater the risk that vulnerable issuers, regions, or sectors could feel the squeeze.”

Barrons : Earnings Have Been Decent. Now Comes the Hard Part.

Earnings Have Been Decent. Now Comes the Hard Part.

Earnings season has been far from perfect, but it’s been just strong enough to keep stocks rallying.

For starters, companies have beaten profit expectations. Roughly 90% of companies in the S&P 500SPX +1.73% have reported second-quarter earnings, and the aggregate earnings per share result for companies on the index has beaten expectations by 5.2% as of Wednesday, according to Credit Suisse. That’s in line with the average quarterly beat since 2016.

But earnings results are backward looking, and still-high inflation plus rising interest rates are eating into consumer demand, dimming the earnings outlook from here.

That’s showing up in companies’ guidance. As of Wednesday, 61% of the companies issuing third-quarter earnings have provided outlooks below expectations, according to FactSet. That’s just above the five-year average of 60%.

Analysts, too, have become more pessimistic on future profits. The aggregate S&P 500 earnings estimate for 2023 has dropped almost 3% since June, according to Evercore, to $245 per share.

Yet stocks have largely risen through the negativity. The average stock reaction the day after a company beats on both sales and earnings has been a gain of 1.3% as of Wednesday, according to Evercore. That’s above the five-year average of a 0.9% gain. The average move after a firm misses on both the top and bottom lines has been down 2.7%, less than the average drop over the last five years. Meanwhile, the S&P 500 is up about 15% since its mid-June intraday low for the year, which came just before earnings season began.

That’s because stocks were already cheap—reflecting a more negative scenario—heading into earnings. The S&P 500’s forward price/earnings multiple bottomed at just over 15 times in mid-June from over 21 times at the start of the year. That meant before earnings season, stock prices were reflecting the possibility of a much lower steam of future profits, so stocks have been able to gain even after slight cuts to forward estimates.

“Going into earnings season, expectations, whisper numbers had gotten extremely negative,” said Sevens Report’s Tom Essaye. “That created a very low bar that the results surpassed.”

The positive market response to earnings, to be sure, hasn’t applied to every stock. Nvidia (ticker: NVDA) and Micron Technology MU +4.36% (MU) both lowered their earnings outlook, citing weakening demand for chips and saw their stocks fall significantly in one day. Target TGT +1.70% (TGT) and Walmart (WMT) also cut their outlooks, citing markdowns on discretionary items, causing their stocks to plummet.

Barrons : This Retail Stock Thrives in Downturns. This Time Won’t Be Different.

This Retail Stock Thrives in Downturns. This Time Won’t Be Different.

The retail sector has been hit hard on fears of rising inflation, a pullback in consumer spending, and a possible recession.

The Dow Jones U.S. Retail Index is down 19% this year, and it’s a similar story in Europe. The Stoxx Europe Total Market Retail index is down 28.7%.

But JD Sports Fashion (ticker: JD.UK), has a record of thriving in downturns. The British sportswear retailer—which sells footwear and apparel from brands including Nike NKE +1.73% , New Balance, The North Face, and Under Armour UAA +1.83% —could buck the latest trend, with the stock estimated to more than double in price.

Shares have tumbled 25.6% to 1.34 pounds sterling ($1.61) in the past six months, but analysts at broker Investec INL +1.55% see a 123% rise to £3. Investment bank Peel Hunt PEEL 0.00% has a price target of £2.50.

JD Sports delivered solid positive underlying sales growth in 2009—during the global financial crisis, the toughest macro period in the company’s history—according to Graham Renwick, an analyst at broker Berenberg.

He said in a recent note that JD Sports became the best-performing stock in his coverage, with the shares rising about 180% in 2009, or 42% across 2008-09.

“There is a sense of déjà vu in the setup for 2022,” he wrote. “History shows that it is more resilient in downturns than investors currently believe.”

JD Sports earlier this month appointed a new CEO, French retail executive Regis Schultz, after longstanding executive chairman Peter Cowgill departed in May over corporate-governance issues. Fresh leadership and tighter regulatory controls should be seen as a positive.

Analysts largely think the retailer, which also owns the Duffer of St. George and McKenzie brands, is misunderstood. They say JD Sports shouldn’t be compared with rivals, because its key customers are between 16 and 24 years old—a group that is obsessed with the latest brands and isn’t encumbered with mortgages and other financial commitments. The company’s strong relationship with leading brands also means it can sell exclusive merchandise at full price.

“JD understands better than anyone what our core sports-fashion-focused and ‘street’ consumer wants,” interim CEO Kath Smith said in a statement. “Our laser focus allows us to curate and deliver the right product offering for this audience.”

JD Sports has a market value of £6.7 billion and employs more than 67,000 workers. It operates 3,360 stores in 34 countries. It trades at a multiple of 10.5 times this year’s expected earnings, a 10% discount to its peers.

The company posted pretax profit of £947.2 million for the 52 weeks ended Jan. 29, more than double the £421.3 million in 2021. Annual revenue was £8.6 billion, up from £6.1 billion in 2021.

The company is conservative with projections, forecasting flat 2023 earnings in line with the 2022 performance. Cost inflation can be offset by passing along price hikes to customers, say analysts Eleonora Dani and Clive Black at Shore Capital. The company “is tightly managed with excellent cash generation, tight stock and cost controls,” they wrote in a note.

JD Sports has a record of scooping up rival retailers—it took an 80% stake in Greek shops group Cosmos and bought U.S. footwear retailer Shoe Palace. Simon Irwin, an analyst at Credit Suisse wrote in a recent note that JD Sports “will continue to be seen as the consolidator of choice by the brands.”

He estimates that the company will have a significant war chest of £1.7 billion in a year, adding, “We believe that M&A will continue to be a significant route for growth and value creation.”

>>> US Close Dow +1,73% S&P +1,73% Nasdaq +2,09% Russell +2,09%

Closing Stock Market Summary

The stock market opened on a high note and extended its gains the whole session, closing at or near session highs. The S&P 500 logged its fourth consecutive winning week and closed above the 4,231 level, which marked a 50% retracement of the losses the market incurred from the Jan. 3 closing level (4796.56) and June 16 closing level (3666.77). Falling oil prices and the better-than-expected preliminary August University of Michigan Consumer Sentiment reading underpinned today's buying efforts. 

Also, the Import-Export Price Index for July piled on to the CPI and PPI reports this week, pointing to possible peak inflation. 

The S&P 500 was up 3.3% week-to-date; the Nasdaq was up 3.1% week-to-date; the Dow Jones Industrial Average was up 2.9% week-to-date. Including this week's gains, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average are up 17.7%, 23.5%, and 13.7%, respectively, from their mid-June lows.

The buying effort today was broad based with all 11 S&P 500 sectors closing in the green with gains ranging from 0.8% (energy) to 2.3% (consumer discretionary).

Energy brought up the rear amid falling oil prices. WTI crude oil futures settled the session 2.1% lower to $92.34/bbl. Natural gas futures fell 1.3% to $8.86/mmbtu. Unleaded gasoline futures fell 0.02% to $3.06/gal.

Meanwhile, consumer discretionary (+2.3%), information technology (+2.1%), and communication services (+2.0%) rose to the top of the leaderboard thanks to their outperforming mega cap components. Information technology was also boosted by its semiconductor related constituents, which had a strong showing today. The PHLX Semiconductor Index closed up 3.0%.

Mega caps led the market higher with the Vanguard Mega Cap Growth ETF (MGK) up 2.0% at the close versus a 1.6% gain in the Invesco S&P 500 Equal Weight ETF (RSP). Small and mid cap stocks were not left out of the rally, however. The Russell 2000 (+2.0%) and S&P Mid Cap 400 (+1.5%) closed with sizable gains.

Two names that were left out of the rally effort were Alibaba (BABA 94.77, -0.10, -0.1%) and Pinduoduo (PDD 48.80, -0.82, -1.7%) following news today that five other Chinese ADRs plan to delist at the NYSE.

Separately, the Treasury market was mixed today with the 2-yr note yield rising six basis points to 3.25% while the 10-yr note yield fell four basis points to 2.85%.

Looking ahead to Monday, market participants will receive August Empire State Manufacturing Index (consensus 5.0; prior 11.1) at 8:30 a.m. ET, August NAHB Housing Market Index ( consensus 55; prior 55) at 10:00 a.m. ET, and June TIC Net Long-Term Transactions (prior $155.3 billion) at 4:00 p.m. ET.

Reviewing today's economic data:

  • August Univ. of Michigan Consumer Sentiment - Prelim 55.1 (consensus 52.1); Prior 51.5
    • The key takeaway from the report is that consumers' inflation expectations were little changed, dipping to 5.0% from 5.2% for the year ahead (but above 4.6% seen a year ago) and edging up to 3.00% from 2.9% for the five-year outlook.
  • July import prices fell 1.4% after the revised increase of 0.3% in May (from 0.2%). Import prices, excluding oil, fell 0.5% after the revised decrease of 0.6% in May (from -0.5%). Export prices fell 3.3% after the 0.7% increase in May. Export prices, excluding agriculture, fell 3.3% after a revised 0.8% increase in May (from 0.9%)

Dow Jones Industrial Average: -7.1% YTD
S&P 400: -7.9% YTD
S&P 500: -10.2% YTD
Russell 2000: -10.2% YTD
Nasdaq Composite: -16.6% YTD

FT : Luxury watch prices plummet on weak Chinese consumer confidence

Luxury watch prices plummet on weak Chinese consumer confidence
Second-hand market for high-end goods battered by Beijing’s strict adherence to zero-Covid

The prices of second-hand luxury goods have fallen rapidly in China over recent months, as even the wealthy cut back on their discretionary spending and sell their Rolex watches and Hermès bags to raise cash.

More than a dozen popular brands of luxury watches and bags have lost between 20 per cent and 50 per cent of their value on the secondary market since Shanghai, China’s financial and commercial capital, imposed a strict lockdown in March to crush a Covid outbreak.

The restrictions in Shanghai and dozens of other regions have dealt a heavy blow to small business owners, many of whom accumulated large collections of luxury goods in better times. But the repeated lockdowns have damaged their cash flows.

Last week tens of thousands of tourists in Hainan, an island province billed as “China’s Hawaii”, were prevented from returning home to stem an outbreak there.

The government is promoting Hainan as a duty-free paradise where Chinese consumers can buy the same luxury goods they used to snap up in cities such as Paris, Rome and London before President Xi Jinping’s controversial zero-Covid policy made it practically impossible to travel abroad for short trips.

Watcheco, an industry portal for used luxury watches, reported that the price of second-hand Rolex Submariners — a model coveted by connoisseurs and collectors — had fallen 46 per cent since March

Luxury bag dealerships in Shanghai and Hangzhou have also cut prices of classics such as Hermès Birkin bags by up to a fifth over the same period.

Pawnshops and other luxury goods resellers said there had been a big increase in customers, led by cash-strapped business owners who were struggling to raise capital to pay down debt and keep their operations afloat.

“The boom time is over,” said James Wang, a seller of second-hand luxury watches in the eastern city of Nanjing. “We are entering a correction period that could last for a long time.”

Wang said he bought six Patek Philippe and 29 Rolex Submariner watches from distressed owners in July alone, compared with no Patek Philippes and five Rolex Submariners in the first quarter of this year.

“Patek Philippe says you never actually own its watch, but merely look after it for the next generation,” said Wang. “That’s not the case in a business crisis.”

Shaun Rein at China Market Research, a Shanghai-based consultancy, said the sudden rise in supply and resulting price drops of second-hand luxury goods were evidence of “very weak consumer confidence”.

“It’s probably the weakest I’ve seen in my 25 years in China,” he added.

Some luxury goods investors argued that the recent price falls were inevitable after an unsustainable surge prior to March.

In the six months leading up to Shanghai’s lockdown, the price of second-hand Rolex Submariners rose by 240 per cent. The same bag dealerships that recently cut their asking prices in Shanghai and Hangzhou did so just months after raising prices at the start of the new year.

Sam Xue, a watch investor who owns an electric heater factory in the eastern city of Wuxi, said the price rises were “pure speculation” and unsustainable.

“The weak economy can’t support a luxury boom,” Xue said, adding that he would not buy luxury watches again unless prices fell by another 30 per cent.

>>> Europe : Brokers Upgrades & Downgrades - 12th of August 2022 V2(+)

>>> Up
* Beazley Raised to Overweight at Morgan Stanley; PT 678 pence
* Fresenius SE Raised to Buy at HSBC; PT 35 euros
* Holmen Raised to Buy at Nordea; PT 480 kronor
* Sanofi Raised to Hold at Deutsche Bank; PT 90 euros
* SMA Solar Raised to Hold at Jefferies; PT 52 euros
* Sodexo Raised to Outperform at Exane; PT 90 euros
* Stroeer Raised to Equal-Weight at Barclays; PT 53 euros
* UPM-Kymmene Raised to Buy at Jefferies; PT 37.25 euros

>>> Down
* Alcon Cut to Hold at SocGen; PT 73.60 Swiss francs
* BCP Cut to Neutral at Grupo Santander; PT 20 euro cents
* Dufry Cut to Neutral at Goldman; PT 44 Swiss francs
* Equinor Cut to Underperform at Grupo Santander; PT 270 kroner
* Eutelsat Cut to Underweight at JPMorgan; PT 8 euros
* Fractal Gaming Group Cut to Hold at ABG; PT 25 kronor
* Kahoot Cut to Sell at DNB Markets; PT 21 kroner (+)
* K+S Cut to Sector Perform at Scotiabank; PT 26 euros
* McPhy Cut to Hold at Panmure Gordon; PT 15.30 euros
* Mowi Cut to Neutral at Exane; PT 240 kroner
* Nel Cut to Hold at Panmure Gordon; PT 15.60 kroner
* Netcompany Cut to Buy at Jyske Bank; PT 550 kroner
* SpareBank 1 Nord Norge Cut to Hold at DNB Markets; PT 102 kroner (+)
* Telenet Cut to Neutral at Goldman; PT 16.50 euros
* TF1 Cut to Underweight at Barclays; PT 6.50 euros

>>> Initiation
* 3i Infra Rated New Buy at Numis; PT 1,940 pence
* Johnson Matthey Resumed Neutral at Citi; PT 2,200 pence
* Lhyfe SAS Rated New Buy at Bryan Garnier; PT 14.30 euros (+)
* Oracle Rated New Buy at Guggenheim; PT $107

>>> Call
* Bayer Narrative Improving, Glyphosate Provisioning Ample: Citi
* Beazley Upgraded at MS After Robust 1H for Lloyd’s Insurers
* IG Group Up to Buy at Liberum as ‘Promising’ Growth Seen Ahead
* SMA Solar Raised at Jefferies as Solar Boom ‘Lifting All Boats’
* UPM Upgraded to Buy at Jefferies on ‘Appealing’ Earnings Outlook

FT : Next financial crisis likely to centre on private markets

Next financial crisis likely to centre on private markets
The rush into the sector was predicated on the continuous availability of cheap capital

Just as US subprime mortgages were at the heart of the 2008 financial turmoil, a future crisis may centre around booming private markets.

Believing they had found the latest formula for success, investors have ploughed about $9.8tn into unlisted equity, private credit and early stage or new venture funding. Alongside well-known problems — overvaluation, optimistic assumptions, aggressive accounting and high debt levels, there are additional concerns.

First, as private investments are inherently illiquid, investors cannot cauterise losses easily. Monetisation, largely reliant on initial public offerings and trade sales, is now difficult, especially at previously anticipated prices.

Where investments are made through funds, there may be mismatches between the redemption rights granted to ultimate investors and the ability to realise underlying assets. In such scenarios, investors can become exposed to forced distressed sales or trapped by restrictions on withdrawals resulting in opportunity costs.

Second, the lack of market prices means opaque valuations, which frequently misstate investment or fund values. Unlisted equity valuation models rely on comparable traded companies and private financing rounds. The discrepancies between these values and market prices can be large. After being valued in 2021 at $46bn, a 2022 $800mn funding round valued Klarna at $6.7bn (an 85 per cent fall). As the disappointing initial public offerings of Uber and WeWork highlight, the case is not isolated.

Private real estate or infrastructure, generally treated as leveraged bond-like investments, are sensitive to growing uncertainty over once predictable revenues, assumed “terminal” values at a point in time, funding costs and the often complex options embedded in the investment structures.

Subjective approaches and difficult to verify inputs can result in large variations in private investment valuations. Values derived from transactions between different in-house managed funds or with other asset managers are affected by potential conflicts of interest as manager remuneration is based on investment values and performance. Infrequent valuations mean prices lag behind changing market conditions, resulting in real gains and losses for investors buying into or withdrawing money from funds.

Third, private equity originally focused on long holding period investments purchased with substantial borrowings in traditional industries that offered undervalued shares, strong cash flows, low operating risk and the potential for business improvements. Today, many of these elements, other than leverage, are frequently absent.

Consistent with industrial shifts outside of property and infrastructure, transactions are not secured by hard assets such as real estate, plant or equipment but supported by intellectual property such as internet platforms or software.

The latter are harder to value and more exposed to economic cycles. Asset recovery values under distressed conditions are less predictable as the replacement cost of tangible items no longer provides a price floor. Limited covenant protection in many transactions increases the risks.

Fourth, for non-profitable or cash-flow-negative enterprises, availability of follow-on funding necessary for operations is presumed. Other private investments, typically with sizeable borrowings, face refinancing risks. All are vulnerable to market disruptions, especially if prolonged.

Finally, private markets exhibit complicated layers of risk. After 2008, when securitised debt and off-balance sheet structures aggravated shocks, the so-called shadow system of banking outside traditional lenders regrouped.

Today, investments are frequently held through tiers of funds, some with borrowings from banks or private providers. Securitisation of private equity loans and non-bank credit display familiar opacity and exacerbate leverage in the system. Falls in asset value anywhere can create instability elsewhere within the financial system.

The recent history of highly managed money supply, low interest rates and artificially suppressed volatility encouraged investors to take on often unquantifiable and poorly understood hazards. The rush into private assets was predicated on the continuous availability of cheap capital as a sustainable investment strategy. It also ignored the immutable positive correlation between risk and return.

To crib from US actor and humourist Will Rogers, it seems that financial markets advance by finding new ways to lose money, which is surprising given that the old ways continue to work just as well.