This week's interesting finds

 

Catherine, partner since 2022 (Toronto, Ontario)  

This week in charts 

National bond markets 

Public and private bond markets 

Bill Ackman makes $200mn from bet against US Treasuries 

Billionaire hedge fund manager Bill Ackman made a profit of about $200mn from his high-profile bet against US 30-year Treasury bonds, according to people familiar with the trade. 

The founder of Pershing Square Capital Management said on social media on Monday that he had exited the short position he first announced in August. His post helped fuel a recovery in Treasury prices, after an earlier sell-off had pushed yields to 16-year highs. 

“There is too much risk in the world to remain short bonds at current long-term rates,” he said on X, formerly Twitter. “The economy is slowing faster than recent data suggests.” 

Ackman made the bet against 30-year bonds using options, derivatives that allow traders to profit from a fall in prices without having to borrow and sell the underlying bonds, the people familiar with the trade said. While he made about $300mn from moves in the market, he also paid out nearly $100mn in premiums that allowed him to maintain his position. 

The $200mn profit helped Pershing Square’s $13bn flagship fund gain 11.6 per cent in the year to October 17, according to figures published by the firm. 

The gains from Ackman’s recent trade are dwarfed by the $2.3bn he netted from another bond market short last year. He entered that bet, which was mostly focused on two-year Treasuries, in December 2021. The trade was described in investor documentation as a hedge for his stock portfolio which fell sharply in value during last year’s bear market. The profits from that bond trade did not fully offset losses in equities, leading to the fund falling 8.8 per cent last year. 

He also made $2.6bn during the early stages of the Covid-19 pandemic from bets that companies would struggle to pay their debts. 

When Ackman announced his latest bet against US government debt, 30-year Treasuries were yielding about 4.3 per cent. After briefly touching a high of 5.18 per cent on Monday, yields have dropped back to about 5.09 per cent. 

In August, Ackman had argued that longer-dated Treasury bonds were “overbought”. Stubbornly high inflation, he said, made it more likely that the US Federal Reserve would increase interest rates, hitting bond prices and driving yields higher. 

He also said that “an increasing supply of [Treasuries] is assured” owing to a large US government deficit, which he expected to drive down prices. 

Latest in mortgage news: Equitable Bank unveils 40-year amortization mortgage 

Equitable Bank has announced that, in partnership with a third-party lender, it is introducing a new 40-year amortization mortgage product. 

Equitable, Canada’s seventh-largest bank, which provides both prime and alternative lending options, made the exclusive announcement at the National Mortgage Conference in Toronto last week. 

By extending the amortization period beyond the standard 25 or 30 years, the bank seeks to lower monthly payment obligations, making home ownership or investment in properties more accessible amidst the current economic and affordability challenges. 

As part of the funding structure for this product, Equitable has partnered with a third-party lender, meaning Equitable will not take on any credit or default risk as the loans won’t appear on its balance sheet. 

In essence, Equitable will act as the originator and service provider to its funding partner, providing the underwriting, closing and servicing over the life cycle of the loans.   

This week’s fun finds 

EdgePoint’s favourite little monsters 

The Toronto office was in for a treat when several internal partners brought in their kids for some candy and a pizza party. 

How to sell a haunted house 

Kelly Moye, a Compass real estate agent in Boulder, Colo., keeps a list of go-to professionals who help make her listings as appealing as possible: furniture stagers, floor repair people, lighting designers — and two “home energy clearers.” 

The “clearers,” she says, are “the exact same as a stager — the stager stages the furniture, the clearer stages the energy.” Moye calls on clearers when houses that otherwise seem prime for a sale just won’t move for mysterious reasons. Although she was at first skeptical, she says the clearers’ “actions have been so confirmed for me over the years, I kind of stopped thinking it was goofy.” 

Moye rattles off a half-dozen anecdotes about times when a property kept getting the same feedback from other agents — “It just doesn’t feel right” — and calling in a clearer was what finally made the difference. 

In one such instance, she was hired to sell a 19th-century Victorian in Denver. Her clients were giving her a tour of their home when they arrived at the entrance to the basement. As Moye began to descend into the old cellar, the owners’ cats, which had followed her throughout the house, suddenly put on the brakes and refused to go past the top of the stairs. 

She asked the owners whether anyone had ever commented about it. Turns out, nobody wanted to go down there, humans or animals. “And I said, ‘Well, let me get my house clearer over here and see what’s up, because if you get this funky feeling that I got, that’s not going to work for a buyer,’” Moye recalls. 

Both of the psychic-like professionals in Moye’s Rolodex offer roughly the same service. For $300, they’ll take between four and five hours to do an elaborate ritual, going into a trance-like state to “communicate” with the space. In this case, the clearer uncovered that past owners of the home had illegally made alcohol during Prohibition, and the basement had been the site of a deadly police raid. After clearing the energy of those murders, Moye says, the cats would enter the space without fear — the owners even put their litter boxes down there during showings. 

This week's interesting finds

 

Luca, partner since 2023 (Madrid, Spain)  

This week in charts 

Canadian bonds 

UK private equity groups sell assets to themselves as exit routes dwindle 

UK private equity managers now see selling companies to themselves as their best option to offload investments, according to new research, as a moribund IPO market and the higher cost of financing deals make traditional exit routes more difficult. 

Disposals to so-called continuation funds are the most popular option for private equity executives seeking an exit from their investments, according to a poll of 200 senior UK-based industry professionals carried out by Numis. 

The results, due to be published this week, underline the rising trend of private equity funds turning to newer funds raised by the same firm as they seek to sell their assets to return cash to investors. Private auctions, the preferred route in last year’s poll, are now the least popular of four exit options as a more difficult debt financing environment combines with political uncertainty ahead of UK and US elections. 

The gloomy economic outlook and the gap between buyers’ and sellers’ valuations were also cited among the most common barriers to dealmaking. In Europe, the number of sales from one private equity group to another dropped earlier this year to the lowest level since the Covid-19 pandemic. 

The vast majority of those polled, drawn from professionals focused on mid-market deals worth £500mn-£1bn, did not expect a fully functioning IPO market before the final quarter of 2024. 

Despite this, IPOs were ranked as the third most popular option for prospective disposals while a “dual track” process, where companies prepare a stock market listing and a private sale in parallel to keep options open, was second. 

The growing use of continuation funds has attracted scrutiny with the chief investment officer of asset manager Amundi last year likening parts of the private equity industry to a “Ponzi scheme” that would face a reckoning in the coming years. 

The technique involves a private equity fund selling an asset it has owned for several years from one of its funds where investors have been promised a return in cash to a newer fund where backers are not due to get their money back for a few years. 

Early AT1 Champion Warns They Can Break Banks in Next Crisis 

Achim Wiechert [head of external funding at insurance giant Allianz SE] is lobbying for one of the most far-reaching overhauls to Europe’s $235 billion market for additional tier 1 bank debt since it was created more than a decade ago to prevent a rerun of 2008’s taxpayer-led bailouts. 

Wiechert’s concern is that AT1s, which count as capital, will fail to buffer banks from another crisis. This isn’t a flaw of the bonds themselves but of market behavior: Convention dictates that banks repay the notes at their first call date, whether or not it makes economic sense. 

And at a time when they really need the capital, in a crisis, lenders would be even more compelled to follow those conventions, swallowing punitive debt costs so they can show it’s business as usual. He argues that the need to keep up appearances could plunge banks into trouble. 

His solution is to take the decision on whether to repay AT1s early out of banks’ hands, and leave it up to market math. Either a replacement bond can be cheaper than a predetermined level or the bank will be barred automatically from exercising the call option. 

What drove Wiechert, in part, to take up his campaign for better AT1 practice were some of the decisions that led up to the wipe-out of $17 billion of Credit Suisse notes in its government-brokered takeover in March. 

The Swiss watchdog signed off Credit Suisse’s last ever AT1 replacement in the summer of 2022, which added about 125 basis points to its annual costs. Crosstown rival UBS Group AG triggered a price jump in its AT1s later that same year when it announced an early redemption even though they would have been cheap to retain. 

“As long as calls are viewed as individual decisions that can signal something beyond pure replacement economics, we have a problem,” said Wiechert. “We have set in motion a vicious circle of ever-more uneconomic calls.” 

It’s an issue he faces himself in his current role at Allianz. More than once he’s been dogged by questions from investors about whether Allianz would call a Restricted Tier 1 note it sold in the past. 

There are already guidelines in place on how to deal with uneconomic replacements. And regulators can already block a replacement if it’s too expensive. In practice, they have allowed several uneconomic decisions, including when a jump in interest rates and spreads since early 2022 turbocharged the cost of issuing new capital. 

Even before AT1s arrived on the scene, banks, regulators and investors were at cross purposes over how to treat securities that may never mature. 

Banks using perpetual notes for capital purposes — and the regulators approving them — wanted a degree of permanence, and fixed income investors wanted to get their money back at a predictable time. To square the gap, banks started including step-up coupons on some of their securities. That meant if they didn’t repay the notes at their first call date, the interest rate would eventually ratchet up. When the financial crisis toppled one bank after another, investors in capital securities were made whole as taxpayers bore the brunt of the cost of bailouts. Afterwards, regulators trying to right those wrongs came up with new definitions on core capital and bankers developed securities that fit those criteria. These perpetual securities don’t incur penalties if issuers decide not to repay them at the first possible opportunity — and if a bank gets into trouble they can skip coupons altogether. 

AT1s, also called contingent convertible, or CoCos, were born, and grew into a risky and high-yielding market worth hundreds of billions. Lenders in the US issue preferred shares for this purpose and purely economic calls are a generally accepted practice there. 

The trouble is, investors outside the US still expect to get repaid when AT1s become callable — no matter the cost to the bank.   

China imposes export curbs on graphite 

China has imposed export controls on graphite, a material used in electric vehicle batteries, as Beijing hits back at US-led restrictions on technology sales to Chinese companies. 

China, which dominates global supply chains for the mineral, will require special export permits for three grades of graphite, the commerce ministry and the General Administration of Customs said on Friday. 

The new export controls, which China said were introduced on “national security” grounds, are set to escalate geopolitical tensions between Beijing and Washington and its allies over tech supply chains. They also underline China’s dominance of global supplies of dozens of critical resources. 

Graphite for batteries can be produced either from mined material, which is called “natural” material, or in a “synthetic” process using petroleum feedstocks, which helps the cell charge quicker and last longer but is more expensive to produce. 

China is by far the biggest processor of natural graphite and generated almost 70 per cent of the world’s synthetic graphite last year, according to Benchmark Mineral Intelligence, making it one of the critical materials where Beijing has the tightest stranglehold. 

Graphite prices have fallen 30 per cent since the start of the year but Thomas Kavanagh, head of battery materials at commodity data provider Argus, said the restrictions could set them on an “upward trajectory internationally”. 

While Chinese officials are wary of retaliation that could damage China’s own companies, Beijing in recent months has started to leverage its dominance over a vast array of materials and resources in response. 

In July Beijing announced similar restrictions on gallium and germanium, metals used in a number of strategic industries including electric vehicles, microchips and some military weapons systems. The government also cited national security concerns. 

Graphite is the most common material used in the anode side of lithium-ion batteries because of its relatively low cost, high energy density and stable structure. The anode side of a battery releases electrons during discharge.  

This week’s fun finds 

Three is the magic number 

Rameen’s moai (our version of bringing EdgePointers together for a meal) featured three types of wraps – chicken or beef shawarma, along with falafel. She also chose three flavours of cheesecake cups, cookies & cream, vanilla and strawberry shortcake. The hardest part was choosing!  

How to become a truly excellent gift giver 

“I’ve always believed that literally anything on earth, any object, any piece of trash, anything you find in a store, can be a perfect gift,” says Helen Rosner, a New Yorker staff writer who publishes an annual food-themed gift guide that is somehow both deranged and genuinely useful. “It can be a Tootsie Pop or a $10,000 diamond-encrusted cocktail shaker. What’s important is matching the right thing to the right person.” 

“We often give ourselves this challenge of being like, ‘What is the gift that only I could give them? What is the gift that proves I know them so well?’ And that’s kind of impossible,” says Erica Cerulo, who runs the recommendation-filled A Thing or Two podcast and newsletter with her business partner, Claire Mazur. (Cerulo and Mazur previously co-founded the retail destination Of A Kind, which shut down in 2019.) A great gift doesn’t have to change someone’s life, Cerulo says: It can just be something that’s fun and nice and comforting. 

Because creativity thrives with constraints, Cerulo offered the following three-point framework for thinking about gift-giving: “Can I introduce someone to something they might not otherwise know about? Can I get them a nicer version of something than they would buy for themselves? Or can I make them feel seen?” If you can check one of those three boxes, you’ve probably got a good present on your hands. 

Almost universally, great gift-givers are doing legwork throughout the year, not just in the weeks leading up to a birthday or major holiday. Many keep lists of potential gifts for their friends and loved ones, which they update every time someone mentions an item they’d love or when their internet travels turn up a particularly great present idea. You can do this in any way that suits you: Cerulo has a single note in her phone dedicated to gift ideas, Mazur keeps individual notes for individual people, and Rosner uses friends’ contacts as a place to log food preferences, birthdays, and present ideas. 

Our closest confidantes are sometimes the most challenging people on our list. How are you supposed to distill your sister’s marvelous and unique essence into a single package? First, step away from the grandiose thinking. Second, get some perspective with a tactic that Mazur and Cerulo figured out while creating gift guides: Write a three-sentence description of the person you have in mind, paying close attention to their enthusiasms, obsessions, and interests. “I might say, ‘My dad is obsessed with sports, he thinks most kitchen gadgets are pretentious, and he’s been a lawyer his whole life,’” says Mazur. “Then there’s a little bit more room to get imaginative.” 

From an etiquette standpoint, [Crystal L. Bailey, director of the Etiquette Institute of Washington] advises personalizing gifts to people you don’t know very well, without getting too personal. For a co-worker, a signed greeting card and a gift card aligned with their interests can be a good option. Perfumes, scented items, and clothing, on the other hand, can be a little too intimate.

This week's interesting finds

Marc-André, partner since 2017 (Montréal, Québec) 

English: The crowd rarely stays invested long enough to build real wealth   

This week in charts 

Income

KKR and Carlyle Take No Carry on New Private Credit Funds 

Two of the world’s biggest private credit firms have launched funds that will take far less profit than is usual for the industry — another sign of how power has started shifting toward investors in this $1.5 trillion market. 

KKR & Co. and Carlyle Group Inc. won’t take the portion of profit known as “carry” on returns from two new European direct-lending vehicles, according to people familiar with the matter who weren’t authorized to speak publicly. 

Both the funds have so-called “evergreen” structures, the people familiar said, meaning investors can withdraw and put in money at regular intervals, unlike this market’s more typical closed-ended funds. As a fairly novel type of instrument in the industry, evergreen funds sometimes have different profit arrangements than is the norm.

Private credit has been a magnet for firms attracted to its extravagant returns. But now they’re having to work harder to win over limited-partner investors, many of whom have less cash because of the weak economy and are restricted on what they can allocate to direct lenders. LPs can also pick from a ballooning number of private credit funds, or general partners, putting pressure on the latter to offer competitive terms on sharing profit. 

KKR and Carlyle’s moves come amid a broader debate within private credit over how carry is calculated. The sharp rise in central bank rates has let fund managers blast through their hurdle return levels, prompting investors to ask whether they’ve earned the windfall. A few funds are pegging the hurdle to the base rate to make profit shares fairer. 

U.S. Considers Dropping Sanctions Against Israeli Billionaire in Push for EV Metals 

As part of its quest to gain access to minerals critical to the energy transition, the U.S. has recently considered a plan to drop sanctions against an Israeli mining magnate accused of corruption, according to people familiar with the matter. 

The plan involves the U.S. lifting sanctions on businessman Dan Gertler, whom it accused nearly six years ago of corruption, to allow him to take part in mining deals with Saudi Arabia, the people said. 

Those mines, in turn, would ultimately deliver metals to American companies, the people said. Saudi Arabia, the U.S. and Gertler have held early-stage talks about potential deals that could benefit all three parties, they added. 

Under one multibillion-dollar proposal that was being discussed, the Saudis would buy stakes in cobalt and copper mines in the Democratic Republic of Congo that are currently paying royalties to Gertler. The U.S. would get some of the rights to production from those mines. 

Because Gertler is sanctioned by the Treasury Department and barred from doing business that has a U.S. nexus, the government is working on ways to remove him, the people said. A deal isn’t guaranteed, and the talks could fall apart, the people cautioned. 

Gertler, a longtime diamond merchant who made a fortune in Africa and has for more than a decade been controversial there, has ramped up efforts to get removed from the sanctions list in recent years. 

The Treasury Department sanctioned Gertler in 2017, accusing him of amassing his fortune through opaque and corrupt mining and oil deals in Congo through connections with former Congolese President Joseph Kabila. It imposed further sanctions on entities affiliated with him in 2018, accusing Gertler of using his close friendship with Kabila to act as a middleman for mining asset sales in the country. 

In a February letter to a U.K.-based nongovernmental organization, Gertler said though he didn’t believe he should have been sanctioned, he had ended his activities in Congo and transferred significant assets. He said he believes his initial investments in the country “built critical infrastructure, created employment, and catalyzed development of the natural resource sector.” 

Justyna Gudzowska, senior policy adviser to the Sentry, a watchdog group co-founded by actor George Clooney, said it was surprising that the U.S. would consider allowing Gertler to collect revenue streams stemming from the activities that got him sanctioned in the first place. Gertler “should have to relinquish any interest in those streams before sanctions relief is even contemplated,” she said. 

Saudi Arabia is looking both at buying stakes in or the entire copper-cobalt projects, some of the people said, in deals that could be worth around $2 billion. Some of the projects in Congo that the Saudis are looking at include those owned by Swiss mining and trading giant Glencore and Eurasian Resources Group, a Kazakh-backed mining company, the people said. A spokesperson for ERG said it is often approached by various investors but that it doesn’t intend to sell its Congolese assets. A spokesperson for Glencore declined to comment. 

Cobalt and copper are key components of the so-called clean economy. Used for electric vehicles and wind farms, copper is in hot demand by governments and companies the world over. 

Chinese companies refine three-quarters of the world’s cobalt supply and produce about 70% of the world’s lithium-ion batteries, raising concerns in the West about reliance on Beijing. 

Walmart says users of weight loss drugs are buying less food 

Walmart's U.S. CEO, John Furner, told Bloomberg News that the company is seeing signs that people taking GLP-1 agonist appetite suppressant medications are buying "less units, slightly less calories." 

The retail giant is comparing shoppers who pick up a prescription for those medications at its pharmacies to shoppers who are otherwise similar but aren't filling those scripts at Walmart. Using anonymized data, it's looking for patterns in the spending of those groups, and it says the first group is buying less food. 

Doug McMillon, CEO of Walmart, Inc., said in August that the growing popularity of the drugs was helping its sales. 

According to Trilliant Health, prescriptions of those medications quadrupled from late 2020 to 2022, with 9 million prescriptions filled in the last three months of last year. 

Walmart previously recorded stronger grocery sales when high inflation was driving wealthier shoppers to its stores. In summer 2022, after inflation had topped out at 9.1%, the company said it saw more customers in higher income brackets shunning expensive grocery stores in favor of Walmart's lower prices. 

This week’s fun finds 

So Much for ‘Learn to Code’ 

After all, computer-science degrees, and certainly not English, have long been sold to college students as among the safest paths toward 21st-century job security. Coding jobs are plentiful across industries, and the pay is good—even after the tech layoffs of the past year. The average starting salary for someone with a computer-science degree is significantly higher than that of a mid-career English graduate, according to the Federal Reserve; at Google, an entry-level software engineer reportedly makes $184,000, and that doesn’t include the free meals, massages, and other perks. Perhaps nothing has defined higher education over the past two decades more than the rise of computer science and STEM. Since 2016, enrollment in undergraduate computer-science programs has increased nearly 49 percent. Meanwhile, humanities enrollments across the United States have withered at a clip—in some cases, shrinking entire departments to nonexistence. 

But that was before the age of generative AI. ChatGPT and other chatbots can do more than compose full essays in an instant; they can also write lines of code in any number of programming languages. You can’t just type make me a video game into ChatGPT and get something that’s playable on the other end, but many programmers have now developed rudimentary smartphone apps coded by AI. In the ultimate irony, software engineers helped create AI, and now they are the American workers who think it will have the biggest impact on their livelihoods, according to a new survey from Pew Research Center. So much for learning to code. 

ChatGPT cannot yet write a better essay than a human author can, nor can it code better than a garden-variety developer, but something has changed even in the 10 months since its introduction. Coders are now using AI as a sort of souped-up Clippy to accelerate the more routine parts of their job, such as debugging lines of code. In one study, software developers with access to GitHub’s Copilot chatbot were able to finish a coding task 56 percent faster than those who did it solo. In 10 years, or maybe five, coding bots may be able to do so much more. 

People will still get jobs, though they may not be as lucrative, says Matt Welsh, a former Harvard computer-science professor and entrepreneur. He hypothesizes that automation will lower the barrier to entry into the field: More people might get more jobs in software, guiding the machines toward ever-faster production. This development could make highly skilled developers even more essential in the tech ecosystem. But Welsh also says that an expanded talent pool “may change the economics of the situation,” possibly leading to lower pay and diminished job security. 

If mid-career developers have to fret about what automation might soon do to their job, students are in the especially tough spot of anticipating the long-term implications before they even start their career. “The question of what it will look like for a student to go through an undergraduate program in computer science, graduate with that degree, and go on into the industry … That is something I do worry about,” Timothy Richards, a computer-science professor at the University of Massachusetts at Amherst, told me. Not only do teachers like Richards have to wrestle with just how worthwhile learning to code is anymore, but even teaching students to code has become a tougher task. ChatGPT and other chatbots can handle some of the basic tasks in any introductory class, such as finding problems with blocks of code. Some students might habitually use ChatGPT to cheat on their assignments, eventually collecting their diploma without having learned how to do the work themselves. 

Richards has already started to tweak his approach. He now tells his introductory-programming students to use AI the way a math student would use a calculator, asking that they disclose the exact prompts they fed into the machine, and explain their reasoning. Instead of taking assignments home, Richards’s students now do the bulk of their work in the classroom, under his supervision. “I don’t think we can really teach students in the way that we’ve been teaching them for a long time, at least not in computer science,” he said. 

Why Silicon Valley Falls for Frauds 

Silicon Valley could be said to be in the business of reality distortion. Fundraising for startups can be as much about narrative as about economic fundamentals. Most venture capital portfolios are filled with companies that will fail because their model is wrong, their product won’t land, their vision of the future won’t pan out. The high dropout rate means that everyone is in search of the one thing that will reach escape velocity. Everyone is looking for an epochal success—a Steve Jobs, a Jeff Bezos. That creates a degree of hunger—even desperation—that can be exploited by someone who arrives with a great story at the right moment. 

On top of that, there’s just a huge amount of money—an absurd amount of money—in Silicon Valley, which accumulates around the gravity of perceived success. In 2021, $630 billion was pumped into venture-backed companies. That translated into vast funding rounds for companies that weren’t necessarily frauds but weren’t able to back up their vision with profits. [Professor of American history Margaret] O’Mara points to WeWork, which was nominally valued at $47 billion in January 2019 after outsized investments from VCs, including notorious mega-investor Softbank, before flopping on the public markets. This August, the company admitted it had doubts as to whether it could survive as a business. Hype cycles helped drive the flywheel—for FTX, it was in part riding a wave of FOMO among investors who wanted to get exposure to crypto but would only do so in a way that felt comfortable, through a scale player with pedigree backers. Either consciously or serendipitously, FTX and Bankman-Fried were accumulating that legitimacy. 

There is a pattern in major financial deceptions, according to Yaniv Hanoch, professor of decision science at the University of Southampton in the UK, who studies frauds. “What happens is that they manage to get over some sort of threshold. And then they’re able to recruit a few big names.” It seems likely, Hanoch says, that some of the big institutional investors that invested in FTX didn’t necessarily understand the crypto markets but crowded in because they assumed that others had done the due diligence. Among FTX’s investors were Temasek, the investment vehicle of the notoriously conservative Singaporean government, and the Ontario Teachers’ Pension Plan. “You see that pension funds get involved … because they think ‘OK, all this is kosher.’ There’s no reason for them to believe that it’s not kosher.’”

This week's interesting finds

Meghan, partner since 2023 (Toronto, Ontario)  

This week in charts 

U.S. electricity consumption 

Index concentration   

Propane-powered heat pumps are greener 

Electricity can be made from the sun, the wind or the atom rather than by burning fossil fuels. Cars, buses and perhaps even lorries can be powered by batteries rather than petrol or diesel. But other parts of the economy are trickier to decarbonise. One such awkward chunk is the heating, in homes and business, of air and water. In the EU, where much of this is done by burning oil or natural gas, commercial and residential heating accounts for about 12% of the bloc’s greenhouse-gas emissions. 

In principle there is a solution, in the form of heat pumps. These work like a refrigerator in reverse, gathering heat from the outside, concentrating it, and piping it into a building. The EU hopes to replace a third of the 68m gas and 18m oil boilers in residential buildings with heat pumps by 2030. That could mean a 28% fall in the total residential emissions generated by oil and gas—and that number should rise as more of the electricity powering those pumps comes from low-carbon sources. 

But there are problems with ambitious targets. Compared with boilers, heat pumps are expensive, often costing twice or three times as much as a fossil-fired boiler. Another is that, since they pump cooler water to radiators, they work best in new, well-insulated buildings. Around 60% of Europe’s housing stock is estimated to fall short of the required standards, and will need extensive—and expensive—renovation work to make them suitable. 

And there is another drawback, too. Although heat pumps powered by low-carbon electricity are undoubtedly better, from an environmental point of view, than fossil-fuelled boilers, their credentials are not entirely green. Most residential models contain environmentally damaging gases which European legislators are poised to outlaw. Redesigning the machines to work without them could mean delays in installing them. 

A heat pump’s efficiency is lower in winter, when there is less heat to be gathered from the air, although they work at temperatures as low as -25°C. But heat pumps tend to produce water heated to around 55°C. This is lower than most gas boilers, which might manage 75°C or so. That means that fitting heat pumps to older buildings often needs extra insulation, bigger radiators or even underfloor heating, all of which is disruptive and pricey. 

Most modern heat pumps use hydrofluorocarbons (hfcs) as their refrigerants. These transform from liquid to gas at the right sort of temperature, and can carry a good deal of heat. But hfcs are also potent greenhouse gases, with climate-changing power that can be several thousand times higher than carbon dioxide, the main man-made greenhouse gas. Leaks of hfcs from heat pumps and other equipment, such as certain types of refrigeration and air-conditioning systems, account for around 2.5% of the EU’s total greenhouse-gas emissions—not far off the amount caused by air travel in the region. 

With that in mind, the EU had planned this summer to put the finishing touches to new rules that would have required hfcs to be replaced with cleaner alternatives by 2027. But discussions have broken down. One side, backed by Germany and the Netherlands, is keen to get on with the phase-out. The other, supported by a number of eastern European countries and some heat-pump manufacturers, wants the deadline moved into the 2030s. 

According to the European Heat Pump Association (although not all its members seem to agree), the rapid phasing out of hfcs would “slam on the brakes for heat pump deployment”. It argues that a laxer schedule would give the industry more time to develop propane-based systems that could be installed more easily in a greater variety of homes. 

Despite what their trade body says, a number of producers, including Viessman and Robert Bosch, two German firms, along with Mitsubishi Electric, a Japanese one, have already launched propane-filled heat-pumps. They tend to be large “monoblock” systems that are mounted outdoors, where any escaping gas can disperse quickly and harmlessly into the air. Viessman says that, besides its eco-friendly credentials, propane also makes it easier to produce heat pumps that can supply water at 70°C—the sorts of temperatures that gas boilers produce. That could remove the need to replace radiators or install underfloor heating in many cases, saving a considerable amount of money.   

Private Equity Is Piling Debt on Itself Like Never Before 

Hit by a drought of deals and dwindling cash, some buyout firms are starting to resort to backroom financing to help meet fund commitments or enable succession planning. The loans — backed by assets including the promise of future income — carry interest of as much as 19%, a rate that's more akin to the charges faced by consumers rather than corporate borrowing. Even a junk-rated company in the US paid 10% on a bond recently. 

Those high costs aren’t deterring private equity firms and experts say demand is at an all-time high. While some of the biggest lenders — such as Carlyle Group Inc.’s AlpInvest Partners — say these debts are relatively safe, others are already starting to take precautions by adding covenants that enable seizure of other underlying fund assets, highlighting worries about possible losses. Some are warning of perils when a firm faces claims from more than one type of loan simultaneously. 

“If the value of the fund drops, for example, you’re looking at a margin call situation,” said Jason Meklinsky, chief revenue and strategy officer at Socium Fund Services, a New Jersey-based firm that helps administer PE portfolios. “It would be like a volcano meets a tornado.” 

For an industry long used to easy money, the rush for such loans marks a reversal in fortune. Buyout firms have been battling rising interest rates and economic uncertainty, forcing takeover volumes to almost halve this year. Cash on hand at PEs is near the lowest since at least 2008, according to data from PitchBook. 

“The investor universe is unbelievably unaware of the underlying leverage throughout this entire ecosystem,” said New York-based Dan Zwirn, founder and chief executive officer of Arena Investors LP, an institutional manager overseeing more than $3.5 billion in assets. “That hasn’t hit the PE investors yet, but it’s becoming more clear for real estate investors,” he said, referring to the recent delinquencies in the commercial property sector. 

The need for extra financing sometimes comes from pressure from the investors in private equity funds, known as limited partners or LPs, requiring private equity managers, known as general partners, to make larger commitments to their own funds to ensure they have more skin in the game. The required amount of GP investment has crept up to as much as 5% of the total fund size, in some cases, from a norm of around 1%, according to Duhamel. 

The management companies ultimately have control over where the proceeds from the new style of borrowing go, though it’s not typical that they’re used for dividend payouts, said Josh Ufberg, partner at Atalaya, a New York-based alternative investment advisory firm focused on alternative credit, including NAV and GP lending. 

“A lot of it is driven by GPs’ need to fund existing commitments as the pace of exits declines and fundraising is more difficult and valuations are rocky,” said Michael Hacker, global head of portfolio finance at AlpInvest Partners, a core division of Carlyle. He was referring to the PE business model of buying up companies, taking them private and selling them back to the market at a profit after a period of time.   

This week’s fun finds 

Happy Thanksgiving to all of our readers!

EdgePointers got together for some turkey, potatoes and pumpkin pie before the long weekend.

The joy of driving   

Google User Data Has Become a Favorite Police Shortcut 

Google maintains one of the world’s most comprehensive repositories of location information. Drawing from phones’ GPS coordinates, plus connections to Wi-Fi networks and cellular towers, it can often estimate a person’s whereabouts to within several feet. It gathers this information in part to sell advertising, but police routinely dip into the data to further their investigations. The use of search data is less common, but that, too, has made its way into police stations throughout the country. 

Police say these warrants can unearth valuable leads when detectives are at a loss. But to get those leads, officers frequently have to rummage through Google data on people who have nothing to do with a crime. And that’s precisely what worries privacy advocates. 

Traditionally, American law enforcement obtains a warrant to search the home or belongings of a specific person, in keeping with a constitutional ban on unreasonable searches and seizures. Warrants for Google’s location and search data are, in some ways, the inverse of that process, says Michael Price, the litigation director for the National Association of Criminal Defense Lawyers’ Fourth Amendment Center. Rather than naming a suspect, law enforcement identifies basic parameters—a set of geographic coordinates or search terms—and asks Google to provide hits, essentially generating a list of leads. 

By their very nature, these Google warrants often return information on people who haven’t been suspected of a crime. In 2018 a man in Arizona was wrongly arrested for murder based on Google location data. Despite this possibility, police have continued to embrace the practice in the years since. “In many ways, law enforcement thinks it’s like hitting the easy button,” says Price, who’s mounting some of the country’s first legal challenges to warrants for Google’s location and search data. “It would be very difficult for Google to refuse to comply in one set of cases if it’s complying in another. The door gets cracked open, and once it’s open, it just becomes a floodgate.” 

Google says it received a record 60,472 search warrants in the US last year, more than double the number from 2019. The company provides at least some information in about 80% of cases. Although many large technology companies receive requests for information from law enforcement at least occasionally, police consider Google to be particularly well suited to jump-start an investigation with few other leads. Law enforcement experts say it’s the only company that provides a detailed inventory of whose personal devices were present at a given time and place. Apple Inc., the other major mobile operating system provider, has said it’s technically unable to supply the sort of location data police want. That’s OK, because many iPhone users depend on Google Maps and other Google apps. Google’s search engine owns 92% of the market worldwide and is currently the focus of an antitrust lawsuit from the US Department of Justice. 

Tech companies rarely help without a legal order. But with a warrant in hand, police can get an unparalleled glimpse into a person’s life. They can obtain emails, text messages and photos in a camera roll. Those requests hinge on police having a suspect. It’s when there’s no suspect at all that Google’s help is most coveted. 

Google can paint the most detailed portrait of a person whose account uses a feature called Location History. For these users, Google compiles a list of places they’ve been with their phone, registering their locations on average every two minutes. The company invites users to enable the feature when they use apps such as Google Maps, whether on an iPhone or Google’s Android. (The notifications are more insistent on Android.) Google pitches the feature as a way to remember trips you’ve taken, rediscover old haunts and get insights on where you’ve spent time and how far you’ve traveled. The company says that the feature has always been opt-in and that users are regularly reminded of the data collection. An estimated one-third of all active Google users have Location History turned on.