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.
