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Private equity turns to new fundraising tactics in tough market

Private equity firms are increasingly raising money to buy individual companies on a deal-by-deal basis, as they struggle with a downturn in the market and investors look for ways to cut management fees. 

A record $31bn was deployed by “deal-by-deal” investors last year, according to data provided by private equity advisory firm Triago, defying a broader dealmaking and fundraising slump in the industry. 

This was more than five times the amount raised and invested in 2019. More than 700 companies were acquired by private equity in this type of deal last year, more than double the total from five years ago. 

Among those offering or considering these types of deals are some of finance’s biggest names, including hedge fund Elliott, US investment giant Hamilton Lane, as well as others such as European credit firm Hayfin, said people familiar with the details. 

“Barely a conversation goes by with investors who aren’t looking at, or are open to, doing deal-by-deal type investments,” said William Clegg, a partner at private equity advisory firm Colmar Capital. “It’s everyone from insurance companies, [to] sophisticated family offices and even sovereign wealth funds.” 

Traditionally, private equity firms raise money from investors in a structure that locks in cash for more than a decade. This is used to buy a portfolio of companies. The firms charge management fees of between 1.5 and 2 per cent and take 20 per cent of the profits when portfolio investments are sold on. The structure means private equity executives can make good money on fees even if they have not invested their clients’ money. 

However, after a decade-long industry boom, private equity groups have been struggling to sell portfolio investments and to convince investors to lock funds up for long periods with high fees attached. Including venture capital, the industry raised $803bn last year, the lowest amount since 2017. 

Dealmakers have also found it hard to find attractive new deals in a higher interest rate environment, leaving them sitting on $4tn of ‘dry powder’, or uninvested client funds. 

The deal-by-deal approach can be an easier sell to investors. It often means lower, more bespoke management fees, though dealmakers can demand a bigger proportion of profits when the investment is sold on. But investors also know where their money is being spent from the start of the process.  

“Deal-by-deal transactions are favoured by institutional investors because they have the opportunity to cherry pick their preferred companies,” said Sunaina Sinha Haldea, head of private capital at Raymond James. “These deals typically come with lower fees than traditional fund investing.” 

Investor money can also be put to work and returned more quickly than from a traditional pooled fund, which is particularly relevant in a slower market where firms are earning fees on mountains of uninvested cash. 

“A lot of general partners are sitting on dry powder,” said Matt Swain, chief executive of Triago, which specialises in raising money for these types of transactions. “The [deal-by-deal] management team won’t sit on their money which is important in this environment.” 

Investment banks are looking to get in on the action. In December, California-based Houlihan Lokey announced a deal to buy Triago. 

The difficult fundraising market has also increased the attractiveness of deal-by-deal investing to executives who want to set up on their own. 

“The primary fundraising market has been challenging for everyone including named brands, and it’s almost been closed for first-time funds,” said Andy Lund, co-head of Houlihan Lokey’s private funds group. “There has been much more activity on the deal-by-deal front.” 

For dealmakers who have struck out on their own, deal-by-deal investing can help them build a record and relationships with potential investors to tap if they want to raise a fund in the future. 

It’s Been 30 Years Since Food Ate Up This Much of Your Income 

The last time Americans spent this much of their money on food, George H.W. Bush was in office, “Terminator 2: Judgment Day” was in theaters and C+C Music Factory was rocking the Billboard charts. 

Eating continues to cost more, even as overall inflation has eased from the blistering pace consumers endured throughout much of 2022 and 2023. Prices at restaurants and other eateries were up 5.1% last month compared with January 2023, while grocery costs increased 1.2% during the same period, Labor Department data show. 

Relief isn’t likely to arrive soon. Restaurant and food company executives said they are still grappling with rising labor costs and some ingredients, such as cocoa, that are only getting more expensive. Consumers, they said, will find ways to cope. 

“If you look historically after periods of inflation, there’s really no period you could point to where [food] prices go back down,” said Steve Cahillane, chief executive of snack giant Kellanova, in an interview. “They tend to be sticky.” 

In 1991, U.S. consumers spent 11.4% of their disposable personal income on food, according to data from the U.S. Agriculture Department. At the time, households were still dealing with steep food-price increases following an inflationary period during the 1970s. 

More than three decades later, food spending has reattained that level, USDA data shows. In 2022, consumers spent 11.3% of their disposable income on food, according to the most recent USDA data available. 

Many diners have said they are going out less frequently or skipping appetizers, while buying cheaper store brands more frequently at supermarkets and seeking out promotions or deals offered via apps. That is starting to chip away at some sales for food makers and restaurant operators. 

Food companies said they are feeling pinched themselves. While commodities such as corn, wheat, coffee beans and chicken have gotten cheaper, prices for sugar, beef and french fries are still high or rising. Companies across the U.S. economy have also raised prices beyond covering their own higher expenses, lifting profits for industries including retail, biotech and manufacturing. 

Food inflation has raised the ire of President Biden, who took to Instagram during the Super Bowl to blast food makers that he said were providing less bang for consumers’ buck—putting fewer chips in each bag or shrinking the size of ice-cream containers. 

“The American public is tired of being played for suckers,” Biden said. “I’ve had enough of what they call shrinkflation. It’s a rip-off.” 

David Chavern, CEO of the Consumer Brands Association, which represents major food manufacturers, said the industry offers many choices at different price points. “We hope to work with the president on real solutions that benefit consumers,” he said. 

Denny’s, Wendy’s and other restaurant chains told investors this month that their guest counts fell last year compared with 2022 levels as consumers, in particular those with lower incomes, feel the financial pinch. Big food makers including Hershey and Kraft Heinz have reported that their sales volumes declined as prices rose for their products, with several reporting a hit to profits in the latest fiscal year—and others an increase. 

Oreo maker Mondelez said in January it would continue raising prices on some of its products this year, largely because of cocoa prices, which earlier in February surged past a 46-year record. Hershey said this month it expects more expensive cocoa to cut into the company’s profit this year. Kraft Heinz said inflation is moderating but that its costs are still higher, driven in part by pricier tomatoes and sugar. 

Restaurant chains said they are trying to operate more efficiently to help defray wage increases, but they also expect to raise prices. 

Some restaurant and food companies, including Kraft Heinz, Mondelez International and Olive Garden owner Darden Restaurants, are projecting higher earnings this year. Signs of a consumer-spending slowdown has led others to temper their outlooks, with Starbucks lowering its same-store sales projection for 2024 and frozen-foods maker Conagra reducing its per-share earnings forecast. 

Investors have cooled on food stocks. An S&P 500 subindex of restaurant stocks has risen 10% in the past 12 months through Wednesday’s close, while the broader index gained about 25%. An S&P subindex tracking packaged food and meat companies fell roughly 8% over that period. 

Food manufacturers and restaurants have been offering more deals on some items. J.M. Smucker and Conagra have reduced prices on coffee and margarine, passing through lower costs for coffee beans and edible oils. McDonald’s and Wendy’s said they would offer deals this year aimed at consumers seeking relief from rising prices. 

Gary Pilnick, chief executive of WK Kellogg, said the company has been working to market cereals such as Frosted Flakes and Froot Loops to pressured consumers. An ad campaign launched in 2022, for example, encouraged consumers to eat cereal for dinner, pitching it as an easy, inexpensive alternative that, combined with milk and fruit, costs less than $1 per serving. “Give chicken the night off,” the campaign’s tagline says. 

Although it is rare for food prices to retreat, it is also unusual for prices to skyrocket as much as they have in recent years, said TD Cowen analyst Robert Moskow. He said he expects grocery prices to decline for a period this year as food makers come under pressure from consumers and retailers. 

Kraft Heinz said it is focused on providing affordable options for families, and that while its costs rose 3% in 2023, it raised prices by 1%. WK Kellogg said that before raising prices, the company tries to combat higher costs through greater productivity. 

This week’s fun finds 

Interns, Aakanksha and Jamie, jumped on the EdgePoint Moai tradition and offered up smoked meat deli sandwiches, half turkey and half smoked meat. And for those with a sweet tooth, Mini Bombolini and Gur Shondesh (a sweet made from cottage cheese and jaggery). 

Coca-Cola Unveils Foodmarks: First-Ever Food ‘Landmarks’ Across the Globe Inspired by Cultural Moments, Movies, Must-Travel Destinations and More 

Launching across the world, Foodmarks are destinations and experiences with a recipe of three key ingredients: the perfect moment, the perfect meal, and an ice-cold Coca-Cola. 

To launch the campaign, Coca-Cola will debut five immersive experiences globally, each inspired by a captivating moment in culture. The debut Foodmarks will invite people to rediscover the magic created during the original moment – from the time Marilyn Monroe was photographed enjoying a hot dog and a Coca-Cola from a New York City street cart, to scenes captured in the Hong Kong film “The God of Cookery.” More than 400 Foodmarks are highlighted at launch in cities and neighborhoods around the world, with more being added over the coming weeks, brought to life through a unique partnership with Time Out. 

Here are some of the debut, immersive launch experiences that fans can expect to see in 2024: 

New York City, USA – February 16-17 

• The first iconic Foodmark experience will debut in New York City, inspired by the famous photograph of Marilyn Monroe stopping traffic while enjoying a hot dog and an ice-cold Coca-Cola. This immersive three-day experience will create a perfect mashup of 1957 and 2024, incorporating theater, dance, technology, and style, featuring shops, breakout flash-shows, and a virtual Marilyn brought to life through AI - all inspired by 1957 Coca-Cola. Free tickets for the event have already “sold out”, however, a limited number of entries will be available at the experience on a first-come, first serve basis. 

Rio de Janeiro, Brazil – March 1 

• In the 80s, Brazilian rock legend Cazuza frequented the bohemian neighborhood of Leblon, enjoying many a late-night meal after a show with an ice-cold Coca-Cola. For The Cazuza Foodmark, Coca-Cola is opening “Pizzaria Cazuza” an 80s themed rock restaurant and music venue serving Cazuza’s favorite pizza and Coca-Cola. 

Hong Kong, China – March 8-10 

• When “The God of Cookery" came out in the 90s, it became an instant hit in Hong Kong cinema, telling the story of a renowned chef who loses his title and sets out to reclaim it, filled with scenes featuring meals and Coca-Cola. At The God of Cookery Foodmark, Coca-Cola is bringing Hong Kong's cinematic flavors to life by recreating the renowned 'Beef Ball Shop' as an immersive pop-up store. 

New Delhi, India – March 8 

• Raj Kapoor was the biggest star in Bollywood, and he would often share meals and Coca-Cola with his co-stars and crew on-set during the 1950s. At The Raj Kapoor Foodmark, Coca-Cola is recreating Raj Kapoor’s on-set meal moments, inviting people to enter the golden age of Bollywood in the 1950s, through an immersive film set that combines the magic of 1950s Bollywood with tech forward interactive moments using AR and A.I. The event will be curated and hosted by Janhvi Kapoor, and Raj’s Grandson will curate the menu with his grandfather's favorite dishes that live on through Junglee Kitchen. 

Bangkok, Thailand – April 

• Bangkok street food stalls have been the location of legendary meals and Coca-Cola moments forever. These are all being transformed into Foodmarks, all announced through a magic audiovisual experience that celebrates Bangkok’s most epic night out, featuring Thai culture and culinary talent. 

Fans can explore and find Foodmarks across the world through a custom interactive map at cocacolafoodmarks.timeout.com as part of a bespoke global campaign created by Time Out.

This week's interesting finds

The path less travelled 

Now live on the website, a new piece: The path less travelled

It’s a look back over the last 15 years and discusses the inflection points we called out over the years. We don’t see these often and believe we’re in one today (which we talk about at the bottom of the piece). 

We don’t invest in businesses because of macro thoughts, however we keep macro-level market issues in mind when looking for potential risks or what to avoid. We’ve always done our best to communicate those risks to the likeminded investors willing to join us along the way. 

15 years is a long time to cover, so we added a timeline on the PDF’s first page to help you navigate between sections: 

This week in charts 

PE distributions 

Equities 

Correlation 

Top 5 by market-cap

Software businesses

Trade

The Six Months That Short-Circuited the Electric-Vehicle Revolution 

The Michigan plant where the F-150 Lightning electric truck is built used to vibrate with excitement.

President Biden visited in 2021 and test drove the blazing-fast pickup. Before the first ones even started rolling off the assembly line in the spring of 2022, Ford said it would expand the factory to quadruple the number it could build. 

That energy is rapidly fading. Ford is cutting the plant’s output by half, and workers are relocating to other facilities, mostly those making gas-powered pickups and SUVs. 

As recently as a year ago, automakers were struggling to meet the hot demand for electric vehicles. In a span of months, though, the dynamic flipped, leaving them hitting the brakes on what for many had been an all-out push toward an electric transformation. 

A confluence of factors had led many auto executives to see the potential for a dramatic societal shift to electric cars: government regulations, corporate climate goals, the rise of Chinese EV makers, and Tesla’s stock valuation, which, at roughly $600 billion, still towers over the legacy car companies. 

But the push overlooked an important constituency: the consumer. 

Last summer, dealers began warning of unsold electric vehicles clogging their lots. Ford, General Motors, Volkswagen and others shifted from frenetic spending on EVs to delaying or downsizing some projects. Dealers who had been begging automakers to ship more EVs faster are now turning them down. 

Even Tesla Chief Executive Elon Musk warned of “notably lower” growth in vehicle deliveries for the company in 2024. 

“This has been a seismic change in the last six months of last year that will rapidly sort out winners and losers in our industry,” said Ford Chief Executive Jim Farley on an earnings call in early February. EV sales continue to grow, and auto executives say they remain committed to the technology. But many are recalibrating their plans. 

Ford has pulled back on EV investment and could delay some vehicle launches, while increasing production of hybrids, which run on both gasoline and electricity. It lost a staggering $4.7 billion last year on its battery-powered car business and projects an even bigger loss this year, in the range of $5 billion to $5.5 billion. 

Some auto executives acknowledge they got ahead of the market with overzealous demand projections. Pandemic-era supply-chain shocks and a resulting car shortage created long waiting lists and early buzz for EVs, making the industry overly optimistic. 

Only later, as a barrage of new EVs hit the market, did executives realize that car buyers were more discerning than they expected. Many were hesitant to pay a premium for a vehicle that came with compromises. 

Farley and other industry CEOs are still confident that EVs will eventually take off, albeit at a slower pace than initially envisioned. But for now, the massive miscalculation has left the industry in a bind, facing a potential glut of EVs and half-empty factories while still having to meet stricter environmental regulations globally. 

“Ultimately, we will follow the customer,” GM Chief Executive Mary Barra told analysts this month.

Trouble ahead

Then warning signs began to appear. In mid-January of last year, Tesla slashed prices on some models by more than 20%, triggering a chain reaction. 

Used-car dealers who had Tesla Model 3s and Model Ys in stock saw their values plummet by thousands of dollars. Customers who had bought Teslas at higher prices were furious. 

“Why cut EV prices when demand is greater than supply?” Bank of America analyst John Murphy wondered. 

Musk insisted that there was no demand problem. The company was trying to broaden appeal by making its cars more affordable, he told analysts. 

Inside Ford, staffers analyzed what Tesla’s cuts might mean for its own EV sales. About two weeks later, Ford reduced prices on some versions of its Mustang Mach-E SUVs by nearly 9%. 

Speaking to analysts in May, Farley largely shrugged off the pricing pressures, saying they weren’t reflective of broader interest in EVs. He remained upbeat about Ford’s outlook, reiterating plans to expand Lightning output. 

As car companies entered the summer-selling season, there were other worrying signs. U.S. EV sales for the first half of 2023 rose 50% from a year earlier, down from a 71% increase in the first half of 2022.

The wave of early EV adopters willing to splurge had receded, and the next round of potential customers was proving more hesitant. They had more questions about how far a car could go on a single charge, and the life expectancy of batteries. They worried about charging times, repair costs, and not having enough places to plug in, according to dealers and surveys. 

Interest rates were rising, pushing up monthly payments on EVs, which already were selling, on average, for about $14,000 more per vehicle than gas-engine models, according to research firm J.D. Power. 

GM was having trouble processing battery cells, a bottleneck that was preventing it from getting EVs to showrooms. Manufacturing delays left buyers waiting for delivery of models such as the Cadillac SUV and Hummer pickup truck. 

Late last July, GM’s Barra told analysts plenty of consumers still wanted the company’s EVs. “These vehicles are getting to the dealers’ lots, and if they’re not already sold, they’ve got a list of people who are waiting for them,” she said. 

Two days later, Ford’s Farley struck a different tone. “The paradigm has shifted,” he told analysts. Although consumers were still buying EVs, Ford’s pricing power was deteriorating compared with gas-engine models, he said, and the market for EVs would remain volatile. 

Jefferies analyst Philippe Houchois asked Farley what had changed. “A few weeks ago when we saw you in Detroit…it’s like you had religion” on EVs, he told the CEO. 

Farley replied that Ford was responding to market realities. 

Changing plans

The unraveling came swiftly. In a single month last fall, the average interest rate on an electric-car purchase jumped from 4.9% to 7%, making monthly payments even less affordable for some shoppers, said Tyson Jominy, vice president of data and analytics for J.D. Power. 

Suddenly, once-long waiting lists for EVs shrank and buyers dropped reservations. 

Over a 10-day span in October, the tone of automakers in Detroit and beyond turned gloomier. GM said it would delay by one year a $4 billion overhaul of a suburban Detroit factory to build new electric pickup trucks, citing “evolving EV demand.” 

The next day, Elon Musk said that not as many people could afford a Tesla given higher interest rates and tougher economic conditions. Affordability was keeping a lid on demand, he said during a call to discuss third-quarter results. 

A week later, on GM’s quarterly call, Barra described the transition to EVs as “bumpy,” and said the company wouldn’t meet a self-imposed goal of producing 400,000 EVs over a two-year period through mid-2024. 

Two days later, Ford said it would defer $12 billion in electric-vehicle investments and focus on increasing hybrid production, citing the need to better match demand. 

By late last year, it was becoming clear that sales of hybrids—once dismissed by some automakers as an unnecessary half-measure—were taking off and would outsell EVs in 2023. 

“People are finally seeing reality,” said Toyota Motor Chairman Akio Toyoda. For years, Toyota and other EV-cautious carmakers had been touting hybrids as a consumer-friendly way to reduce carbon emissions. 

In November, thousands of U.S. dealers signed a letter urging Biden to ease proposed regulations that would push the industry to sell more battery-powered cars. “Last year, there was a lot of hope and hype about EVs,” the dealers wrote. “But that enthusiasm has stalled.” 

China’s consumers tighten belts even as prices fall 

Consumer prices in the world’s second-largest economy have been in deflation for the past four months, falling at their fastest annual rate in 15 years in January. While the headline figure is driven by food and prices are edging higher in other sectors, businesses selling everything from cosmetics to electrical goods are offering discounts. Car prices are falling at their fastest rate in at least 22 years. 

The deflation data taps into long-standing concerns over consumer demand as policymakers seek to restore momentum to the world’s second-largest economy. While growth of 5.2 per cent in 2023 benefited from a low base effect the previous year because of the coronavirus pandemic, consumers will need to play a stronger role this year if the economy is to grow again at the same rate. 

But with the property market, historically a core driver of confidence, still under pressure, consumer caution has persisted even as people have headed into the Chinese new year, traditionally a period of big spending. Weak price growth is not automatically encouraging people to spend. 

“Theoretically low prices should increase purchasing power of consumers, but that hasn’t been the case,” said Louise Loo, lead economist at Oxford Economics. “We think the reason is because the deflationary mindset has been quite entrenched.” 

Official data showed retail sales rose 7.4 per cent in December, albeit against a low base in December 2022 when the pandemic swept across the country. Over the full year, affected by similar base effects from lockdowns, retail sales rose 7.2 per cent. 

A Morgan Stanley consumer survey for December, published in January, found just over half of respondents expected the economy to improve in the next six months. But it also noted that 76 per cent of consumers have made spending cuts to at least one category in the past six months, and that across all categories, consumers were downgrading to cheaper brands more often than they were upgrading to more expensive ones. 

A “lack of income growth” was behind low consumption, suggested Fred Neumann, co-head of Asian Economics at HSBC. The Morgan Stanley survey showed that only 45 per cent of consumers expected household finances to improve over the next six months, the joint-lowest level in the past year. 

Auto sales, which rose 12 per cent over 2023, are one sign of lower prices supporting demand, though Loo said the auto data had been “volatile”. 

Across major brands in China, genuine falls in prices can be difficult to distinguish from a constant marketing schedule of discounts and deals. 

Yaling Jiang, an analyst of consumer markets, said that some price cuts, such as an Apple discount on new phones, were just “regular marketing”. But she added the “premium that Chinese consumers are willing to accept is going down”, in part because savvier domestic buyers had “a higher understanding of the manufacturing process”. 

Western hedge funds that saw a killing in billions of Evergrande bonds stunned when government handed out 99% haircut instead, sources say

From afar, China Evergrande Group had all the makings of a killer distressed-debt trade: $19 billion in defaulted offshore bonds; $242 billion in assets; and a government that appeared determined to prop up the country’s faltering property market. So US and European hedge funds piled into the debt, envisioning big payouts to juice their returns. 

What they got instead over the course of the next two years is a harsh lesson in the dangers of trying to bargain with the Communist Party. The talks are now dead — a Hong Kong court has ordered Evergrande’s liquidation, and the bonds are nearly worthless, trading in secondary markets at just 1 cent on the dollar. 

In the aftermath of the Jan. 29 wind-up order, the biggest in China’s history, key players on both sides of the negotiations paint a Kafkaesque picture of endless micro-managing by unidentified government handlers that was communicated to investors through a mind-numbing maze of channels, only to then be interrupted by months-long gaps in dialogue. The last of those gaps came — to the shock of creditors — after the court’s December ruling giving the two sides one final chance to cut a deal. 

While global money managers have long known that the Chinese government exerts influence over corporate affairs in ways that are uncommon across the developed world, Evergrande was nonetheless a first-hand education for many of them in just how much authorities will intervene for the sake of political and economic expediency. 

The 1-cent-on-the-dollar price on the bonds, they say, sends a warning to investors as other Chinese companies, including Country Garden Holdings Co., follow Evergrande into default amid an economic slump that officials have struggled to fix. And the country’s disregard for foreign creditors almost certainly means more of them will get sold for parts. 

Of course, it’s more than just Beijing’s involvement that caused Evergrande’s bonds to crater. The nation’s deepening property-market slump, a $7 trillion stock rout and a tepid policy response are all weighing on broader sentiment. The fact that the bulk of the company’s assets are either already seized or located not in Hong Kong but mainland China — potentially out of reach of bondholders including Davidson Kempner Capital Management, King Street Capital Management and Contrarian Capital Management, has also contributed to rock-bottom recovery expectations. 

Soon after the company’s 2021 default, a risk-management committee dominated by officials from Evergrande’s home province of Guangdong — in part made up of company executives and state-affiliated debt managers — was formed to guide the overhaul. Provincial authorities also said that year that they would send a working group to strengthen internal controls and management of Evergrande. 

Over the course of the negotiations, Evergrande representatives would sometimes refer to “Guangzhou” (the capital of Guangdong province) as responsible for vetting virtually all key decisions, yet it remained unclear to creditors which combination of entities or individuals they were alluding to. 

Investors and advisers lamented not being fully aware of whose interests were being prioritized in negotiations, nor which layers of government they were dealing with. 

The secretive yet omnipresent group never directly interacted with those involved in offshore debt talks, said the people familiar. Their views were relayed to the company’s financial advisers, China International Capital Corp. and Bank of China International Holdings, which would then pass information on to bondholders via a convoluted web of communications that consisted of lawyers and advisers both in Hong Kong and the mainland, the people said. 

The group could, and did, veto creditor proposals with minimal explanation, the people added. 

In one example, it balked at an early offer that would’ve given offshore creditors access to the future income streams generated from Evergrande’s onshore projects. That cash instead was to be preserved for ensuring the delivery of other company projects, the people said. That reasoning wasn’t communicated to investors, who were only told the terms were not acceptable, they added. 

Still, early last year, Evergrande and its creditors were seemingly near an agreement to overhaul the company’s offshore debt load. Its $4.7 billion of dollar bonds due 2025 spiked as high as 11 cents. 

But a series of setbacks, including weaker than expected property sales, push back from regulators and the detention of Evergrande billionaire chairman Hui Ka Yan, ultimately torpedoed a deal, fueling further frustration and leading to a significant breakdown in talks, the people said. 

In early December, when a Hong Kong court gave Evergrande one last chance to strike a deal, the company’s representatives largely fell silent. Over a month went by before they finally contacted the offshore creditor group again — via email. 

When they did, their proposal shocked bondholders. Not only did it do little to strengthen their offer, it crossed a number of red lines the creditor group thought were clearly laid out, people with knowledge of the situation said. 

One key sticking point was the claims of a group of creditors identified as class C, which consists of some state-run banks, according to the people. 

While Evergrande eventually agreed to give creditors controlling stakes in two offshore listed units’ equity — a compromise it previously refused to make, the plan would have put the foreign bondholder claims and the debt held by the banks on equal footing, shrinking the pie for the international investors, multiple people familiar said. Offshore bondholders deemed the plan particularly objectionable because class C creditors also have access to onshore assets that they have little recourse to. 

A counteroffer was quickly made, and the company sent over another proposal on Jan. 29, just hours before the latest scheduled wind-up hearing. 

In the end, the judge overseeing the case, frustrated by the lack of progress on a deal, ordered the company’s liquidation. 

‘Serious Setback’ 

The company’s court-ordered liquidators from Alvarez & Marsal now begin the process of seizing and carving up the developer’s 1.74 trillion yuan ($242 billion) of assets, more than 90% of which are located in mainland China. Yet given Hong Kong’s insolvency proceedings have limited recognition in China, creditors face an uphill battle recouping losses. 

“Authorities are not likely to allow offshore claimants to secure valuable onshore assets while effectively insolvent developers struggle to meet politically tense onshore obligations,” said Brock Silvers, managing director at private equity firm Kaiyuan Capital. “This is a serious setback for China’s still-developing credit markets and can only exacerbate declining market sentiment as foreign capital increasingly seeks lower risk outlets.” 

This week’s fun finds 

AI is shaking up online dating with chatbots that are ‘flirty but not too flirty’ 

As of Valentine’s Day 2024, the world of online romance looks very different. An increasing number of people are using artificial intelligence to flirt, whether that means generating messages for dating apps, uploading profiles, or evaluating compatibility with a “situationship.” 

In the U.S., 1 in 3 men ages 18 to 34 use ChatGPT for relationship advice, compared with 14% of women in the same age range, according to a survey last month on AI platform Pollfish. Startups focused on AI-generated messages for dating are seeing booming demand. A Russian man who programmed a chatbot to converse with more than 5,000 women on Tinder is now engaged to one of them. 

The phenomenon even found its way last year into an episode of Comedy Central’s “South Park,” when the character Stan Marsh asked another character, Clyde Donovan, for advice on responding to his girlfriend’s texts. 

“ChatGPT, dude,” Clyde told Stan, in the school hallway. “There’s a bunch of apps and programs you can subscribe to that use OpenAI to do all your writing for you. People use them to write poems, write job applications. But what they’re really good for is dealing with chicks.” 

Some form of generative AI has entered virtually every industry, from financial services to biomedical research. Nvidia, the leading provider of processors used to power most generative AI models, has seen its revenue soar, and its market cap now rivals that of Amazon. OpenAI has emerged as one of the hottest startups on the planet, thanks to its large language models (LLMs), while Anthropic, founded by former OpenAI employees, is trying to catch up. 

Generative AI for dating may sound bleak, but it’s not necessarily surprising. Booming interest in the sector has set the stage for a rush of investments and a mountain of new products and services, including some targeting online romance. 

YourMove.AI, an AI dating tool that offers a range of services such as drafting messages, analyzing conversations and evaluating users’ dating app profiles, has about 250,000 users, founder Dmitri Mirakyan estimates. Launched in 2022, YourMove receives about 200,000 site visits per month, he said, and revenue has grown roughly 20% month over month. 

“The types of people that use this – you’d think it’s mostly just people that feel awkward, but there’s a ton of people who are just introverts,” Mirakyan told CNBC. He said users include people who are shy, speak English as a second language, are navigating cultural change or are simply newbies to online dating. 

A ChatGPT user in New York told CNBC that he decided to use OpenAI’s service to draft messages to women on dating apps after the “South Park” episode last March. He would plug in a woman’s opening message to ChatGPT and prompt it to act like a single person with the goal of getting a date. He made sure to tell the chatbot not to ask the person out immediately.

This week's interesting finds

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For First Time in Two Decades, U.S. Buys More From Mexico Than China 

New data released on Wednesday showed that Mexico outpaced China to become America’s top source of official imports — a significant shift that highlights how increased tensions between Washington and Beijing are altering trade flows. 

The United States’ trade deficit with China narrowed last year, with goods imports from the country dropping 20 percent to $427.2 billion, the data shows. American consumers and businesses turned to Mexico, Europe, South Korea, India, Canada and Vietnam for auto parts, shoes, toys and raw materials. 

Mexican exports to the United States were roughly the same as last year, at $323.2 billion. 

America’s total trade deficit, which consists of exports minus imports, narrowed 18.7 percent to $177.8 billion. Overall U.S. exports to the world increased slightly in 2023 from the previous year, despite a strong dollar and a soft global economy. 

U.S. imports fell annually as Americans bought less crude oil and chemicals and fewer consumer goods, including cellphones, clothes, camping gear, toys and furniture. 

The recent weakness in imports, and drop-off in trade with China, has partially been a reflection of the pandemic. American consumers stuck at home during the pandemic snapped up Chinese-made laptops, toys, Covid tests, athleisure, furniture and home exercise equipment. 

Even as concerns about the coronavirus faded in 2022, the United States continued to import a lot of Chinese products, as bottlenecks at congested U.S. ports finally cleared and businesses restocked their warehouses. 

“The world couldn’t get access to enough Chinese goods in ’21, and it gorged on Chinese goods in ’22,” said Brad Setser, an economist and senior fellow at the Council on Foreign Relations. “Everything has been normalizing since then.” 

But beyond the unusual swings in annual patterns in the last few years, trade data is beginning to provide compelling evidence that years of heightened tensions have significantly chipped away at America’s trading relationship with China. 

In 2023, U.S. quarterly imports from China were at roughly the same level as they were 10 years ago, despite a decade of growth in the American economy and rising U.S. imports from elsewhere in the world. 

“We are decoupling, and that’s weighing heavily on trade flows,” Mark Zandi, the chief economist of Moody’s Analytics, said of the United States and China. 

Economists say the relative decrease in trade with China is clearly linked to the tariffs imposed by the Trump administration and then maintained by the Biden administration.

Some economists caution that the U.S. reduction in trade with China might not be as sharp as bilateral data shows. That is because like Hisun, the Chinese vehicle producer, some multinationals have shifted portions of their manufacturing out of China and into other countries but continued sourcing some raw materials and parts from China. 

In other cases, companies may simply be routing goods that are actually made in China through other countries to avoid U.S. tariffs. 

U.S. trade statistics do not record such products as coming from China, even though a significant portion of their value would have been created there.

Ms. Freund, who wrote a recent paper on the subject, said the two countries’ trade relationship was “definitely being attenuated, but not as much as the official statistics suggest.” 

Homebuilders group pushing for 30-year mortgages to boost construction in Canada 

The Canadian Home Builders' Association says extending the period an additional five years would help with affordability and spur more construction. 

The move would bring more first-time homebuyers into the market, in turn encouraging developers to build more homes, association CEO Kevin Lee told a news conference Thursday. 

The proposal is one of several recommendations made by the association in a new report that lays out ways policymakers can help the industry build more homes. 

Housing expert Mike Moffatt said he likes some of the recommendations made by the group, including setting up an investment tax credit to support productivity growth in the sector. 

But offering a longer mortgage risks boosting demand without addressing the core issues behind the shortage, he said. 

"I don't think it's particularly harmful. But I also don't think it's particularly helpful either," Moffatt said in an interview. 

The Canadian Mortgage and Housing Corp. estimates the country needs to build 5.8 million homes by 2030 to restore housing affordability. 

Canada's housing shortage has worsened amid strong population growth, which in turn has put more pressure on governments to tackle the affordability crisis. 

Housing Minister Sean Fraser has conceded that Canada won't be able to significantly ramp up home construction without innovation. 

The federal government is hoping to boost productivity and speed up construction with modular homebuilding — dwellings that are built in a factory setting and assembled on-site. 

In the fall, Fraser said the federal government would launch a catalogue of pre-approved home designs that would speed up the permitting process and incentivize more factory-built homes. 

About a quarter of homebuilders are using some form of factory-based construction, but there's still plenty of room to grow the technology, Lee said. 

The association wants a refundable tax credit equal to 30 per cent of investment in machinery and equipment, similar to the investment tax credit created for clean technologies.  

This week’s fun finds 

Lunar New Year celebration at EdgePoint 

To ring in the Year of the Dragon, several EdgePointers teamed up to bring us all together with an impressive collection of dishes. 

The pig-shaped cake from Daan Go Cake Lab was a huge hit. 

Super Bowl guide

This week's interesting finds

This week in charts 

Interest rates 

  

Real estate

Canadian companies 

Canadian banks 

Market cycles   

Equities 

Birthrates

A $560 Billion Property Warning Hits Banks From NY to Tokyo 

New York Community Bancorp’s decisions to slash its dividend and stockpile reserves sent its stock down a record 38% on Wednesday, with the fallout dragging the shares to a 23-year low on Thursday. The selling bled overnight into Europe and Asia, where Tokyo-based Aozora plunged more than 20% after warning of US commercial-property losses and Frankfurt’s Deutsche Bank AG more than quadrupled its US real estate loss provisions. 

The concern reflects the ongoing slide in commercial property values coupled with the difficulty predicting which loans might unravel. Setting that stage is a pandemic-induced shift to remote work and a rapid run-up in interest rates, which have made it more expensive for strained borrowers to refinance. Billionaire investor Barry Sternlicht warned this week that the office market is headed for more than $1 trillion in losses. 

For lenders, that means the prospect of more defaults as some landlords struggle to pay loans or simply walk away from buildings. 

“This is a huge issue that the market has to reckon with,” said Harold Bordwin, a principal at Keen-Summit Capital Partners LLC in New York, which specializes in renegotiating distressed properties. “Banks’ balance sheets aren’t accounting for the fact that there’s lots of real estate on there that’s not going to pay off at maturity.” 

Moody’s Investors Service said it’s reviewing whether to lower New York Community Bancorp’s credit rating to junk after Wednesday’s developments. 

Banks are facing roughly $560 billion in commercial real estate maturities by the end of 2025, according to commercial real estate data provider Trepp, representing more than half of the total property debt coming due over that period. Regional lenders in particular are more exposed to the industry, and stand to be hit harder than their larger peers because they lack the large credit card portfolios or investment-banking businesses that can insulate them. 

While real estate troubles, particularly for offices, have been apparent in the nearly four years since the pandemic, the property market has in some ways been in limbo: Transactions have plunged because of uncertainty among both buyers and sellers over how much buildings are worth. Now, the need to address looming debt maturities — and the prospect of Federal Reserve interest-rate cuts — are expected to spark more deals that will bring clarity to just how much values have fallen. 

While offices are a particular area of concern for real estate investors, the company’s largest real estate exposure comes from multifamily buildings, with the bank carrying about $37 billion in apartment loans. Nearly half of those loans are backed by rent-regulated buildings, making them vulnerable to New York state regulations passed in 2019 that strictly limit landlords’ ability to raise rents.   

New China property financing measures set to be tested by banks' cautious approach 

China aims to ramp up financing for home projects in the coming days as part of its support measures, but banks' reluctance to lend to the crisis-hit sector will remain a major obstacle for the distressed developers who need fresh funding the most. 

Under the "project whitelist" mechanism, governments of 35 cities across the country are gearing up to recommend to banks residential projects that need financial support. Distressed developers are hoping the new mechanism will bring succor with some of their projects getting included in the whitelist. 

The mechanism, which is designed to expedite issuance of project loans from banks, comes as Beijing steps up efforts to ease a liquidity squeeze in the sector and boost homebuyer confidence as new home prices in December saw steepest drop in nearly nine years. 

But the success of the latest financing support measure could be stymied by banks' reluctance to extend fresh credit to the struggling real estate firms due to worries about the impact on their asset quality, developers, bankers and analysts say. 

A corporate lending manager at a joint-stock bank said banks would prioritise risk controls under the new "Project Whitelist" mechanism rather than take "significant bad debts" onto their books. 

The preferred residential projects on the whitelists to receive financing support are expected to be mostly those that are under development by state-owned enterprises, considered a safer bet due to their deep pockets, said the manager, who declined to be named as he is not authorised to speak to media. 

Chinese banks' aversion to extending fresh credit to the ailing property sector comes as Evergrande's liquidation highlights foreign investor despair at China's debt levels and leaves developers locked out of global borrowing markets. 

Real estate development loans in the world's second-largest economy grew 1.5% year-on-year to 12.88 trillion yuan ($1.8 trillion) at the end of 2023, versus 3.7% a year ago, data from the central bank showed. 

Japan's government interest costs seen more than doubling over next decade -draft

Japan faces more than a two-fold increase in annual interest payments on government debt to 24.8 trillion yen ($169 billion) over the next decade, draft government estimates seen by Reuters showed on Friday. 

The latest estimate, prepared by the Ministry of Finance for parliament ahead of debate on the government's budget bills, served as a reminder that the costs of financing debt could shoot up as the central bank leans toward exiting crisis-mode stimulus. 

Years of the Bank of Japan's unconventional policy, such as negative interest rates, has kept borrowing costs ultra low, effectively bankrolling government debt. 

However, interest payments on government debt are expected to jump to 24.8 trillion yen in fiscal 2033, which ends in March 2034, versus 9.83 trillion yen for the fiscal year ending in March 2025, the draft estimate showed. 

Japan's public debt stands at more than twice the size of its economy, by far the worst among industrial world.   

This week’s fun finds 

How to microdose movement 

I’m not the only one hopelessly devoted to the sit. American adults spend an average of 7.7 hours a day seated. Both prolonged sitting — extended, uninterrupted periods of time in a seat — and sedentary behaviors — tasks that expend extremely little energy, such as playing video games, watching television, using a computer, or reading a book — are linked to a number of negative health outcomes. Sedentary behavior increases your risk of diabetes, cardiovascular disease, and even early death. Sitting for long periods of time also ups your chances for blood clots, back and joint pain, weight gain, and cancer. 

And regular physical activity does little to offset the negative impacts of prolonged sitting. Keith Diaz, an associate professor of behavioral medicine at Columbia University Medical Center, says, “The muscles, it’s great for them to be active and stimulated really heavily and really hard for 30 minutes or 60 minutes, whatever you do for your exercise. But eventually they stop doing their job again when you don’t use them.” 

There is some good news, though: A 2023 study co-authored by Diaz found that just five minutes of light walking every half hour can help reduce some of these risks. There are also modifications for those with limited mobility or who use a wheelchair to get their movement breaks, experts say. In general, experts consider one hour to be the maximum amount of time people should spend sitting at any given time: In addition to the 150 minutes a week of moderate intensity physical activity recommended by the Physical Activity Guidelines for Americans, you should strive to get out of your seat at least once an hour to offset the negative effects of prolonged sitting. Here’s some expert-approved advice on how to do it. 

Back-to-back Zoom meetings or highly engrossing media may keep you glued to your chair for hours at a time, sometimes without your noticing. In his 2023 study, Diaz found most participants simply forgot to stand. Many smartwatches and fitness trackers can display movement reminders, prompting users to get up after a certain length of time. If you don’t have one, [oncology physiotherapist Scott] Capozza recommends setting alarms or reminders on your phone for every 30 to 60 minutes or putting notes next to your computer screen reminding you to stand up. 

Once you’re out of your seat, there are a number of low-effort movements you can try. Whether you work in an office or at home, you can take trips to fill up your water bottle or to go to the bathroom. If you can, try to use the water fountain that’s farthest away from your desk or a bathroom that’s on another floor, Capozza suggests. To make the best use of phone time, take a walk or unload the dishwasher while on calls. (A headset or wireless headphones will save your neck and help with hands-free chatting.) Commuters can park at the back of the parking lot or get off public transit a stop or two early and walk the rest of the way to work if time and weather allow. 

During the times you are seated, proper alignment is crucial to avoid any neck or low back pain, Capozza says. Make sure your hips and pelvis are slightly above your knees. Your feet should be on the ground with equal weight distributed between both, meaning you don’t want one foot to be elevated on a stool or ledge. Make sure to keep your weight balanced between your pelvis and your feet to take pressure off your back. “You don’t want to be too far back in your chair so that more of your weight is on your pelvis and your hips,” Capozza says, “but you don’t want to be too far forward in your chair so that more and more weight is on your feet.”