This week's interesting finds

Ben, partner since 2017 (Sarnia, Ontario)   

Rest in Peace, Charlie Munger

‘Take a simple idea and take it seriously’: CharlieMunger in his own words.

Charlie Munger, who has died aged 99, was instrumental in helping Warren Buffett turn Berkshire Hathaway into an investment powerhouse.

Munger laid down the principles on which the pair built Berkshire, Buffett has said, helping him refine a philosophy that was initially shaped by value investing pioneer Benjamin Graham.

“The blueprint he gave me was simple: ‘Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices’,” Buffett, 93, said.

Over a career spanning more than 70 years — most of which spent alongside the Sage of Omaha — Munger became famous for his sharp wit about investing and life delivered during Berkshire’s annual shareholders meetings. Some of Munger’s best-known “zingers”

“Capitalism without failure is like religion without hell.”

“Take a simple idea and take it seriously.”

“Show me the incentive and I will show you the outcome.”

“Every time you hear EBITDA, just substitute it with bullshit.”

“There is more dementia about finance than there is about sex.”

“To say accounting for derivatives in America is a sewer is an insult to sewage.”

This week in charts 

Household debt

Inflation

Housing and Immigration 

Source: Statistics Canada 

Economy   

Unicorns   

China   

ESG   

2022 and 2023 YTD Returns 

Source: Goldman Sachs FICC & Equities, Custom Baskets, Bloomberg, as of 30-Nov-2023. Past performance is not indicative of forward returns  

Decarbonization in Alberta

Canada's main oil-producing province Alberta on Tuesday said it would provide a 12% grant on eligible capital costs associated with building new carbon capture utilization and storage (CCUS) projects to help industry cut emissions that cause climate change. 

The incentive from Alberta, which the provincial government has been working on since January, comes on top of a federal government CCUS tax credit announced last year and is designed to spur investment in the costly technology. 

Alberta Energy Minister Brian Jean said CCUS is the "only viable option" to cut emissions of hard-to-abate industries, such as oil and gas, cement and petrochemicals. 

"Not only will this technology help preserve our position as a major bitumen producer, but our whole economy will depend on CCUS for large volumes of reduced emissions reductions," Jean told a news conference. 

Alberta Premier Danielle Smith said the incentive program was expected to help attract C$35 billion ($25.80 billion) in capital investment and cost the province between C$3.5 billion and C$5.3 billion. 

Chemical maker Dow said federal and provincial government CCUS incentives contributed to its board's decision on Tuesday to approve a C$6.5 billion investment in its existing Fort Saskatchewan, Alberta, facility. 

The Path2Zero project includes building a new ethylene cracker and increasing polyethylene capacity by 2 million metric tonnes per annum, and will use CCUS to help meet net-zero emissions. 

More than twenty new CCUS projects have been proposed in Alberta, including a C$16.5 billion project put forward by the Pathways Alliance, a consortium of Canada's six biggest oil sands producers.   

Half Of All Skills Will Be Outdated Within Two Years, Study Suggests 

Executives believe nearly half of the skills that exist in today’s workforce won’t be relevant just two years from now, thanks to artificial intelligence. And a lot of that includes their own skills. This startling proclamation came out of a recent survey of 800 executives and 800 employees released by edX, an online education platform. 

The executives estimate that nearly half (49%) of the skills that exist in their workforce today won’t be relevant in 2025. The same number, 47%, believe their workforces are unprepared for the future workplace. Identifying skills shortages is not a surprising result to come out of an educational platform provider, but the short timespan is an eye-opener. 

Executives in the survey estimate that within the next five years, their organizations will eliminate over half (56%) of entry-level knowledge worker roles because of AI. What’s more, 79% of executives predict that entry-level knowledge worker jobs will no longer exist as AI creates an entirely new suite of roles for employees entering the workforce. On top of that, 56% say their own roles will be “completely” or “partially” replaced by AI. 

However, there are industry leaders who are skeptical of such heavy-handed doom-laden predictions. "In my view, the immediate impact of AI on career goals is likely to be minimal," says Richard Jefts, executive vice president and general manager at HCL Software. "While many companies claim to be leveraging AI, the reality is that most are still in the early stages of adoption.” Expect more of a longer-term impact on careers as AI matures, he says. 

While AI will redirect jobs and career prospects, its impact on jobs and tasks is murky — it’s not a simple matter of swapping out tasks with AI and you’re done. "The challenging part is that it is very difficult to predict precisely where and when that redirection will occur,” says Frederico Braga, head of digital at Debiopharm. “Almost every professional whose day to day is somehow connected with a digital activity will need to re-adjust their career goals as they — and the people around them — will begin to see changes in their daily work-related activities and processes.”   

This week’s fun finds 

Giving the gift of financial literacy 

Several EdgePointers presented at our financial literacy “kids camp” in Montréal to help the youth capitalize on their incredibly long-time horizons.

This week's interesting finds

Tye & Sylvie, partners since 2008 and 2010 (Montréal, Québec) 

Translation: Business values don’t change daily / Investor emotions (and stock prices) do

This week in charts 

Autos  

 

Diamonds 

My Bonds (Music Video) - Why Treasury Bonds Are So Attractive Now 

With the U.S. national debt surpassing $33 trillion and the largest foreign buyers of Treasury bonds reducing their holdings, the government may need some help finding new buyers. 

Nomura Is Building a $1 Billion Strategy for Private Credit 

The Japanese bank is looking to put down $1 billion from its own balance sheet over the next 18 months to participate on private lending deals, rivaling firms such as Blackstone Inc. and Ares Management Corp., said the people, who aren’t authorized to speak publicly. 

Nomura’s effort — which will involve lending to private equity-backed companies — is being led by Gordon Sweely, the New York-based global head of securitized products and private credit, the people said. 

Though the bank occasionally participated on private credit deals before, it provided one of its first loans under the firm’s newly-established global private credit unit last Thursday, the people said. Teaming up with PGIM, Nomura provided a £110 million ($138 million) term loan and a £20 million working capital bridge facility to back HIG’s takeover of DX Group Plc. 

Nomura is one of many investment banks trying to grab a slice of private credit, a market that has historically taken deals out of the banking industry.   

OpenAI Made an AI Breakthrough Before Altman Firing, Stoking Excitement and Concern 

“The technical breakthrough, spearheaded by OpenAI chief scientist Ilya Sutskever, raised concerns among some staff that the company didn’t have proper safeguards in place to commercialize such advanced AI models, this person said. 

In the following months, senior OpenAI researchers used the innovation to build systems that could solve basic math problems, a difficult task for existing AI models...A demo of the model circulated within OpenAI in recent weeks, and the pace of development alarmed some researchers focused on AI safety.. OpenAI President and co-founder Greg Brockman had been working to integrate the technique into new products. 

… Sutskever’s breakthrough allowed OpenAI to overcome limitations on obtaining enough high-quality data to train new models, according to the person with knowledge, a major obstacle for developing next-generation models. The research involved using computer-generated, rather than real-world, data like text or images pulled from the internet to train new models.” 

This week’s fun finds 

An American Thanksgiving trip to the Lonestar State 

We brought our Texas-sized appetites to the moai (our version of bringing EdgePointers together for a meal) organized by Adam. It’s the second year celebrating the U.S. holiday, so we hope this means it’s now an annual tradition. 

Why Teslas Totaled in the US Are Mysteriously Reincarnated in Ukraine 

For a long time, cars written off in North America have found their way to Eastern European repair shops willing to take on damage that US and Canadian mechanics won’t touch. In 2021, the most recent data available, Ukraine was a top-three destination for used US passenger vehicles sent overseas, close behind Nigeria and the United Arab Emirates. And Ukraine’s wreck importers and repairers are particularly known for their ingenuity. Some have made fixing EVs written off across the Atlantic into a specialty, helping to drive a surge in the number of electric vehicles on the country’s roads, even as the war with Russia rages. 

Though few automakers sell new EVs in Ukraine, the share of newly registered vehicles that are fully electric, 9 percent, is about the same as in the US and nearly double that of neighboring Poland and the Czech Republic. Most of Ukraine’s refurbished EVs come from North America, and many arrive with major damage. 

There’s a ready supply of crashed North American EVs in part because electrics are becoming more common, and also because in recent years, relatively new EVs with low mileage have been written off at a higher rate than their gas-powered equivalents, according to data from insurers. US and Canadian repair shops and insurers see them as more dangerous and difficult to fix. Scrapyards find it hard to make money from their parts and instead ship them abroad. 

The war has even boosted Ukraine’s EV resurrection business at times, by driving up gas prices and making electrics more attractive to drivers. Ukraine has a public charging network of some 11,000 chargers, according to Volodymyr Ivanov, the head of communications at Nissan Motor Ukraine—that’s more than the state of New York, and double the number in neighboring Poland. Since 2018, Ukraine’s government has removed most taxes and customs duties on used EV imports. In the US, electric vehicles tend to be expensive, and the average EV driver is still a high-income male homeowner. North American wrecks, Ukraine’s EV incentives, and its relatively low electricity prices have created a different picture. 

“There is a joke here that all poor people are driving electric cars, and all the rich people are driving petrol cars,” says Malakhovsky. “Tesla is a common-people, popular car because it’s very cheap in maintenance.”

This week's interesting finds

 

Geoff, partner since 2008 (Kingston, Ontario) 

November 17th marked the 15th anniversary of the launch of the original four EdgePoint Portfolios. Thank you for your trust over this time. We will continue to work hard every day to be worthy of it.

The return of the EdgePoint holiday gift list 

Internal partners submitted some of their favourite gift ideas to help anyone looking for something to give to their friends and family. Comfy sweaters, books and, of course, earbuds. 

We also brought back some of our holiday favourites on the EdgePoint store:   

This week in charts 

Company updates   

U.S. small-caps 

U.S. bonds 

 Liquid natural gas 

Chinese researchers claim they can break 2048-bit RSA using quantum computers, entire tech world at risk 

It is fairly well-known among security researchers that quantum computers, once they are powerful enough, will be able to crack the existing encryption technologies. In other words, powerful quantum computers will be able to unlock phones and crack passwords within minutes by 2048-bit RSA encryption, a standard that is used in almost everything smart tech that we have in our life. But the powerful quantum computers don't exist yet. Now, a few Chinese researchers claim that they do not need a powerful quantum computer to crack 2048-bit RSA. The existing quantum computers can do it well enough. A group of Chinese researchers have recently published a scientific paper titled "Factoring integers with sublinear resources on a superconducting quantum processor." In the paper, they have claimed that it is possible to break into the 2048-bit RSA encryption using existing quantum computers. The news comes as a shock to the entire scientific community as the existing quantum computers were never thought to be capable enough of such a move. 

An excerpt from the paper reads, "We demonstrate the algorithm experimentally by factoring integers up to 48 bits with 10 superconducting qubits, the largest integer factored on a quantum device. We estimate that a quantum circuit with 372 physical qubits and a depth of thousands is necessary to challenge RSA-2048 using our algorithm. Our study shows great promise in expediting the application of current noisy quantum computers, and paves the way to factor large integers of realistic cryptographic significance." 

Given that the claim is so startling, most security researchers are sceptical. 

"It might not be correct, but it's not obviously wrong," writes renowned security technologist Bruce Scheiner on his blog. He further adds that the Chinese researchers claimed in their paper that they were able to "factor 48-bit numbers using a 10-qbit quantum computer. And while there are always potential problems when scaling something like this up by a factor of 50, there are no obvious barriers." 

However, the researchers haven't demonstrated their theory on any device larger than 48-bits, which, as per experts, is a major red flag.   

Where Have All the Foreign Buyers Gone for U.S. Treasury Debt? 

Foreigners no longer have an insatiable appetite for U.S. government debt. That’s bad news for Washington. 

The U.S. Treasury market is in the midst of major supply and demand changes. The Federal Reserve is shedding its portfolio at a rate of about $60 billion a month. Overseas buyers who were once important sources of demand—China and Japan in particular—have become less reliable lately. 

Meanwhile, supply has exploded. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record when excluding the pandemic borrowing spree of 2020. 

“U.S. issuance is way up, and foreign demand hasn’t gone up,” said Brad Setser, senior fellow at the Council on Foreign Relations. “And in some key categories—notably Japan and China—they don’t seem likely to be net buyers going forward.” 

Foreigners, including private investors and central banks, now own about 30% of all outstanding U.S. Treasury securities, down from roughly 43% a decade ago, according to data from the Securities Industry and Financial Markets Association. 

The makeup of overseas demand has shifted. European investors bought $214 billion in Treasurys over the past 12 months, according to Goldman Sachs data. Latin America and the Middle East, flush with oil profits, also added to holdings. That has helped offset a $182 billion decline in holdings from Japan and China. 

This week’s fun finds 

AI for a cooler Earth 

What Do U.S. Teens Want To Be When They Grow Up? 

Internet Sleuths Want to Track Down This Mystery Pop Song. They Only Have 17 Seconds of It 

The file is labeled “Pop – English,” indicating the genre and language. “Mid 80s, Bad quality. (Everyone Knows That),” wrote carl92, offering an estimate of when the song might have been recorded. “Everyone Knows That” is an interpretation of a lyric heard in the clip. “I rediscover[ed] this sample between a bunch of very old files in a DVD backup,” carl92 explained in a followup comment. “Probably I was simply learning how to capture audio and this was a left over.” 

The grainy recording, just 17 seconds long, captures what indeed sounds like the catchy hook to an upbeat 1980s New Wave tune, though most of the words are hard to make out. It didn’t attract much interest at first. Yet as the months passed without an identification, each proposal of a potential artist being ruled out one after another, a cultish fascination began to take hold. Two years later, it’s the most-commented thread in WatZatSong history, and there’s a 5,000-strong subreddit devoted to theories about the song. Fans have recorded remixes and covers imagining the missing verses, generated longer versions with AI, and perpetrated successful hoaxes about where the original came from. But the fact remains: no one knows the band behind “Everyone Knows That.” 

The lack of leads is itself intriguing, he says, comparing “Everyone Knows That” to another popular piece of so-called “lost media,” widely known as “Like the Wind” or “The Most Mysterious Song on the Internet.” This was recorded sometime in the 1980s from a German radio broadcast and has likewise thwarted years of investigation into who produced it. (Such artifacts are sometimes given the genre tag of “lostwave.”) But, notes cotton–underground, people researching “Like the Wind” have a full, three-minute audio file of decent quality to work from. The existing short fragment of “Everyone Knows That,” whose precise lyrics are still a subject of debate (some hear the words “ulterior motives” where others hear “fear of emotions,” for example) presents a greater degree of difficulty for audio detectives. Some even believe that carl92, who left WatZatSong after uploading it, pulled off some kind of maddening prank. There’s no end to the list of the potential sources suggested for carl92’s garbled snippet of “Everyone Knows That.” Some believe he got it off an MTV broadcast in the 1990s, while others are convinced it was a commercial jingle. It could be an unreleased demo by a group that never hit the big time. Or it might be from a compilation of muzak created by a Japanese company and played in McDonald’s locations in Eastern Europe — except that one investigator called the distributor and confirmed they have no such track in their databases. These dead ends have only multiplied. 

“It was fun to have hope, but as of late, the hoaxes have gotten so common, it’s becoming increasingly more and more disruptive to the search,” [Reddit user] sodapopyarn laments. Still, it often appears as if creative inspiration — not the dogged quest for cold, hard truth — is what keeps the discussion going. 

As one YouTube commenter wrote on a recent music video that convincingly fleshes out the song in polished form, complete with suitably neon 1980s visuals: “Even if we find the original, it’s probably not gonna be as good as this.”

This week's interesting finds

 

Marie Hélène, partner since 2017 (Montréal, Québec) 
English: Investing isn’t about seizing the day, but mapping out your future  

This week in charts 

U.S. equities 

Balanced portfolios

U.S. government spending

Beauty products   

It’s U.S. vs. China in an Increasingly Divided World Economy 

China passed a significant milestone last fall: For the first time since its economic opening more than four decades ago, it traded more with developing countries than the U.S., Europe and Japan combined. It was one of the clearest signs yet that China and the West are going in different directions as tensions increase over trade, technology, security and other thorny issues. 

For decades, the U.S. and other Western countries sought to make China both a partner and a customer in a single global economy led by the richest nations. Now trade and investment flows are settling into new patterns built around the two competing power centers. 

In this increasingly divided world economy, Washington continues to raise the heat on China with investment curbs and export bans, while China reorients large parts of its economy away from the West toward the developing world. 

Benefits for the U.S. and Europe include less reliance on Chinese supply chains and more jobs for Americans and Europeans that otherwise might go to China. But there are major risks, such as slower global growth—and many economists worry the costs for both the West and China will outweigh the advantages. 

The International Monetary Fund said in October that fragmentation between China and the West was weighing on the world’s economic recovery this year. A more severe break between U.S.- and China-led blocs could cost the global economy as much as 7% of gross domestic product, worth trillions of dollars, IMF research suggests. 

The economic split deprives companies of access to vital markets that drive profits and makes it harder to share technology and capital, depressing growth. 

China, meanwhile, has invested big sums in Indonesian nickel factories to supply China’s EV industry. Tech firms Tencent and Alibaba have expanded across Asia, Africa and Latin America. Other Chinese companies have targeted renewable energy projects in Latin America and Africa. 

Latin America, Africa and developing markets in Asia now account for 36% of overall Chinese trade, compared with 33% for its trade with the U.S., Europe and Japan, according to a Wall Street Journal analysis of Chinese customs data. As recently as last summer, that trio of advanced markets accounted for a larger share of Chinese trade. 

Part of the explanation is Chinese factories are moving to countries such as Vietnam, India and Mexico to keep selling to U.S. customers while avoiding U.S. tariffs. But China’s growing expertise in affordable smartphones, cars and machinery that appeal to developing-world customers is also helping drive the shift at the expense of Western rivals. 

As Chinese companies displace Western makers of tools and components for finished goods, the country’s use of imports in industrial production has declined by around 50% since its 2005 peak, even as exports have grown, according to data from CPB, a Dutch government agency that tracks global trade.   

More Semiconductors, Less Housing: China’s New Economic Plan 

China’s political leaders, under pressure to support the country’s fragile recovery, are slowly steering the economy on a new course. No longer able to rely on real estate and local debt to drive growth, they are instead investing more heavily in manufacturing and increasing borrowing by the central government. 

For the first time since 2005, when comparable record keeping in China began, banks controlled by the state have started a sustained reduction in real estate lending, data released last week showed. Enormous sums are instead being channeled to manufacturers, particularly in fast-growing industries like electric cars and semiconductors. 

There are risks to the approach. China has a chronic oversupply of factories, well more than it needs for its domestic market. A greater emphasis on manufacturing will probably lead to more exports, an increase that could antagonize China’s trading partners. China’s extra lending also poses a challenge for the West, which is trying to foster extra investment in some of the same industries through legislation like the Biden administration’s Inflation Reduction Act. 

The shift to manufacturing loans underlines Beijing’s reluctance to bail out China’s debt-burdened property market. Construction and housing account for about a quarter of the economy and are now suffering from steep declines in prices, sales and investment. 

China’s investment push might stir more growth in the coming months, partly offsetting troubles in the housing sector. But more central government borrowing, as a replacement for local borrowing, will do little to defuse the long-term drag on growth caused by accumulating debt. 

“I don’t think there is a problem for short-term development, but we have to be concerned about medium and long-term development,” Ding Shuang, the chief economist for China at Standard Chartered, said at a recent forum of Chinese economists and finance experts in Guangzhou. “It’s fair to say real estate is not at a floor.” 

Many economists have expressed concern that throwing more money at manufacturing might not fix the broader economy. The real estate sector is still decaying and is so large that offsetting its troubles with growth in industries like car manufacturing, which is 6 to 7 percent of economic output, won’t be easy. 

How Work From Home Has Reshaped What Americans Buy 

Early in the pandemic, unable to spend on things such as traveling and dining out, and with their finances buoyed by government relief, people bought goods with abandon. This played a role in the supply-chain snarls, the hefty price increases that beset the economy, and in retailers’ scramble to secure as much inventory as possible. As the economy gradually reopened there was a reversal that left many stores burdened with more than they needed. 

Now, the rebound in services’ share of spending seems to have ended, and retailers’ inventory problems largely have been wrung out. Those selling furniture, electronics and appliances, for example, saw their inventory swell to as much as 1.75 times sales in December 2022, according to data from the Census Bureau. As of August, that ratio shrank back to 1.56, which is pretty much in line with prepandemic levels. 

U.S. consumers are still devoting a lot of spending toward goods—a reshaping of the economy that, in addition to any far-reaching consequences it might have, suggests retailers’ 2023 holiday-season sales will be much higher than they might have imagined in 2019. 

Figures from the Commerce Department’s Bureau of Economic Analysis show that U.S. consumers devoted a seasonally adjusted 33.3% of their spending to goods in September compared with an average of 31.4% in 2019. With goods prices moderating lately while services prices continue to climb, inflation doesn’t play much of a role in that. Indeed, adjusted for inflation spending on goods was 20.4% higher in September than the 2019 average, while services spending was just 7.6% higher. 

A survey conducted by the Census Bureau during the latter half of last month showed that, among respondents who answered the question, 29% of U.S. households included someone who had teleworked at least once over the past seven days. That was almost exactly the same share as a year earlier—an indication of the staying power of the work-from-home revolution the pandemic set off. 

People who work from home more don’t avail themselves of some services as much as they used to. They don’t spend as much money taking public transportation to work, for example, or at downtown lunch spots and after-work watering holes. If they used to have a gym membership near their office, maybe now they don’t. They buy stuff instead. 

But a Goldman Sachs analysis shows that the stuff they buy is often a sort of substitution for the services they used to buy. If they aren’t buying a monthly bus pass, maybe they buy an office chair. If they aren’t spending money on a spin class near work, maybe they buy a bicycle.   

This week’s fun finds 

Valuation metrics   

The return of the Hot Sauce reviewers 

Originally the hottest sauce on Hot Ones, the crew reconvened to try The Last Dab. There are now two spicier versions, Apollo and Xperience, that will be tried in the coming weeks (assuming our mouths and stomachs can handle it…). 

Reviews: 

• “Really flavourful!” 

• “Hints of mustard.” 

• “It sneaks up on you and lingers…” 

• “Why did you do that to me?” 

Bored Ape NFT event attendees report ‘severe eye burn’ 

Several people have reported experiencing eye pain, vision problems, and sunburnt skin on Sunday after attending ApeFest, a Bored Ape Yacht Club NFT collection event in Hong Kong that ran from November 3rd-5th. 

Some ApeFest attendees posted on X (formerly Twitter) after seeking medical attention, with one person reporting that they had been diagnosed with Photokeratitis — aka, “welder’s eye,” a condition caused by unprotected exposure to ultraviolet radiation — and another saying the issue was a result of UV from the stage lights, leading to speculation that the injuries were caused by improper lighting used at the event. 

“I woke up at 04:00 and couldn’t see anymore,” said @CryptoJune777. “Had so much pain and my whole skin is burned. Needed to go to the hospital.” 

Yuga Labs, the blockchain company behind the Bored Ape Yacht Club NFT project, says it’s aware of the situation and taking the reports seriously. “We are actively reaching out and in touch with those affected to better understand the root cause,” said Yuga Labs spokesperson Emily Kitts in a statement to The Verge. “Based on our estimates, the 15 people we’ve been in direct communication with so far represent less than one percent of the approximately 2,250 event attendees and staff at our Saturday night event.”

This week's interesting finds

 

Mimi, Pat and Claire – partners since 2019, 2008 and 2019 (Cymbria, Prince Edward Island) 

In honour of Cymbria’s 15th anniversary on November 3rd, three EdgePointers stopped by the town that inspired our company’s name. They were on the island for meetings with our advisor partners.   

This week in charts 

Education

U.S. equities   

Private equity: higher rates start to pummel dealmakers 

The prospect of rates staying higher for longer is having powerful ripple effects across the economy; companies large and small are struggling to refinance debt, while governments are seeing the cost of their pandemic-era borrowings rise. 

But private equity is the industry that surfed the decade and a half of low interest rates, using plentiful and cheap debt to snap up one company after another and become the new titans of the financial sector. 

“Many of the reasons these guys outperformed had nothing to do with skill,” says Patrick Dwyer, a managing director at NewEdge Wealth, an advisory firm whose clients invest in private equity funds. “Borrowing costs were cheap and the liquidity was there. Now, it’s not there,” he adds. “Private equity is going to have a really hard time for a while . . . The wind is blowing in your face today, not at your back.” 

Facing a sudden hiatus in new money flowing into their funds and with existing investments facing refinancing pressure, private equity groups are increasingly resorting to various types of financial engineering. 

They have begun borrowing heavily against the combined assets of their funds to unlock the cash needed to pay dividends to investors. Some firms favour these loans because they remove the need to ask their investors for more money to bail out companies struggling under heavy debt loads. 

Another tactic is to shift away from making interest payments in cash, which conserves it in the short term but adds to the overall amounts owed. 

The co-founder of one of the world’s largest investment firms points out that almost the entire history of the industry has played out against a backdrop of “declining rates, which raise asset values and reduce the cost of capital. And that’s largely over.” 

“The tide has gone out,” says Andrea Auerbach, head of private investments at Cambridge Associates, which advises large institutions on their private equity investments. “The rocks are showing and we are going to figure out who is a good swimmer.” 

Before committing new funds to private equity, investors generally like to see returns from previous ventures. Increasingly, firms are resorting to financial engineering and complex fund structures to provide those returns. 

Hg Capital, one of Europe’s largest buyout groups, has been particularly innovative, developing a model that other firms including EQT and Carlyle are replicating. It involves holding on to its best-performing assets for longer than is normal, transferring them between funds and generating returns for its backers by selling small parcels of these companies to other investors. 

Other buyout groups are also turning to NAV loans to accelerate distributions as the traditional exit routes from investments — a sale to another company, or a flotation on the stock market — become more difficult. 

Eyeing an opportunity, banks are increasingly pitching these loans to investment firms struggling to sell their companies, industry executives say. Carlyle, Vista Equity and Nordic Capital are among the firms that have tapped this market over the past year. Twenty per cent of the PE industry is considering such loans, according to a recent poll from Goldman Sachs. 

Some pensions and endowments have even resorted to selling large stakes in private equity funds at discounts to their stated value to raise cash. 

“We are having a lot of uncomfortable conversations,” says Dwyer, referring to meetings with private equity firms on behalf of investor clients. “It is year three and I haven’t had a distribution in funds that are fully baked [invested]. When am I going to get my capital back?” 

This week’s fun finds 

Lunch was a smash-ing success 

Luca’s moai (our version of bringing EdgePointers together for a meal) was from one of Toronto’s best burger shops for smash burgers and fried chicken. Since we didn’t have enough Halloween candy floating around the office, there were Scooby-Doughnuts for dessert. 

What’s the Shelf Life of Halloween Candy? 

A candy’s shelf life is directly influenced by its ingredients. “For most sugar-based confections, losing moisture or drying out is the main reason,” says Richard W. Hartel, a professor of food engineering at the University of Wisconsin. “Find an old box of Peeps or Dots or jelly beans, and you’ll quickly see what that means.” Packaging can help sugar-based candies retain their shelf life: Such candies are often wrapped in plastic to prevent moisture loss, but once you open the package and expose the candies to air, they can dry out within days or weeks. 

There are several factors that can instigate candy spoilage, including moisture, light, heat, and a candy’s fat content, according to food scientists from Kansas State University. Overall, general recommendations suggest the pantry is the best place to store sweets, away from light and moisture. Certain candies (like chocolate) may be okay in the fridge or freezer, but any that contain fruit or nuts should not be frozen. 

The shelf life of chocolate varies based on type. Dark chocolate will last one to two years in foil if kept in cool, dark, and dry places, while milk and white chocolate will last up to 10 months. The higher milk fat content in white and milk chocolates shorten its shelf life when compared with dark chocolate. 

Hard candies essentially have an indefinite shelf life, provided they are stored properly. Items like lollipops, Jolly Ranchers, and other individually wrapped candies do best without exposure to moisture. If such candies do spoil, they’ll appear sticky or grainy as a result of temperature changes or sugar crystallization, and may experience changes in flavor. 

A good rule of thumb is to simply toss it when it stops tasting good. You probably won’t get sick — unless you eat all of it in one sitting, that is.

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.