This week's interesting finds

This week in charts 

Electric vehicles

Rental housing 

Commercial real estate

U.S. property loans

Semiconductors

Copper production

Solar industry

Provincial migration

The Little-Known Secret to the Success of Secondaries 

Over the past decade the growth of the private equity market in secondaries — LP interests in funds sold to other investors — has skyrocketed, tripling to more than $130 billion in transactions each year. There are even funds dedicated solely to acquiring investor stakes in existing private equity portfolios, including a mammoth $22 billion one launched by Blackstone last year. 

These secondaries have also posted the highest returns of any private asset class, according to one recent analysis. But critics suggest this action is due to a sleight of hand — the ability for buyers to mark up such assets almost immediately after purchase.

But secondaries have another, little discussed, advantage for buyers since the market began to take off in 2015. That year, the Financial Accounting Standards Board decided in a new rule that after purchasing LP interests at a discount, investors can mark them up to the NAV of the private equity fund. 

The surge of interest in secondaries has happened at a time when investors are strapped for cash as they are receiving more capital calls from private equity firms than they are getting back in distributions from funds, according to a Preqin analysis reported by the Financial Times. It has also been spurred by the growth of evergreen funds, which have no finite end date and provide only limited distributions. 

Chinese companies rush to tap US convertible bond market 

Big Chinese companies are turning to the convertible bond market as a way of raising cheap cash from US hedge funds while circumventing investor concerns about political tensions between the two countries.

Traditional US equity fundraising routes such as initial public offerings and follow-on share sales have been almost completely shut to Chinese companies since the disastrous listing of rideshare group Didi in 2021, which delisted the following year after regulatory scrutiny.

In recent weeks, however, a string of large Chinese technology groups have raised billions of dollars through issuing convertible bonds. Such debt typically pays a lower coupon than conventional bonds, but can be converted into stock if a company’s valuation rises to a pre-agreed level. 

This week’s fun finds 

EdgePoint celebrates Philippines Independence Day with a Filipino moai 

Wednesday, June 12, was the Philippines Independence Day. To celebrate, Juan and Miguel treated the team to some rich and flavourful Filipino dishes.

Filipino food is one of the original fusion cuisines, with influences including Spanish, Malaysian, Chinese and American traditions.

Here’s some quick Tagalog vocab that resonates well with EdgePoint:

Pamilya: family
Barkada: a group of friends or clique 

Denmark recalls Korean ramen for being too spicy 

Denmark has recalled several spicy ramen noodle products by South Korean company Samyang, claiming that the capsaicin levels in them could poison consumers.

It's unknown if any specific incidents in Denmark had prompted authorities there to take action. 

*Note – In 2019, we tried some spicy Samyang noodles in the office. Take 1 went awry as we left too much water in our bowls and it wasn't spicy at all. We followed the instructions on Take 2 and, while we were sweating, we're surprised the heat levels would merit a recall.

This week's interesting finds

This week in charts 

Gold

Global onshoring index

Recession

Uranium

Nuclear power

Small caps 

Small caps vs. Large caps 

S&P 500 Earning yield

Private Equity’s Latest Move to Gin Up Cash: Borrowing Against Its Stock Holdings 

Cinven’s clients got some unwelcome news last year: the buyout firm’s financing tied to a lab-testing company wasn’t going well. Instead of getting a windfall, clients had to ante up more cash. 

The price drop was so bad in February 2023 that Cinven faced a margin call — an ultimatum from lenders to put up more money for collateral or risk seeing the stock seized. Cinven, with the help of clients, had to hand over 299 million euros, or about $320 million, said people familiar with the investment. 

But the risk is more than just a falling stock price. On top of the margin loans, funds have adopted more novel forms of borrowing against their holdings to free up cash for investors, adding to the proliferation of debt across private equity. 

China’s exports surged in May 

China’s exports grew faster than expected in May, official customs data showed on Friday, in a boost to policymakers eager to drive economic momentum even as trade tensions rise. 

The recovery in exports points to stronger overseas demand at a time when domestic consumption in China remains weak and has provided a further boost as officials target annual GDP growth of about 5 per cent for 2024. 

Faced with the effects of a prolonged property slowdown in the mainland, Xi Jinping’s government has focused heavily on manufacturing as part of an upgraded industrial strategy. 

Beijing’s prioritising of industry has been criticised in the US and the EU, which is next week expected to publish the results of a months-long probe into subsidies for Chinese electric vehicles. 

The European Commission’s decision will be closely watched across markets. Chinese auto exports are up 20 per cent in the year to date, according to an ING report, against a backdrop of a domestic price war between dozens of competitors. 

China’s exports soared during the Covid-19 pandemic but declined for much of 2023 as trade activity normalised. 

This week’s fun finds

Rather than try to intentionally burn our faces off, this time around we were all about the flavour. This week's entrants were Wolf’s Bite Pepper Sauce and Tijuana Tom’s Gochu Gang.

Consensus was that both had really great flavour and would both make good wing sauces. People were even smiling at the end.

Other comments:

• Would I let my children eat this?
• Smells like pumpkins. 

How Birkenstock became an improbable luxury empire 

The 250-year-old German orthopedic shoe company Birkenstock has transformed itself into a luxury behemoth with Succession-level family drama. Tim Loh explains how the shoemaker got where it is today. Watch the video to learn more.

This week's interesting finds

Our willingness to look different – Notice of EdgePoint Go West Portfolio’s closure…for a good reason! 

Rather than close a fund for underperforming, we’re redeeming investors’ money on June 19, 2024 to lock in pleasing returns for our investors from what we believed was a once-in-a-multi-decade opportunity in Canadian energy. 

Go West was launched back in November 2019 to capitalize on an underappreciated sector where we believed we could add value through our proprietary insights on each of the businesses we owned. 

We said this was a Portfolio with a finite life. If the market recognized the sector’s potential and the opportunity was no longer as attractive as when we launched Go West, we would close the Portfolio and return the funds to all investors. 

For more on Go West’s closure, you can read this letter from Portfolio Managers Frank Mullen and Geoff MacDonald. 

This week in charts 

Office loans 

Workplace occupancy 

Bank withdrawals 

Unrealized gains (losses) 

Equities 

Data centres 

ChatGPT 

Consumer spending 

U.S. stock market 

Jamie Dimon says some private credit ratings ‘shocked’ him, evoking bad memories of mortgages before the Great Recession: ‘There could be hell to pay’

The rise of private credit over the past decade has been nothing short of monumental. But JPMorgan Chase CEO Jamie Dimon warned this week that parts of the burgeoning sector have some of the same problems that the mortgage market had prior to the Great Recession of 2008, including questionable credit ratings from ratings agencies. 

Losses Pile Up in Top-Rated Bonds Backed by Commercial Real Estate Debt 

For the first time since the financial crisis, investors in top-rated bonds backed by commercial real estate debt are getting hit with losses. 

Buyers of the AAA portion of a $308 million note backed by the mortgage on the 1740 Broadway building in midtown Manhattan got less than three-quarters of their original investment back earlier this month after the loan was sold at a steep discount. It’s the first such loss of the post-crisis era, according to Barclays Plc. All five groups of lower ranking creditors were wiped out. 

Market watchers say the fact the pain is reaching all the way up to top-ranked holders, overwhelming safeguards put in place to ensure their full repayment, is a testament to how deeply distressed pockets of the US commercial real estate market have become. 

This week’s fun finds 

This week, Catherine and Kevin celebrated their two year work anniversary and treated the team to authentic Cuban food. Congratulations and well done. Definitely happy to have you as part of the EdgePoint family. 

The Cube Rule of Food Identification 

The question was asked: are hot dogs sandwiches? New York said yes.

This week's interesting finds

Embracing change at our 16th annual Cymbria Day 

On May 15th, Cymbria held its 16th annual Cymbria Investor Day at Koerner Hall. This year the Investment Team talked about how correctly identifying the benefits of change inside a business is what gives us the ability to buy future growth at a value price. 

Click here to watch the video. 

This week in charts 

Data centres 

Interest rates 

Debt forecasts 

Global website traffic 

Silver 

Lithium 

Multifamily deliveries / construction

Office space vacancy 

Japan’s 10-year yield tops 1% for first time in 11 years 

In recent weeks, investors have increased their bets that the Bank of Japan will lift interest rates further and begin to reduce its purchases of government debt after it ended eight years of negative rates in March. 

Benchmark 10-year borrowing costs in Asia’s largest advanced economy rose as high as 1.005 per cent on Wednesday, a level not seen since May 2013. 

The central bank in March abandoned its policy of using purchases to cap 10-year borrowing costs, but has continued to buy government debt to avoid causing shocks to financial markets. Governor Kazuo Ueda has previously said the central bank had no immediate plans to change the size of its bond purchases. 

Private Credit Has Too Much Cash and Not Enough Places to Put It 

Private credit’s historic rise is creating a problem that most asset managers would love to have: too much cash in their coffers. 

Dry powder, or the amount of money committed to private credit funds that has yet to be deployed, is at a record. That’s in part because demand for their capital from buyout firms remains tepid. What’s more, bank leveraged finance desks are increasingly seeking to poach back business. The result has been what some have called a ‘race to the bottom’ among private credit managers. 

To win deals, managers in the $1.7 trillion industry are offering cheaper pricing and giving up key investor protections. They’re also keeping larger slices of financings for themselves, and even swooping in at the last minute to snatch business from the leveraged loan market. 

In recent weeks direct lenders have offered some of the most aggressive financing terms ever seen in the market. 

This week’s fun finds 

Hot Sauce Review - Liquid Stoopid 

Omaha, Nebraska is home to Berkshire Hathaway, but it's also where Tim purchased a bottle of Liquid Stoopid for the EdgePoint Review Crew. He told us that he requested the hottest sauce that was still flavourful and came back with this brain-melting bottle. 

Here are some of our thoughts… 

• Smells like: Fruit 
• Tastes like: Pepper and chemicals 
• “It gave me the hiccups” and “My face is numb!”

This week's interesting finds

This week in charts

Retail investors

AI

U.S. vehicle sales

Global GDP

Gold production

Oil

U.S. credit spreads

Consumer price index

US sharply raises tariffs on Chinese EVs and semiconductor imports

President Joe Biden is sharply raising tariffs on Chinese imports, ranging from electric vehicles to solar cells, in a pre-election effort to protect US jobs.

The White House said $18bn of Chinese goods would be hit by the rises, which were “carefully targeted at strategic sectors” and designed to buy time for US companies to catch up with Chinese rivals in green technology.

In one of the biggest moves, the US will quadruple the tariff on Chinese EVs to 100 percent this year.

Only 2 per cent of US imports of EVs come from China, according to the CSIS, a think-tank. But the higher tariffs are designed to make it even harder for the Asian country to gain a real foothold.

A ‘Digital Twin’ of Your Heart Lets Doctors Test Treatments Before Surgery

Patients diagnosed with heart disease, cancer and other ailments face myriad decisions: Which drug will be most effective? Will the side effects outweigh the benefits? Will surgery be enough? 

Determining the best path forward may be far easier in years to come. Instead of trying a therapy and hoping it works, researchers are creating so-called digital twins to predict how a patient will respond before ever starting treatment.

In a Baltimore lab, Natalia Trayanova and her team at Johns Hopkins University are creating computational models of hearts. Each one mirrors the heart of a real patient with a potentially fatal arrhythmia, an irregular heartbeat that is often a result of scarring from heart attacks or other conditions.

The replicas, or “digital twins,” appear as personalized 3-D hearts on computers, with areas of scarring shown in white. The team can use them to model how and where to make new tiny scars through a procedure called ablation to fix the arrhythmia.

Digital twins for all?

Clinicians envision a tomorrow where nearly everyone could have a digital twin created by artificial intelligence, using information from medical exams, wearable data devices and medical records. AI could search through data of others with comparable issues and run simulations while providing continuous monitoring of a patient’s health.

Like a crash-test dummy, a digital twin could be used to test drugs and conduct trials without harming the actual patient. A digital twin of a heart could allow surgeons to visualize the procedure and the patient’s specific vessels before an operation. The technology could be used to design highly accurate prosthetics or determine the most effective rehabilitation exercises. Digital twins of a patient’s uterus and cervix could help predict pregnancy outcomes. 

While the concept has been used for decades in other industries such as mechanical engineering, digital twins are still relatively new in healthcare because modeling a human organ or body—at times to the cellular level—is so complex. Collecting personal data with wearable devices and sensors also requires addressing concerns about how to preserve privacy. Machine learning, or artificial intelligence, is still evolving and can at times produce biased results. 

Tackling tough questions

But the potential has generated enthusiasm from doctors and researchers who describe a not-too-distant future where digital twins could answer difficult medical questions. What side effects will a specific patient get from cholesterol-lowering drugs? How likely is a patient to get asthma or diabetes, and if so, how soon? How might a woman’s specific pregnancy progress?

Researchers are already working on these ideas and, in some cases, putting them into novel use. 

This week’s fun find

Passage of water

In collaboration with artist Yiyun Kang and NASA, learn about freshwater availability and engage with possible solutions to avoid a water crisis.