Read It And Eat 14/03

Welcome to ‘Read it and Eat’ — your go-to for bite-sized updates on corporate actions in finance, AI and anything I consider newsworthy. Join me twice a week for quick reads, where I serve up the latest insights that matter in the world of business and a bit of politics.

Major Headlines:

• Biden v Trump; Winner Takes America [Round Two]

• It seems to be round two of the fight for America, Biden v Trump, the round one that went to Biden in 2020, would it be a two-round knockout this time? Both Joe Biden and Donald Trump have passed the delegate threshold to win their parties’ nominations. Polling suggests it will be a tight race that will come down to narrow margins in a few key states. The nominations will be made official at party conventions this summer. Biden, 81, issued a statement after he sealed the Democratic nomination, taking aim at what he called Trump’s “campaign of resentment, revenge, and retribution that threatens the very idea of America.” In a video posted on social media, Trump said there was no time to celebrate, and instead put the focus on beating Biden, whom he called the “worst” president in U.S. history.“We’re going to drill, baby, drill. We’re going to close our borders. We’re going to do things like nobody has ever seen before. And we’re going to make our nation’s economy be the best ever in the world,” said Trump. [BBC]
  

• Toyota Agrees To The Biggest Employee Pay Rise In 25 Years:

• Toyota Motors agreed to give factory workers in Japan their biggest pay raises in 25 years on Wednesday as inflation remains at historically high levels. The wage hikes were agreed upon as part of this year’s “shuntō” wage talks, an annual event where management officials of major Japanese firms meet with labour unions to discuss pay raises for the year ahead. Toyota is the world’s largest carmaker and a leader in annual negotiations. the automaker fully agreed to its labor union’s demands for monthly pay raises of as much as 28,440 yen ($193) and record bonus payments, according to local reports. Nissan Motor also fully met its labour union’s demands, agreeing to an average 18,000 yen ($121) increase in monthly pay. Honda Motor and Mazda Motor have also agreed to record pay raises for their workers. [Reuters]
  

• Did A YouTuber Just Bankrupt A Car Company? MKBHD v Fisker:

• To answer the clickbait title question, no a YouTuber did not bankrupt an electric vehicle company. In essence, it was on its last legs and a negative car review plus the way they handled that whole situation just exacerbated their woes. EV startup Fisher has hired restructuring advisers to assist with a possible bankruptcy filing. Earlier this month after not reaching their financial forecast, the company instituted job cuts and issued a statement that said that there is substantial doubt it could meet all of its financial obligations without an infusion of more capital. The company is a victim of death by a thousand cuts (which means failure due to a combination of small reasons), which include software issues, regulatory probing due to brake failures, and a car review by MKBHD (one of the world’s biggest tech reviewer) who called it “The Worst Car I’ve Ever Reviewed.” The way the company handled it was even worse than the review itself, which included overt condescension and a sprinkle of British-flavoured racism. [Wall Street Journal]
  

• The House passed a Bill that can lead to a Ban on TikTok:

• In a communist-style move by the House of Representatives in the “Land of the Free” a bill was drafted and passed, in 4 days, that is forcing ByteDance the parent company of TikTok to essentially sell its U.S. division of TikTok within 6 months or be banned from operating within the U.S. and lose its 150 million American users. The legislation dubbed the Protecting Americans from Foreign Adversary Controlled Applications Act, that calls for China tech giant ByteDance to divest TikTok or the popular social video app will effectively be banned in the U.S. The measure passed with a resounding 352–65 vote and with one member voting present. This issue is clearly one that is political but not in the way you think. The data as of October of 2023 states that there is organic growth and support for the freedom of Palestinians as #standwithpalestine stood at eighty-seven thousand posts and 285m views as opposed to #standwithisrael which is at nine thousand posts and 64m views. AIPAC, (American Israel Public Affairs Committee) has spentover $7m in contributions and over $3m in lobbying as such wields tremendous power within the political clime of the country and has called for this ban. Whether it’s because it wishes to sensor the atrocities committed, filmed and posted on the platform by the IDF itself by banning it in the U.S. or to push support for Israel and Zionistic propaganda by using its connections within the American companies that are already lined up as buyers and inadvertently controllers of the platform after the sale. The bill now heads to the Senate where it faces an uncertain future as senators appear divided about the legislation, and other federal and state-led efforts to ban TikTok have stalled. [CNBC]
  

Minor Headlines:

• Bear Robotics, a robot waiter startup, raised a $60m investment from LG Electronics. [Tech Crunch]

• Nike’s merchandising partnership with FC Barcelona may be coming to an end after 26 years. [BoF]

• Global corporate dividends hit a record $1.66 Trillion in 2023. [Reuters]

• Generative AI video creator startup, Tavus, raises an $18m Series A round by Scale Venture Partners. [Business Wire]

• Goldman Sachs to expand private credit portfolio to $300Bn by 2029. [Reuters]

• Coinbase plans to offer $1bn in unsecured Convertible Notes to repay existing debts and cover operating expenses. [Bloomberg]

• Global Art sales fell 4% to a three-year low of $65Bn. [Financial Times]

• Automakers are scaling back or delaying their EV plans, The Electric Vehicle hype is dead. [CNBC]

NEWS OF THE DAY:

Private Equity Is Over-Leveraged, Illiquid And Might’ve Outdone Themselves As They Hold A Record 28,000+ Companies Worth $3 TRILLION

Private Equity is playing an interesting and risky game with the world’s economy that is going unnoticed. This section would be a bit lengthy and technical but I will do my best to keep it simple. Rising Interest rates, record-low IPOs, an increasingly uncertain market an overused bankruptcy strategy, and debt-laden companies have all come together to bring the private equities returns down to 11% from 25% to disgruntled investors and this is a very dangerous game they are playing

Private Equity (PE) is a broad classification of investing that just means putting money into companies that are not publicly listed on any securities exchange. Think Shark Tank, Dragons Den and Venture Capitalists that inject capital into companies to help them grow, these are all types of PE deals. Also if you have ever given money to your cousin who has a business idea that is sure to 10x in exchange for part ownership of the business or profits, you are technically a PE investor. In this situation, the type of PE I would be addressing is the Buyout funds, they raise billions from pension funds, investment pools and other wealthy investors to buy out and control entire companies. The thought process is, like a house-flipper, use their experience to make improvements, cut down on costs increase sales and eventually sell the company for a profit and from those profits bring returns to their investors in theory. From start to finish this process takes about 7–10 years. The problem is the last part, the selling off of the company or regaining back that capital which has slowed tremendously

Another thing to note is the fact that interest rates were incredibly low in 2022–2023 and have now almost tripled. As such these Buyout funds will acquire a company like WeWork, install a new CEO and have that new CEO get a loan from a bank for WeWork against its valuation and its profits. However, instead of using the capital to reinvest in the business through advertising and/or growth, they have that new CEO pay the entire sum of the loan to the PE firm and the firm would use some of that capital to give returns to their investors and use the rest of it to buyout another company and repeat the same process as many times as they can leaving more companies saddled with incredible debts as the PE Firm is not responsible for the debt. This is a simplification of the term “Leveraged Buyout” or and LBO. These companies could manage their repayment schemes as interest rates were low, but now that it has more than tripled businesses have no choice but to file for bankruptcy, even a 1% increase might be worth hundreds of millions of dollars in additional cost to the repayment of the loan, this was the reason why in 2023 the highest number of bankruptcy filings were recorded, SVB, WeWork and Vice Media were all amongst the businesses that filed last year.

Assuming I haven’t lost you yet, it gets much worse. Now that PE firms have practically bought up all they could and aren’t borrowing anymore because the rates have gone up, they must still make their returns to their investors, and investors do not like getting paid less than what they’re used to. The firms, knowing they cannot use the LBO vehicle, and cannot increase the liability of the firm itself but still need Liquidity, introduced NAV financing, or Net Asset Value (the net value of an investment fund’s assets minus its liabilities, divided by the number of shares outstanding) Financing. A group of companies that a PE firm owns or controls is called a portfolio, a NAV loan, or NAV Financing in simple terms occurs when a firm takes a loan from a bank and puts up their stake in or shares of a company or companies within their portfolio as collateral, which lays the onus of paying back these loans on the company and not the PE Firm.

Now to make sense of all this, if you cannot really make out how this is a problem I’ll explain. Eventually, companies will start to go belly up, causing an incredible number of job losses, and would be unable to pay back the loans given which in turn will make banks weary of approving NAV loans, this increases the liquidity issue, causing investors to pull their money, furthering the liquidity issue, causing more companies to go belly up, and a vicious cycle ensues. With PE firms holding 28,000+ companies, all it takes is a few major lenders halting their funding.

It seems like we are not there yet as Goldman announced their $300Bn private credit portfolio expansion and The traditional initial public offering (IPO) exit route is starting to light up in green, after a long time with barely a flicker. European companies have raised over $3 billion in IPOs since January, more than double the amount from the same time last year. [Bloomberg]

GEN-Z Word Of The Day

Put me On

It means to inform someone or to hook them up with something. Usually in the context of informing or helping them on how to succeed the way you have.