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Reuters
10 hours ago
- Business
- Reuters
Breakingviews - AkzoNobel sale flags India's foreign capital angst
MUMBAI, June 27 (Reuters Breakingviews) - What's good for Indian tycoons is not always good for India. Dutch paint maker AkzoNobel ( opens new tab is selling a controlling stake in its local unit to the domestic JSW Group. The deal fits into its goal to focus its global portfolio amid a hypercompetitive market – but it also deepens India's capital outflow woes. The $12 billion maker of the Dulux paint brand on Friday said it would offload, opens new tab up to a 75% stake in Akzo Nobel India to privately held JSW Paints for $1.1 billion. It will retain full control over its local powder coatings business and research unit. The proceeds from the sale will be used to cut debt and buy back shares of the parent. The transaction comes at an opportune time for AkzoNobel, which decided last October to concentrate on coatings in key geographies. It eases the company away from a market shaken up by the entry last year of local tycoon KM Birla's Grasim Industries ( opens new tab, whose discounts to grab market share are hurting the margins of incumbents. It makes financial sense too, valuing Akzo Nobel India at 22 times EBITDA, more than twice the multiple at which the parent's Amsterdam-listed shares trade. Inspired by these sorts of punchy valuations, multinationals in India have been paring stakes in local units. British American Tobacco (BATS.L), opens new tab sold shares in ITC ( opens new tab to raise $1.5 billion last month, and U.S. appliance maker Whirlpool (WHR.N), opens new tab plans to slash its stake in its Indian business to 20% from 51%. Less benign reasons underpin other transactions. Germany's Siemens sold 90% in its loss-making wind turbine division to TPG amidst cutthroat competition. Swiss drugmaker Novartis is looking for a buyer for its Indian operations, which it says are relatively small, opens new tab compared to other geographies. The slate of assets on offer bodes well for Indian founders looking to grow through acquisitions. But it undermines India's vaunted position as a haven for global capital. Net foreign direct investment during the eight months to the end of November 2024 dropped, opens new tab to $500 million from $8.5 billion in the same period of 2023, per data from the Reserve Bank of India. Blame it on repatriations by global firms, which stood at $44.5 billion for the 12 months ended March 2024, having risen every year since March 2020. Strong valuations aren't exactly bad news. But if they wind up making India look less of a magnet for global capital, they're not uniformly good news either. Follow Shritama Bose on Linkedin, opens new tab and X, opens new tab.
Reuters
10 hours ago
- Business
- Reuters
Breakingviews - Why green investors keep getting carried away
LONDON, June 26 (Reuters Breakingviews) - To paraphrase Mark Twain, speculative bubbles don't repeat themselves, but they often rhyme. The green technology boom that has imploded over the past three years is remarkably similar to the alternative energy bubble that inflated prior to the global financial crisis of 2008. Both frenzies were driven by investors' unrealistic expectations about how quickly new energy technologies would be taken up. What is now known as the Cleantech 1.0 boom took off in 2005 after the U.S. Congress enacted tax credits for renewable energy. Former Vice President Al Gore's 2006 documentary 'An Inconvenient Truth' raised public awareness of climate change. In early 2007 the venture capital investor John Doerr gave a much-publicised TED talk, opens new tab in which he asserted that 'green technologies – going green – is bigger than the internet. It could be the biggest opportunity of the twenty-first century.' Doerr's firm, Kleiner Perkins, later launched a fund to 'help speed mass market adoption of solutions to the climate crisis.' Many other venture capitalists jumped on the bandwagon. The WilderHill Clean Energy Index, launched in 2004, more than doubled between May 2005 and December 2007. Dozens of startups were launched to invest in batteries, solar, biomass and wind energy. An electric vehicle company, Better Place, established in Silicon Valley in 2007, raised nearly $1 billion to build a network of charging stations. Solyndra, an innovative solar panel manufacturer, attracted a host of big-name investors and later received more than $500 million in loan guarantees from the administration of President Barack Obama. No single factor was responsible for pricking the bubble. The collapse of Lehman Brothers in September 2008 dampened animal spirits; advances in hydraulic fracturing technology led to cheaper U.S. natural gas; Spain and Germany reduced their subsidies for renewable energy; and American solar companies proved unable to compete with subsidised Chinese competitors. Nearly all the 150 renewable energy startups founded in Silicon Valley during the boom subsequently failed, including Solyndra and Better Place. Cleantech venture capital funds launched during the bubble produced negative returns. By the end of 2012 the WilderHill index had fallen 85% from its peak to around 40. By coincidence, that is where the benchmark currently trades. The recent green tech bubble was more extreme. The WilderHill index climbed from 47 in March 2020 to 281 less than a year later. Whereas U.S. venture capitalists spent an estimated $25 billion funding clean energy startups between 2006 and 2011, Silicon Valley splurged more than twice that sum in 2021 alone, according to Silicon Valley Bank. Market valuations were quite absurd. By late 2020, the battery company QuantumScape (QS.N), opens new tab, which came to the market by merging with a blank-check firm, was valued at more than General Motors (GM.N), opens new tab, despite having no sales. The market frenzy is long past. QuantumScape stock is down more than 95% from its peak, while the WilderHill index has fallen 85%. Several listed electric vehicle companies, including truck maker Nikola, have filed for protection from creditors. President Donald Trump's administration is reducing subsidies for renewables and electric vehicles. Oil giants BP (BP.L), opens new tab and Shell (SHEL.L), opens new tab are cutting back their alternative energy investments, just as they did after the Cleantech 1.0 boom. The outcome for green venture capital remains unclear but anecdotal evidence suggests that many funds are now changing hands at steep discounts to their appraised valuations. The common error investors made during both booms was to become entranced by extravagant growth forecasts. In his book, 'More and More and More: An All-Consuming History of Energy', Jean-Baptiste Fressoz criticises the application of the sigmoid function – also known as the S-curve – to predict the course of the energy transition. This model describes the adoption of a new technology as starting out slowly, rapidly gathering pace before eventually levelling off when the market becomes saturated. The United Nations Intergovernmental Panel on Climate Change has used the S-curve in its projections for renewable energy demand and the accompanying decline of fossil fuels. The S-curve was originally discovered a hundred years ago to describe how the population of drosophila flies changes under laboratory conditions. It was later applied, with varying degrees of success, to project human population growth. The American energy scientist M. King Hubbert was the first to use the S-curve to forecast energy production. In the 1950s, advocates for nuclear energy used the model to predict what they believed was the inevitable transition from fossil fuels towards an atomic-powered future. Hubbert also used the S-curve for his famous forecast that U.S. oil production would peak in 1970. Vaclav Smil, a leading energy historian, points out that energy transitions are slow, inherently unpredictable and require extraordinary amounts of investment. Fressoz goes further, claiming that – when energy consumption is viewed in absolute rather than relative terms – there has historically never been a transition. It's true that coal took over from wood as the world's prime energy source in the 19th century, and that later oil and natural gas became dominant. Yet the consumption of all these energy sources continued increasing. The world has never burned more wood than it does today. In absolute terms, coal usage continues to grow. The S-curve has also been used to predict the uptake of various green technologies. As Rob West of Thunder Said Energy, a research firm, observed in a report published last September, both the speed of adoption and the ultimate penetration rate for new inventions are variable. For instance, the demand for refrigerators and television by U.S. households grew very rapidly from the outset, with both reaching penetration rates of nearly 100% in just a few decades. Yet it took more than half a century for gas heating to reach 60% of U.S. households, at which point its market share flatlined. 'It is important not to fall into the trap of assuming that the 'top of the S' is an endpoint of 100% adoption,' writes West. Not long ago, electric vehicles were set to rapidly replace the internal combustion engine, but sales forecasts are now being cut back in developed markets. West anticipates that the eventual market share for battery-powered cars will not surpass 30%. That's a guess. The actual outcome will depend on the state of future technology, which is unknowable. That leaves plenty of scope for green investors to get it wrong again. Follow @Breakingviews, opens new tab on X
Reuters
18-06-2025
- Business
- Reuters
Breakingviews - How UBS and Switzerland can come to terms
LONDON, June 18 (Reuters Breakingviews) - Switzerland is at a crossroads. Two years ago, politicians bent over backwards to help UBS (UBSG.S), opens new tab buy Credit Suisse, partly on the grounds that a failure would imperil the Alpine nation's status as banking hub. In 2025, the same leaders are calling for an extra $24 billion of equity from the enlarged giant, which could erode Zurich's status in another way by prompting UBS to take its $1.5 trillion balance sheet elsewhere. Yet a compromise, to stop the twin extremes of UBS moving or a ruinous bank bailout, looks within reach. Finance Minister Karin Keller-Sutter in 2023 controversially gave UBS significant sweeteners for the Credit Suisse deal, including a government loss guarantee, which Chair Colm Kelleher ultimately didn't need. Now, she wants, opens new tab the bank to fully deduct the value of foreign subsidiaries from the parent bank's common equity Tier 1 (CET1) capital. Keller-Sutter has grounds to insist on unusually high capital ratios. UBS's assets dwarf Switzerland's $950 billion GDP. It also has a large U.S. business, which arguably makes it prudent to have enough equity to withstand any writedowns to overseas operations. The current rules, along with other more bank-specific carveouts, meant that Credit Suisse's capital ratios were more fragile than they seemed in the runup to its rescue, undermining its ability to sort out a perennially loss-making investment bank. It's possible, at least in theory, that something similar could happen to UBS one day. Still, Kelleher and his CEO Sergio Ermotti can legitimately say that the new rules make their bank much less appealing to investors. The government's wider package of measures will by 2030 create a de facto 17.2% minimum CET1 ratio for the listed holding company, compared with 14% absent the planned changes, using UBS's estimates. That erodes returns. In May, before the government released its proposals, analysts expected $11.9 billion of annual earnings and $76 billion of regulatory capital by the end of 2027, implying a 15.7% return on CET1. Raising the capital level to 17.2% would shrink the result to 13.7%. Morgan Stanley's (MS.N), opens new tab equivalent return that year will exceed 19%, according to Breakingviews calculations using Visible Alpha data. What happens next is down to lawmakers in Switzerland's parliament, who will decide whether to approve the rules, or water them down. That process runs slowly. UBS may not decisively know their thinking until the end of 2026. One consideration is whether the bank is exaggerating the pain of the hit. Stock analysts reckon there are several billion dollars of spare capital in UBS's foreign subsidiaries. Keller-Sutter's number crunchers say the bank can shrink the de facto CET1 minimum below 15% through measures such as so-called repatriation, which involves pulling money out of the overseas units to shrink the capital required to back them. That lower number is close to Morgan Stanley and JPMorgan's (JPM.N), opens new tab CET1 levels, the government points out. Another possibility doing the rounds in Zurich is that UBS could use more leverage at its listed holding company to offset the capital trapped lower down in the corporate hierarchy. Finally, a six-to-eight-year transition period dilutes the intensity of the capital pain now. Ermotti and Kelleher have some strong possible counter-arguments, though. It would be perverse to partially solve a leverage issue at one set of subsidiaries by borrowing more at another level. Moreover, the government's international comparison mixes apples and oranges. Keller-Sutter's team benchmarks UBS's requirements against the 15% to 16% levels of Morgan Stanley and other American rivals, which are tangibly higher than what U.S. regulators order them to hold. Morgan Stanley's actual regulatory minimum is 13.5%. The basic fact is that UBS could have a meaningfully lower minimum equity ratio, and therefore higher returns and even share price, if it was based elsewhere. Those numbers add weight to an implicit threat: UBS could move its headquarters to New York or London if parliament sides with the government. The bank's growth opportunities are predominantly outside Switzerland. The planned rules make U.S. expansion costly, in capital terms. It's not a stretch to imagine that Kelleher, a former Morgan Stanley executive, would prioritise global expansion over local loyalties. If his old shop or JPMorgan lobbed in a bid, offering another way to switch domicile, he might listen. Switching HQ could create a meaningful tax bill under local laws and raise questions about whether UBS's additional Tier 1 (AT1) debt would be eligible under U.S. regulations. The bank also could lose any clients who like the fact that UBS is neither American nor British. Yet the conservative lawmakers, which currently constitute the biggest grouping in parliament, will also be acutely aware of the risk of going from having two globally relevant banks a few years ago to none. That could represent a big blow in a country where banking accounts, opens new tab for 5% of GDP. Yet the biggest reason a compromise is possible is that there are ways to fudge the Keller-Sutter plan while retaining its essence. Allowing UBS to cover the foreign subsidiaries' value with AT1 capital as well as CET1, for example, would still arguably protect the parent bank's equity. Letting all outstanding AT1s count for these purposes could cut the CET1 ask to just $5 billion rather than $24 billion, JPMorgan analysts have calculated. That might be too small for comfort, but lawmakers could in theory split the difference by saying that AT1s can cover 20% of the capital, with CET1 accounting for the rest. Doing so would imply $15 billion of extra CET1, or about two-thirds of the current ask, and imply a 15% de facto minimum requirement according to Breakingviews calculations. It might not be a satisfying outcome for capital purists, particularly after the controversial Credit Suisse AT1 writedown tainted the funky hybrid securities, but Swiss supervisors are already working to make those securities absorb losses more readily in a crisis. Kelleher and Ermotti have some leverage by virtue of the possible HQ move, but time is not on their side. UBS faces 18 months or more of capital uncertainty and its shares, off 20% since late January, could fall further if investors get jittery. Lawmakers preoccupied with avoiding a future bank failure, in contrast, will want to take their time. Yet they should remember that while Credit Suisse's rickety capital structure didn't help, it ultimately went bust because wealthy clients mistrusted its ropey business model. As such, hitting UBS's returns carries risks as well as rewards. Follow Liam Proud on Bluesky, opens new tab and LinkedIn, opens new tab.
Reuters
12-06-2025
- Business
- Reuters
Breakingviews - Private credit dives back into FABulous funding
NEW YORK, June 11 (Reuters Breakingviews) - Insurance is becoming the engine of the $17 trillion private asset management industry. For years, buyout barons funded deals with checks from pension funds or college endowments. An M&A slowdown, middling returns, and the chance to muscle banks aside has turbo-charged a push into lending by asset managers like Apollo Global Management (APO.N), opens new tab. Their fast-expanding private credit arms increasingly draw funding from the insurance industry. Insurers, in turn, are raising cash by returning to a pre-financial crisis favorite: Funding Agreement-Backed Notes (FABNs). By their nature, insurance companies have cash to spare. They collect premiums and invest the proceeds until a policy pays out. Their iron law is that assets and liabilities should have the same duration. If an insurer sells an annuity promising 5% interest that begins paying out in five years, it must accumulate assets which mature over the same timeframe while generating sufficient income to more than cover that payment. Private credit offers a neat fit: IOUs pay down predictably and offer a range of different returns tuned to risk. This pairing is particularly appealing for asset-based finance, industry-speak for loans backed by anything from cars to Picassos. Lenders can package such debt into investment-grade bonds, which neatly slot into insurers' balance sheets. By the end of 2024, U.S. insurers had plunged roughly $700 billion, or 13% of their total bond holdings, into asset-backed and other structured securities, according, opens new tab to the National Association of Insurance Commissioners. Apollo reckons, opens new tab asset-backed finance is a $20 trillion opportunity, equivalent to almost 10 times the private credit industry's current $2.2 trillion hoard, per PitchBook. The iron law runs both ways, though. For every dollar invested in asset-backed finance, there must be a corresponding liability. That is why insurers like Apollo's Athene subsidiary, KKR-owned Global Atlantic and their rivals have rushed to sell annuities to policyholders. Annual retail issuance exploded from the roughly $200 billion common prior to the pandemic to $434 billion in 2024, according, opens new tab to industry association LIMRA. Even this, though, is not enough. Enter FABNs. The notes dispense with the need for laborious marketing or managing the risk – common to annuities – that policyholders cash them in ahead of schedule. Instead, FABNs allow insurers to offer a guaranteed return to big investors like PIMCO or Janus Henderson. Here's how it works, opens new tab: An insurer sets up a special purpose vehicle – effectively a box - which sells bonds to investors. The insurer drops a funding agreement into the box and receives the cash from the bonds. This is an annuity, but on a much larger scale - frequently $500 million or more. The insurer makes payments to satisfy the funding agreement, which in turn flow to the bondholders. Excluding various other flavors of funding agreements, there were some $191 billion of FABNs outstanding in the U.S. as of the end of 2024, according to Federal Reserve data, opens new tab, surpassing the previous 2008 peak by 68%. The notes have several advantages. Despite blurring the line between debt and annuities, ratings agencies treat them as operating rather than financial leverage. Because the securities are issued by an insurer's operating company, they rank senior to holding company debt. That allows them to win superior ratings. FABNs issued by Athene enjoy an A+ label from Fitch, two notches above the grade awarded to its holding company. Some 28% of issuance rated by Fitch in 2024 won the highest triple-A rating. This wheeze is not limitless. AM Best and Moody's raise an eyebrow if an insurer's FABNs top 30% of the liabilities across its operating companies. Fitch begins looking askance if the securities top 20% of an insurer's general account. Athene's funding agreements reached 21% of its net reserve liabilities in the first quarter of 2025, according to company filings, opens new tab, though that figure includes various other types of liabilities. But the market is not just racy upstarts. While Athene was 2024's largest issuer, at $11.2 billion, some of the oldest firms around pioneered the market. New York Life issued roughly $10 billion of notes rated by Fitch last year. MetLife and Pacific Life Insurance also joined in. One concern is that FABNs have caused trouble before. Back in 2001 insurers began issuing extendible FABNs, which allowed investors to redeem the notes after roughly a year. After reaching a peak of over $26 billion outstanding in 2007, investors rushed for the exits during the financial crisis, draining liquidity from insurers. This a textbook example of what investors call 'rollover risk', where an issuer must find fresh funding for longer-dated assets. Extendible FABNs no longer exist. Some 66% of issuance thus far in 2025 matures in three to five years, according to figures from Deutsche Bank aggregated using Bloomberg data. However, short-term financing remains a temptation. Some insurers issue Funding Agreement-Backed Commercial Paper with maturities measured in days. Fitch rates programs from Brighthouse Financial, MetLife, Jackson National, Pacific Life and Protective Life. FABCP outstanding crept up to about $11 billion at the end of 2024. When designating MetLife a systemically important financial institution in 2014, U.S. regulators specifically pointed, opens new tab to rollover risk from FABNs and FABCP. Even if insurers remain disciplined in matching the duration of assets and liabilities, there are other risks. For one, private credit's rapid expansion has not yet been tested by a severe downturn. If assets go sour, insurers are on the hook for the losses. The opacity of private loans flowing into their balance sheets can be bewildering to outsiders; a high-profile blow-up could make buyers of FABNs leery, triggering a funding crunch. The notes are, of course, one of multiple ways in which insurers gather liabilities, including annuity sales or reinsurance deals. But they are becoming very large and are uniquely abstracted from insurers' core purpose of serving policyholders. Last year, Apollo's Athene issued notes equivalent to 31% of its retail annuity sales. The market has a habit of following the firm led by Marc Rowan. Apollo, though, has advantages over rivals: it can directly make the kinds of loans that will be matched with Athene's liabilities, while its Atlas SP Partners unit advises others on creating yet more asset-backed securities. FABNs could enable an over-eager insurer to chase rapid growth without a clear grasp of its pipeline of assets. A spree-fueled run funding dicey credits could rebound on others, too. Even the highest-octane engines can backfire. Follow Jonathan Guilford on X, opens new tab and LinkedIn, opens new tab.
Reuters
12-06-2025
- Business
- Reuters
Breakingviews - India's wealth boom is within reach for foreigners
MUMBAI, June 12 (Reuters Breakingviews) - Foreign money managers are pouring into India to cater to the rising rich. Many of them may find success easier to come by than they did in neighbouring China. The race kicked off in earnest this week when BlackRock (BLK.N), opens new tab won regulatory approval to launch a wealth business, within a month of securing a go-ahead for its mutual fund operations. The world's largest asset manager led by Larry Fink is back in the country after exiting a local joint venture in 2018. This time the U.S. firm is in partnership with Jio Financial Services ( opens new tab, an upstart spun off from tycoon Mukesh Ambani's $227 billion Reliance Industries ( opens new tab. Others present also are digging deeper to tap everyday savers. Armed with a new licence, HSBC (HSBA.L), opens new tab will push into 20 new cities in search of wealth clients. Its rival Standard Chartered (STAN.L), opens new tab is pivoting toward affluent clients and away from single product relationships. Meanwhile, Blackstone bought wealth services provider ASK Investment Managers in 2022, whose parent now plans to launch a mutual fund. Underway is a dramatic shift in how Indians put money to work. Households' net financial wealth, after deducting liabilities, rose 249% to $3 trillion over the nearly 12 years to the end of March 2023, per researchers at the Reserve Bank of India. Bank deposits account for 43% of financial assets, down from 51% in March 2012. In effect, households are moving deposits into riskier instruments. Pumped up by a high-voltage marketing campaign targeting mom-and-pop savers, the mutual fund industry's net assets under management stood at 72 trillion rupees ($845 billion) as of May, rising 22.5% year-on-year. Mutual funds' share of net financial savings was 8.4% at the end of March 2023, up from less than 1% a decade ago, per data from industry group Association of Mutual Funds in India and research firm Crisil Intelligence. And there's plenty of runway for growth; the industry counts just 3% of the population as customers. Beyond everyday savers, the number of Indian ultra-high net worth individuals will increase to 19,908, a 50% increase during the five years to 2028, property consultancy Knight Frank reckons, faster than in any other geography. There's also rising interest from richer parts of the 35 million-strong Indian diaspora living to invest at home. To be sure, by some measure India currently has just one twelfth of the investable wealth assets under management that China had in 2020. Ping An Asset Management alone shepherds funds nearly equivalent in value to those of the entire Indian asset management industry. Yet the smaller opportunity may be easier for Western financial firms hungry for growth to tap. A sluggish economy, poor stock market returns, and geopolitical tensions dim the allure of China. Asset managers including Fidelity and Schroders have cut costs and scaled back expansion plans in the People's Republic. India not only saw GDP growth of 7.4% in the March quarter, but its stock market is booming too. Unlike in China where equities have miserably failed to reflect decades of strong economic growth, Indian stocks are better correlated to GDP. Mutual fund investors in India are largely equity-oriented; in China, 68% of flows were into fixed income instruments in 2022, per Fitch Ratings. Of course, local competition is formidable. There are 51 mutual fund houses, and the largest by assets under management are backed by Indian banks with a foreign partner: State Bank of India's ( opens new tab joint venture with France's Amundi ( opens new tab leads, followed by ICICI Bank ( opens new tab with Prudential (PRU.L), opens new tab. What's new is the potential for digitisation to drive down high expenses. Thanks to a distributor-led model, the asset-weighted median expense ratio for equity funds, a measure of cost, was 1.78% in India, higher than 1.75% for China and 1.37% for Korea in 2022, data from Morningstar shows. In partnering with Jio Financial, whose telecom affiliate counts 477 million subscribers, BlackRock probably sees an opportunity to scale up quickly and use technology to cut out the middleman. Only 41% of mutual funds' assets under management are sourced directly from investors, per AMFI and Crisil Intelligence, and the share is probably lower by number of accounts. If executed well, the BlackRock-Jio duo will disrupt the status quo and eat into the business of homegrown technology-led brokers like Zerodha and the soon-to-go-public Groww, which sells one in every four 'systematic-investment plans' where individuals commit a fixed amount, usually monthly, to mutual funds. Both privately-owned companies might be worth up to $7 billion each. Singapore's StashAway, backed by Hamilton Lane and others, has secured over $1 billion in assets under management through digital sourcing within just four years of its launch in 2017. Not everyone feels the prize is within reach. Some of the new strategic partnerships emerging look more like an exit. UBS (UBSG.S), opens new tab is acquiring 5% of Mumbai-listed $5 billion 360 One ( opens new tab and is transferring the onshore wealth business it inherited through the acquisition of Credit Suisse to the Indian group. The Swiss bank closed its own Indian wealth business roughly a decade ago. The India opportunity also has some hard-looking longer-term limits. The real value BlackRock might bring to the table for Indian investors probably rests in deploying their money offshore. That edge is dulled by capital controls; New Delhi imposes a $250,000 limit on sending money overseas. That looks more liberal than Beijing's long-standing limit of $50,000, but India has ramped up taxes on outbound remittances exceeding $11,700. For now, at least, there is plenty to do within India. Follow Shritama Bose on LinkedIn, opens new tab and X, opens new tab.
