Every week, I write on 3 interesting happenings from the world of distressed investing, in a short and digestible manner.
Here is what I found intriguing…
Increasing adoption of clean energy is starving conventional energy providers of capital.
“The move towards ESG-focused investing is starting to starve the supply of capital to the conventional energy space,” said Dave Lowery, head of research insights at Preqin Capital.
After the renewable industries inability to get any momentum going over the past decade, the last 18 months has seen real tailwinds. The industry heavy hitters like Blackstone and public pension funds see solar, carbon capture and battery storage as areas that areas of adoption likely to increase the most.
No matter what the returns are from oil & gas, these funds are simply ignoring the names in favor of “going green”. Expect any company with a pledge of NET ZERO greenhouse gas emissions to attract the most attention, similar to companies that would include “blockchain” or “artificial intelligence” in a prospectus. Some pension funds, including the Ontario Teachers Pension Fund have even gone so far to commit to a portfolio wide net zero policy by 2050.
At the moment, this investment shift has political support as well. President Joe Biden has put climate as a central focal point of his administration which is in-line with many European governments. Knowing this trend poses an existential risk to conventional energy companies; private equity is getting ahead of the trend —> being stuck with unmovable conventional assets that don’t meet more ever stringent ESG standards.
The Restaurant Revitalization Fund has been a disaster. What went so wrong?
The $28.6B Restaurant Revitalization Fund (RRF) was supposed to be the lifeline, independent restaurants needed to stay in business as patrons slowly return to indoor/outdoor dining. Over 250,000 applications will not be receiving any money with the fund now all dried up.
The issue can be boiled down to a few key missteps…
The $28.6B just wasn’t going to be enough —> the fund needed in excess of $75B to be properly funded. Of the 370K applicants, only 105K received funds with an average approval for $272,000 per restaurant
Discrimination was built into the application process —> women and minorities were ushered to the front of the line, leading to lawsuits from other restaurant owners claiming the government chose race & gender as key factors on who to give funding to, which violates the Constitutional equal-protection clause
Being a “priority applicant” wasn’t all what is was cracked up to be —> of those women & minorities who did receive funding, over 3000 had the funding rescinded due to the lawsuits. Many claimed they shouldn’t have even applied using the priority applications
Throw in some bureaucratic errors for good measure for a reason for rejection which can’t be corrected due to the changing nature of the policy. For example, many owners used their checking accounts on the application but the funds were wired to a saving account, creating a rejection notice by the bank.
Congress has asked for another $60B to top up the fund but whether it will passed is not certain at this time. What should have been a lifeline to a seriously impacted industry only highlights the incompetency of the funds administration.
U.S. Private Equity Firm, Warburg, setting up a $5B distressed real estate fund in China
Warburg couldn’t go it alone in China due to the control of the central government so the investments will be made via a joint venture with Chinese based Wensheng. Both firms recently commented that these special situations are in a growth trajectory.
Chinese property companies are feeling pressure from tighter liquidity and policy changed aimed to prevent a significant 2008 like real estate crash. High debt levels and government deleveraging are leading the market to sell off more real estate, which is creating the opportunity for this JV.
Other U.S. funds have already made the leap and finding both office & residential properties selling at 40% discount to 2020 NAV’s.
China is experiencing a systematic risk to it’s property sector driven by excess over leverage and speculative buying. Beijing has had to react with 70% LTV restrictions, 100% debt to equity and cash to ST Debt ratio of 1.
Warburg smells blood in the water as major developers miss bonds payments, forcing selling sprees that create solid deal flow.
BONUS FACT --> Update on Morrison's
A few weeks ago, I wrote on the UK grocer, Morrison’s cheap x2.0 TBV ratio attracting a $7.6B offer from CD&R. We’ll that got other PE firms interested and has created a bidding war. As more & higher offers come in, the stock (which was $236.06/share) has soared with the largest spike coming in before the 4th of July weekend.