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Chipotle launched a $50 million venture fund in April that aims to tackle the various challenges facing the restaurant sector.
Last year, Chipotle invested in self-driving robotics company Nuro as a first venture investment, and this year it is piloting Chippy, a robotic tortilla chip maker that saves time and labor costs.
The fast food giant’s investment in technologies like AI and robotics are part of a larger plan to ultimately change the world’s food systems.

Chipotle is testing out an autonomous kitchen assistant, Chippy, which offers a robotic solution for making chips in restaurants.
Courtesy: Chipotle

The lengthy lunchtime lines at Chipotle Mexican Grill waiting to order could serve as a good metaphor for Chipotle’s approach to investing in innovation: though you may have to wait a bit for results, the taco and burrito brand is fostering technology from all over the world that’s going to change the way restaurants run and customers think about food.
It’s not exactly a new sentiment from the company. Chief technology officer Curt Garner notes that Chipotle, inspired by Uber, first went digital in 2016 with its app and then quickly built space at each of its restaurants so employees wouldn’t ever have to choose between serving customers standing in front of them versus those who ordered digitally. But investing in globe-altering innovation took on new meaning for Chipotle in April when it launched Cultivate Next, its $50 million venture fund intended to soothe the margin-squeezing pressures of the restaurant sector, tackling challenges from labor shortages to rising food costs and enticing customers to spend more time eating in their stores.

“We’re thinking about how to grow and scale the company through a lot of lenses,” said Garner, noting that the fund represents an opportunity for Chipotle to evolve from merely adapting to technological change to creating it. “There’s restaurant growth, there’s growing and scaling our digital business and there’s also continuing the mission of cultivating a better world and changing the way people think about where their food comes from.”
Chipotle’s new venture fund could be a beacon for investors as the restaurant sector continues to fight significant economic headwinds. Analysts will be looking for concrete examples of Garner’s first two points — new tech that promises to streamline and expand Chipotle’s operations — when Chipotle reports its second quarter results on July 26.
Chipotle has generally posted positive growth numbers since 2016 when the chain was dealing with food safety scares — it experienced near double-digit systemwide sales growth between 2017 and 2020, according to Morningstar. But it’s not immune to today’s broader market downswing. While consensus estimates are calling for Chipotle to post second quarter revenue of $2.24 billion, up nearly 19% year over year, and quarterly earnings of $9.04 per share, up 21%, its stock is down more than 20% year-to-date.
“The trouble is on the margins side,” said Sean Dunlop, equities analyst with Morningstar.
While Chipotle and the restaurant sector have seen a slight softening of comparable store sales growth, the rising costs of food, labor and utilities combined with a trend of consumers venturing out of their homes less “is pinching Chipotle’s P&L,” Dunlop said, noting that the squeeze will likely last into 2024. Owner-operated chains like Chipotle and Starbucks may also be faring worse than franchised businesses because “they bear all those below-the-line costs themselves,” he added.

Another potential hurdle for Chipotle’s stock: unionizing workers. In early June, a Chipotle Mexican Grill shop in Augusta, Maine, filed a petition for a union election, the first of the chain’s restaurants to join the recent organizing push across the U.S. that has swept across companies from Apple to Starbucks.

A self-driving delivery robot provided the spark

Like every other VC investor, Chipotle is looking to get in on the ground floor of early-stage firms developing revolutionary technology. Unlike typical VC firms, though, Chipotle isn’t looking for a specific return on investment over a particular timeframe.
“Success for us is multifaceted,” Garner said. “It’s a chance for us to improve our operating business and that improvement could become greater than what we would achieve in terms of strict financial returns on capital.”
The venture fund notion came last year after Chipotle invested in Nuro, a SoftBank-backed startup that uses self-driving technology, in Priuses and custom vehicles, to deliver groceries and other goods.

Domino’s tests Nuro, an autonomous car for pizza delivery in Houston.
Source: Domino’s

“We found a lot of traction there in terms of synergies of culture and ideas and innovation and we wondered if there was an opportunity to expand our influence and become an accelerator of those ideas,” Garner told the Silicon Valley-themed Sand Hill Road podcast in May. Chipotle’s executive team found itself being pitched all kinds of ideas but had no formal funnel to sift through opportunities either as a supplier or partner, said Garner.
Record venture investment in restaurant technology — including hardware and software for restaurant management, bookings, staffing, mobile payments and inventory management — reached more than $4 billion in 2021, and it is on track to beat that this year. Hundreds of companies have expressed interest in Chipotle’s first round, which targets seed funds to series B startups.
Garner said Chipotle will announce its first picks in the next few weeks. Industry watchers say to expect Chipotle’s money to follow industry pain points.
“After the pandemic a lot of folks are making investments to modernize and improve customer experiences and doing things to take labor costs down and out of the operation,” said Eric Symon, vice president of the Enterprise Process Innovation Center at Panasonic System Solutions Company of North America.
Symon is seeing demand for solutions like Panasonic’s temperature-controlled smart food lockers that deter take-away theft and mix-ups, which tie up employees who have to remake orders. He is also seeing demand for artificial intelligence apps to help restaurant managers forecast busy times of day so they can better staff their shops.
To that end, Chipotle has already invested in an AI-powered labor management tool that analyzes dozens of variables like weather and available promotions to determine more efficient restaurant staffing. It’s also rolling out an AI-based training program, which helps restaurant workers to move up the ladder to management.

The labor of an automated tortilla chip maker

When it comes to the type of innovation that Chipotle is looking to foster, Garner nods to Chippy, a robotic tortilla chip maker that saves time and labor costs by handling repetitive kitchen tasks.
“It started with, ‘how do we remove some of the dreariness of a worker standing at the fryer and frying chip basket after chip basket?'” Garner said, noting that Chippy will be piloted at one Chipotle location later this year once it becomes certified as food safe. “It allows our crew to spend more time doing culinary tests, serving guests.”
Chippy might help Chipotle deal with the industry’s labor shortage, but ultimately what the company is aiming for with its venture fund is changing the world’s food systems.
“When you think about the environmental opportunities for how food is sourced and how it’s served, those are huge areas for technology to be accelerated and enabled,” Garner said, specifically pointing to environmentally focused farming techniques coming out of Europe. “Guests want to understand the provenance of their food and feel good about what they’re shopping for.”
Buying into sustainable farming practices will allow quick service restaurants brands better affordability of ingredients, a guaranteed supply, and the opportunity to offer customers something unique vs. competitors, said Sanjeev Krishnan, chief investment officer at S2G Ventures, a 9-year-old venture fund dedicated to supporting sustainable and healthy food systems.
“More interesting is that these quick serve restaurants can bring an era of biodiversity into our food system — ours is boring,” Krishnan said. “Just 15 crop plants provide 90% of the world’s food energy intake, with three — rice, maize and wheat — making up two-thirds of this,” he added.
Investment in non-meat protein products has ballooned over the past few years, with Chipotle, McDonald’s, Burger King and Dunkin all recently trialing burger and sausage substitutes on their menus. Many brands are extending plant-based experimentation to other product categories, and PitchBook Data tracks venture funding in a newish category: 3D bioprinting, which involves printing living cells, growth factors and other biomaterials to produce whole cut cultivated meat, according to the firm’s Q1 Foodtech Report. 3D food-printer companies logged $185.7 million in VC funding last year, it said.
When it comes to investing in higher-risk emerging technology, it may help to think of Chipotle’s role as akin to other companies’ R&D costs, according to Dunlop.
“Nothing is off the table,” Garner said. “One of the things that [CEO Brian Niccol] has brought to our culture is this idea that we have a lot of pride in what we do and very little ego. We can be proud of what we’ve done — like plant-based chorizo — but if someone out there has a cool idea, we want to hear from them.” More

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Supply chain constraints — including those related to semiconductors — have proven to be a major challenge for automakers in recent times.
“We’re trying to keep delivery times short,” VW CEO Herbert Diess tells CNBC, “but we have a lead time of a year or so currently, so we are ramping up production.”
German automotive giant’s focus on electric vehicles is a world away from the “dieselgate” scandal that rocked it in the 2010s.

An ID. Buzz photographed at a plant in Hanover, Germany, on June 16, 2022. Supply chain constraints — including those related to semiconductors — have been a major challenge for automakers in recent times.
Ole Spata | Picture Alliance | Getty Images

The CEO of German automotive giant Volkswagen sought to assuage concerns about electric vehicle sales and semiconductor supplies on Thursday, predicting delivery times for EVs will get shorter as the year progresses.
“The outlook is very good, we have [a] very good order intake in Asia,” Herbert Diess told CNBC’s Annette Weisbach on Thursday.

Supply chain constraints — including those related to semiconductors — have proven to be a major challenge for automakers in recent times.
“We’re trying to keep delivery times short,” Diess said, “but we have a lead time of a year or so currently, so we are ramping up production … five assembly plants are coming into production now.”
Shares of Volkswagen traded up 5% during afternoon deals in London. The Frankfurt-listed stock price is down over 28% year-to-date.

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“We will see a ramp-up in the second half of the year to really be able to reduce delivery times for our EVs,” he added. “There’s high demand in Europe and also in the United States.”
Semiconductors, Diess noted, still represented a bottleneck, but said this was likely to change soon. “We will see an alleviation through the next weeks,” he said.

Diess’ comments came on the same day his company broke ground on a cell factory in Salzgitter, Germany, and launched a battery company called PowerCo. In a statement, it said PowerCo would be “responsible for global battery activities of the Volkswagen Group.”
It added that, in the period up to 2030, PowerCo would “invest more than €20 billion [$20.4 billion] together with partners in the development of the business area, to generate annual sales in excess of €20 billion and to employ up to 20,000 people in Europe alone.”
By the year 2030, VW says it wants at least 70% of its European revenue to come from electric cars. In China and North America, its goal is at least 50% of revenue from EVs.
Earlier this year, VW announced plans to re-launch the iconic Scout brand as a fully-electric pick-up and “rugged” SUV, with prototypes due to be revealed in 2023 and production planned to begin in 2026.
The company is also concentrating on the development of vehicles such as the fully electric ID Buzz, which is inspired by the T1 Microbus or “hippie” van.

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Stay Tuned: Top States for Business will be revealed on July 13, 2022

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Electric vehicle manufacturing is a major battleground as states vie for leadership in rebuilding the U.S. supply chain.
Southern states including Georgia, North Carolina, Tennessee and Kentucky have won major plants with Ford, Rivian, Hyundai, and Volkswagen by offering huge incentives.
Not to be outdone, Michigan is trying to retain its status as the automotive capital by offering hefty incentives of its own, including a $1 billion deal with GM.

For as long as there has been an auto industry, Michigan has been its epicenter. But now, the industry is making clear that it is not bound by tradition.
The move to electric vehicles — rapidly accelerating as the price of fossil fuels rises and battery technology improves — is easily the biggest shakeup in the industry since mass production began in Michigan at the start of the 20th century. And it has left Michigan’s status as the nation’s automotive capital deeply in jeopardy.

Startups including Amazon-backed Rivian and VinFast from Vietnam are spending billions to build factories in the Southeast — Georgia and North Carolina, respectively. Korea’s Hyundai has announced that it will set up shop in Georgia. Volkswagen has a massive facility in Tennessee and is looking to expand there.
But Michigan took a body blow last year when one of its most iconic companies — Ford — announced it would spend $11.4 billion to build a manufacturing complex dubbed “Blue Oval City” in Tennessee, and a pair of battery plants nearby in Kentucky. The company says the expansion will create nearly 11,000 jobs.

Rendering of Ford’s $5.6 billion “Blue Oval City” campus in Tennessee.

“No one wants to see that, right?” said Michigan Gov. Gretchen Whitmer in an interview. “I mean, it was kind of a shock.”
It was enough of a shock to get Whitmer, a Democrat, and the Republican-controlled state legislature to agree in record time on a package of incentives aimed at matching the deals that helped other states win EV manufacturers. Georgia is doling out $1.5 billion in state and local incentives to Rivian, for example. North Carolina agreed to pay up to $1.2 billion to lure VinFast. Ford stands to collect $883 million from Tennessee and another $250 million from Kentucky.
So, in December, just weeks after Ford’s bombshell announcement, Whitmer signed a package of legislation including a new $1 billion incentive fund for “strategic outreach and attraction.”

If anyone in Michigan is annoyed about having to put up that kind of money just to retain an industry that is already there, they are not showing it.
“It’s my job to make sure that we’ve got all of the resources we can focus, so that we are competitive with what other states are throwing at these companies to try to earn their investment,” Whitmer said.
Sure enough, another homegrown Michigan company, General Motors, happily took the bait.
In January, GM announced it would spend $7 billion to expand its electric vehicle business in the state, including a new battery plant in a joint venture with South Korea’s LG Energy Solution, and expanding GM’s electric vehicle production at its Lake Orion, Michigan, assembly plant. That work had been slated to be done in Mexico.
In exchange, GM stands to collect around $1 billion in incentives, including $600 million from the new incentive fund.
“The future of mobility is very much happening in the state of Michigan,” Whitmer said.
The head of the state’s economic development arm said the new incentives will help bolster Michigan’s sales pitch as it tries to win more business.
“Michigan is a state that put the world on wheels, created Motown, tremendous advances in the life sciences and medical devices. We’re still that state of inventiveness,” said Quentin L. Messer, Jr., CEO of the Michigan Economic Development Corporation.

But one site selection consultant, who says he worked on several electric vehicle deals, warns that most of the big deals have already been done.
“I think we are at peak EV in terms of the frenzy,” said Tom Stringer, managing director in charge of the site selection and incentives practice at BDO in New York. “I think you see this reflected in the stock prices. The froth is off the market. Now, it’s ‘prove it.’ Do customers want these vehicles? Can these manufacturers go to scale and deliver?”
Stringer said that all the states have been careful to structure their incentives so the companies must first create the jobs before they can cash in.
“There have been no giveaways in this industry, which is great for from a taxpayer standpoint,” he said.
Still, subsidy watchdog Greg LeRoy of the nonprofit group Good Jobs First believes states have gotten caught up in the hype, to the potential detriment of the taxpayers.
“It’s understandable, governors want to get in on the ground floor of a rising industry, electric vehicles, in the future.” But, he said, “spending a billion dollars on a single facility, you’re never going to break even from a tax revenue point of view.”

United Auto Workers in the EV era

Another Michigan institution with a major stake in the EV battle between the states is the United Auto Workers.
“We’re headquartered here, we were founded here,” said UAW President Ray Curry in an interview. “We’re always going to advocate for Michigan. It’s always about the home team.”
Regardless, the union is still seeking to organize the facilities in less union-friendly states. It has had some successes, including at Ford’s Blue Oval City complex. But most of the other plants, like Rivian in Georgia, are non-union.
Even in Michigan, there are no guarantees. GM’s battery joint venture, called Ultium Cells, is non-union, at least for now. Curry is vowing to change that.
“It’s a very critical time for the UAW,” he said. “This transformation piece is about our future. It’s about 86-plus years of longstanding history.”
Messer, the state economic development official, believes Michigan’s deep union history may have hurt the state due to what he said are misconceptions among business leaders.
“The unions have been very focused on talent development, workforce development, getting young people into the trades,” he said. “These are critically important things that I think people don’t appreciate.”
Stringer said many companies are taking a new look at unions, no longer strictly as adversaries, but also as sources of badly needed talent.
“I think the ability to get skilled workers, whether they’re union or non-union, is critical,” he said. “If unionized states can show that value proposition, that if you hire our individuals, they’re going to be better, faster, more effective over the long term, those states are winning projects.”  More

The American Gaming Association says illegal operators are a “serious threat.”
The industry trade group is asking Attorney General Merrick Garland and the Department of Justice to enforce existing laws.
FanDuel’s CEO says unregulated, offshore sites have an unfair advantage because they don’t pay state and local taxes and don’t invest in compliance or lobbying for the expansion of sports gambling in the U.S.

American casinos, gaming companies and lawmakers are calling on federal prosecutors to crack down on illegal offshore gambling sites that they say are evading consumer protection regulations. 
The push comes as sports gambling has quickly expanded in the U.S. in recent years, with more than 30 states and Washington, D.C., allowing it.

“What maybe at one point in time was a relative nuisance, is now becoming a serious threat to the legal, licensed gaming industry,” Bill Miller, CEO of the American Gaming Association, told CNBC in a recent interview.
In a letter to Attorney General Merrick Garland this spring, the AGA asked the Justice Department to investigate well-known offshore gambling sites, which it said are openly violating federal and state laws and brazenly paying for advertising that targets U.S. gamblers.
Then on June 29, more than two dozen members of Congress also sent a letter calling on the Justice Department to investigate and prosecute illegal offshore sportsbooks.
The Justice Department has not yet responded to the AGA’s letter or to CNBC’s request for comment.
The challenge for the gaming industry has escalated as online searches for offshore sportsbooks last year rose faster than searches for the regulated operators, according to the AGA. More than half of gamblers say they still wager using offshore sites like Bovada, MyBookie and BetOnline, according to a survey by the association.

“There are hundreds of illegal or unregulated operators who are taking sports bets every single day. We estimate there’s potentially $15 billion going through some of these offshore operators,” FanDuel CEO Amy Howe told CNBC.
Legal operators including FanDuel, owned by Flutter, DraftKings, Caesars and BetMGM, co-owned by MGM Resorts and Entain, spend billions of dollars on licensing, marketing and lobbying for the legalization of sports betting in new states.
The companies say offshore operators compete for customers without having to invest in licensing or lobbying or paying state and local taxes.
“It gives them an unfair competitive advantage. They can offer better odds to the consumer,” Howe said. She added that many players don’t even know when they’re using illegal betting sites. 
Some gamblers used offshore bookies for years before the Supreme Court overturned the Professional and Amateur Sports Protection Act in 2018 and cleared the way for states to legalize sports betting.

Professional gambler Justin Werlander says many high rollers use offshore gambling sites because they allow bigger transactions and accept credit.
Courtesy: Justin Werlander

New Jersey gambler Justin Wunderler said he used to bet on sports through offshore sites, starting in high school, when that was the only option for sports wagering. Since then, he’s been burned a number of times when he couldn’t withdraw money from the offshore bookies.
“I got kind of screwed,” he said. “They ran away with my winnings, and that’s it. Sometimes bookies don’t pay out when you win.”
Howe said unregulated sites frequently ignore the responsible gambling safeguards U.S. operators have in place to maintain their licenses. She said 25% of FanDuel’s customers who switch from illegal operators do so because they weren’t paid their winnings.
Yet some experienced gamblers continue to use unregulated sites, drawn by more advantageous odds or promotions or because the sites let high rollers bet on credit. Plus, some frequent gamblers might find their bet limits restricted at legal sportsbooks in the U.S.
Wunderler said the offshore sites allow far higher limits, including for the “sharks,” who are experienced, savvy gamblers. “Some of them could go up to $50,000, while some of these legal sites you can only bet $120,” he said.
In states that have legalized sports betting, online searches for offshore betting sites have declined, according to the gaming association. But the offshore site Bovada still accounts for half of sports-betting-related searches nationwide, the AGA told CNBC.
Miller of the AGA said the gaming industry is looking to partner with Google and other internet search engines to stop turning up results with illegal sites.

The casino industry is also asking law enforcement to crackdown on unlicensed gambling machines, often placed in taverns, mini-marts and gas stations.
Courtesy: American Gaming Association

The casino industry is also asking law enforcement to crackdown on unlicensed gambling machines, often found in taverns, mini-marts and gas stations. They look, sound and play like slot machines, but the manufacturers label them “skills-based” games to avoid gambling regulations.
“Why that matters is they’re not tested. There’s no quality assurance around odds,” said Miller. And if the machines don’t pay out, he said there’s rarely accountability from the host location.
Aristocrat manufactures the popular Buffalo slot machines, as well as many others, that are licensed in 300 U.S. jurisdictions. Its CEO, Hector Fernandez, said unregulated manufacturers have stolen designs and other intellectual property from the company.
Fernandez said he’s also concerned about the lack of consumer protections with unregulated games.
The industry is working to educate players about unregulated operators, although it says that it can be difficult to tell the difference between legal and illegal operators.
“Educating the public that is generally unaware of whether they’re betting on illegal sites or illegal sites is a job for all of us,” Miller said.
Disclosure: CNBC parent Comcast and NBC Sports are investors in FanDuel.

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Prices at the pump have retreated from June’s never-before-seen levels, but remain stubbornly high.
Some relief could be in sight with gasoline futures down more than 10% this week.
Patrick De Haan, head of petroleum analysis at GasBuddy, said the national average could drop to between $4 and $4.25 by mid-August.

Brie Olootu pumps gas at an Exxon Mobil gas station on June 09, 2022 in Houston, Texas. Gas prices are breaching record highs as demand increases and supply fails to keep up.
Brandon Bell | Getty Images

Prices at the pump have retreated from June’s never-before-seen levels, but remain stubbornly high.
Some relief could be in sight. U.S. gasoline futures have dropped more than 11% this week, following a decline in oil prices as recession fears spark concerns around a drop-off in demand.

The national average for a gallon of gas stood at $4.75 Thursday, according to AAA. That’s down from the record $5.016 hit on June 14. But prices are still $1.62 higher than this time last year.
California has the highest state average at $6.185. The state’s Mono county is currently averaging $7.224 per gallon. South Carolina’s average of $4.257 is the lowest in the U.S.
Patrick De Haan, head of petroleum analysis at GasBuddy, said the national average could drop to between $4 and $4.25 by mid-August, barring a price spike in oil.
West Texas Intermediate crude, the U.S. oil benchmark, slid below $100 per barrel on Tuesday for the first time since mid-May. Oil makes up more than half the cost of gasoline, with refining expenses and taxes, among other things, also influencing prices.
On Thursday WTI traded around $99.51 per barrel, while gasoline futures stood 1.2% higher at $3.27 per gallon.

Prices at the pump tend to rise faster than they fall, as stations look to lock in profits in an ultra-competitive business.
“When [oil] prices trend up, stations are usually 2-5 days behind price increases until the upward trend stops,” noted De Haan. “That means for weeks they can be behind on raising prices. When prices do finally fall, they lower prices slowly to recapture margins from when prices rose. The longer and steeper upward trend, the slower stations likely lower prices when there’s finally relief,” he added.
But there were some positive signs of easing. De Haan counted 2,535 gas stations with prices below $3.99 on Thursday. Even though that’s a small fraction of 145,000 gas stations in the country, De Haan expects the number could double or triple in the next week or so.
Record prices have been a major contributor to rampant inflation, and a headache for the Biden administration ahead of November’s midterm elections.
President Joe Biden called on Congress in June to temporarily suspend the federal gas tax, but such a move has garnered little support from lawmakers.
Looking forward, some Wall Street firms believe oil prices will regain prior highs, which would mean only temporary relief at the pump. Goldman Sachs is calling for Brent crude, the international oil benchmark, to hit $140 this summer. It traded at $101.81 Thursday. Meantime Citi has been an oil bear for some time, and on Tuesday said Brent could hit $65 by the end of the year should the economy tip into recession.
Other factors that could send gas prices higher again include a hurricane or any refining-related issues, with refineries already running near peak capacity.
Andy Lipow, president of Lipow Oil Associates, forecasts the national average will drop to $4.50. Without any major disruptions, prices could fall even further.
“If we can get through the next six weeks without a major hurricane, we are looking at $4.40,” he said.

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India inc’s business calendar has only one contender to rival Berkshire Hathaway’s famous shareholder gathering. The subcontinent’s equivalent of that “Woodstock for capitalists” is the annual general meeting of Reliance Industries. Like Warren Buffett’s shindig it usually features a celebratory crowd of devoted investors (although not the same quality of corporate-finance insights). The company’s founder, Dhirubhai Ambani, an upstart entrepreneur from Gujarat, was also an outsider with a nose for opportunities. He built India’s largest company from a humble trading and textiles firm into a vast conglomerate. It has continued to expand after his death under the leadership of his son Mukesh Ambani and today encompasses petrochemicals, refining, telecoms, a shopping app and retail stores—among other things. The importance of the resulting entity to India is impossible to overstate. With a market value of $206bn, the firm’s revenues are the equivalent of 3% of the country’s gdp. Among India’s largest 500 public companies, it is responsible for 6% of sales and profits, 7% of total capitalisation and a staggering 18% of capital investment. Jio, the telecoms division, provides service to 410m Indians, and is the latest in a series of massive, stomach-churning capital-intensive bets that have paid off over the years. The retail operations are by far the largest in India, encompassing 15,000 shops. Its refinery and petrochemicals operation in the north-west of the country is among the biggest in the world. In short, any change at Reliance affects India as a whole—and it appears that change may well be on the way.The rumour mill has been abuzz because this year the annual meeting, usually held in June or July in Mumbai, has yet to be scheduled. Mr Ambani seems to have largely withdrawn from public appearances. The company says he is spending time in Jamnagar, the site of the company’s massive oil refinery. India’s gossipy business world, where no figure receives more attention, is alight with talk that he may be suffering from health problems. The company says he is well and continues to attend public functions within the restrictions of a pandemic. On June 28th the company said that Mr Ambani would step aside from the chairmanship of Jio Infocomm, a subsidiary of the telecoms arm, in favour of his 30-year-old son, Akash. The next day reports emerged that Akash’s twin sister, Isha, would soon head Reliance’s retail operations. And on July 3rd the Hindu Business Line, a newspaper, said that Mr Ambani’s wife, Nita, already a director of Reliance, was favoured by some on the board to become a vice-chairman of the company. Another son, Anant, is also said to be positioned to take over running part of its energy operations.Interpreting these rumours is tricky. Perhaps they reflect prudent succession planning. Mr Ambani is 65, not old for an Indian tycoon, but it is time to start teeing up the next generation of leaders. Even if his children were to take over the running of some of the group’s major subsidiaries, they would ideally have years more experience at management and building teams before even being considered as candidates qualified to take over Reliance itself. And Reliance’s history shows the drawbacks of leaving it too late. Soon after Dhirubhai died in 2002 a brutal succession battle broke out between Mr Ambani and his brother, Anil, which ended with the company being split into two, and Anil’s side of the business fading into obscurity. Whenever he departs, there is little debate that Mr Ambani’s exit would constitute a huge loss for the company. Reliance has a loyal cadre of managers but he is regarded as the driving force behind every facet of Reliance’s business from strategy to finance. He is seen as having the ability to deal with the complicated judicial, political and economic currents of India better than anyone. Whether in telecoms, energy or retail, Reliance has navigated and benefited from innumerable rules and rulings that make hamstrung competitors seethe with envy. Ensuring that this continues will be a tall order for the next generation at Reliance. Perhaps most important, Mr Ambani has continued a pattern that his father began: betting the firm on enormous and risky projects within India. Some of these wagers have not worked well: Reliance’s attempt to develop gas fields in the Bay of Bengal has been underwhelming, for example. But some have been been both jaw-droppingly daring and successful. Reliance’s telecoms and digital operation required huge upfront investments—its assets are now $49bn, according to Bloomberg data, up from close to zero a decade ago. And by bringing cheap communications to the masses it has helped transform Indian society. This may go some way to explaining the respect now shown to Reliance even by its critics. Unlike classic crony capitalism where the extraction of rents is paramount, Reliance’s huge level of reinvestment mean its return on capital is modest: below 10% every year for the past decade. Already the next big bet is being lined up. Profits from refining are providing tens of billions of dollars for investments in renewable energy infrastructure in a country with a shortage of power generation and an over-dependence on fossil fuels that will need to be remedied soon.A reliable appetite for riskOne theory is that the annual meeting has been delayed while a break-up of the company is debated. The firm is certainly in good nick. After India went into lockdown in 2020 it brought minority investors, including Google, into its digital arm. The cash was used to slash debt. Refining profits are at high levels, notwithstanding the recent imposition of a windfall tax by the government. Jio enjoys a steady subscriber base and rising tariffs. Reliance’s retailing arm is profitable and expanding. All this suggests Reliance, or its constituent parts, could plod on without Mr Ambani at the helm. But would the group still have the appetite to undertake some of the boldest bets in global business?■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

If investors in equities and debt markets will remember anything of the first half of 2022 it will be generational sell-offs. But the turmoil in public markets has not yet fully bled into private equity: fundraising has marched on, large deals are still being consummated and paper returns look strong. The blood, however, may be about to flow. Buy-out barbarians made their names in the late 1980s, not the 1970s, for good reason. The corporate buy-out is a financial ploy unsuited to the coming period of slow growth and high inflation; no previous boom-and-bust cycle in private-equity’s 40-year history has been like it. Most important, cheap debt is unlikely to be able to save the day. If trouble is to strike, it will hit an industry that is now hubristic and vast. The amount of money invested, or waiting to be invested, by private-equity funds has swelled from $1.3trn in 2009 to $4.6trn today. This was driven by a scramble for yield among pension funds, insurance companies and endowments during a decade of historically low interest rates in the aftermath of the global financial crisis of 2007-09. Many have more than doubled their allocations to private equity. Since 2015 the ten largest American public-sector pension funds have collectively committed in excess of $100bn to buy-out funds.In the search for market-beating returns, some $3.3trn managed by private-equity firms is currently invested in private companies. A chunk of this reflects the $850bn of buy-out deals done during 2021 (see chart 1). It is not by the genius of private-equity bosses that this capital has been posting impressive paper gains (see chart 2). Rather, company valuations have until recently been on a tear; low interest rates push up the valuations of firms, which have been chased by buy-out firms armed with cheap debt. Buy-outs have been increasingly common in sectors with the highest valuations, including technology, driving the average valuation multiple for American transactions to take firms private to 19.3 times ebitda (earnings before interest, tax, depreciation and amortisation) in 2021, compared with 12.6 in 2007, according to Bain & Company, a consulting firm. The stockmarket crash this year will take months to wash through private markets. But a reckoning is on the horizon. Private equity benefits from a fig leaf of illiquidity, resulting in a delay between real and reported fund valuations. In the absence of a liquid market to price investments, private-equity funds assess the current “fair value” of their portfolio based on the price an investment would realise in an “orderly transaction”, which should look similar to the valuations of comparable companies in the public markets.But such “orderly” exits are drying up fast. Market turmoil means stockmarket listings are off the table and companies are thinking harder about spending cash on acquisitions ahead of a recession. Sales from one private-equity fund to another will not sustain an alternative reality of high valuations. For some fund managers, adjusting valuations will be painful. Funds which bought companies at a premium to sky-high stockmarket prices will suffer significant mark-downs. Fund managers and investors accustomed to stable, market-beating returns must accept the true underlying volatility of their investments. Only the smartest fund managers, who have kept their discipline and sought bargains outside frothy sectors, need not fear the accountant’s scythe.Public markets are a useful window on the future of private-equity returns. The view is not a pleasant one. One index, which maps private-equity portfolios to their public stockmarket equivalents, is down by 37% this year. Another proxy is the share-price performance of investment trusts, a type of publicly traded investment vehicle, which invest in private equity. Usually, these trusts trade close to their underlying asset values, which are based on “fair value” assessments provided by the private-equity funds. These spreads have widened, sometimes cavernously. HgCapital Trust, a technology-focused private-equity investor, currently trades at a 25% discount to its most recent net-asset value; the trust’s largest investments are held at 27 times ebitda.Private-equity bosses often claim it is their skills as business-operators, rather than financial engineers, which generate returns (and handsome fees). Their investors should hope this is true. But these masters of the universe will find that they are not immune from the difficulties of managing a business during a period of stagflation; growth and margin worries keep bosses of private companies up at night, too. According to one study, expanding margins accounted for only 6% of private-equity value-creation during the past five years; as pricing-power becomes the focus of all firms, defending profitability will take priority over growth. The penalties for failing to adapt will be harsh. Hefty debt piles (average leverage in large American buy-outs is now more than seven times ebitda, the highest since 2007) make getting this right critical to avoiding the bankruptcy courts. The fate of the $1.3trn waiting to be invested by private-equity firms, known as “dry powder”, is also uncertain. Volatile valuations are one immediate obstacle to spending it. A widening gap in price expectations between buyers and sellers of companies is proving fatal to would-be deals. On 28th June Walgreens Boots Alliance, the American parent company of Boots, a British pharmacist-cum-retailer, called it quits on the sale of the well-known British brand after lengthy talks with potential private-equity suitors failed. A dramatic adjustment in valuations is needed to push buy-outs over the line: on June 24th Zendesk, an American software firm, announced it had agreed to a $10.2bn buy-out by Hellman & Friedman and Permira, two private-equity firms. Only four months earlier, Zendesk had rejected a $17bn proposal from the same funds.Interest rates will prove a more enduring challenge to the buy-out playbook. Cheap debt is a red rag to private-equity bulls: around half a typical buy-out is paid for using debt, magnifying the returns to investors’ capital. It has played a critical role in each buy-out boom period; the present one can trace its genealogy directly to rate cuts by central banks during the global financial crisis.As these policies are unwound in response to rising inflation, buy-out debt has become significantly more expensive. That is not going to change soon. Investors not fleeing these risky assets are demanding far higher returns than before, and American junk-bond yields have reached 9%. The availability of leveraged loans, critical for executing buy-out transactions, has collapsed; in June, loan issuance was down by 41% compared with the same month last year. Investment bankers, who typically underwrite these loans, are bracing for significant losses as the ground shifts beneath their feet and they struggle to offload the debt to investors.A heady mix of stockmarket mania and historically low interest rates has sustained the fourth buy-out boom; it has been scaled-up by immense pools of capital increasing their exposure to private markets. Private equity is coming back down to earth. It will be returning to an unfamiliar planet. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

After an astonishingly robust More