Finance

How much money are your private-equity investments making? The question is easy to answer for other asset classes, such as bonds or publicly traded stocks. All that is required is the price paid at purchase, the price now and the time that has elapsed between the two. It is less obvious how returns for private-equity investments should be calculated. Capital is earmarked for such investments, but it is only “called” once the investment firm has found a project. There is little information about value once invested. Cash is returned in lump sums at irregular intervals.An alphabet soup of measures are supplied to investors, which are known as “limited partners”. There is irr (the internal rate of return, calculated from returns to a specific project), mom (the estimated value of a fund, as a “multiple of money” paid in) and a dozen more besides. All have flaws. Some rely on private valuations of assets, which might be flattering; others do not take into account the cost of capital. But nitpicking seems pedantic so long as one measure stays high: cash distributions measured as a share of paid-in capital, known as “dpi”. This concerns the money that private-equity firms wire to the pension funds and university endowments that invest in them each year, as a share of the cash those investors have paid in. Unlike irr or mom it is hard to game and takes into account the meaty fees charged for access to funds.Over the past quarter of a century, private-equity firms have churned out distributions worth around 25% of fund values each year. But according to Raymond James, an investment bank, distributions in 2022 plunged to just 14.6%. They fell even further in 2023 to just 11.2%, their lowest since 2009. Investors are growing impatient. It is now possible to buy jumpers and t-shirts emblazoned with the slogan “dpi is the new irr” on Amazon, an online retailer. According to Bloomberg, a news service, an investor recently showed up to a private-equity firm’s annual meeting wearing one.It is understandable that dpi has fallen. As interest rates climbed, equity valuations dropped. Private-equity managers get to choose when to sell their portfolio companies. Why would they sell in a down market? Possible paths for them to exit investments, such as taking a firm public or selling it to another company, have been all but shut off. In the years following the dotcom bubble, which popped in 2000, and the global financial crisis of 2007-09, distributions from private investments dropped similarly.Still, this slump might prove more damaging than previous ones, for a couple of reasons. First, allocations to private equity have risen. Pension funds rely on income streams—dividends from companies that they own, coupon payments from bonds and, now, distributions from private equity—to make payments to retirees. A decade or two ago, a lean year from private equity might not have mattered much. Now things are different.Second, previous lean periods coincided with there being few other investment opportunities for pension funds and university endowments, and plentiful ones for private-equity managers. Some of the best returns private equity has posted have come after crises or the popping of bubbles, when managers could pick up firms for a song. But the past two years have offered few such opportunities. With interest rates high, arranging financing has been difficult; although valuations fell, they did not plummet. The result is that firms are sitting on a record $2.6trn-worth of “dry powder”—capital committed by investors, but not yet invested. At the same time, pension funds are itching to buy more bonds, owing to the high yields that are now on offer.How might this situation resolve itself? Stockmarkets are reaching all-time highs, and valuations in private markets tend to follow those in public ones. The initial-public-offering pipeline is filling up nicely. Exits are becoming possible. If all this carries on, distributions might well begin to flow. Yet this is just one future scenario. Much of the market’s recent strength reflects the success of the biggest technology firms, which have been pumped up by excitement about what artificial intelligence will do to profits. And private-equity funds tend to own health-care and home-maintenance firms, rather than software ones. Moreover, American inflation looks worryingly stubborn, auguring higher rates. Investors in private equity will only be able to relax when they have their cash in hand once again. ■Read more from Buttonwood, our columnist on financial markets: How investors get risk wrong (Mar 7th)Uranium prices are soaring. Investors should be careful (Feb 28th)Should you put all your savings into stocks? (Feb 19th)Also: How the Buttonwood column got its name More

If America’s economy begins to deteriorate, people in Ningbo will be among the first to know. The eastern Chinese port, home to 9.6m residents, contains a sprawling industrial district. Its goods are prepared for export, and are shipped abroad via a deepwater harbour, which is one of the world’s busiest. The coast of Zhejiang province is dotted with similar entrepôts, where thousands of mostly family-owned firms have built up a diverse manufacturing base over the past 40 years. They make everything from textiles and car parts to electronics and machine components.Ningbo is also a city of political importance. Although private industry, rather than state-backed enterprise, has thrived in the region, it has nevertheless been held up as a model of “common prosperity”—Xi Jinping’s way of dealing with wealth inequality. And amid a gloomy overall outlook, with much of the country mired in a property crisis and suffering from weak consumer demand, surprisingly strong exports and fading fears of a recession in America have combined to make Ningbo one of China’s most optimistic cities.Official data released on March 7th showed that China’s exports surged by 7.1% year on year in the first two months of 2024. This is especially impressive given that some analysts had expected growth of less than 1%. Even exports to America climbed 5% year on year, after having tumbled by nearly 7% in December. The figures were sufficiently encouraging that policymakers at China’s annual congress in Beijing disclosed a version of them a day ahead of the expected release date.Little surprise, then, that the atmosphere in Ningbo is more cheerful than in other Chinese cities. Part of this, locals say, can be attributed to its relatively easy covid-19 years. In 2022 many large Chinese cities were locked down for months on end. Ningbo, perhaps by dint of luck, avoided a full-city lockdown and closed few factories. When Shanghai was shut down in April and May that year, halting lorries bound for its port, some traffic was rerouted to Ningbo’s busy harbour.The good cheer has limits, though, which suggests that cities such as Ningbo may not drive China’s recovery. A downturn in foreign demand would be devastating for the region. Local factories experienced a brief taste of this as China reopened in early 2023. Empty containers began stacking up in Ningbo’s port, indicating a lack of overseas purchases. An official who visited the city last March says he anticipated a disaster for the city and other export hubs. Fortunately, part of the phenomenon was explained by excess shipping containers returning to China for the first time since the start of the pandemic. The drop in demand was a blip.Ningbonese factory bosses have other concerns. The family-controlled nature of their firms makes financing from banks more difficult to secure. As larger manufacturers in southern cities such as Shenzhen enjoy government support for technology upgrades—involving robotics and the internet of things—local companies are finding it tough to keep pace.And although the most recent export data beat expectations across the board, things improved from a very low base. Analysts at HSBC, a bank, expect trade uncertainty to persist. Meanwhile, demand is shifting: that from poorer markets, such as Africa and South America, is surging, according to the most recent data; that from America remains strong; but that from Australia, the EU and Japan is falling.How well will Ningbo adapt? Many manufacturers got their start supplying foreign brands. More recently, they have begun selling directly to customers in the rich world through Amazon, an online marketplace, and Temu and Shein, two Chinese e-commerce sites, notes Hing Kai Chan of the University of Nottingham Ningbo China. They are unlikely to have developed similar channels in the markets now growing strongly. If rich-world demand fizzles out, Ningbo’s happy days could come to an end. Instead of developing a new path to prosperity, China’s optimistic city is riding on the coat-tails of the country’s geopolitical rivals. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

About a decade ago, a flashy, deep-pocketed investor made an appearance. Saudi Arabia’s Public Investment Fund (PIF) had a mandate to go big, and was ready to: it picked up a $3.5bn stake in Uber, placed $45bn in the world’s largest technology-investment fund, SoftBank’s Vision Fund, and provided half the capital for a $40bn infrastructure fund run by Blackstone, a private-equity giant. It has since bought stakes in everything from Heathrow Airport and Nintendo to Hollywood studios and French hotels. Last year it deployed more than $30bn of fresh capital, making it the highest-spending wealth fund in the world (see chart).image: The EconomistYet even as the PIF splurges abroad, its mandate at home is becoming more important. That is because of crown prince Muhammad bin Salman’s plan to transform Saudi Arabia’s economy, known as “Vision 2030”, in which the PIF is expected to play a vital role. It has been instructed to invest at least 150bn riyals ($40bn) at home each year. The intention is also to raise its holdings from 3.5trn riyals to 7.5trn riyals by the end of the decade, with luck creating millions of jobs as the economy moves away from oil. After a strong 2022, the kingdom’s gdp fell by 0.9% last year—its worst performance since 2002, aside from years of pandemic or financial crisis—making the task more urgent.The PIF’s role as a fulcrum of the Saudi economy means it is unlike any other sovereign-wealth or public-pension fund. Norges Bank Investment Management, Norway’s sovereign-wealth fund, has tasks and governance that are distinct from the country’s pension fund and finance ministry. Singapore’s GIC has to replenish its government’s budget, but its investments are focused on profits. In Qatar the state fund mainly invests abroad. As the PIF attempts to meet the ambitions of its political masters, it faces three challenges.The first concerns funding. The PIF currently receives most of its capital through asset transfers and capital injections from the government. On March 7th the Saudi government revealed that 8% of Saudi Aramco’s equity, worth about $164bn, had been transferred to the fund, doubling its stake in the state oil giant. The fund also receives dividends from investments and holdings, and can tap debt markets. It raised $11bn by issuing bonds on international capital markets last year, and has already raised another $5bn this year. On top of this, the fund borrowed at least $12bn in long-term loans last year. In the past, the central bank’s foreign-currency reserves have been transferred to it, too.Many of these sources will come under pressure. Not only is the fund expected to keep spending more, but as demand for oil slows the Saudi government will become less munificent. By 2030 millions more Saudis will have entered the workforce. The state employs many locals on higher wages than the private sector, with salaries counting for 40% of its total spending, meaning this will strain its budget. Bosses at domestic firms, many part-owned by the PIF, now talk of cost-cutting. And since the fund has eagerly tapped debt markets, interest payments are growing. Its cash dropped to $15bn at the end of September, from around $50bn at the end of 2022.The PIF’s desire to boost growth across the Saudi economy also means it invests in firms at various stages of evolution, complicating efforts to sustain consistent returns. Over the past five years the fund has established 93 companies. Over the 13 “strategic” sectors that the PIF has been tasked with developing, from health to sports and tourism, returns vary widely. Portfolio companies range from ROSHN, a property developer, to NEOM, a vast smart-city under construction, and Riyadh Air, an airline yet to become operational.All of this leads to the PIF’s second challenge: boosting returns. Since 2017, when the fund was tasked with implementing Vision 2030, its investments have returned about 8% a year. This is just above its minimum target of 7%, but far below the private-equity-style returns it really aims to achieve, admits one executive. Such ambitions are loftier than those pursued by most sovereign-wealth funds, which are more reserved owing to the difficulties of making big returns with diversified holdings and such large pools of money. So far the PIF has been able to pick assets that promise both economic development and strong returns, while tapping dividends from these holdings. As its role expands, that will become increasingly difficult.Moreover, private-equity-style valuation methods, which depend on past performance and projections of future cash flows, are tough to apply to many of the companies and projects in which the PIF is now investing. NEOM, for instance, is expected to cost around $500bn. But how and when it will begin to offer consistent cash flow is up for debate, making the investment more akin to a venture-capital one. In other areas, such as health and infrastructure, the fund’s role has the air of impact investing, where the goal is to achieve certain social ends as well as secure profits. This sort of investment is normally characterised by returns that deteriorate with scale and perform better when held for a long time, according to researchers from Harvard Business School and the International Finance Corporation, part of the World Bank. As the PIF expands, another problem is emerging: portfolio firms often overlap and compete with one another, cannibalising returns. In effect, this means taking money from your left pocket to put in your right, the executive sighs.The final challenge is attracting foreign investment into Saudi Arabia. As the fund grows bigger, foreign money would assist its ambitions. It would also enable domestic firms to expand their horizons and access new markets, thereby reducing the chances of ending up in competition with one another. And it would allow the PIF to exit some of its investments, which would push the private sector to fend for itself.But last year, after an IMF-approved data revision, Saudi Arabia attracted just 53bn riyals in foreign direct investment in the first three quarters, an amount equivalent to 2% of GDP. The aim is to entice over double that by 2030. “We can wait for investors but it will take time, so let’s go and do it [ourselves],” says a Saudi minister, “while being inviting to others.” It could be a very long wait. So far, global investors seem happier to take Saudi Arabia’s money than to put their own money into the country. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Sand is everywhere. Yet only a certain sort can be used to make the ultra-clear glass required for smartphones and solar panels. It must have a silica concentration of more than 99.9%, against less than 80% for construction material. This high-quality sand is scarce: of the 50bn or so tonnes extracted each year, less than 1% can be used to produce regular glass. A tiny fraction of that is pure enough for solar panels.As China’s leaders seek to revive the country’s economy, and to rebalance it away from property, they are throwing cash at manufacturing firms. The result is likely to be a surge in production, especially in sectors that Xi Jinping sees as important to China’s future, such as lithium-ion batteries, electric cars and solar panels, many of which require vast amounts of sand. As a result, demand will probably rise higher still. Prices are already hovering near record highs; last year they came to around $55 a tonne.The market is opaque and fragmented. But Crux Investor, a data firm, notes that the price of high-quality sand has risen twice as much as that of lower-quality stuff over the past five years, owing to the expansion of green manufacturing and the growing popularity of smartphones. Prices are buoyed by the fact that most Asian countries control exports so as to prevent environmental degradation. In America, where fine sand is mostly found in freshwater rivers, tough regulation makes extraction hard.Some manufacturers are now looking for alternatives. One option is to refine sand used for regular glass, which tends to be 99.5% silica. The problem is that doing so is itself expensive.Miners, both legitimate and otherwise, therefore spy an opportunity. The black market, estimated to be worth hundreds of billions of dollars a year, is likely to grow. Australia and Brazil are perhaps best placed to profit from the legal boom, according to Brian Leeners of Homerun Resources, a miner. Although these countries are best known for their sparkling white beaches, they also have significant reserves of industrial sand. These reserves are often farther from human settlements than those elsewhere, making extraction simpler. Mining companies report that until recently the price of sand was not high enough to cover shipping costs. Soaring prices have changed the equation.Neither country is in China’s sphere of influence. As such, they may help make Western supply chains more resilient. Mr Leeners points out that Brazil’s shipping lanes are also less prone to disruption, since they avoid the drought-hit Panama Canal and the Red Sea, which is under bombardment by Houthi rebels. Other commodities essential for the green transition, including cobalt, nickel and lithium, have seen prices jump, only to fall subsequently when new supplies or cheaper alternatives are discovered. Once permits have been acquired for extraction, high-quality sand could be the next to follow this path. The wait will, however, be an uncomfortable one for many manufacturers.■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

JPMorgan Chase CEO Jamie Dimon endorsed Disney CEO Bob Iger in his proxy battle with activist Trian Partners, CNBC’s David Faber has learned.
Dimon gave the following statement on Iger to Faber:

“Bob is a first-class executive and outstanding leader who I’ve known for decades. He knows the media and entertainment business cold and has the successful track record to prove it. It’s a complicated industry filled with creative talent, requiring the unique expertise and engagement skills that Bob possesses. Putting people on a Board unnecessarily can harm a company. I don’t know why shareholders would take that risk, especially given the significant progress the company has made since Bob came back.”

Trian, run by Nelson Peltz, launched an intense proxy fight against Disney, asking investors to nominate him and former Disney Chief Financial Officer Jay Rasulo to the board at its annual general meeting on April 3.
“Trian is disappointed that Disney is running a scorched-earth campaign that appears to be focused on deflecting attention from the Board’s failures,” Peltz said in a statement Wednesday.
In a 133-page white paper released earlier this month, Peltz outlined demands for a restructuring of leadership and an overhaul of Disney’s traditional TV channels, which he thinks have been a shrinking business. The activist also wants Disney to target and achieve “Netflix-like margins” of 15% to 20% by 2027. Peltz believes that Netflix is Disney’s biggest competitor.
Meanwhile, Iger has been trying to streamline the sprawling media company to rein in spending and make its Disney+ streaming platform profitable. Iger has instituted broad restructuring, including thousands of layoffs.

Nelson Peltz
David A. Grogan | CNBC

In February, Disney reported a blowout quarter with an earnings beat, narrowing streaming losses and upbeat guidance as it saw progress in its effort to cut costs. However, the report didn’t satisfy Peltz.
Dimon rarely weighs in on proxy battles, while JPMorgan does have a history of advising Disney on defensive matters.

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Around 86% of listed companies around the world either increased dividends or maintained them at current levels in 2023, Janus Henderson said.
Banks delivered record payouts as high interest rates boosted margins, according to a new report from British asset manager Janus Henderson.
However, the report noted that large dividend cuts from major companies such as BHP, Petrobras, Rio Tinto, Intel and AT&T diluted the global underlying growth rate for the year.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., March 5, 2024.
Brendan Mcdermid | Reuters

LONDON — Global dividend payouts to shareholders hit a record $1.66 trillion in 2023, according to a new report by British asset manager Janus Henderson.
The Global Dividend Index report, published Wednesday, said payouts rose by 5% year-on-year on an underlying basis, with the fourth quarter showing a 7.2% rise from the previous three months.

The underlying figure adjusts for the impact of exchange rates, one-off special dividends and technical factors related to dividend calendars, along with changes to the index.
The banking sector contributed almost half of the world’s total dividend growth, delivering record payouts as high interest rates boosted lenders’ margins, the report found.
Last year, major banks including JPMorgan Chase, Wells Fargo and Morgan Stanley announced plans to raise their quarterly dividends after clearing the Federal Reserve’s annual stress test, which dictates how much capital banks can return to shareholders.
“In addition, lingering post-pandemic catch-up effects meant payouts were fully restored, most notably at HSBC,” Janus Henderson’s report added.
“Emerging market banks made a particularly strong contribution to the increase, though those in China did not participate in the banking-sector’s dividend boom.”

However, the positive impact from banking dividends was “almost entirely offset by cuts from the mining sector,” according to Janus Henderson.
The report noted that large dividend cuts by some major companies such as BHP, Petrobras, Rio Tinto, Intel and AT&T diluted the global underlying growth rate for the year by two percentage points, masking significant broad-based growth in many parts of the world.

‘Key engine of growth’

Around 86% of listed companies around the world either increased dividends or maintained them at current levels in 2023, Janus Henderson said.
A total of 22 countries, including the U.S., France, Germany, Italy, Canada, Mexico and Indonesia, saw record payouts last year.
Europe was described as a “key engine of growth,” with payouts rising 10.4% year-on-year on an underlying basis.
For 2024, Janus Henderson expects total dividends to hit $1.72 trillion, equivalent to underlying growth of 5%.
— CNBC’s Hugh Son contributed to this report. More

Ken Griffin, Citadel at CNBC’s Delivering Alpha, Sept. 28, 2022.
Scott Mlyn | CNBC

Ken Griffin, Citadel founder and CEO, thinks the Federal Reserve should move slowly to cut interest rates in its fight against stubborn inflation.
“If I’m them, I don’t want to cut too quickly,” Griffin said at the International Futures Industry conference in Boca Raton, Florida on Tuesday. “The worst thing they could end up doing is cutting, pausing and then changing direction back towards higher rates quickly. That would, in my opinion, be the most devastating course of action that they could pursue.”

“So I think they are going to be a bit slower than what people were expecting two months ago in cutting rates. I think we are seeing that play out,” he added.
His comment came as data showed inflation rose again in February, with the consumer price index climbing slightly higher than expected on an annualized basis. The uptick in price pressures could keep the Fed on course to wait at least until the summer before starting to lower interest rates.
The billionaire investor said there are significant inflationary forces in place that keep prices elevated.
“We still have an enormous amount of government spending. That’s pro inflationary. And we are also going to a period in history of deglobalization. So we’ve got two big, big tailwinds that continue to support the inflation narrative,” Griffin said.
While the inflation rate is well off its mid-2022 peak, it still remains well above the Fed’s 2% goal. Fed officials in recent weeks have signaled that rate cuts are likely at some point this year and have expressed caution about letting up too soon in the battle against high prices. 

The Fed’s next two-day policy meeting takes place in a week.
Citadel’s flagship multistrategy Wellington fund gained 15.3% last year. More

Chinese smartphone company Xiaomi announced Tuesday it would formally launch its long-awaited electric car on March 28.
The company claimed in a social media post the product “would be delivered as soon as it is launched,” according to CNBC’s translation of the post written in Chinese.
Last month, Xiaomi President Weibing Lu told CNBC the company was targeting the premium segment with the car, and indicated deliveries could begin as soon as the second quarter.

Chinese consumer electronics company Xiaomi revealed Thurs., Dec. 28, 2023, its long-awaited electric car, but declined to share its price or specific release date.
CNBC | Evelyn Cheng

BEIJING — Chinese smartphone company Xiaomi announced Tuesday it would formally launch its long-awaited electric car on March 28.
The company claimed in a social media post its SU7 electric car “would be delivered as soon as it is launched,” according to CNBC’s translation of the post written in Chinese.

The post said the company was opening the waitlist for 59 stores in 29 cities in China.
Xiaomi revealed the vehicle’s exterior and tech features in late December, but did not share a price or specific delivery date.

Last month, Xiaomi President Weibing Lu told CNBC the company was targeting the premium segment with the car, and indicated deliveries could begin as soon as the second quarter.
While the company revealed the car to an international audience for the first time at Mobile World Congress Barcelona, Lu said it would likely take at least another two or three years before Xiaomi starts selling the vehicle overseas. More