Change, Change, Change: With Sustainability at the Very Core, Transformation Poses No Threat

Business transformation requires a change-management strategy to align the people, processes, and technology initiatives of a company with its vision.

Corporate overhauls are ideally undertaken pre-emptively, but in practice it is more commonly a reaction to dynamic and challenging circumstances. With the mission of achieving a tangible improvement in an organisation and its trajectory, transformations are a fundamental and risk-laden “reboot”.

Such transformations should be bold and rapid. During usual business operations, some employees may find the process frustrating. To achieve a rapid result, management must minimise resistance.

Myanmar Reforms

Since the re-opening of the Myanmar economy in 2011, the country has undergone significant economic, legislative and political reforms. It has made great strides in the past seven years and the results are commendable. The government is decidedly pro-business and is open to foreign investment.

To maintain momentum and build investor confidence, a clear and stable legal framework is crucial. A robust Companies Law can instill sound corporate practices that safeguard investors, creditors and other stakeholders – for SMES as well as for multilaterals and conglomerates.

"The group remains committed to the principle of the Universal Declaration of Human Rights and UN’s Global Compact."

Key law reforms in Myanmar include that foreign investors will be able to own up to 35% of a local company before it is considered a ‘foreign’ company, giving greater scope for international investors to operate in Myanmar. More flexible capital structures and changes to share capital allow companies to raise or reduce capital, with fewer procedural requirements.

Max’s Sustainable Culture

Max Myanmar Group, incorporated in 1993, has become a font of growth for people, stakeholders – and the country’s economy. Max Myanmar has made measurable progress and has become truly multi-disciplinary. It has an enviable track record in its various fields of work, and a reputation based on integrity and experience.

The group is strengthening itself as well as building a foundation for responsible business practice in Myanmar. Its aspiration to be a leading national institution has paid off, driving growth for stakeholders, and for the country as a whole. Max Myanmar Group has lived up to its potential and demonstrates the importance of acting responsibly. trates the importance of acting responsibly. Successfully set up Strategic Partnership with foreign partners in the area of logistics, manufacturing and insurance shows how the private sector can follow its lead in a way that is consistent with international best-practice.

Max Myanmar is committed to excellence in sustainability and corporate governance across each of its business segments: transport, trading, hotels, energy, agriculture, manufacturing, and logistics. Its has happily participated across the group in United Nations Global Compact since 2012, and has contributed to UNGC’s Myanmar network.

As a national pioneer of corporate sustainability, Max Myanmar proactively conducted an in-depth sustainability assessment of its own operations, with input from international experts. It also organised a sustainability seminar with its stakeholders. Max Myanmar’s engagement with corporate responsibility is one of long standing, and the group solidly upholds its reputation.

Max Myanmar strives for business success in ways that demonstrate respect and champion ethical values. As a responsible Myanmar organisation, it has always shown compassion and respect for people and planet. Long- and short-term impacts to the environment and community are taken into account in all business decisions.

The group remains committed to the principle of the Universal Declaration of Human Rights and UN’s Global Compact, the world’s largest corporate citizenship initiative. Max Myanmar aspires to be the first-choice company for employees and stakeholders, and a benchmark for excellence in corporate identity.

Initiated, Integrated, Innovated

As part of its 2025 Sustainability Goals, Max Myanmar is focusing on Responsible Production for environmental protection, Innovative Application for lifestyles, and Socio-economic Contribution for society.

To ensure the group-wide spread of this culture, and to communicate the message to subsidiaries, there are three parts of reform process:

Business structure

Finance structure

Corporate foundation

These structures align with the group’s medium- to long-term targets and sustainability initiatives.

To reform the business structure, Max Myanmar is building trust, worthiness and brand value as a unified group. It aims to raise community awareness and engagement while boosting cost-efficiency through productivity. It encourages confidence in technology through its integrated reporting system, which ensures transparency for shareholders. This is a group that prides itself on delivering innovations and services that advance general wellbeing.

Looking Forward

Max Myanmar’s strategy is to look for better ways of doing business and achieving market leadership. That means meeting – or exceeding – the expectations of employees, customers and communities. From internal business processes to customer service and community relations, the group’s proactive approach is a crucial factor in ensuring growth for all. Developing an effective management framework for sustainable development requires sound decision-making and solid governance.

The concept of sustainable development must be integrated into business planning and management systems. Governance is increasingly important, and the corporation and its senior management consider themselves accountable for the direction of business development.

Max Myanmar recognises that long-term outcomes require the adoption of strategies and activities that meet company and stakeholder needs while protecting and sustaining human and natural resources. Effective production based on sustainable business standards allows the continued improvement of the lives of customers. It also enhances the supply chain’s ability to support sustainability.

The group strategy is to focus on maximizing sustainable competitiveness in a transparent and responsible manner and to build, promote and maintain the brand image of the group.


FBS: Sharing ‘Inside Line’ and Tech Advances with Clients

FBS has been successfully operating in the Forex market since 2009 – and sharing its accumulated expertise with more than 15m traders around the world.

The global company was born with the goal of “staying on the clients' side” and building long-term relationships for collaboration and mutual benefit.

Technology is part of its success story. The FBS Copy Trade app connects clients with mentors (who are compensated for their collaboration). The social trading platform allows investors to follow the strategies of selected professionals and emulate their success using the tried-and-true methods they have pioneered.

Another app provided by the company is FBS Trader, an all-in-one platform providing access to the world's most sought-after trading instruments. All the necessary functionality is packed into one powerful application that gives 24/7 access to trades – from any iOS or Android device.

FBS platforms boast robust underlying technologies, effective reporting tools, and user-friendly interfaces. FBS offers proven trading technologies which can be shared by individual and institutional traders worldwide. The company’s trading and analysis platforms provide access to all major international exchanges and financial markets. FBS clients can design, test, optimise, monitor and even automate their own equities, options, and trading strategies.

Despite the global fall of markets due to the coronavirus pandemic – and the resulting economic stresses – the trading industry continues to steadily evolve. “We face a truly unprecedented situation when nothing is clear,” experienced traders are saying. “Isn't that the best time to become a trader?”

FBS continually develops its strategies to set new and ambitious goals. From the comfort of their homes, people can start trading on platforms optimised for versatility and reliability.

The company provides seamless account management, advanced analytics, fast deposits and withdrawals that enable clients to swiftly respond to market changes. With access to real-time stats, it is possible to track currency rates using price charts. Never missing opportunities is crucial when trading during volatile periods – such as right now.

FBS invests in people by hiring agile and highly-skilled professionals. In January, the broker became the Official Trading Partner of FC Barcelona. This partnership will be mutually beneficial while delivering recognition, patronage, awareness and positive points.

FBS has won the long-term confidence of its clients, as well as official recognition. The company has netted numerous awards, including coveted recognition at the Forex Broker Awards 2020. It won the top honours for Best Copy Trading Application – Global 2020, and Best Forex Broker – Asia 2020.


Sherzod Khodjhaev, Deputy Minister for Energy, Republic of Uzbekistan: Uzbekistan Gets to Grips with Challenges of Responsible Electric Power Generation

[caption id="attachment_16067" align="alignright" width="300"] Deputy Minister for Energy: Sherzod Khodjhaev[/caption]

There is something magical about electricity: it has always been present, but its power was only harnessed at the end of the 19th Century.

In that relatively short time, it has become almost as necessary as oxygen to billions of people: we only truly notice electricity it when the supply is cut. When outages occur, cities — and even countries — become virtually paralysed. But 940m people, 13 percent of the world’s population, still don’t have access to electricity, or to the progress and prosperity it brings.

An outage in the UK last summer left almost a million people without an electricity supply — and they literally did not know what to do. From lighting to heating, internet to home entertainment systems, all appliances were becalmed. In the UK such outages are rare; in Uzbekistan, where a 100 percent electrification rate was achieved a few years ago, this is a more frequent occurrence.

It is estimated that in the 10 years facing us, world energy consumption will increase more than 55 percent. The more technologically advanced societies become, the more electricity is required. By 2030, electricity consumption in Uzbekistan is set to double. The Ministry of Energy was instructed to come up with a comprehensive plan to meet that demand.

The solution includes building a nuclear power station, commissioning new thermal power plants with an aggregate capacity of almost 8,000 megawatts over the next decade, and developing renewable sources of energy such as solar power and wind.

Power consumption in Uzbekistan for 2020 will be about 73bn kilowatt hours, which is nine percent more than the previous year. The demand from manufacturing industries is anticipated to grow by 10 percent, and domestic use will increase by 8.5 percent. The numbers reflect the growth of the Uzbek economy, improvements to the lives of its people, and the positive changes taking place in Uzbekistan.

The reform programme initiated by President Shavkat Mirziyoyev aims to meet these increasing demands of a growing population and a diversifying economy. There is an urgent need to ensure an ample, uninterrupted supply.
The country’s power supply system stretches around 255,000km, more than six times the length of the equator. Included are 9,700km of 220-500kV main overhead power transmission lines delivering electricity to some 33m people as well as industrial facilities. Such a network requires constant updating and repair, modernisation and the introduction of innovative technologies. Unfortunately, nearly 62 percent of the electricity network is more than 30 years old. Distribution networks are worn, which leads to a large loss of electricity — more than 13 percent of the total supplied by thermal power plants.

Uzbekistan is striving to become energy sufficient, as well as efficient. A lot of its gas is being used for power generation, something which can be avoided. Gas is a valuable and finite commodity that could be more carefully utilised for better returns. The solution is to diversify energy sources and direct efforts towards renewable sources, as well as more traditional generation methods.

Projects have been identified for the construction of solar and wind powerplants with a total capacity of 8,000 megawatts, with the engagement of foreign and domestic investors. Other projects anticipate hydroelectric capacity rising, with plans for the construction of small hydropower stations in the private sector.

Uzbekistan is grateful for the support it receives from institutions including the World Bank, the European Bank for Reconstruction and Development (EBRD), and Asian Development Bank (ADB). They provide financial support and access to an international pool of expertise. Any organisation or company is only as good as the people working for it. The country has a highly educated population, but there is always a need for further learning and empowerment in the field of IT. A knowledge-sharing exercise is under way.

International co-operation efforts include the creation of a joint venture with Assystem, a French project management and engineering company, an agreement to undertake transmission and distribution projects within and without Uzbekistan, infrastructure activities, and a bid to update the national electrical grid.

A presidential decree was signed on November 23, 2016, for further modernisation and updating of low-voltage (0.4-6-10 kV) networks for 2017-2021. In 2020, 67.9bn kWh of electricity will be produced, including 61.4bn kWh at thermal plants and 6.5bn kWh at hydropower plants.

Total exports will amount to $128.8m (with $23.9m in the first quarter). In 2020, 2.15bn kWh of electricity will be exported to Afghanistan. At present, Uzbekistan has a total installed capacity of 15GW (gigawatts). Policymakers are aiming to double that by 2030, with nearly half of new capacity coming from renewable sources.

Consumption in the modern world comes with responsibility. Uzbekistan is working to implement modern management principles, corporate governance, and transparency in all entities. The country is aware of the high international standards of efficiency and monitoring of environmental impact.

Globally, the number of people without access to electricity fell to below one billion in 2017. This is great news — and not just for those gaining better opportunities. It’s also good news for the global economy. For the world’s remaining underdeveloped regions to participate in the global marketplace, universal access to modern forms of energy is essential. The big question is how these regions will develop capacity. In the increasingly globalised energy value-chain, they may play a vital role.

Recent progress in improving access to electricity has been concentrated in Asia. India has made significant advances. The biggest challenge remains in sub-Saharan Africa, where, according to the International Energy Agency, in 2017 there were still 600 million people with no electricity. The major task is not only connection to the grid, but a search for a sustainable addition of reliable power generation.

Reforms will only succeed with changes in attitude to efficiency, and increased understanding of strengths and weaknesses. The focus must be on minimising wastage and losses due to inefficiency, underinvestment and lack of accountability. Huge strides have been made in recent years, but there is a long road ahead.

Electricity has historically been a great enabler for economic development, social welfare and healthcare, and its role is increasing. Electrification of transport and heating defines the cornerstone of global energy supply. Contributing to the momentum is the promise of a cleaner supply, which will benefit the environment. Hopefully, these positive changes will bring an improved quality of life to many countries.

In 2020, three projects (totalling $978.4m) will be completed, including the construction of a first and second combined cycle gas turbine unit with an individual capacity of 280MW at the Takhiatash Thermal Power Plant. Also under construction is a second combined cycle gas turbine unit with a capacity of 450MW at the Turakhurgan Thermal Power Plant. A 17MW co-generation gas turbine unit at the Ferghana Thermal Power Centre and six power units (with a capacity of 150MW) will be upgraded and commissioned at the Syrdarya Thermal Power Plant.

Within the framework of state programmes, 2,718km of power transmission networks and 905 transformer points will be installed and reviewed, and 3,053km of transmission networks and 1,839 transformer points overhauled. i


SBM: Island Nation’s Bank Group Goes From Bit Part to a Starring Role

[caption id="attachment_16071" align="alignright" width="300"] Kee Chong LI KWONG WING, G.O.S.K. (K.C. LI) SBM[/caption]

SBM — aka the SBM Group, previously known as the State Bank of Mauritius — is a major player by any name.

The publicly listed company, the second-largest bank in Mauritius, has successfully positioned itself on the regional market. Over the past five years, under the watchful eye of group chairman KC Li, SBM is now playing in the top of that league.

With a growth strategy based on regionalisation, diversification and digitalisation, SBM’s total assets increased by a 80 percent — $3.35bn in 2014 to $6.04bn as at December 2018. Headquartered in Mauritius, with a strong capital base and liquidity position, SBM Group has responded to the constraints of a small market by focusing on regionalisation.

SBM has gone from a local retail banking services provider to a growing trade and investment facilitator in the Asia-Africa corridor.
Over the past three years, SBM Group has established a foothold on mainland Africa by acquiring the Fidelity Commercial Bank and selected assets and liabilities of Chase Bank Limited (in receivership) in Kenya. It is now a strong Top Tier 2 Bank. SBM Kenya is now making a healthy contribution to the financial growth of the group.

SBM has complemented its Kenya strategy with the conversion of its Indian branches to a fully-fledged subsidiary with a universal banking licence. With the opening of two more branches in India, SBM paved the way for further growth while diversifying its customer base within target segments of retail and corporate banking. SBM has now set the base for serving the end-to-end financial needs of global players operating along the Asia-Africa corridor — with Mauritius as the anchor point. SBM has increased the number of branches in Madagascar to six and enriched its presence in the Indian Ocean Rim by opening its first corporate office in the Seychelles.

To implement its regionalisation strategy, SBM had to reinvent its way of doing business and diversify its range of products and services. With clients looking for more sophisticated financial solutions, and to respond to the demand of the new markets where it operates, SBM introduced a series of modern banking, financial and non-financial solutions.

Diversification of its non-banking activities was aimed at meeting clients’ end-to-end financial needs. It also complemented the growth of banking entities across geographies. Under its non-banking cluster, SBM offers insurance policy or investment solutions, asset management and factoring solutions, as well as tailor-made wealth management solutions adapted for high-net-worth clients. SBM also provides advisory services with respect to raising debt and equity capital from investors for corporations, banks and sovereign governments.

Through its regionalisation and diversification initiatives, SBM was able to meaningfully participate in the issue and listing of the Afreximbank’s Depository Receipts two years ago. The choice for SBM as a partner was a clear recognition of its track record. SBM Capital Markets, the investment arm of group, has an experienced team of corporate financial professionals with a reputation for smoothly executing complex transactions.

The team acted as Lead Arranger for over-subscribed bond issues, including the SBM MUR1.5Bn ($40m) bond, the SBM $65m bond and SIT MUR1.5Bn notes. It was recently appointed as arranger and adviser on the Government Infrastructure Leverage Note, and has provided advisory services on multiple private equity deals.

SBM’s diversification strategy has been enhanced through successful partnerships with respected organisations. It was the first financial institution in Mauritius to collaborate with the leader of the digital financial service and lifestyle platform, ALIPAY, which is operated by Ant Financial Services, a sister company of Alibaba Group. The objective was to facilitate payments by merchants and Chinese tourists visiting the island — and to maintain good relationships with Asia.

SBM’s strategies have been enhanced by continuous investment in the research and development. SBM is aware that the growth of a business depends on its ability to adapt to new technologies. The world is converging on digitalisation, and people are getting connected at an impressive rate. In line with the technological developments around the world, the government of Mauritius implemented a digital transformation strategy — and so did SBM Group.

As a reliable financial services provider, SBM deepens its technological research and investment to find the best talent and to transform its services to digital. Back in 2015, SBM implemented a plan to allow its customers to do their banking online, and at their convenience. There was no longer a need to physically visit a branch.

The digitalisation plan began with the deployment of online services via internet banking and mobile apps on customers’ mobile phones and tablets. SBM offers customers easy access to their accounts, and has extended this same service to other countries where it operates, including India, Kenya, Madagascar and the Seychelles.

SBM’s digitalisation and innovation initiatives also consider the environment. SBM has set up an electronic signature system which allows the digitalisation of documents and forms, reducing paper consumption.

By partnering with giants from Silicon Valley — notably Consensys — SBM has been at the forefront in provoking debate on the introduction of blockchain in the banking and administrative systems, mainly as a tool to facilitate the KYC (know your customer).

The SBM Academy, launched two years ago, will be used for high-level training — including potential courses on the use of blockchain technology to improve efficiency and service in the financial sector.

SBM Group has evolved from being a retail domestic bank in Mauritius — capitalising on its strengths and experience and making use of the advantages that Mauritius offers as a financial hub — to become a financial institution with investment banking capabilities in the Indian Ocean rim. It facilitates trade and investment in the booming Asia-Africa corridor — in the interest and needs of its customers.


Lord Waverley: The EAEU is an Alternative to the EU — But Will It Last?

The Eurasian Economic Union (EAEU) spreads across Eastern Europe and Central and Northern Asia, covering some 20 million square kilometres and representing 180 million people.

But with concern about uniting principles — aside from removal of trade barriers — there is little keeping member countries engaged.

The project had been mooted since a 1994 speech at Moscow University by Kazakhstan’s Nursultan Nazarbayev. By June of that year, plans had been drawn-up for greater economic co-operation between Eurasian countries. The EAEU came into force in January 2015, and its economies today amount to a combined GDP of $5tn.

It developed from the Eurasian Customs Union, founded in 2010 between Russia, Belarus and Kazakhstan. It was further advanced with Armenia and Kyrgyzstan signing treaties in 2014 and joining in January and August 2015, respectively.

Designed as an alternative to Western Europe’s EU customs union, the EAEU seeks to unite former Soviet states and develop an integrated and cohesive economic entity. The EAEU aims to develop a comprehensive framework for a common market in three main sectors: energy, industry and agriculture. It seeks to do this through the removal of tariffs and non-tariff barriers, and by implementing greater economic co-operation and harmonisation of domestic policy.

The EAEU had early successes. It made a strong start to integration, creating three tiers of supra-national institutions:

Supreme Eurasian Economic Council, comprised of heads of states

Eurasian Intergovernmental Council, comprised of heads of government

Eurasian Economic Commission, which carries out the day-to-day work of the union.

Remove all internal customs borders, thus easing flow of goods, capital, services and labour between member countries has been notable. It has also gone some way in removing non-tariff barriers, which has caused member countries to modernise more swiftly — diversifying economies and developing more comprehensive infrastructure. It has also allowed for greater engagement by Russia and its neighbouring countries; prior to the EAEU, only five percent of Russian trade was with EAEU members.

With the EAEU focusing on economic issues, there is limited scope for political fallout between member states — allowing members to maintain political inde-pendence and divergence, without consequence. There is scope for future successes within the EAEU, especially in its specified sectors of energy, industry and agriculture — particularly if it can effectively co-operate on a macroeconomic scale.

The EAEU is not without its challenges. The relative speed at which the EAEU was created was made possible through Russia’s bilateral deals with individual member countries. This avoided complex and time-consuming multi-country negotiations, but the speed has come at a cost. Each country joined tentatively, and for differing reasons. The project was largely instigated by Russia, and member countries’ interest and commitment to the EAEU is waning.

Belarus has a strong reliance on Russian energy imports — in particular, oil and gas. It joined the union to strengthen ties to Russia and shore up energy sup-plies. Armenia had strong interests in the union’s security and economic benefits. Armenia had been nearing the conclusion of long negotiations with the EU when it decided to join the EAEU, drawn-in by reduced energy prices and security benefits in light of long-standing conflict with Azerbaijan. Kyrgyzstan relies on significant migrant labour remittances from Russia, and was interested in joining the union to expand access to the Russian labour market, and resultant financial assistance.

Kazakhstan, the second-largest economy in the union, had different reasons for joining. It desired greater free trade within the region to aid its developing economy, but was also interested in containing Russia via a regulatory agreement and framework. This is evident as Kazakhstan has made significant efforts to limit the EAEU to the economic sphere.

With terms on energy and trade loosely agreed at the EAEU’s conception, it is difficult for a comprehensive regulatory framework to be developed. The EAEU inter-governmental and supranational institutions are lacking in authority. Member countries are seemingly unwilling to cede any power or sovereignty to EAEU institutions, and are equally unwilling to abide by any new rulings.

With little-developed institutions, there is a great deal for member countries to agree on. This is hampered by competing objectives. Symptomatic of waning EAEU interest and commitment, some initial integration developments are beginning to unravel. The region is waiting to see if Uzbekistan — the most populous state in the region — will join.

Uzbekistan is increasingly seen as a rising star of emerging and frontier markets, a view validated by The Economist, which ranked it as the “most improved nation” in 2019. It has come a long way in liberalising economic and monetary policies and opening up to foreign and domestic investment over the past three years. Membership would strengthen the association.

A lack of strong governing institutions hampers long-term aims, however. Economic integration on the scale desired by the EAEU is unlikely between countries that lack common objectives. The lose agreements that facilitated the divergence and independence that drew member countries together, are the same mechanisms that are seeing the EAEU challenged.

It should be remembered that the journey, in the short 25 years since statehood was thrust upon members, could well see EAEU fulfilling potential to become a strong and inclusive economic union in a competitive common market. Iran and Mongolia have expressed an interest to join, which would expand the union’s landmass, population and collective GDP. There is talk of a single currency, too, but this long-term aim is not high on the priority list. What it signals is a view to develop the EAEU along the lines of the European Union.

Currently the EAEU faces two major issues. It lacks a comprehensive regulatory framework supported by common institutions and supranational governance. This hampers developments in policy, economic co-operation and growth. Secondly, member countries’ commitment is on the wane. Uzbekistan joining would be a shot in the arm.

Russia is struggling economically under Western sanctions. But the EAEU’s core function – to offer an alternative to the EU – remains clear and unwavering.


When Even Warren Buffett Is Clueless

[caption id="attachment_15235" align="alignright" width="300"] J. Countess/Getty Images[/caption]

You can bet on America, says Warren Buffett, before admitting that even he does not know what comes next. The phrase that defined this years’ Berkshire Hathaway shareholder meeting was ‘I don’t know’.

One of the world’s wealthiest self-made men and a celebrated source of de-hyped advice and common sense, Mr Buffett seems at a loss to explain the present moment and detect a future trend. In his folksy style, the billionaire investor on Saturday revealed that Berkshire Hathaway had exited the airline industry, selling its entire stake in American Airlines, Southwest, United, and Delta.

In this morning’s pre-market trading, the move caused a mini stampede for the exit with shares in US airlines dropping almost 10 percent, pushing the Dow Jones Industrial Average futures down by 1.2 percent.

Returning to the sector in 2016, Mr Buffett caused surprise and disbelief amongst his followers by acquiring 10 percent stakes in the four largest US carriers. Just nine years earlier he had vowed never to invest in airlines again after a major bet on US Airways went sour. Visibly annoyed with his misstep, Mr Buffett remarked in 2007: “If a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a great favour by shooting Orville [Wright] down.” Likening the airline industry to a bottomless pit, Mr Buffett deplored its ‘insatiable’ demand for capital and the volatile nature of the flying business. Berkshire Hathaway used most of the proceeds from its sale of airline stock, some $6.5 billion, to buy Treasury bills.

Now over his dalliance with airlines, Mr Buffett tried very hard to put on a brave face as he chatted online with Berkshire Hathaway shareholders. Whilst he peppered his talk with tired one-liners - ‘Nothing can basically stop America’ - what reverberated most were his ‘I-don’t-knows’. Investors’ spirits briefly rose when Mr Buffett assured them that markets would improve over the long term, only to dash all hope for a speedy recovery in the very next sentence by reminding participants that it took the stock market 22 years to reclaim the ground lost in the crash of 1929.

Offering neither pessimism nor optimism, Mr Buffett instead projected a sense of realism and let his wallet do most of the talking. Contrary to previous crises, Berkshire Hathaway is not snapping up undervalued or distressed companies for the proverbial song and dance. The company keeps a tight lid on its cash reserves, estimated to hover around the $137 billion mark.

The dark clouds of the Corona Recession will not ‘rain gold’. Earlier, Mr Buffett attributed part of his success in amassing a fortune for himself and Berkshire Hathaway shareholders to rushing out with a ‘washtub’ to catch some of that precious water pouring down from heavens darkened by an economic downturn. Not this time around: “Our position will be to stay a Fort Knox.”

On his company’s formidable pile of ready cash, Mr Buffett said that, given worst-case possibilities, it is not ‘all that huge’: “We don’t prepare ourselves for a single problem, we prepare ourselves for problems that sometimes create their own momentum.”

Webcast by Yahoo, the 2020 Woodstock for Capitalists was an event almost as depressing as the current times. Mr Buffett is not so sure that the financial sector can hold up when the chips start falling and warned that trouble in the retail, energy, and real estate sectors may cascade down to banks before long. In a flash of brilliance, Mr Buffett noted that it seems a good time to borrow money, “which means that it may not be such a great time to lend money.”

Investors took courage from the fact that the Sage of Omaha did not spell out a scenario of doom and gloom, but merely pointed out that the market lacks direction and moves on the hunches of investors willing to ignore the ravages on the pandemic on one day and getting ‘all shook-up’ over the carnage on the next. Berkshire Hathaway reported a net loss of close to $50 billion in the first quarter of the year.

As investors considered Mr Buffett’s advice, or rather the lack of it, markets were spooked by yet another spat between Washington and Beijing after US Secretary of State Mike Pompeo suffered a momentary lapse of diplomatic reason and revealed that the Trump Administration now possesses an ‘enormous’ amount of evidence connecting the corona virus to a lab in Wuhan, China.

Appearing on ABC’s This Week, Mr Pompeo lashed out at the country and promised to hold China to account over the outbreak. The former CIA chief accused the Chinese Communist Party of orchestrating a campaign to withhold evidence, deny outside specialists access to crucial data, and silence journalists and medical professionals trying to raise alarm.

Though Mr Pompeo declined to back up his allegations with hard proof, he did recall the sudden and inexplicable closure of the Shanghai lab that published the first genome sequence of the corona virus and shared its research with the global scientific community. On 12 January, the Hong Kong-based South China Morning Post reported that the lab at the Shanghai Public Health Clinical Center was ordered closed for ‘rectification’.

However, US officials who have read the intelligence report on the origins of the novel virus as circulated by the Department of Homeland Security say in private that the evidence cited by Mr Pompeo is largely circumstantial and based on an analysis of publicly available documents. Absent a smoking gun, they fear that pressure from an administration eager to assign blame to China may distort the findings not unlike the fake intelligence reports on weapons of mass destruction that sparked the 2003 invasion of Iraq. Also, most US virologists agree that the virus shows no signs of having been man-made or genetically modified.

Bracing for a second quarter that will likely see the US economy plunge to nearly unfathomable depths, the Trump Administration is readying a third infusion of cash for the Paycheck Protection Program to add to the initial $349 billion, which was exhausted almost instantly, and the $310 billion top-up authorised by Congress early last week and that has now also been mostly accounted for. Director Larry Kudlow of the National Economic Council on Sunday said the second tranche had taken far too long to materialise and that the delay added to the misery of workers and small- and medium-sized businesses. Mr Kudlow appealed to Congress to act faster on a future third addendum to the programme.

The Small Business Administration (SBA), charged with coordinating the disbursement of the loans, has managed to funnel more money to smaller companies after the agency initially approved payouts to large publicly traded corporations, some of which have now returned the funds. Over the last two weeks, the average loan size has decreased from $206,000 to $79,000 whilst the number of applications has increased significantly.

Meanwhile, a growing number of US business owners display a disconcerting reluctance to spend the emergency cash due to the bewildering number of evolving and often ambiguous strings attached to the loans. A minimum of 75 percent of the funds must go towards the payroll and has to be spent in eight weeks. If these and a host of other conditions are met, companies may request debt forgiveness.

Many business owners feel uncomfortable paying workers to sit at home for the duration of the pandemic. They fail to grasp the actual intend of the programme: to keep staff from losing their income. Instead, entrepreneurs wish to use the loans to retool their business for the new post-corona era, confident that they can then afford to re-hire employees.

From Mr Buffett down to the mom-and-pop corner shop, nearly all economic actors are almost desperately trying to look for reassurances in a world turned upside down and shaken thoroughly. With certainties far and few between, there is cold comfort in Mr Buffett’s advice to hold on and sit tight.


Spain NAB: Setting Agenda for Spanish Impact Investment Market

At an estimated €90m[1], Spanish impact investment is considered an incipient market by European standards[2], well behind Germany, France, Italy and even Portugal.

This market counts 14 impact funds[3], and has been developing slowly over the past 10 years out of individual private initiatives from different sectors interested in supporting and financing social enterprise.

This has taken place through projects linked to incubators and accelerators, and funds with below-market profitability expectations. Microfinance and ethical banking have been leading the charge, and are well-established actors of the ecosystem.

"The supply of capital for impact investment in Spain is limited. The investment culture is dominated by a dichotomy between philanthropy and traditional investment."

The most recent figures from the OECD[4] rank BBVA Microfinance Foundation as world leader in impact investing in developing countries, with some $ 1.2bn of philanthropic[5] debt instruments disbursed in the 2017-2018 period, followed by the Grameen CA Foundation with $37m. Caixa Microbank granted €773m in microloans to families, small companies and entrepreneurs in 2018, growing its loan portfolio to a total of €1.5bn.

In ethical banking, the total loan portfolio in Spain amounted to €1.5bn in 2018[6].

These actors — led by three pioneers: Eurocapital EAF, Open Value Foundation, and UnLtd Spain — got together in 2018 to create a National Advisory Board for Impact Investment, called Spain NAB, to join the GSG (Global Steering Group for Impact Investment) by June 2019.

Working with more than 70 organisations from the Spanish impact investment sector to identify the main roadblocks for supply, demand and intermediation, and to build a consensus on the measures required to grow the market, Spain NAB has created a cohesive community with a clear agenda.

This consists of five recommendations prioritised from the more than 100 produced. Spain NAB has ambitions to grow the market four times by June 2021, to a figure of some €360m.

The recommendations:

1. Strengthen social enterprises through incubators and accelerators
Supporting social enterprises in the initial stages of their development is a good strategy to generate positive impact on society in the medium and long term. Some companies have difficulty accessing financing due to their hybrid nature. Spanish incubators and accelerators play a key role in strengthening and training social enterprises from the social economy, as well as those set under common corporate law. Supporting the work of these entities, and their capacity to offer technical assistance and financing, is vital to developing the full potential of social entrepreneurship and the impact investment market.

1.1 Creation of an alliance of social incubators and accelerators to share best practices, standardize processes and cover the different needs of social enterprises.

1.2 Creation of a support programme through subsidies (or adaptation of existing ones), with public and / or private capital, to cover the costs borne by social incubators and accelerators to support and offer technical assistance to entrepreneurs.

1.3 Creation of a financing vehicle, with public and / or private capital with no expectations of financial return, for social enterprises in their initial phases (idea / pilot).

1.4 Creation of a financing vehicle, with public and / or private capital, for social enterprises in seed and start-up phase.

1.5 Creation of a financing vehicle, with public and / or private capital, for innovation and transformation projects at consolidated social enterprises.
2. Attract public and private funds to catalyse impact investing

The supply of capital for impact investment in Spain is limited. The investment culture is dominated by a dichotomy between philanthropy and traditional investment. As a result, the financing needs of social enterprises are often left unfulfilled.

Since the initial rounds of financing are usually too small and risky for most investors, it is essential to create hybrid instruments catering to the needs of social enterprise. This catalytic capital should lower risk of projects with below-market returns but high potential.

2.1 Use of domestic and supranational public resources to catalyse new impact funds and reinforce existing ones

2.2 Capture Structural Funds from the European Union (2021-2027)

2.3 Create a specific vehicle to invest in different risk-return-impact strategies such as technical assistance, and blending

2.4 Create and distribute dedicated impact funds by private capital asset managers and financial institutions

2.5 Incorporate social and environmental impact variables in the financing offered by financial entities and fund managers

2.6 Participate in the drafting of the Sustainable Finance Plan of the European Union to reinforce the importance of impact investing to institutional investors

2.7 Promote an EU harmonised legal framework (regulatory and fiscal) for venture capital entities qualifying as EuSEF and improve the tax treatment of financing instruments under EuSEFs

2.8 Promote public and private investment instruments that foster innovative structures to enhance social impact.
3. Relying on the capital and knowledge of foundations to boost impact investing

Foundations provide capital and technical assistance to organisations and social enterprises. In many GSG member countries, key initiatives in market development were funded by private foundations.

A key element is the alignment of the missions of foundations with their fiduciary responsibility through impact investing. This has been possible because domestic regulatory bodies have eliminated legal barriers that were preventing foundations from investing according to beyond-profit-maximisation criteria.

Another way to contribute to the growth of the sector is through hybrid instruments in which impact investing is supported by venture philanthropy.

3.1 Clarify the regulatory framework (state and regional) to allow foundations to make mission-related investments, both through their endowment and reserves and their annual budget, based on revenues and income

3.2 Raise awareness and train foundations on the possibilities to use impact investing for mission fulfilment

3.3 Create a joint pilot financial vehicle between several foundations to allocate part of their endowment to impact investments

3.4 Use endowments and reserves of foundations to create new vehicles of patient and hybrid capital that invest through a combination of equity, debt and non-refundable contributions

3.5 Promote venture philanthropy from foundations to support social organizations towards internal transformation processes and financial sustainability

3.6 Promote venture philanthropy from foundations to support social enterprises in their initial stages of development

3.7 Use the budget of foundations to build part of the infrastructure required for the development of the impact investment market (studies, databases, spreading of initiatives).

4. Promote outcomes-based contracts to foster social innovation

Payment-by-results contracts (PbRs) or Social Outcomes Contracts (SOCs) represent an innovation in public procurement and in the provision of social services in Spain.

SOCs represent an obligation for the contracted party to deliver certain impact results instead of specific benefits or services in order to get paid. In these contracts, payments are subject to achieving pre-agreed social impact objectives and require impact measurement. SOCs such as the Social Impact Bond (SIB) have received attention. Here, a public administration commits to pay some investors their initial capital — plus a return based on the results/outcomes delivered by a social provider versus some pre-agreed goals.

SIBs are a tool to align the interests of public administrations, service providers and investors towards preventive and innovative solutions for the “wicked” problems. SIBs can also help to achieve measurable social impact. There are currently several initiatives regarding implementation of SIBs in Spain, with the Barcelona council and the government of Catalunya, the Madrid council, the government of the Basque country, and the government of Navarre.

4.1 Give greater visibility to PbRs that are being implemented in Spain and abroad to raise awareness, and train relevant actors

4.2 Train public administrations on the opportunities offered by PbRs

4.3 Experiment with public policies that promote payment-by-results contracts and evidence-based policies, in order to introduce these mechanisms in the new Public Procurement Law

4.4 Establish a line of financing from the central administration, along with philanthropic resources, which could be blended in to pay for feasibility studies and PbRs design

4.5 Promote the creation of outcomes funds from public administrations to co-finance and expedite implementation of PbRs for innovative projects addressing problems

4.6 Create a pilot for a PbR scheme in which an alliance of foundations acts as the “outcomes payer”

4.7 Establish PbR-dedicated impact investment funds.

5. Create knowledge and market infrastructure to build an impact economy

Market infrastructure is pivotal for the development of new markets. Other countries’ experience demonstrates the importance of having solid and diverse financial and non-financial intermediaries, as well as raising awareness, and training different groups.

Despite a growing interest in impact investing, Spanish actors from the public, social and financial sectors highlight lack of knowledge on the subject as a big challenge. Dedicating resources to research and training is key to providing the knowledge and tools required. Promoting a culture of impact measurement and management is imperative.

5.1 Conduct studies to better understand the characteristics of the sector, for example on the financing needs of social enterprises at each stage of development, or to collect both the social and financial track record of Spanish social enterprises

5.2 Emphasise communication regarding impact investing to increase visibility of domestic and international success stories

5.3 Training on the potential of impact investing for relevant actors in the social, public and private sectors

5.4 Promote the measurement and management of social impact through commonly accepted methodologies and tools

5.5 Create an evidence-based interventions database, including information on PbRs, to share knowledge among public administrations at all levels

5.6 Create a unit costs database to allow measuring and comparing of impact from specific social interventions

5.7 Training and awareness-raising for the new generations to increase perception and understanding of companies as key actors in solving social and environmental challenges.

Spain NAB’s agenda aims at advancing the 2030 Agenda in Spain, leveraging on international experiences and best-practice to mobilise public and private capital to solve the most urgent challenges facing us.

Spain NAB will be working on several projects. The main one is the taskforce on SOCs and Outcomes Funds launched in alliance with Fundación COTEC on an event organised by the Madrid council and Open Value Foundation on January 14. Through September 2020, the taskforce will work with commissioners, social purpose organisations and intermediaries to explore international and domestic initiatives and experiences, and identify barriers and best practices, including the creation of an outcomes funds. Through this taskforce, Spain NAB will produce a toolkit for main users of SOCs (commissioners and social purpose organisations). The taskforce will work on the existing legal and regulatory barriers, which will result in a proposal for a regulatory sandbox, which could allow interested parties to experience with SOCs in a safe and friendly environment.

Footnotes

[1] ESADE and Foro Impacto, 2019, p 26. Hacia una Economía de Impacto: Recomendaciones para Impulsar la Inversión de Impacto en España. www.foroimpacto.es
[2] Maduro, Pasi, Misuraca, 2018, pp 41-45. Social Impact Investment in the EU
[3] ESADE and Foro Impacto, 2019, Anexo 2, p 65. La inversión de impacto en España: Intermediación de Capital. www.foroimpacto.es
[4] OECD DAC statistics, January 2020. Private Philanthropy for the SDGs.
[5] Include foundations’ PRIs and MRIs, impact investments and other non-grant activities with the main goal of promoting economic development and welfare of developing countries.
[6] Barómetro de las Finanzas Éticas y Solidarias, 2018.

About the Authors

[caption id="attachment_15259" align="aligncenter" width="300"] Author: Laura Blanco[/caption]

Laura Blanco is director of knowledge and outreach for Spain NAB, the Spanish National Advisory Board for Impact Investment. Since 2017, she has been studying strategies and instruments for sustainable investments, with a focus on impact measurement methodologies while working as head of research for Nakatomi Capital’s private equity group. Prior to that, Blanco was an investment manager at Baring Asset Management. She started her career in New York as an equity analyst working for UBS and Credit Suisse, earning a spot in both Institutional Investor and Latin Finance Research Olympics. In 2006, she moved to Hong Kong as a principal of fintech start-up Lusight Research to open the Asian market. She holds an MBA from NYU Stern School of Business.

[caption id="attachment_15260" align="aligncenter" width="300"] Author: José Luis Ruiz de Munain[/caption]

José Luis Ruiz de Munain is the CEO of Spain NAB and founder of its Secretariat, Foro Impacto, which successfully led the process of Spain's entry to the GSG in June 2019. He is a founding trustee of UnLtd Spain, a social entrepreneurship accelerator, and Senior Advisor of the International Venture Philanthropy Center (IVPC), a center of international excellence aiming at creating a Latin American Network of Venture Philanthropy. He has been a consultant for public, private and third sector entities, such as the IDB Lab, PwC, CECA or BBVA, and professor and lecturer in several business schools and universities. He holds a bachelor in Economics and an MBA from IE Business School.


Schalke 04 Fighting for Its Life and Soul

Ausgliederung. What wrecked the deep emotional bond between British football fans and their club is now coming to Germany: The privatisation of the beautiful game. Diehard supporters would probably prefer to describe the trend as a ‘corporate sell-out’ that changed the dynamics of the game forever by exposing it to big money.

With about 160,000 active members, Schalke 04 is one of the largest sports associations in the world. Its eponymous football squad usually dwells in the upper echelons of the Bundesliga whilst the club’s lesser known but equally competitive handball, basketball, athletics, table tennis, and winter sports teams also claim more than their fair share of trophies.

Just five years ago, Schalke 04 was firmly established as one of the richest football clubs in the world with an estimated worth of some €650 million. Last year, Schalke 04 generated well over €270 million in operational revenue. However, all is not well in Gelsenkirchen, the rather drab industrial city in North Rhine-Westphalia that is home to the club since its founding in 1904.

The mid-season suspension of the Bundesliga due to the corona pandemic has caught Schalke 04 short and brought to light a number of major management debacles that now threaten to financially ruin the club. According to Kicker, a well-respected German football magazine, Schalke 04 urgently needs the €16 million in television rights it is owed to keep the liquidators at bay. However, a number of broadcasters, including Sky Sports and ARD, have stopped all royalty payments to clubs.

Due to its status as an association, Schalke 04 is unable to bring in outside investors. Over the past decade, the club has also taken on a debt, now approaching €200 million, in order to keep up with privatised competitors.

Placed sixth in the Bundesliga when the competition was suspended in March, Schalke 04 may miss out on European championship games altogether if the club fails to secure a string of home-turf victories when the league resumes on May 15. However, in the remaining ‘phantom’ matches Schalke 04 will suffer more than most the absence of its ‘twelfth man’.

The remainder of the German competition will be played without the presence of fans. The club now desperately needs to win its next games in order to claim a ticket for the qualifying rounds of the Champions League – the only sure way out of its financial predicament.

Schalke 04 supporters, a particularly vocal lot, have resisted attempts at ‘ausgliederung’ and refuse to consider any statutory changes that would undermine their considerable say in the running of the club. They suspect that the cash crunch caused by the corona pandemic is being used as a way to force through the detachment of the main football squad from the association and set it up as a private business.

Schalke 04’s chairman and fan Numero Uno, Clemens Tönnies is worth an estimated $2.1 billion and would not at all mind to shovel a fair bit of his cash into the club. He is, however, quite reluctant to suggest such an investment to the fans as it would necessitate a number of fundamental changes to the club’s organisational structure. Mr Tönnies, who owns a string of meat packing plants, does not seek power and is quite attached to tradition. He would much prefer to keep things as they are and understands the passions that Schalke 04 arouses in Gelsenkirchen.

Still, the club’s regional nemesis Borussia Dortmund has completed its privatisation ordeal and is now run as a private business. It was, in 2000, the first German football club to obtain a listing on the Frankfurt Stock Exchange. The corporate makeover has fattened Borussia Dortmund’s cash reserves and significantly increased the club’s buying power.

Another regional rival, Bayer Leverkusen, also separated its football squad from the association and has since gained access to a considerable pool of money. However, Schalke 04 supporters deride Bayer as a ‘plastic club’ that lacks passion and fails to inspire loyalty. With its family-friendly image, the squad from Leverkusen is the odd one out in the Bundesliga and, say Schalke and Borussia fans in rare unison, as such well suited to be run as an extension of Bayer AG, the chemical giant that is the club’s long-time sponsor.

After revenues from ticket sales and television rights have dried up, Schalke 04 had to face a severe liquidity crisis. Just before the pandemic struck, club management had repeatedly and embarrassingly dropped the ball by failing to secure the timely renewal of player contracts which allowed a few of them to escape transfer-free. It is estimated that Schalke 04 over the past few years missed out on $100 million or more in transfer fees.

Schalke 04 star players departed in droves: Leon Goretzka slipped away to Bayern München, Joël Matip signed with Liverpool, and Sead Kolasinac found his way to Arsenal – all without their former employer being any the wiser. The haemorrhaging of players continued this year with the departure of Alexander Nübel, the exceptionally talented goalie who followed Mr Goretzka to Bayern München.

Though Schalke 04’s name and reputation remain formidable as ever, the club’s depleted cash reserve prevents the signing on of top talent. A good player with potential is hard to secure for less than $20 million. It is the sort of money that Mr Tönnies can perhaps spend without flinching, but not his club.

Schalke 04 supporters argue that their emotional bond with the team is priceless and should not be monetised. They take pride in the fact that Schalke 04 players immediately agreed to forego part of their salary to help keep the association’s 400 workers employed. That, and the willingness of season ticket holders to waive refunds for games not played, shaved almost $10 million off the club’s expenses.

Management has opened discussions with members to explore possibilities. One is to sell or mortgage the domed Veltin-Arena which the association owns outright. The club’s extensive training grounds, occupying prime real estate, may also be mortgaged.

Schalke 04 supporters remain adamant that their club will not be privatised, even if that means a lower average ranking in the Bundesliga and foregoing European football – the cash cow of most major football teams. However, the crisis at the club may soon become existential in nature should the squad, deprived of key players, fail to work a miracle.

The corona pandemic has affected football clubs the world over. In Belgium, second tier FC Lokeren was declared insolvent by a Dendermonde court in April, just months before the club was to celebrate its fiftieth anniversary. FC Lokeren now hopes to merge with a local amateur club and so at least see its name survive.

However, it is rare for troubled football clubs to disappear altogether. In Germany, France, and The Netherlands, municipal authorities often step in to ensure the survival of the local club. Richer clubs in Germany have already promised to help out rivals stricken by the pandemic with millions in subsidies. Dutch Ajax and English Chelsea both have plenty of cash to spend and hope to benefit handsomely from a depressed transfer market.

Meanwhile, really big clubs with almost limitless financial firepower before the pandemic struck, now struggle to recoup risky investments in promising but yet unproven players made in pre-corona times. Barcelona ‘bought’ Ousmane Dembele for €105 million in 2017 but even at half price can find no buyers for the Senegalese forward.

Barcelona President Josep Bartomeu thinks cash transfers are out and player swaps the new normal. It is a public secret that Mr Bartomeu wants to bring Brazilian star striker Neymar to Barcelona. He is working on what the Spanish press has already dubbed the ‘swap of the century’ that will see Neymar, now under contract with Paris Saint-Germain, possibly exchanged for a number of Barcelona players.

In Europe, football is big business with annual revenues bordering €30 billion. The pandemic caught most clubs on a financial high. The game will survive just as it did during the Great Recession of the late 2000s when revenues slumped to barely €16 billion. Hard times require clubs to live within their financial means. To accomplish that, player salaries – the clubs’ biggest expense – will be slashed.

Financially supercharged by the proliferation of pay TV, player budgets have become bloated in a sort of merry-go-round that increases the volumes of cash being pumped through the sector without necessarily improving the quality of the sport. Precisely the point Schalke 04 supporters have been trying to make all along.


Private Equity Takes Care of Its Own

The creativity displayed by private equity fund managers when snapping up companies and squeezing out profits has apparently evaporated into thin air. The industry claims to have no clue how to help the companies sitting on its books. Most of those businesses are saddled with outsized debts that were heaped onto their balance sheet by owners in a particularly cruel, but perfectly legal, twist that has companies pay for their own acquisition.

Barely tolerated in normal times for its supposed meddling, the state is now being invited to step in and rescue the sector. However, the invite has been declined. US lawmakers included an affiliation rule in the $2 trillion CARES (Coronavirus Aid, Relief, and Economic Security) act to disqualify companies owned by private equity funds. For legal purposes, these businesses are not considered individual corporate entities, but part of a larger conglomerate. Earlier this week, the US Federal Reserve updated, tightened, and clarified CARES eligibility criteria, confirming the exclusion of companies owned by private equity funds.

The American Investment Council (AIC), the industry’s main trade body and lobby group, was unable to sway lawmakers with the argument that businesses owned by its members are every bit as much a part of the fabric of society as any publicly listed or privately held company. AIC hopes that Washington may yet lift the restriction after mass market fashion retailer J.Crew, owned by two private equity funds and operating 506 outlets across the country, last Monday filed for bankruptcy protection and became the first large US chain store to fall victim to the corona pandemic.

However, the plight of J.Crew showcases the predatory business practices of an industry that is not only Wall Street’s most profitable but also its wildest and most daring. The retailer was driven into near-insolvency not by a pernicious virus but by a carefully constructed plot to extract every available penny from the company and leave it a hollowed-out shell with no pickings left for creditors.

In 1997, TPF Capital acquired the company from its founder and took the business public six years later. However, in 2011, the private equity firm teamed up with Leonard Green Partners to delist J Crew in a $3 billion leveraged buyout, i.e. putting up the company’s assets as collateral for the loans raised to finance the transaction. Shareholders reluctantly agreed to the proposed deal.

Almost immediately after taking possession of the retailer, the new owners forced the company to borrow another $800 million or so in order to pay them dividends. After years of largely neglecting the operational side of the business, the private equity partners in 2016 pioneered a novel raiding technique that became known to industry insiders as the ‘J.Crew trapdoor’.

First, the company set up an unrestricted subsidiary in the Cayman Islands to offshore and shelter its intellectual property, including all tradenames and fashion brands. It then took out a $300 million loan against its brand names and used that money to repay the junior debt owed to its owners. Still burdened by a $2 billion debt load, J.Crew in 2017 managed to organise a debt-for-equity swap, offering creditors $200 million in new bonds and a 5 percent stake in the company in return for $500 million in debt write offs.

By offshoring J.Crew’s most valuable assets and using their company to take on additional debt, TPG Capital and Leonard Green Partners managed to recover the full value of their investment whilst other debtholders had to accept a significant write down. The trapdoor was designed in such a legally refined way that all attempts at holding the company or its banks to account came to naught.

Private equity (p/e) raiders have always been keen to exploit the retail sector. Over the last decade, p/e funds have acquired over 80 store chains and drove a fair number of them into the ground. Since 2012, 10 out of the 14 bankruptcies of major US retailers were of companies owned by private equity investors.

Whereas the corporate raiders of the 1990s (Barbarians at the Gate) could reasonably justify their ruthless approach to business as a necessary exercise in corporate sanitation via the trimming of bloat, their successors apparently display little or no interest in their companies’ health or long-term viability, using them instead for asset stripping and as cash cows to maximise instant returns to the detriment of future prospects and, more often than not, creditors.

With bond maturities looming, and high ongoing interest payments, J.Crew was ill-prepared to face the sober retail environment that emerged out of the pandemic. The proposed IPO (initial public offering) of its Madewell store chain, tagged for a listing on the New York Stock Exchange, was meant to bring in a measure of financial relief but got cancelled as the market turned sour.

Meanwhile, the US Federal Reserve has signalled that it will buy up corporate bonds under its relief programme only down to a BB- rating, just into ‘speculative’ (junk) territory. However, this floor excludes large but severely stressed corporates such as Hertz, JCPenney, and fracking pioneer Chesapeake Energy.

Hertz is said to prepare to file for Chapter 11 bankruptcy protection although its lenders earlier this week threw the company a lifeline to allow management time to figure out a way forward.

Suffering not one, but two leveraged buyout by private equity funds, upscale retailer Neiman Marcus now carries a $4.8 billion debt burden whilst its most – In fact only – lucrative business unit, online retailer MyTheresa, was stripped out of the company and parked in a shielded entity directly controlled by its p/e owners. Concerned creditors are reportedly ready to submit a fraudulent conveyance suit to the courts as soon as Neiman Marcus files for bankruptcy.

A purveyor of $70,000 airconditioned doghouses and $475,000 custom made perfumes, amongst other basic necessities for the discerning and opulent patron, Neiman Marcus occupies a retail perch that is widely considered a safe haven in recessionary times yet the company barely manages to get by as the same customers it sells to have raided its accounts, in a twist not devoid of irony.

S&P Global Ratings fears that the J.Crew bankruptcy may be the beginning of a ‘broad retail shakeout’ and justifies its pessimism by pointing to the CCC or lower credit rating assigned to fully one third of the stores and restaurant it covers. At this level, companies only have a 50/50 chance of meeting their financial commitments and are considered highly vulnerable to adverse economic conditions. The agency expects the rate of default in the retail and restaurant sector to spike by 20 percent or more over the coming months.

Sitting atop a cash hoard amounting to hundreds of billions, US private equity funds are unlikely to suffer more than most from the fallout of the pandemic. In fact, most Chapter 11 filings will merely serve to lighten the debt burdens carried by portfolio companies, hurting bondholders and outside creditors whilst keeping present ownership structures mostly intact and enabling a quick restart that allows the p/e business to resume the boom-and-bust cycle that has become its hallmark.


A Troubling Edict from Karlsruhe

[caption id="attachment_15286" align="alignright" width="300"] Sign at the entrance to The Federal Court of Justice in Karlsruhe, Germany. [/caption]

The European Union is facing the sharpest contraction of economic output since its founding in 1957. This year, the EU’s GDP is set to shrink by 7.4 percent. The steepest declines occur along the northern rim of the Mediterranean in Greece (-9.7%), Italy (-9.5%), and Spain (-9.4%).

Now outside the union, the UK is facing the deepest recession of all European countries with its GDP forecast to lose over 14 percent, according to the Bank of England. This shockingly large pullback compounds the economic adversity caused by the country’s departure from the EU and the increased likelihood that it will lose unfettered access to the union’s internal market as of next year. Negotiations on a comprehensive free trade deal are bogged down over a series of technical issues and may not be concluded in time to prevent a ‘crash out’ scenario.

In Brussels, the corona pandemic has pushed the UK’s plight down the list of priorities. Chief EU negotiator Michel Barnier has received instructions to not indulge the opposing team. He is specifically not to entertain any notions of British exceptionalism and has been told to limit his offer to a barebones off-the-shelf trade deal on a take-it-or-leave-it basis. Given the severity of the Corona Recession, EU diplomats indicated that patience is wearing thin as other more pressing issues need their attention.

Earlier this week, the German Constitutional Court (Bundesverfassungsgericht) in Karlsruhe ruled that the European Central Bank (ECB) failed to observe the principle of proportionality in its Public Sector Purchase Programme (PSPP), aka quantitative easing, that propped up the sagging Eurozone economy between 2015 and 2018 and was restarted last year.

Though the court was at pains to explain that its ruling does not apply to the ECB’s current pandemic-inspired asset buying efforts (PEPP - Pandemic Emergency Purchase Programme), the ruling surprised the market as the judges clearly indicated their unease with the central bank’s largesse. So far, investors are in a holding pattern not quite sure what to make of the judges’ intervention.

The court asked the Bundesbank to stop buying government bonds under the ECB programme in three months’ time unless the European Central Bank can show that these purchases are necessary and serve a well-defined purpose. Analysts fear that the judges may next turn their attention to Germany’s role in the much larger PEPP, potentially derailing the ECB’s entire support effort and preventing the bank from underwriting the post-corona economic recovery project currently being hammered out.

The ECB must explain its actions to the German parliament within three months and seek its approval. If the bank fails to obtain a green light, the Bundesbank must immediately end its participation in the PSPP and clean up its balance sheet, i.e. sell all bonds that were acquired under the ECB programme.

The case on which the court ruled was brought five years ago by a group of about 1,750 German academics and politicians who questioned the legal status of the ECB and pointed out that the bank is not subject to democratic oversight. The plaintiffs also argued that it is not the job of the central bank to ensure the survival of the euro but merely to keep the currency stable and ward off inflation. Market watchers do not doubt the willingness of Bundesbank President Jens Weidmann to implement to court’s instructions to the letter.

The full extent of the ruling, and its many implications, have not yet been absorbed as legal experts dissect the edict from Karlsruhe. Some consider the German ruling a slap in the face of the Europe Court of Justice (ECJ) which has repeatedly confirmed the ECB’s independence.

In its initial reaction, the ECB seems unimpressed and indicated it plans to stick with previous ECJ rulings. Not unreasonably, it considers the Luxemburg-based court to be of a higher legal standing than the German Constitutional Court. The ECB is not expected to give explanations to parliamentarians in Berlin or elsewhere since the bank greatly values its political independence and will not want to set a precedent. ECB President Christine Lagarde may, perhaps, consider an informal chat with members of parliament in order to help diffuse the awkward situation.

However, legal experts also note that the German court does have jurisdiction over the Bundesbank and can force that central bank to end its participation in ECB asset purchase programmes. Without the full backing of the Bundesbank, by far its most important member, the European Central Bank would be reduced to a footnote.

Guy Verhofstadt, leader of the Alliance of Liberals and Democrats (ALDE) in the European Parliament, yesterday said that the German court is acting rather irresponsibly and undermining the functioning of the union: “When national judges of the 27 member states are allowed to question any and all EU decisions, the union will cease to function and exist.”

Though the concerns of the German judges can easily be understood by taking into account their country’s phobia of debts and deficits, the ruling may inadvertently hasten the creation of the transfer union dreaded by the EU’s more prosperous northern member states. There are but two ways to finance the rebuilding of economies ravaged by the corona pandemic: one is to create money out of nothing and the other entails turning up the fiscal pressure in the north to free up cash for the less well-off south.

The first option is the easiest and politically more acceptable of the two. The ECB just monetises the problem and may, as an added benefit, spur consumer spending by introducing a modicum of inflation. Since it is largely a technical exercise, the injection of vast amounts of cash into the depressed European economy via asset purchases is a relatively painless way of providing financial help without directly burdening already disgruntled northern taxpayers.

The fiscal solution apparently preferred by the constitutional court in Karlsruhe is, however, a hot potato – and that may count as an understatement of British proportions. As the acerbic discussion over eurobonds has amply demonstrated, any talk of fiscal transfers from north to south instantly gets the Frugal Four (Austria, Denmark, Sweden, and The Netherlands) and their hangers-on (Germany, the Baltics) up in arms. Dutch Prime Minister Mark Rutte realises all too well that merely broaching this topic equates to political suicide and would invite a massive sweep by nationalist parties in next year’s elections.

Though perhaps well intended and of course legally unimpeachable, the ruling of the German Constitutional Court is also unhelpful. As the economies of Europe plunge to almost unfathomable depths, this is perhaps not the most appropriate time to engage in legalistic nit-picking. Working for decades on end, with varying results, towards the convergence of disparate European nations, the EU must act fast and decisively to prevent the corona pandemic from driving an even deeper wedge in the north-south divide that plagues the continent.

Given that fiscal transfers will only widen that split to a point at which the union falls apart into bickering blocs, the solution to the conundrum lies with the ECB and its ability to create the cheap credit needed for the recovery. The central bank may even be lightly prodded to boost the ‘narrow’ M1 money supply with freshly minted euros, as opposed to just adding bonds to its balance sheet, in order to stimulate growth – and inflation. Monetising may not look pretty but is a lot more palatable to northern politicians than the alternative which may be construed as having, say, a German worker pay for an Italian’s pension.


Optimism in the Face of Disaster

Xavier Becerra

[caption id="attachment_15289" align="alignright" width="300"] California Attorney General: Xavier Becerra / Source: Getty Images[/caption]

Don’t apply for benefits, ask for a job. US unemployment centres are now hiring. In a single month, a virus invisible to the naked eye has wiped out a decade’s worth of job creation. In April, more than 20 million American workers filed for unemployment benefits. Morgan Stanley Chief US Economist Ellen Zentner expects the jobless rate to show some inertia yet and hit 16.4 percent next month – a level not seen since 1933 when a quarter of American workers was idled.

Back then, it took the Great Depression a full four years to push the unemployment rate to 25 percent – a seven-fold increase over the 3.2 percent registered in 1929 at the start of the long and steep downward slide. Economists and statisticians broadly agree that contemporary history offers no parallel to the speed with which the pandemic destroyed jobs.

For now, the only remaining hope is that once the virus has worked its way through society, the economy may be shifted into overdrive to make up for lost time and get people back into work. However, even the most sanguine of market watchers do not expect the unemployment rate to return to its pre-corona level for many years.

The non-farm payroll numbers published today by the US Bureau of Labor Statistics (BLS) do not include job losses outside the formal sector. According to Paul Ashworth of Capital Economics, an extrapolation of the latest data coming out of the Labour Department points to an overall US unemployment rate of 23 percent.

In its April report, the BLS recorded 20.5 million new applications for unemployment benefits, pushing the official jobless rate for the month to 14.7 percent. In February, only 3.5 percent of US workers were without a job – a 50-year low for which President Donald Trump took credit. The dismal news was taken in stride by Wall Street where Friday morning futures pointed to a strong opening of trade. Investors took heart from the soothing noises made by US and Chinese trade officials. European markets opened on a high as well.

Regarding the BLS report, Mr Ashworth remains cautiously optimistic and expects a significant part of the newly unemployed to be back at work within weeks after the end of lockdown. Economists at the Federal Reserve agree. In an analysis published late last month, they conclude that most layoffs are directly attributable to the temporary suspension of business activity. The study’s authors expect the unemployment rate to settle around the 7 percent mark by the end of the year.

US market analysts turn out to be an exceptionally upbeat lot. At Citigroup, chief economist Veronica Clark is convinced that the worst has already past and that most of the current claims for unemployment benefits are filed by people unable to do so in previous weeks when systems processing the paperwork were overloaded and unable to cope with the surge in demand.

According to a study by the University of California Santa Cruz, millions of Americans precariously employed in the gig economy, and often classified as ‘independent contractors’, fall through the cracks in the system and are amongst those most affected by the pandemic. Whilst app-based companies continue to pour money into a ballot initiative that would exempt them from employer regulations, gig workers such as delivery drivers go without sanitisers, gloves, masks, and information. Companies fear that supplying these essentials could possibly undermine the legal standing of their ‘associates’ and be construed as evidence of the existence of a more traditional, and much more expensive, employment relationship.

“Food and grocery delivery has been deemed essential work, and these workers are putting themselves at risk, but they are not getting adequate support or protection,” says Professor Chris Brenner who co-authored the study. The university’s survey of ride-hailing and food-delivery workers found that 21 percent of those queried had no form of health insurance and 13 percent depended on food stamps in order to get by. Almost half of the workers queried were unable to meet a $400 emergency expense without borrowing money.

Though the average weekly (pre-corona) takings reported by ride-hailing workers hover around $900, once adjusted for expenses using the same criteria as those employed by the Internal Revenue Service (IRS), one in five drivers often see their net earnings reduced to zero. “Fully 20 percent of these people actually pay to work,” says Prof Brenner. The results of the study are all the more remarkable because San Francisco boasts some of the toughest fair-labour standards in the US.

On Tuesday, California Attorney General Xavier Becerra said that he will sue app-based ride-hailing companies under a new law for misclassifying their drivers as contractors in an attempt to deny workers their rights and the state its taxes.

In the UK, gig economy workers are also left without much recourse. The country’s estimated five million self-employed are not covered by the government’s pledge to subsidise up to 80 percent of the wages of furloughed employees. Gig workers have only been offered limited tax relief and may draw the equivalent of $112 (£94) in benefits, an amount that comes nowhere close to covering basic living expenses. The Trades Union Congress, which represent over 50 British labour unions, has called on the government to extend its financial assistance programmes to include self-employed workers.

In a filing with the Securities and Exchange Commission, Uber announced its intention to fire 3,700 workers – about 14 percent of the company’s global workforce. Uber engages close to 14 million drivers worldwide who it qualifies as contractors even though they must comply with a vast set of regulations stipulated and enforced by the company. Uber’s closest competitor Lyft this week also announced a new round of firings whilst Airbnb already sent a quarter of its workforce home. WeWork, an app-based real estate company that offers start-ups shared office space, no longer has work for 250 employees and intends to fire more people later this month.

With their business model dependent on shared spaces – inside taxis, homes, hotels, and porticoes – gig companies may suffer a delayed rebound of their fortunes as app-users remain reluctant to occupy rooms or vehicles that may not have been properly disinfected. Both Uber and Airbnb this week updated their cleaning policies and standards with the latter offering guest the possibility to book a room, house, or apartment that has not been rented out in the three to seven days prior to their arrival.

Writing in The New York Times, Professor Paul Krugman of the City University of New York meanwhile wonders why conservatives in US Congress remain adamantly opposed to strengthening the social security safety net. Senator Lindsey Graham, a Republican from South Carolina, got visibly upset when asked about the structural enhancement of unemployment benefits: “Over my dead body.”

Senator Graham still advocates the reversal of the Affordable Care Act, better known as ‘Obamacare’, which he and fellow Republicans, including President Donald Trump, consider an expression of socialism. Republicans are also still trying to dial back the food stamp programme which helps impoverished families put food on the table. A recent study by the Brookings Institution found that food insecurity now affects one in five US households. Almost half of single-parent families with children under the age of twelve report food shortages.

Prof Krugman, recipient of the 2008 Nobel Memorial Prize in Economic Sciences, suspects that once introduced to the benefits of a more comprehensive social security net, American voters may decide to institutionalise such a welfare system. The popularity of the unapologetically socialist Vermont senator Bernie Sanders amongst the under-30 demographic may indicate a shifting in public opinion away from conservatism. In order not to split the Democratic ticket, Senator Sanders withdrew his candidacy for the party’s presidential nomination on April 8.

With the US unemployment rate nearing an all-time high, the pressure is on to end the lockdown and get the economy moving, even if the corona virus has not yet been completely contained. Concerned about his own electoral prospects, President Trump tries to strong-arm governors to open their states for business, disregarding the advice of virologists and immunologists. Although a dangerous tack to take, some exposure to risk may be called for given the unprecedented economic ravage caused by the corona pandemic.


A Famine of ‘Biblical Proportion’

[caption id="attachment_15319" align="alignright" width="275"] David Beasley[/caption]

The worst humanitarian crisis since the end of World War II. That is how World Food Programme (WFP) Executive Director David Beasley described the impact of the corona pandemic on vulnerable people in countries suffering war and drought.

According to Mr Beasley, an estimated 130 million people teeter on the edge of starvation in a famine that may soon reach a ‘biblical proportion’. An equal number of people have seen their food security deteriorate dangerously and may shortly face ‘crisis levels of hunger’.

The WFP provides food aid to about 100 million people in Africa and the Middle East. Starvation, Mr Beasley warns, may be significantly more lethal than covid-19. The United Nations programme forecasts that without a major expansion of the global aid effort, the looming famine may claim up to 300,000 lives per day over a three-month period.

In a report to the UN Security Council, the WFP requests $350 million in supplementary funding for new logistics hubs that help speed up the delivery of food aid. Mr Beasley also needs the Security Council to stop wars and press governments to allow the unimpeded access of humanitarian workers and supplies to people in need of emergency aid.

In his 2020 annual report, Director-General Qu Dongyu of the Food and Agriculture Organisation (FAO) points to escalating conflicts, extreme weather events, economic shocks, and more recently a plague of desert locusts and the corona pandemic as culprits of increased food insecurity. Mr Dongyu said that the FAO has mobilised its resources in a way not seen since the organisation’s founding in 1945.

Jan Egeland, secretary-general of the Norwegian Refugee Council and a former top UN official, agrees: “In my 40 years as a humanitarian worker, I have never seen as many people displaced by conflict as now.” By way of example, Mr Egeland cited Burkina Faso where over the past twelve months the number of people forced to leave their home due to drought and conflict has increased ten-fold – an escalation not seen anywhere else in the world. Mr Egeland also appealed to the UN to ensure the safety of humanitarian workers and guarantee their access to distressed people.

Now to the other extreme of the scale: Amazon founder and CEO Jeff Bezos has seen his fortune balloon north of $138 billion. According to Bloomberg´s Billionaires Index, Mr Bezos is the only one of the world’s five richest people not to have lost money to the pandemic. In one minute, he makes $149,353 – more than three times the annual median income of a US worker. It has made him the richest man alive with assets surpassing the GDP of 125 of the world’s 195 countries.

Mr Bezos leads a group of about 2.200 billionaires who jointly own more than $10 trillion in assets. For an added sense of perspective: The successful implementation of the 17 Sustainable Development Goals (SDGs) adopted by the UN in 2015 requires an additional $400 billion in investments, or 4 percent of the collective fortune amassed by Mr Bezos and his fellow über-rich.

According to public survey conducted in 25 countries by Glocalities, an Amsterdam-based marketing bureau, most people – 81 percent – would like billionaires to become more engaged in the elimination of extreme poverty. It is, of course, rather easy to dispose of another’s wealth. However, a tiny tax on vast wealth to alleviate want, save millions of lives, and give tens of millions a chance to secure a decent livelihood – and perhaps turn them into avid consumers – seems eminently reasonable.

Such a levy on wealth would merely institutionalise the philanthropic work by Bill Gates, Warren Buffett, Jack Ma, Jack Dorsey, Giorgio Armani, and other billionaires who need no prodding to do the right thing.

A few years back, Mr Buffett caused some commotion by suggesting rich people should be made to pay more in taxes. The self-made billionaire discovered to his own amazement – and anger – that the share Uncle Sam claimed of his personal assistant’s income was not much smaller than he as a billionaire many times over was expected to pay.

Since then, President Donald Trump slashed corporate and individual taxes even more in his attempt to Make America Great Again – a Quixotesque push unceremoniously derailed by the corona pandemic.

In 2010, Messrs Gates and Buffett started The Giving Pledge, promising to dedicate half of their fortune to charitable causes. Though not legally binding, the pledge has since been signed and honoured by 204 billionaires from 22 countries.

However laudable the initiative, US billionaires are, on the whole, a lot less generous than it seems. According to a study by University of California Berkeley, the country’s ten richest billionaires in 2018 donated just 0.94 percent of their fortune to charity. Only Bill Gates, Warren Buffet, and Michael Bloomberg bucked the trend. That year, Larry Ellison (Oracle, $58.4bn) and Sergey Brin (Alphabet, $52.4bn) did not donate any measurable portion of their wealth to philanthropy.

However, billionaire largesse is a truly American invention and tradition. The country’s most successful tycoons such as the Scottish-born steel magnate Andrew Carnegie, the richest man in the world at the turn of the twentieth century, adhered to a ‘gospel of wealth’ and found disgrace in ‘dying rich’.

Mr Carnegie gave fully 90 percent of his money away. He used it to buy books for the more than 2,800 public libraries built with his donations. John D Rockefeller, Henry Ford, Jean Paul Getty, and many others with fortunes made in the Gilded Age of American capitalism got rid of their cash for a variety of reasons: narcissism, paternalism, immortality - and a shared love of humanity.

Then as now, many billionaires profess a noble dedication to higher causes that is duly applied to the broader world but not necessarily to the people who actually built their fortune. Mr Carnegie is remembered for his generosity more than for the appalling labour conditions at his steel mills where employees worked 12-hour shifts six days a week, enjoying a single annual holiday (4 July). A man of his times, Mr Carnegie dismissed any and all complaints: “Trifling sums given to each worker every week or month would be frittered away upon richer food and drink, better clothing, and more extravagant living, which are beneficial neither to rich nor poor.”

Though present-day billionaires may not be that explicit when justifying poor labour conditions, many of them dedicate a fair portion of their wherewithal to the avoidance of taxes. Though Mr Bezos has refused to sign The Giving Pledge, he does provide about $100 million annually to his Day One Fund that helps fight homelessness in the US.

However, the Amazon CEO suffered a near fit last year after municipal authorities in Seattle tried to introduce a $275 annual tax on large employers for each of their workers. The revenue, estimated at $43 million, had been earmarked to fight homelessness. After Amazon threatened to leave the city and move its staff elsewhere in protest, the local council caved in and scrapped the tax.

Mr Bezos manages to avoid taxes better than most: whilst the US corporate tax rate during the 2010s averaged 35 percent, Amazon’s effective rate over the decade amounted to just 12.7 percent. Of the ‘Silicon Valley Big Six’, Facebook succeeded in obtaining the lowest effective rate, releasing just over 10 percent of its profits to tax authorities.

As the true cost of the corona pandemic comes into view, and spinoff catastrophes unfold, calls will increase for a tightening of tax legislation and a closing of loopholes. In Europe, the topic is slowly making its way to the top of the agenda. EU member states have a long history of undercutting each other’s corporate tax rate with some, such as Ireland and The Netherlands, offering bespoke – and secretive – deals to large employers scouting for a fiscal haven.

In a world beset by simultaneous plagues there may be an upper limit to the volume of individual wealth tolerated. When one man earns in just 15 minutes as much as a US college graduate may expect to earn in a lifetime ($2.2 million), the hidden hand keeping the balance between effort and reward in check has probably gone missing.