Finimize - 💸 Not-so-private equity

What’s going on here?

Private equity (PE) firms were left cradling a record number of unsold assets at the end of last year, with their something old, something new, and money borrowed leaving them blue.

What does this mean?

PE firms are like house flippers, but for businesses. They pool and borrow money, buy a company, spruce it up, then ideally, sell it for a profit. But that last bit has been a sticking point lately. Higher interest rates have made it pricier for companies to borrow money, leaving PE firms with shrinking piles of business cards to call on when they need buyers. So now, Bain estimates that a record-breaking 28,000 unsold companies – worth more than $3 trillion – are in the clutches of the world’s PE groups. They’d usually have been cast off three to five years after their makeovers. But with over 40% of the unsold fledglings landing around the four-year-old mark, PE firms will be struggling to bring in enough fresh cash to pay out their more impatient investors.

Why should I care?

Zooming in: Stop the bleeding.

Heartfelt promises and I-O-U notes aren’t enough to keep wary investors onside, so PE firms have been borrowing money to bridge the gap. That solution is more of a Band-Aid than an antibiotic, though: they’re using their assets as collateral for those loans – you know, the unsold companies that were bought using debt. In other words, PE firms are layering debt with debt.

The bigger picture: From private to public.

The traditional initial public offering (IPO) exit route is starting to light up in green, after a long time with barely a flicker. European companies have raised over $3 billion in IPOs since January, more than double the amount from the same time last year. That’s put the market on track for its best quarter since 2021, so it’s no wonder two PE-owned businesses recently announced plans to join that flurry of stock market listings.

What’s going on here?

Saudi Aramco paid stakeholders nearly a third more last year than the one before, despite the age-old belief that shrinking profit and growing dividends don’t mix.

What does this mean?

Saudi Arabia’s government has been capping the amount of oil the country’s producers can drill, determined to influence the slippery stuff’s stagnant prices through scarcity. That weighed on Saudi Aramco, pushing the state-owned producer’s profit down by a quarter last year from the one before. Still, Aramco’s easy access to onshore oil means its low costs are the envy of its global competitors, so even that compromised profit was the best of the bunch. In fact, despite the limitations, Aramco’s profit was its second-highest ever. No wonder the company could afford to push dividend payments up 30% to nearly $100 billion last year, marking a tidy payout to the Saudi government and Aramco stakeholders.

Why should I care?

Zooming out: Talk about being the breadwinner.

Most companies would trim or pause dividends if profit moved backward, but Aramco is not “most companies”. The Saudi government owns 82% of the oil giant, and in return, it expects enough cash to run a country. No exaggeration: Aramco made up 62% of the state’s revenue last year. Plus, the more enticing a company’s history of dividends, the more investors will want in. That’ll be on Saudi’s mind: after selling 1.7% of Aramco’s stock in 2019, the country’s thinking about teeing up round two later this year.

The bigger picture: Aramco’s gassed up.

Aramco predicts that the world will buy 104 barrels of oil a day this year, only slightly higher than last year’s 102.4 million. That might explain why Saudi Arabia is betting on cleaner, more sustainable gas energy. Aramco’s doing the grunt work, scoping out international gas projects and outlining plans to churn out 60% more gas than its 2021 standards as soon as 2030.