Shares in high-flying European luxury goods groups tumbled on Monday after Switzerland’s Richemont suffered a slowdown in US demand that punctured investor optimism about a rebound for the sector’s sales in Asia. 

Richemont fell more than 9 per cent, the most in about 14 months, after the owner of jewellers Cartier and Van Cleef & Arpels reported slightly lower than expected first-quarter sales, boosted by the recovery in China but weighed down by a slowing luxury market in the US. 

The group’s results dragged several of its competitors lower in early trading, with LVMH and Hermès — two of Europe’s biggest companies by market capitalisation — down 4 per cent and 3.9 per cent, respectively. 

“The market was overconfident about the strength of the US consumer, and that’s why we’ve seen the hit [to luxury goods groups] today,” said Emmanuel Cau, head of European equity strategy at Barclays.

Monday’s declines are a setback for a sector at the heart of Europe’s stock rally this year. In the spring, France’s LVMH became the first European company to reach a $500bn market value, even as China, the luxury sector’s biggest growth market, faltered following the country’s post-pandemic reopening. Its value has since dropped to $430bn.



China’s economy grew just 0.8 per cent in the second quarter, data released on Monday showed. But it was Richemont’s underwhelming US sales figures that caught investors’ attention, days after British group Burberry said its revenues in the three months to July increased in all regions outside the Americas.

“We are getting to the point where excess savings [in the US] are largely spent and inflation is biting on disposable income,” Cau said. “The market needs to become comfortable with the sustainability of US demand for luxury groups to keep pushing up.”

Richemont’s overall sales grew 19 per cent at constant exchange rates, just shy of analyst expectations, but sales in the Americas — driven by the US, the luxury sector’s biggest market by sales — turned negative compared with the same period last year.

The group’s jewellery division, driven by its biggest brand Cartier, grew 24 per cent, while Asia outside of Japan was up 40 per cent as the key Chinese market bounced back from Covid-19 restrictions at the end of last year. 

Bernstein analysts turned more cautious about Richemont’s prospects this year because of the company’s high exposure to expensive items such as jewellery, which consistently drive group sales but can be a harder sell to middle-class consumers in a slowing economy. 

“Richemont’s best foot forward — as usual — is the jewellery maisons,” said Luca Solca at Bernstein. “The Americas was the weakest region [which] seems consistent with Richemont’s softer performance in America in the previous quarter relative to peers.”

Private equity fund managers are borrowing against asset portfolios to return cash to investors as they struggle to exit investments, adding another layer of debt to the loans financing their corporate buyouts.

Firms are increasingly resorting to the technique, called net asset value financing, because rising debt costs and concern over the economy are making it difficult for them to sell or list the companies they own.

Texas-based Vista Equity Partners and Sweden’s Nordic Capital have used NAV financing this year, while groups such as Carlyle, Hg Capital and SoftBank have previously turned to the mechanism to return cash to investors.

NAV financing is perceived as less risky than lending to a single company. It is also cheaper for the borrower, according to private equity executives.

But some analysts have voiced concerns that such borrowing heaps extra debt on buyout portfolio companies that are already grappling with higher borrowing costs and a weakening economic outlook.

“These aren’t universally a good thing to adopt, you have to look at the overall leverage across the portfolio,” said Magnus Goodlad, a partner at advisory firm Rede Partners.

He added that NAV financing had provided “an alternative means to introduce liquidity” at a time when “all M&A metrics are down and exit activity is dramatically reduced [and] refinancing at the individual asset’s level is more expensive and difficult”.

Goodlad said that overall NAV financing activity was on track to surpass its 2022 total, estimated by Rede to be $21bn.



By contrast, as of mid-June, buyout groups had raised less than $37.7bn through listing portfolio companies globally, PitchBook data shows, on course to be the lowest amount in a decade.

Sales to corporate buyers and other private equity are also on course to fall to their lowest level in a decade, the data shows.

Firms typically seek to return cash to investors as they gear up for a new cycle of fundraising.

Vista Equity Partners, which is seeking to raise as much as $20bn for its latest flagship fund, has tapped Goldman Sachs to arrange a $1.5bn loan secured against its portfolio companies. This was used in part to repay its backers earlier this year, according to people with knowledge of the loan. Goldman declined to comment on the Vista loan.

Nordic Capital is also in talks to raise a loan secured against some of its investments, according to people familiar with the matter, with one saying the Stockholm group could raise as much as €600mn.

Nordic Capital and Vista declined to comment.

Ted Goldthorpe, head of the credit unit at BC Partners, which provides NAV financing loans, cautioned that investors in PE funds “can be very sensitive to leverage”.

Joana Rocha Scaff, head of European private equity at Neuberger Berman, also said that, while such techniques “can have some useful benefits, they add incremental financial risk to the fund”.

In a notable transaction last year, Goldman Sachs and Carlyle’s internal capital markets unit helped arrange a loan exceeding €1bn for Carlyle late last year, securing it against assets in the US firm’s fifth European buyout fund, according to two people with knowledge of the borrowing. The loan was used to send money back to Limited Partners. Carlyle declined to comment.

London-based Hg Capital, Europe’s largest software investor, has raised at least £500mn via NAV loans to help finance payouts and continues to view it as a useful tool, according to people close to the firm.

In late 2021, SoftBank, the Japanese investment group, borrowed more than $4bn from lenders led by Apollo against companies in its Vision Fund 2, to return money to itself as the fund’s largest investor.

SoftBank then used the money for new investments. The loan was taken out at a 5 per cent fixed rate and secured against assets worth nearly $50bn.

The value of the assets in VF2 has since decreased, without SoftBank coming close to defaulting, according to a person familiar with the matter. SoftBank did not respond to a request for comment.

The terms of recent loans viewed by the Financial Times showed that borrowers have agreed to pay at least 7 percentage points above benchmark rates and normally ask for payment-in-kind features that give them the option of paying interest with resources other than cash.

At current rates, NAV borrowing costs are at a minimum of 10 per cent in the US and Europe and can reach as high as 20 per cent or 30 per cent, according to market sources.

Many such loans have floating interest rates, which means their costs — while still less than other financing routes — will have increased “enormously” as base rates have risen, hurting fund returns, said Grant Cosby, head of fund solutions at Investec.

While they can be a useful tool, they “don’t take the exit pressure off”, Cosby added.

The Bank of Japan’s latest relaxation of its cap on bond yields will enhance the returns on offer on the country’s debt, leading some investors to forecast that a “great repatriation” of Japanese investment flows is set to accelerate. 

The policy shift comes at a time when overseas debt has become an increasingly unappealing prospect for many Japanese investors because of the soaring cost of hedging against swings in the value of the yen.

Many big Japanese investors, such as insurers, routinely hedge their currency exposure when they buy foreign bonds. Rising interest rates in the rest of the developed world have sharply driven up the cost of doing so, more than cancelling out the growing yield gap between Japan and other economies, making Japan’s low-yielding bond market appear relatively attractive.

The currency-hedged yield on a 10-year Treasury fell below the equivalent Japanese bond yield late last year, according to data from Apollo, and a gulf has opened between the two markets since then.

“It hasn’t made sense for Japanese investors to own Treasuries and [German] Bunds, they would rather buy Japanese government bonds — which is what everyone was doing,” said Mohit Kumar, managing director at Jefferies.



Japanese investors are some of the biggest owners of bonds in the US and Europe, after years of a strong currency and higher returns elsewhere had made foreign assets more attractive to own. According to Commerzbank research, Japanese investors owned more than $2tn in foreign long-term debt securities at the end of 2022, with large holdings in the US, France, the Netherlands and Germany.

But Japanese investors have been net sellers of foreign assets over the past 18 months, said Kumar, despite soaring yields in the US and Europe and a domestic bond market where the BoJ has kept borrowing costs at very low levels.

On Friday, the BoJ took a step towards ending its ultra-loose monetary policy by saying it would tolerate yields on 10-year government bonds of up to 1 per cent, from a previous level of 0.5 per cent. The policy shift sent jitters through US and European bond markets, as traders bet that it would encourage Japanese investors to bring their cash home by further burnishing the appeal of the domestic market.

“Global yields have risen in response to the tweak in yield curve control based on the fear that higher yields in Japan may lead local investors there to invest more in Japanese government bonds and therefore sell some of their holdings of Treasuries or bunds,” said Michael Metcalfe, head of macro strategy at State Street Global Markets. 

Investors also said that a relatively strong economy and diminishing threat of deflation would tempt more investors back to Japan, including Tokyo’s high-flying stock market, where the Topix index is up more than 20 per cent this year.

The “great repatriation” of Japanese assets is just getting underway, said Luca Paolini, chief strategist at Pictet. “People always talk about bonds, but it will also cause a re-rating of Japanese equities.”

Private equity firms are increasingly offering sweeteners such as fee discounts to secure backing from deep-pocketed investors, in a sign that the industry is facing its toughest-ever fundraising environment.

Blue-chip firms including CVC Capital Partners, Ardian, TPG and Cinven have all in recent months offered investors either a discount on management fees or other incentives such as larger amounts of so-called co-investment, which enables investors to get a bigger slice of individual deals without paying a fee, according to people familiar with the matter and fund marketing documents. 

Some firms are even offering big backers such as pension plans and sovereign wealth funds a slice of the management fee that usually goes to the fund manager. 

“Almost every firm in our suite of clients is contemplating or has employed some form of incentive for investors to put capital in as quickly as possible and in as large a size as possible,” said Sunaina Sinha, head of private capital at Raymond James. 

The favourable terms being offered to potential backers are a function of an increasingly competitive fundraising market. After years of dashing headlong into private equity, many big investors have been unwilling — or unable — to allocate fresh funds to the asset class because a drought in dealmaking and public market listings makes it tricky to exit existing investments.

In the first half of 2023, firms globally raised $517bn, a 35 per cent fall against the same period a year ago, according to a Bain & Co report released in July. The report found that for every $3 of capital firms are trying to raise, investors only have $1 available to allocate to private equity, the worst imbalance since the global financial crisis. 

The tough fundraising market has seen the pendulum “undoubtedly swinging” towards investors, said Karl Adam, a partner at advisory firm Monument Group. That has enabled them to push for better terms than they would typically secure.

The efforts are largely focused on private equity’s biggest backers like pension plans and sovereign wealth funds who are being offered the chance to cut the overall fees they have to pay to get access to some of the industry’s top-performing funds. 

“You don’t normally get much by way of special deals,” said the head of investor relations at one European private equity firm. “But they typically get linked to size.” 

Ardian, which this year has raised more than $20bn for its flagship secondaries fund, received a $6bn cheque from the Abu Dhabi Investment Authority; this included $4bn to go into the fund and $2bn for co-investment, according to a person familiar with the matter.

Cinven recently hit its €12bn target, boosted by offering new, large investors co-investment, according to people familiar with the matter. The firm is also continuing to raise more money, the people said. 

Ardian and Cinven both declined to comment.

Other tactics firms are using include giving a discount to their largest investors and offering so-called management fee holidays.

For example, CVC offered large investors a management fee discount on its recently closed record-breaking €26bn flagship fund, according to a fund marketing document.

Some investors were able to pay a management fee of 1.375 per cent, less than the 1.5 per cent charged to other investors. To be sure, CVC has previously offered larger investors in previous funds a fee discount although industry insiders say this practice is becoming more common, particularly at funds that are less in demand than CVC.

For investors in the asset class, securing co-investment or fee discounts can help boost overall returns, net of fees, at a time of concern over the impact of rising interest rates on private equity’s ability to outperform cheaper options such as investing in stocks or bonds. Private equity fees are among the highest in the financial services industry. 

Typically, firms charge a 2 per cent management fee and 20 per cent of profits above a performance hurdle.

“It’s going to be harder [for private equity] to produce those returns because you don’t have cheap leverage,” Jon Little, the incoming chair of Local Pensions Partnership Investments, which manages £24bn of local authority pension cash, said. He added the industry’s fee model was “hard to justify”.

The California State Teachers’ Retirement System and California Public Employees’ Retirement System — two of the largest US public sector pension funds — said last month their private equity portfolios delivered negative returns in the most recent financial year, even as public markets surged.

Calpers said its primary initiative to reduce costs was increasing co-investment, without management fees and carry, “alongside our partners in high-conviction opportunities”. The fund added that it expected private equity to outperform public equity markets over a five-year period, and that it remained “committed” to the asset class.

Some private equity firms are having to get even more creative.

To boost the size of a secondaries fund launched last year, US private equity giant TPG struck an unusual deal that gave Canadian pension fund Alberta Investment Management Corporation a share in the fund’s management fee stream in return for a commitment to invest.

Despite the concessions from the private equity industry, investors hoping for an end to the two-and-twenty model are likely to be left disappointed. The current rash of inducements is a way of protecting a fee system that has changed little over the past few decades, according to Gabrielle Joseph, a partner at advisory firm Rede Partners.

“There isn’t so much overt discounting but there is secret discounting” such as fee-free co-investment, Joseph said. “What we haven’t seen is a lot of change in the overall headline fees.”

Many rivals of Apollo Global Management were convinced that its merger with Athene Holding, its retirement annuities affiliate, would prove a strategic blunder.

The risk was that the private equity firm would spoil its high-margin, capital-light business of collecting hefty asset management fees by taking on a heavily regulated, lumbering balance sheet of a life insurance company. 

Yet two years on, Apollo’s stock price is trading at an all-time high as its assets under management have soared to $600bn, an apparent vindication of the single, integrated company.

As it turns out, the Apollo/Athene combination has proved much more deft than it may appear. Using financial engineering, Apollo created an off-balance sheet gizmo based in the welcoming climes of Bermuda. The result is cheaper equity capital that has turbocharged Athene’s asset growth and, in turn, juiced Apollo shareholder returns. 

Competitors in private equity as well as traditional insurers have noticed, replicating their own versions. And, increasingly, regulators and rating agencies are paying attention too. Moody’s wrote in a recent report that “the rising tide of offshore life reinsurance raises [a] yellow caution flag”. 



For its part, Apollo notes that fresh investment in annuities and life insurance had been moribund for years — until it got involved. After creating Athene initially in a one-off 2009 reinsurance trade, Apollo went on to build enough of an annuities machine to take Athene public in 2016. Athene itself was conservatively capitalised with an A credit rating and billions in capital that exceeded regulatory requirements.

Apollo managed its investments well enough that Athene’s book value per share grew annually by an average of 17 per cent. Public shareholders, however, never fully embraced Athene, worried about its complexity and its tricky relationship with Apollo. As a result, its stock price never traded at a high premium to book value. The weak currency then left Athene hamstrung when it came to raising equity capital needed to buy or write more annuities.

As it turned out, Apollo’s longtime backers among sovereign wealth funds in the Middle East and other institutions liked Athene as a concept. But rather than buy Athene stock, Apollo invented in 2019 a so-called “sidecar” vehicle that functioned like a traditional private equity fund, calling capital only as needed, usually when Athene sought a big acquisition. The off-balance sheet fund pledged returns to its backers in the low teens, a cost of capital that was cheaper than what Athene’s then price/earnings ratio on its public stock implied. 

The rub was the sidecar, known as ADIP, was domiciled in Bermuda. That home allowed ADIP’s fund investors to avoid corporate income tax, moderating their return requirements. Bermuda itself is central to Athene’s strategy and its original home before merging with US-based Apollo. Of its $24bn in total equity capital, $18bn is stationed in Bermuda entities.

Most of Athene’s annuity liabilities have migrated to Bermuda itself through reinsurance agreements. Apollo and Athene insist that the Bermuda activities have nothing to do with regulatory arbitrage. Rather, its capital ratios in the island nation are roughly the same as onshore in the US and that, ultimately, Apollo and Athene remain on the hook for customer obligations.

Apollo is also equally clear on the firepower that the billions in ADIP equity capital brings. A $1bn of Athene’s own equity stands up the acquisition and writing of $12bn of annuities. Adding in the sidecar equity as a supplement takes that figure up to $21bn, enough to be worth, all else equal, an incremental 25 per cent boost in fee income and investment earnings. More concretely, Athene forecasts the ADIP sidecar will help take its gross invested portfolio to $385bn by 2026, up from just $67bn a decade before, making it a “game changer” in the words of management.

Athene has just announced a second vintage ADIP vehicle with a $2bn fundraising, an apparent validation of its approach. It is notable that in insurance markets, illiquid and esoteric private capital somehow endures as a more efficient option than public capital.

Athene and Apollo had themselves merged, in large part, to eliminate the inherent principal/agent inefficiencies between an insurer and an affiliated asset manager. The sidecar structure has cleverly solved a cost of capital challenge. But it has also reintroduced this similar tension. With big gains for all sides, everyone is a winner for now. But the relationship is worth monitoring.

sujeet.indap@ft.com

Exchange traded fund industry participants are bracing themselves to take on a costly transfer of risk from US retail brokers, such as Robinhood, when the US unilaterally implements T+1 settlement in May next year.

The move, which will reduce the standard US trade settlement cycle of two business days to just one for all securities (US Treasuries already settle on T+1), would reduce “credit, market and liquidity risks” for market participants, according to the US Securities and Exchange Commission.

But critics said the additional costs this will create for many ETFs, including US ETFs with exposure to overseas markets, will disproportionately be borne by non-US investors because most of the rest of the world will continue to operate on a T+2 basis.

Among those critics is the European Fund and Asset Management Association.

Susan Yavari, senior regulatory policy adviser at Efama, said ETFs were particularly exposed to the coming mismatch because of the way they work and referred to the heavy burden being borne by investors outside the US. Efama’s data suggests 42 per cent of the assets of Ucits equity funds are invested in US equities.

In contrast, just a sixth of the holdings of US equity funds are estimated to be invested overseas.

ETFs rely on a primary market of so-called authorised participants who make their money by looking for arbitrage opportunities between the price of an ETF’s underlying securities and the price of the ETF itself.

Investors in ETFs participate in a secondary market trading of the shares of ETFs that the APs create. When T+1 is implemented, European-listed ETFs, for example, will settle in T+2, but any US-domiciled securities they hold will settle a day earlier.

As Yavari explained, on creation of ETF shares, faced with the coming timing mismatch, the authorised participant will step in and fund the position for a day, passing on the cost to the end investor through wider spreads, or the ETF issuer will rely on an overdraft with a broker to still settle on T+1.

“Either way, the shortage of funding will incur a cost, ultimately borne by the investor,” Yavari said.

The change to shorter settlement has been mooted since the meme stock frenzy in January 2021. Retail brokers scrambled to meet sharply elevated collateral obligations sparking regulatory concerns.

“I understand the rationale for risk reduction and improving margin efficiencies. In the specific case of ETFs, however, I personally don’t believe this will make much difference to overall ETF adoption or liquidity, and the pains may outweigh the benefits for some time,” said Joachim Tigler, who until recently was head of ETF trading at ADG Securities, a specialist ETF market maker.

The pains would also stretch to foreign exchange markets, explained Adam Conn, head of trading at Baillie Gifford.

At present, many managers based outside the US complete trade matching processes and then generate and execute settlement of FX orders on T+1. This process ensures payment can be actually completed by T+2.

To do this, managers tend to use CLS Bank, the primary operator of payment-to-payment platforms.

“The need to execute settlement FX between the close of the North American equity markets [4pm EST] and custodian cut-off times, which can be as early as 4.30pm, dramatically reduces the ability to settle through CLS,” said Conn, adding that this situation was likely to lead to an increase in bilaterally settled trades .

“Trading outside of a payment-versus-payment netting platform carries a greater operating and settlement risk,” Conn added.

On top of the increased trading costs, come operational headaches, the cost of which will also eventually be passed to end investors.

As Yavari explained: “It goes without saying that EU firms will have to extend working hours either through night desks in Europe or expanded operations in US to cater to all the cut-off times happening on T+1.”

For managers based in Asia, trying to settle within US T+1 when they have started their day much earlier — Australia is 14 hours ahead of EST and Hong Kong 12 hours — the challenge might be insurmountable.

“It is likely there will be an increase in failed trades for APAC-based investors transacting in US ETFs following the move to T+1, which is purely a timezone issue,” said Jim Goldie, a regional head of capital markets for ETFs at Invesco.

Goldie played down some of the concerns expressed by his peers. While he agreed that brokers in the EU would have long exposure to an ETF for a day and have to fund that position, or hedge the position to align settlement between primary and secondary market trades, he thought costs would be a “fraction of a basis point per day”, which would be worn by the broker or “baked into the spreads they show investors”.

But he agreed the biggest burden would be felt outside the US. “There is a larger proportion of [European] Ucits AUM invested in US securities, relative to US ETFs tracking international securities,” he said.

For Yavari, the potential fall-out is hard to predict. “There will definitely be an increase in the overall cost of trading for EU funds,” she said. “There may also be an impact on the appeal of US securities, given all the associated issues, from an EU perspective.”

The Investment Association, which represents UK investment managers, said: “The shift to T+1 will see the timelines and ability to settle FX trades become more constrained, particularly for UK and Europe-based firms managing on behalf of investors in the Asia-Pacific region. We are working with our members to explore practical solutions to this challenge.”