This year Patrick Pouyanné, chief executive of TotalEnergies, was en route to Mozambique when he stopped off in the tiny central African nation of Rwanda.

Rwanda has no oil and gas reserves and a small domestic market of 13mn people. Yet Pouyanné and Rwanda’s president Paul Kagame signed a co-operation agreement anyway, agreeing to explore opportunities to develop renewable energy projects.

The proposal was of little commercial value to the French oil major. But in the preceding months Rwanda had made itself invaluable to Total by deploying 1,000 troops to Mozambique to quell an Islamist insurgency that had halted the company’s plans for a mammoth gas project.

The pit stop in Kigali was typical of Pouyanné, an oil and gas executive renowned in the industry for an ability to leverage diplomatic relations in service of Total’s commercial goals.

“You need to find allies to understand things,” Pouyanné tells the Financial Times, when asked about the meeting. “It’s a small, sympathetic country. It has a president who has influence well outside Rwanda, in the African Union. And we’re trying to move into east Africa. That’s new for us.”



Today, Mozambique is still too unstable for Total to resume construction. But the project is just one of a series of complex oil and gas developments in challenging parts of the world that Pouyanné is aiming to deliver just as environmental pressure on the industry to cease such activity is peaking.

While European rivals BP and Shell have become increasingly cautious about developing oil and gas projects in previously unexploited regions, Pouyanné has pushed on and most shareholders have backed him so far.

“I don’t think I’ve ever seen [shareholder] trust levels be so high for an integrated oil chief executive as I currently do with Patrick,” says Bernstein analyst Oswald Clint, who has been covering the oil industry for 20 years. “There is conviction that he can manage the geopolitical risk.”

As a result, since Pouyanné’s rise to the top in 2014, Total has become one of the starkest exemplars of an energy industry in flux and beset by the paradox of continuing demand for fossil fuel products even as governments and the public clamour for their elimination.

Pouyanné seems determined to play both sides of this paradox. The group he oversees is pursuing some of the industry’s most contentious developments, like its $20bn liquefied natural gas play in Mozambique and a $10bn oil project and pipeline in Uganda, which has become a lightning rod for climate activists and critical investors.



Yet at the same time the company, renamed TotalEnergies last year to signify its diversifying interests, is investing billions of dollars in clean energy projects from wind farms in the UK’s North Sea to solar plants in Iraq, to hydrogen installations spanning the US to India. Investment bank RBC Capital Markets values Total’s low-carbon business at $35bn, making it far larger than that of any of its big competitors.

Pouyanné may be trying to have it both ways, but the approach has brought rewards: Total’s share price is up about 10 per cent since his appointment, while most of its competitors are down. The group’s total shareholder returns are the best over the period of any of the six super majors. Competitors such as BP, which has made the biggest step away from fossil fuels, pledging to cut oil production by 40 per cent by 2030, have fared much worse.

But uncertain long-term demand for oil and gas makes any significant fossil fuel investment an increasingly risky bet, particularly as the pool of banks and insurers willing to support such projects shrinks every year.

“We want a rapid transformation of their model ,” says Nicolas Théry, chair of French mutual bank Crédit Mutuel, which was among the 11 per cent of shareholders that voted against Total’s climate plan this year, in part because they are still investing in oil projects. “Our benchmark is not comparing them to rivals, it’s climate change.”

Pouyanné has said Total will continue to develop new fossil fuel basins, particularly gas, for at least the next decade while cars will still need petrol and Total’s renewable energy investments will need financing.

He thinks his critics have oversimplified the energy transition. “The trouble with the whole topic around climate and energy is that the world of energy is a very complex one, with many connecting parts,” he says. “Just look at the way some politicians have only just discovered that the price of electricity is linked to the price of gas in Europe.”



In the oil industry, he is seen as a person of conviction, unafraid to confront the reality of a world in which oil and gas is still needed, even while pushing into lower-carbon products. Most of Total’s shareholders trust him to pursue big projects, despite the growing risks, because so far he has delivered rewards. The challenge, for Pouyanné, might be recognising when to stop.

Rise of an oil man

From the day he set foot in 1997 in what was then France’s Elf, before its absorption three years later by TotalFina, Pouyanné forged a career as a dyed-in-the-wool oil man.

His first posting in his early 30s took him to Angola, then in the grip of a civil war. A move shortly afterwards to Qatar placed him at the helm of one of Total’s most important markets, where he caught the eye of the company’s then chief executive Christophe de Margerie. That triggered a rapid ascent into senior jobs in the exploration and production and refining parts of the business.

It was also a first opportunity to build ties that have proved relevant today. In June, Total was named as the first foreign partner in a coveted $29bn expansion of a Qatari liquefied natural gas project, ahead of European rivals and Qatar’s traditionally closest partner, ExxonMobil.

“Pouyanné’s relationship with the likes of Qatar go back 20 years,” a person at the group says. “It’s the type of longevity a politician would never have.”



Born to a customs director father and a mother who worked for the French postal service, Pouyanné spent part of his youth in the southwestern Basque region. His early steps could have taken him in a different direction. A talent for maths earned him a place at France’s most elite engineering university, Polytechnique. That propelled Pouyanné first of all into advisory and chief of staff jobs in the French government before Elf came calling.

University classmates recall some of the characteristics Pouyanné is known for still: a quick mind; a lumbering 1.91-metre frame and awkward gait; and a prickliness when criticised or told to do things a certain way.

“He’s of that French schooling where you are taught to reason and use the power of the mind. His approach is ‘I’ve thought this out, I’m right and this is the view I’m going to impose on everyone’,” says one acquaintance.

This attitude has made him a successful chief executive but has also caused him grief, they continue. “The thing with Patrick Pouyanné is that he is always right, but sometimes he needs to not say everything so bluntly or out loud.”

At times, that bluntness has flared up into impatience and anger. His “volcanic eruptions” have sometimes had colleagues trembling, several former Total employees say, and have contributed to a top-down atmosphere at the group, despite his work with a coach to rein in his temper.

Even Pouyanné, a tennis fan, concedes that he may have “something in common” with his favourite player, the hot-headed John McEnroe.

‘Pouyanné Petroleum’

In 2014 Pouyanné was propelled into the top job in dramatic fashion. One night in October, De Margerie’s business jet crashed into a snowplough on the tarmac in Moscow. The emir of Qatar attended his Paris funeral; Russian president Vladimir Putin was later to pay homage to the businessman, naming an ice-breaking LNG tanker after him in 2017.



Total’s board installed Pouyanné, one of two people De Margerie had been grooming as potential successors, as chief executive, preferring him over a rival in charge of more nascent renewable energy operations. By the end of 2016 he had been named chairman too.

Pouyanné has acted since then as TotalEnergies’ dealmaker-in-chief, wielding tight control over every big move. “He runs TotalEnergies as if it were Pouyanné Petroleum,” jokes one French businessman, likening his approach to that of France’s most successful family-controlled companies such as luxury goods conglomerate LVMH.

He has tended to shun hiring cadres of advisers, including for acquisitions, in favour of trusting his own instincts. “He doesn’t get involved in public auctions. He doesn’t do it through bankers. He does it himself, that’s the distinguishing characteristic,” says Irene Himona, managing director for oil and gas at Société Générale, who has followed Total for 25 years.

Jacques Veyrat, an energy entrepreneur and former classmate from Polytechnique who sold a controlling stake in French electricity group Direct Energie to TotalEnergies in 2018, says Pouyanné was involved in the negotiations throughout.

“There were lawyers on the contracts of course. But several times he called me up to say ‘have you seen this clause, it’s no good’,” Veyrat says. “He reads absolutely everything.”

Colleagues and business partners noted other telling changes from the De Margerie era. Out went the drinks cabinet in a CEO’s office set up for entertaining; in came cabinets filled with files instead. Banks of secretaries and assistants made way for the company’s mergers and acquisitions team, which was moved on to his floor.



The executive says his hands-on approach is simply the fastest way to get things done. “If I get in the game and negotiate the acquisition of Clearway in the US with the boss of [infrastructure fund] GIP, they see the head of TotalEnergies. They believe in it,” Pouyanné says, after a widely praised $2.4bn deal in May to take a 50 per cent stake in the US wind and solar farm developer. “It’s about shortening the decision circuits, about going fast and acting like small companies do.”

Managing the risks

Pouyanné’s talent for bilateral relations extends beyond the corporate sphere to the often more volatile world of politics.

In Uganda, where Total is leading the development of a 230,000-barrel-a-day oil project on the country’s border with the Democratic Republic of Congo, Pouyanné is said to have built an unrivalled personal relationship with the long-serving Uganda president Yoweri Museveni.

“Patrick is the one person Museveni would listen to,” says one senior oil executive who spent over a decade working on the project.

In his willingness to do business with leaders such as Museveni and Rwanda’s Kagame, each accused by human rights groups of suppressing opposition parties and silencing critics, he is not unusual in the industry. But he has been accused of struggling to draw the line.



After Russia invaded Ukraine in February, Total and Pouyanné came under fire from some politicians and campaigners in France and overseas, for stalling for several weeks on the future of its Russian investments, including a stake in a $21bn Arctic LNG project in Siberia that had been due to start exporting in 2023. BP and Shell said within days they would exit their Russian projects.

Total has since said it will stop all new investments in Russia and divest its projects when it can find suitable buyers. It continues to ship gas to Europe from its Yamal operation in Russia, as it says the French government has encouraged it to do. Pouyanné had exchanges with Emmanuel Macron over Russia, and the president called for gas to keep flowing and was supportive of Total’s bid not to rush for the exit on day one, people familiar with the discussions said.

While some shareholders sold out over the Russian backlash, most backed the company. “If it was anyone else in the centre, I think they would have had a much harder time,” says Biraj Borkhataria, an analyst with RBC Capital Markets. “But because he’s got the big calls right, more than once, there is a lot of good will in the industry.” 

Total’s appetite for new oil and gas developments, however, has generated little but ill will from environmentalists and activists.



“Total’s activities are killing the planet and are extremely problematic on a human rights level,” said Charles de Lacombe, an engineer and activist who was one of dozens of protesters who blocked the entrance to Total’s shareholder meeting in Paris in May. “Of course we can’t get out of petrol from one day to the next. But we shouldn’t be doing new projects.”

The Ugandan pipeline in particular is subject to several court cases and has been the focus of intense protests against Total. “It’s clear today that it’s become a thorn in our side in terms of the transformation we’re carrying out,” Pouyanné says.

The group says it has tried to mitigate its environmental impact, including by reducing the project’s footprint inside a protected park. Pouyanné argues opposition to the project, which he acquired for Total over a decade ago, is disproportionate to its potential effects.

Giving in to opposition on the project would put Total’s reputation at risk, he adds. “We have a commitment towards the countries that trust us,” Pouyanné says. “If I say tomorrow I’m going to drop Uganda, there’ll be other states that will lose confidence in us.”

Total ultimately plans to whittle down oil and gas product sales by 2050 to a quarter of its current sales, a level almost in line with the International Energy Agency’s vision to reach net zero emissions, although the pathways to getting there diverge sharply. The IEA said last year that no new oil or gasfield developments in new areas were needed.



Pouyanné disagrees, and the nature of his dominance at Total means the company will shift towards cleaner forms of energy on his terms. So far, his record has shielded him from serious opposition internally or from shareholders.

Yet to a greater extent than at other supermajors, much hinges on this particular chief executive’s ability to keep stacking up the right choices year after year. To some within the company, a big risk is whether there are enough strong voices to call Pouyanné out if his judgment falters.

But who dares tell the man who is always right that he is wrong? Characteristically, Pouyanné says he has his own formula to answer that question, with confidantes outside TotalEnergies he turns to as a sounding board, as well as his internal teams.

“You need to make sure that if you’re doing something stupid, people will tell you,” he says.

The world’s biggest oil and gas companies are generating more money than ever while spending relatively little of it.

European supermajors BP, Shell and TotalEnergies have each pledged to become green businesses over the next three decades but are still investing only a fraction of their capital on renewable energy.

With each expected to report another set of bumper profits over the next week, bankers are asking whether they might be tempted to turbocharge their transition strategies with a big acquisition.

The companies have not stopped buying. In April Shell acquired Indian renewable power group Sprng Energy from Actis for $1.55bn; in May Total took 50 per cent of a US wind and solar farm developer for $2.4bn; and in June BP said it had gained a 40 per cent stake in a vast Australian renewables project for an undisclosed sum.

Even US rival Chevron — a relative laggard on climate commitments — spent $3.15bn in February on the sustainable fuel-focused Renewable Energy Group.



But the deals are tiny compared with the tens of billions that would be needed to strike a transformative deal for a “green energy major” such as Germany’s RWE or Denmark’s Orsted.

In the first year of the Covid-19 pandemic, as oil prices crashed and the value of renewables companies soared, such a deal looked near impossible. In October 2020 Orsted’s market capitalisation surpassed $70bn, as Shell’s fell below $90bn and BP’s dropped to $51bn, its lowest since 1997.

This year, the rally in oil and gas prices has helped Shell’s shares jump 30 per cent, pushing its valuation back to over $185bn. Orsted’s market cap, in contrast, is down to $46bn, its shares having dropped about 3 per cent since January.

However, Jim Peterkin, head of oil and gas at investment bank Credit Suisse, said that while the time for such deals would come, it was still some way off.

“I do think there’s going to be a consolidation over time but that may be 10 years away, not one year away,” he said.

Despite the shift in relative valuations, higher investor support for those companies more heavily weighted towards renewables meant the likes of Orsted and RWE continued to trade at much higher multiples than the old oil and gas majors, Peterkin added.

“The multiples have not changed,” he said, so large-scale acquisitions of renewable companies were “still dilutive”.

Shell chief executive Ben van Beurden told the Financial Times he had been holding back from big deals to give Shell more time to better understand the renewables sector.

“At some point in time, I would expect there to be a time for large, inorganic [growth], but you don’t want to start if you are a relative newcomer on the block,” he said. “We’ve been looking at a lot of large things before that didn’t work out, or that we didn’t decide to do . . . and today I’m congratulating myself for not having done it.”

If Shell were to make a big move, he added, the number of power customers the target company had would be more important than the number of power assets.



Others in the industry point to a lack of viable targets for a blockbuster acquisition.

“Yes it makes sense but there’s no obvious deal to done,” said one senior investment banker. “There are not that many targets that would be really transformative and the bigger ones, like RWE or Orsted, aren’t really executable.”

Orsted is majority-owned by the Danish government, the banker added, while successful acquisitions of listed German companies such as RWE are rare.

Total has been the most active of the supermajors in striking deals. The French group made roughly $6bn in low-carbon investments between 2010 and 2020, the same as BP and Shell combined, according to Bernstein analysts. Investment bank RBC Capital Markets values Total’s low-carbon business at $35bn, compared with $24bn for Shell’s and only $12bn for BP’s.

Bankers say Total has been more willing than its competitors to pursue partnerships with renewables companies rather than outright acquisitions. Last year it bought a 20 per cent stake in Adani Green Energy for $2.5bn at an almost 40 per cent discount to the Indian group’s market capitalisation.

In May Total acquired 50 per cent of US group Clearway Energy Group from Global Infrastructure Partners. With Clearway owning 42 per cent of its listed subsidiary Clearway Energy Inc, the deal gives Total access to a pipeline of 25 gigawatts of wind, solar and storage projects across the US.

Total limited the amounted of cash it was required to pay to $1.6bn by investing in the parent company rather than the listed entity and selling GIP a stake in its SunPower business in the same deal.

“That to me is what smart M&A looks like for an energy major going forward,” Peterkin said.

Total chief executive Patrick Pouyanné, who tends to shun bankers, preferring to negotiate deals such as that with Clearway directly, told the FT that the challenge for the old oil and gas majors was how to make renewables sufficiently profitable.

“Our DNA is that we love the volatility of raw materials of petrol, of gas . . . we know there can be low points but there are high points too,” he said. “A utility isn’t that, these are people that accept a return level that is regulated and controlled.”

As a result, companies such as Total will need to acquire or develop renewable energy businesses where at least some portion of the power produced is not subject to regulated tariffs. “If I have, say, 70 per cent of my park under regulated tariffs, I have 30 to 40 per cent of production outside it, I can make a lot of money,” Pouyanné said.

For now, the supermajors are yet to show whether they can run renewables businesses profitably — let alone, for the purposes of successful M&A, more profitability than their current owners.

To approve a deal, shareholders in an oil and gas company would need to be convinced that it could run a company such as RWE’s assets better than they are being run currently, said the head of one renewables-focused private equity group.

Many industry insiders remain sceptical of the ability of oil and gas companies to make the leap.

One suggestion is that by bringing their trading experience to the power market, the European supermajors could increase the returns at renewables projects under their management.



BP, Shell and Total’s trading capability stands out, even in the oil industry, and all three have built large power trading businesses. Access to Total’s power trading capabilities was pitched as a component of the recent Clearway deal.

If the European supermajors can use this advantage to deliver “double-digit returns” from developing and owning renewables assets, it would go a long way to convincing shareholders to back a bigger acquisition in future, said Peterkin.

Until then, most in the sector expect the biggest deals to remain in the $1bn-$5bn range, meaning billions of dollars a quarter will continue to flow back to shareholders in the form of buybacks and dividends.

Shell has completed $8.5bn of share buybacks already this year and van Beurden has said shareholders should expect more.

Analysts believe the UK-headquartered group will report another record quarterly profit figure on Thursday of $11bn. RBC predicts a further $7.5bn in share buybacks in the second half the year.

“Maybe in a year’s time after more buybacks and more dividends, there will be a more serious discussion about what else to do with the money,” said Peterkin.

Additional reporting by Sarah White in Paris

The UK’s top financial regulator on Wednesday delayed long-awaited measures to protect customers and stopped short of banning charges, such as exit fees, which campaigners argue are inherently unfair.

The Financial Conduct Authority spent more than a year consulting with industry and consumer groups on proposals to end exploitative charges, improve customer services and make it easier to cancel unwanted financial products.

The FCA said the “consumer duty” recommendations will be introduced in most areas of the 60,000 companies it supervises by June 2023, three months later than originally planned after industry pleas for extra time.

Companies will have until June 2024 to apply the new protections to products that are no longer on sale, like old life insurance policies, as the processes around such products were more complicated to update, said the FCA.

The rules will not apply to investments in cryptocurrency or loans from “buy now pay later” companies, areas ripe for consumer rights abuse, as these lie outside the FCA’s jurisdiction.

FCA consumers and competition chief Sheldon Mills insisted the new regime would bring significant benefits to the UK at a critical time, as consumers face a cost of living crisis driven by rising food and fuel prices.

“The duty is going to fundamentally change industry behaviours by setting higher and clearer standards of consumer protection,” Mills told reporters.

He rejected suggestions that the overhaul was an admission of failings of the past regime which presided over the collapse of mini bond company London Capital Finance in 2019.

Under the proposals, companies must show they deliver good outcomes to customers and “avoid foreseeable harm” instead of merely demonstrating they have treated people fairly. Mills said that the reforms put the UK at the “forefront” of international consumer protection.

Companies will also have to ensure it is as easy for customers to cancel a product as to buy one, as well as improving call waiting times and conducting audits to ensure customers are not harmed by financial products.

Under the rules companies will be required to produce annual reports demonstrating how they are prioritising consumers’ interests.

Earlier drafts of the rules were criticised by campaigners for not being specific enough. The final package of measures does not include strict provisions on things including call waiting times or the types of charges that should be banned.

“We can’t be completely prescriptive,” said Millis, adding that while the FCA wanted customer service waiting times to be shorter, might be longer at certain times, for example, during systems outages.

The regulator’s treatment of exit charges — which apply to some mortgages and investment policies — would depend on whether customers were aware of the fees up front and if they were harmful.

The FCA will ask new companies to prove they have systems in place to comply with the rules, while using its “data-led approach” to identify and take action when existing groups are not complying.

“Where firms have breached the duty, we will use our full range of powers to tackle that . . . and we will hold firms and boards to account for these outcomes,” Mills said.

Airbus said it would deliver fewer planes by the end of the year than originally forecast and slow plans to increase production of its best-selling family of jets, in the latest sign of the supply chain constraints hampering the recovery of the aviation industry.

The world’s biggest plane maker said it was now aiming to deliver “around 700 aircraft” by the end of the year instead of its previous target of 720.

It is also adjusting the planned output of its A320 family of jets for this year and next. Airbus said it was now targeting a monthly production rate of 65 in early 2024 — some six months later than originally forecast. The company, however, said it was sticking with its plan to get to a monthly rate of 75 jets by 2025.

It also stressed that its earnings and free cash flow guidance for the year remained unchanged.

Airbus chief executive Guillaume Faury said the company had delivered a “solid” performance in the first half of the year in what he described as a “complex operating environment”, citing disruptions to supply chains, logistics and energy supplies as well as high inflation.

Like other global manufacturers, including US rival Boeing, Airbus is struggling with a shortage of raw materials, electronic components and other parts. Faury warned in an interview with the Financial Times last week that he expected the crisis to last until next year.

Supplies of engines have been a particular problem. Airbus had 26 “gliders” — aircraft that have been built but are sitting in storage without engines — at the end of June. Faury said on Wednesday he thought the company would be able to get back to zero gliders by the end of this year.

He said there had been no new “single event” in the supply chain that had led to the modification of the company’s guidance. Rather, Airbus had in recent weeks tried to make a “deep and fair assessment” of the environment based on a lot of discussions with suppliers.

“We are trying to go as fast as we can but have to recognise the environment for what it is,” Faury added.

Despite the constraints, Airbus is exploring the feasibility of increasing the rate of production of its widebody aircraft, which typically fly on long-haul destinations, amid signs that international air travel is recovering.

The changed targets came as Airbus reported adjusted earnings before interest and tax of €2.64bn for the first half, 2 per cent lower than a year earlier. The figure should reach €5.5bn by the end of the year.

Free cash flow before customer financing and acquisitions is still expected to come in at €3.5bn in 2022.

Sash Tusa, analyst at Agency Partners, described the results as a “bit of a loss of thrust”. 

While the cut to full-year deliveries and the flattening of the ramp-up of the A320 “should not really matter” given that Airbus was still outproducing Boeing by 1.5 to 1, the European company “is losing a bit of momentum as macro conditions get tougher”, he said.

The outlook for dividends from UK companies has been clouded by expectations that payouts from mining groups have peaked, according to an industry report.

Total dividends from UK-listed companies rose by 38 per cent in the second quarter, compared with the year before, hitting £37bn, according to the report from funds group Link.

Analysts increased their forecast for shareholder payouts this year, partly because of the weak pound. But they warned that core dividends, which exclude one-off specials, could weaken as mining companies cease to provide a key boost to growth in payouts from UK companies.

“Mining payouts are closely linked to the cyclical fluctuations in mining profits and tend to rise and fall much more over that cycle than dividends from other industries. Concerns over global growth have pushed commodity prices sharply lower in recent weeks, though they remain high in historic terms,” said Ian Stokes, managing director, corporate markets UK and Europe at Link.

“If mining dividends have indeed now peaked, they will act as a brake on UK dividend growth in the next 12 months, having provided the main engine over the last 24,” he said.

Mining payouts contributed a quarter of the total payouts in the three months to the end of June. Oil companies and banks remain the UK market’s other key payers, supported by a good quarter for the broader corporate sector.

The return of common viruses after the coronavirus pandemic and Covid-19 becoming part of everyday life has sparked a boom in sales of over-the-counter cold and flu medicines.

Strepsils-maker Reckitt Benckiser is projecting a long-term increase in sales of cold and flu products and said that sales in its health portfolio had surged close to 25 per cent in the first half of the year.

Growth was partly propelled by the return of colds and flu, which were suppressed by pandemic-induced restrictions, but also by the spread of Covid-19 through populations as it moves from a “pandemic to an endemic” phase, said chief executive Laxman Narasimhan.

Sales of Mucinex cold medicine and Nurofen painkillers helped Reckitt beat expectations with first-half like-for-like net revenue growth of 8.6 per cent.

Scientists refer to a disease becoming “endemic” when its presence is steady or predictable in a particular region, as with flu. They say Covid-19 is in the process of moving to this stage, with researchers at the Yale School of Medicine in the US saying it could be reached as soon as two years’ time.

Narasimhan said he expected a “baseline change in the business as [Covid-19] becomes endemic . . . We are seeing . . . that consumers are resorting to self-care more,” he added.

The trend also benefited rival Haleon, the consumer health group spun out from GSK last week, which reported first-half like-for-like net revenue growth of 11.6 per cent, helped by the rebound in sales of over-the-counter cold and flu medicines.

Haleon, which makes Panadol painkillers and Theraflu and Contac cold medicines, said the boost was “supported by the Covid-19 Omicron wave underpinning results across all regions”.

Revenues from Theraflu more than doubled, while those of Otrivin nasal sprays were up by almost half, it said.

Reckitt said it expected like-for-like net revenue growth — a key metric for the sector — of 5 to 8 per cent for the full year, up from previous guidance of 1 to 4 per cent, as it benefits from higher medicine sales along with a productivity programme and higher pricing.

Narasimhan said the productivity programme, which involves measures such as bringing some advertising creation in-house, was delivering results faster than expected, with £370mn of savings in the first half.

Reckitt also gained from pushing up prices for its products by 6 per cent to help pass on steep rises in commodity and transport costs, a similar rise to companies including dairy group Danone.

Reckitt’s operating profit rose 20 per cent to £1.8bn, while pre-tax profit was £1.7bn, swinging from a £1.9bn loss a year earlier.

The positive numbers prompted Narasimhan to declare victory in a bid to turn round the company, which had suffered execution problems and slow growth ahead of his appointment in 2019.

He said he had met a target of “sustainable, mid-single-digit net revenue growth” and would reach another goal of mid-20s adjusted operating margins by the mid-2020s. “Reckitt is a much stronger business today than it was in 2020,” he said.

The company has also benefited from competitor Abbott Laboratories halting production of infant formula as a result of problems at its US plant.

Shares in Reckitt closed up 2.8 per cent to £65.50, while shares in Haleon fell 1.8 per cent to 303.5p.

Colds and flu put on a lockdown disappearing act. They have since come roaring back, compounding the misery caused by new coronavirus variants with similar symptoms. That has made for what UK consumer health group Haleon — spun out of GSK last week — cheerfully describes as a “strong” cold and flu season. It buoyed Haleon’s half-year results and those of rival Reckitt Benckiser on Wednesday.

Reckitt’s sales of medicines such as Mucinex and Strepsils grew more than 60 per cent for the half year. True, that performance was flattered by a weak comparator. But Reckitt says sales of cold and flu remedies in recent months have jumped 30 per cent higher than a normal flu season. Boss Laxman Narasimhan talks of a step change in the business as Covid-19 becomes endemic.

It is a similar story from Haleon, which reported that sales of its Theraflu medicine more than doubled.





These are unusually racy numbers for such products. Sales of OTC medicines typically grow at 2 to 3 per cent a year. Strong brand loyalty dictates relatively stable market shares, with limited innovation and little generic competition. Private labels have just 9 per cent of the OTC market, according to UBS.

In past downturns, customers have tended not to trade down. Haleon, the largest consumer health company with nearly a tenth of the market, trades on an enterprise value-to-ebitda multiple of 15 times. This 10 per cent premium to the EU food and household goods sector reflects those defensive qualities.

Demand for cold cures should remain strong, even if work-from-home trends stop people sharing their germs with passengers and colleagues so freely. Australia, which often provides a guide to what will follow in the northern hemisphere, recently reported an exceptional surge in flu cases. The lack of exposure to flu during periods of social distancing may have caused immunity to wane.

Meanwhile Covid is here to stay. That will sustain demand for products that promise to prevent or cure. Cold medicine makers, once pandemic losers, should benefit from Covid over the long term.

Credit Suisse directors last month made the trek up the Swiss Alps for their annual off-site gathering in the spa town of Bad Ragaz, famous for its healing waters.

After a bruising few years in which the bank lurched from crisis to crisis, chair Axel Lehmann and the board had finally decided on a turnround plan.

The only question remaining was who would drive that change. They had concluded that chief executive Thomas Gottstein, who had his own health problems, was no longer the right man for the job.

That was settled on Wednesday with the promotion of Ulrich Körner, a former UBS executive who joined last year to run the asset management division. He beat out two internal rivals, investment bank boss Christian Meissner and Francesco De Ferrari, head of wealth management, people familiar with the matter told the Financial Times.

Körner was picked because of his reputation for dispassionate cost-cutting and operational execution, the people said, deemed essential in a bank that has spiralled out of control, unable to stem the flow of scandals and with its shares at a three-decade low.

People close to the 59-year-old Swiss executive say he earned the nickname “Uli the knife” during his 11 years at UBS, where he helped restore discipline in the wake of a rogue trading scandal that led to losses of $2bn and the chief executive’s ousting.

A person familiar with the matter said Körner narrowly missed out on UBS’s top job to Sergio Ermotti a decade ago. When he takes over at Credit Suisse on Monday he will have the chance to revive another ailing Swiss lender. “He clearly has unfinished business,” said one former UBS colleague.

His task is daunting. During Gottstein’s two-year tenure, Credit Suisse shares plunged 60 per cent and the bank was haunted by scandals old and new.



It lost $5.5bn from the collapse of family office Archegos, is still trying to recover $2.7bn of client money after the failure of Greensill Capital, was fined for its role in the $2bn Mozambique “tuna bonds” scandal and became the first Swiss bank to be found guilty of a corporate crime after it was found to have laundered money for a Bulgarian cocaine cartel run by a former professional wrestler.

The financial performance has been equally bleak. After making a SFr2bn ($2.1bn) loss in the fourth quarter last year, it has lost a further SFr1.9bn this year. It has issued profit warnings in six of the last seven periods.

Gottstein’s departure means all but one member of the dozen-strong executive board he installed in early 2020 is gone, or soon will be.

“While Mr Gottstein inherited a number of problems, the way in which the firm reacted to these and the subsequent strategy adopted has left the bank in a weaker position with significant franchise erosion across all divisions, most notably the investment bank,” said Citigroup analyst Andrew Coombs.

Top of Körner’s lengthy to-do list is a brutal cost-cutting exercise that will lead to a much-diminished investment bank and strip out as much as 20 per cent of the bank’s annual spending to less than SFr15.5bn.



Shareholders and Credit Suisse’s 45,000 global workforce will be watching anxiously to see if Körner and Lehmann — who worked together at UBS — will be able to arrest the decline of a national champion that has taken on Deutsche Bank’s mantle as world’s most scandal-prone lender.

People familiar with the new strategy, which will be unveiled in more detail in October, said another focus would be cutting what is considered to be bloated and inefficient technology and operational divisions.

The change in leadership was announced at the same time as the bank reported a third consecutive lossmaking quarter. The SFr1.6bn group-wide loss, significantly worse than the SFr206mn expected by analysts, was driven by a SFr1.2bn hit from Credit Suisse’s investment bank, the source of many of its recent woes.

Credit Suisse’s latest strategic review — its second in less than a year — aims to slim the investment bank to focus on capital-light advisory work to support the group’s three other business lines: wealth management, asset management and the Swiss domestic bank.

The plan is being hashed out with support from advisers at Centerview Partners, whom the bank’s previous leadership had recruited to devise a more sustainable strategy.

The move risks alienating investment bankers. Meissner, head of the division, is planning to step down after an interim period, despite having joined little more than a year ago, the FT reported on Tuesday.

Körner and Lehmann have said they are considering an exit or sale of the bank’s securitised products business, which used to be one its most profitable. But analysts cautioned that while revenues are quick to disappear as trading units are shut down, the costs stick around for much longer.

“We expect exit costs from this business, which has $20bn of risk-weighted assets and $75bn of leverage exposure, could be sizeable,” said Citigroup’s Coombs. Third-party capital is being sought “presumably to reduce the magnitude of exit and restructuring costs, but we question who would step in and how this relationship would work”.

Credit Suisse investors have long called on the group to pull back from investment banking, saying its returns do not justify the costs of running the business or the frequent scandals.

“We are encouraged that management is taking steps to realise the inherent value in Credit Suisse by improving upon their strengths and shedding their weaknesses,” said David Herro, vice-chair of US asset manager Harris Associates, the bank’s largest shareholder.

Vincent Kaufmann, chief executive of Ethos Foundation, which represents shareholders owning about 5 per cent of Credit Suisse stock, said scaling back the investment bank was long overdue and mimicked UBS’s successful shift to wealth management a decade earlier.

“Having two former UBS executives now running Credit Suisse is an acknowledgment that UBS made the right turnround 10 years ago,” he said. “They can change strategy and leadership, but the real change needs to be on culture. They need to show it’s working.”

However, another top-10 shareholder gave a less optimistic assessment.

“My view is the company is listless, it has no effective leadership,” the person said. “My forecast is that the bank will be sold. This will not work out and the regulator will force a transaction.”

Some trace Credit Suisse’s problems back decades to its attempt to break into Wall Street by building a stake in First Boston, taking majority control in 1988 and branching out from its Swiss private banking roots. It was then run by a series of US investment bankers including John Mack and Brady Dougan.

“Twenty years ago we lost our soul. We wanted to play in the NBA, that is how we saw investment banking,” said one veteran wealth manager. “And not only did we buy an investment bank, who were the next CEOs? They all came from there — what do they know about private banking? Banana trees are not going to produce cherries.”

“We need to go back to the essence of our core business and regain our soul,” he added. However, there is “little room for strategic manoeuvre today with the capital position, business mix, legacy misconduct issues, provisions and the loss of vast human capital”.

The bank sought a new direction in 2015, recruiting insurance executive Tidjane Thiam. After a promising start where he set about de-risking the investment bank and shifting the strategic focus to wealth management in Asia, he became mired in a corporate spying scandal that undermined his turnround and ultimately cost him his job.

Credit Suisse then recruited former Lloyds chief executive António Horta-Osório for a fresh start. But he lasted less than a year as chair, quitting in January after losing the confidence of his board when it emerged he had breached Covid-19 quarantine rules to attend sports events with his family and used company-funded private jets for personal trips.

Internally, many in Zurich hope the sober Körner will bring an end to such lurid scandals and address a cavalier approach to risk management that has characterised its recent past.

“Credit Suisse has always been too small to compete with Wall Street, so we have taken risks that are too great,” said a Credit Suisse compliance professional, citing last year’s twin crises of Greensill and Archegos.

“Some of them pay off for a while. But it is like Russian roulette — the sixth bullet always kills you.”

Riding a rickety vehicle down a hill is fun at soapbox derbies, less so in banking. Ulrich Körner will try to pilot the wobbly-wheeled jalopy that is Credit Suisse through yet another course of restructuring. The Swiss bank has triggered the ejector seat under current boss Thomas Gottstein after just over two years.

The share price has fallen 61 per cent since Gottstein arrived. His successor must somehow rebuild the confidence of investors and employees.

Credit Suisse drifts chaotically from crisis to restructuring and back again. Scandals over Archegos and Greensill Capital have drained coffers. Gottstein, a journeyman boss at best, could not root out a cavalier culture of risk-taking within prime brokerage and other parts of the investment bank.

The board seems to have scratched around for a replacement. Körner, a former Credit Suisse and UBS executive, does not look like an inspiring hire. His recent experience is in asset management, a quite different business to the investment bank he must now cut down to size. Nearly a third of the bank’s SFr274bn of risk-weighted assets sit there.

Wednesday’s second-quarter results featured SFr1.1bn of litigation charges for the first half. That is on top of nearly SFr3bn ($3.1bn) of legal settlements and goodwill impairments in the past two years. That led to SFr442mn of reported losses in the period.

No wonder Credit Suisse trades at just 30 per cent of its tangible book value. Its answer is to bring down the previous cost base target by roughly a billion to SFr15.5bn. It can be done. Deutsche Bank, suffering from a similarly depressed valuation, has so far survived such a ride.

Investment matters too. Otherwise, the investment bank may simply dwindle to irrelevance. Finding fresh funds will be hard as revenues drop in volatile markets. Credit Suisse wants to create a capital-light investment bank, attracting outside partners for its securitised products unit. This deals in derivatives and securitisations, among other things. Credit Suisse had better pick collaborators more reliable than Lex Greensill.

Securitised products represents about $20bn in risk-weighted assets, not all of which sits within the investment bank. Untangling would be required for joint ventures to proceed, says Berenberg. The bigger question is what happens to the investment bank longer term. One option would be to integrate it into wealth management.

Credit Suisse has plenty of momentum — downhill.

For decades, the Kuwait Investment Authority kept a low profile as it garnered a reputation as one of the oil-rich Gulf’s most powerful and respected sovereign wealth funds.

But last week, the KIA abruptly sacked Saleh al-Ateeqi, the head of its London investment arm, the Kuwait Investment Office, dragging the secretive fund into the spotlight.

Founded in 1953, the KIA is one of the Gulf state’s most influential institutions and guardian of Kuwait’s wealth for a post-oil future. With an estimated $700bn ore more in assets, under half of which are managed out of London, the fund has investments across the globe, from stakes in asset managers like BlackRock to critical infrastructure such as the UK’s Associated British Ports. In 2008, as Western markets plunged in value during the great financial crisis, it also snapped up shares in Wall Street banks Citi and Merrill Lynch.

But with stock markets in turmoil once again, the departure of Ateeqi has exposed the challenges the fund faces as it grapples with internal disputes sparked by attempts to modernise, according to more than a dozen current and former staff interviewed by the Financial Times.

The fund has not explained its decision to fire Ateeqi, which capped a four-year period in which the KIO became embroiled in a string of legal battles with former staff, internal investigations and rising tensions between the London office and leadership in Kuwait.



Ateeqi’s backers said his firing was politically motivated, blaming a power struggle between those attempting to reform the fund and an old guard at the KIA.

“It’s chaos there now, with various factions pitted against one another,” said a fund manager who invests on behalf of the KIA.

Changes started to ripple through the traditionally conservative fund from 2017, say people familiar with the matter, when Bader al-Saad, who had been the dominant figure at the KIA for over a decade, stepped down as managing director. His successor, Farouk Bastaki, and a freshly appointed board, wanted to modernise the fund, say the people.

New members of the board had been shocked to find there was weak compliance and risk control and no effective performance measures for internal fund managers, one person close to the KIA said.

“These deficiencies were extraordinary” for one of the world’s largest sovereign wealth funds, said another person close to the KIA and Ateeqi.

With Bastaki in place, Ateeqi was hired from management consultant McKinsey in 2018 and given a mandate to modernise how the London office worked, the person said.

Under Ateeqi, the London outpost was chosen to become a “kind of prime springboard” to develop new talent, update trading and compliance systems — many of which were still manual — and implement new standards, including a compensation system tied to performance, they added.

Ateeqi added an investment committee alongside a chief investment officer, chief technology officer, a head of asset allocation and a head of strategy.

“It was completely absurd that if you take a look at all the metrics in terms of the compensation of fund managers who’ve been there . . . almost 25,30 years ago, it hadn’t changed,” said the second person close to the KIA and Ateeqi.



Ateeqi also wanted to tighten his oversight of the KIO’s investments and developed a “CEO dashboard” that would allow him to monitor KIO fund managers decisions in real time, say insiders. The project, completed in autumn 2021, was opposed by senior IT staff due in part to its estimated $300,000 cost. The head of IT has since resigned after taking a leave of absence for stress and after his department repeatedly clashed with Ateeqi over costs and direction for redesigning the KIO’s systems.

Ateeqi declined to comment for this article. The KIA did not reply to multiple requests for comment.

Rising tensions

Ateeqi’s management approach stirred resentment within the KIA and led to an outflow of staff from the London office, according to current and former employees.

At least 53 full-time staff left over the past four years out of a team of around 100, including 10 members of the human resources team, according to people with knowledge of the situation, a marked change for an organisation where people tended to stay in their jobs for more than a decade.

A person close to Ateeqi insisted that turnover was still below the average for the UK financial sector during his tenure and that the previous low level had contributed to the problems of the organisation.

His time in charge of the KIO polarised opinion. The current and former employees said that Ateeqi, a Wharton graduate who once worked as an adviser to Tony Blair, had shaken up a sleepy organisation and supported high performers.

But others described a turbulent, dysfunctional work environment rife with bullying. They remember being shouted at in project and investment meetings by Ateeqi, and said they were quickly sidelined if they pushed back against decision making — assertions rejected by Ateeqi’s supporters.

“The culture of the office has drastically changed from what it was. Within six months of arriving, [Ateeqi] started wielding the axe and it hasn’t been the same place since,” said a person who has worked at the KIO, referring to departures of employees. “The culture is awful.”

One member of the KIO’s strategy team, Yanni Legbelos, became a central source of tension with Ateeqi, clashing with him over culture and leadership in the London office and lodging complaints about intimidation, employee departures and inexperienced hires with top KIA executives in Kuwait.

On Tuesday, following his termination, Ateeqi launched a legal complaint in Kuwait against the finance minister and the head of the KIA for their failure to dismiss Legbelos. Ateeqi had previously complained to his bosses about the Greek employee alleging, among other things, that he had misrepresented his role at the London office in dealings with outside parties, conflicts of interest and disclosure of state secrets.

Legbelos denies the allegations, saying his former boss had been aware of his background and qualifications over the four years they had known each other.

A person close to Ateeqi said that all dismissals at the London office were handled by an external consultant and that he did not fire anyone.

However, multiple legal disputes between the KIO and former employees are continuing in the UK’s courts. One case revolves around the firing during Ateeqi’s tenure of three senior executives for allegedly conspiring to award unapproved pay increases in the period before he took over, but after his predecessor had left office. A High Court case is on hold until employment tribunal proceedings, brought by the former employees, have been concluded.



In addition to the legal processes in the UK, the KIO had pushed for the three fired executives, all of whom are British citizens living in the UK, to be reported to criminal prosecutors in Kuwait under a law which carries a maximum penalty of life imprisonment, according to a 2022 report by Kuwait’s State Audit Bureau.

The move was opposed by the KIA, however, concerned that criminal prosecutions in Kuwait would create “sovereign complications” with British authorities and “cost the state enormous sums”, according to the same report.

The fund’s inner workings being dissected in public has raised hackles in Kuwait, where Ateeqi lacked deep connections, say people familiar with the matter. His relationship with the KIA also appeared to deteriorate after a new board and managing director were appointed in 2021.

Internal investigations

As tensions mounted this year, the KIA launched a formal investigation into how the London office was being run, said several people with knowledge of the situation. The probe was launched in April, according to one of the people.

Alongside the staff turnover, another issue raised by the investigation was the performance of the Satellite fund, a fund run by the London office that takes large positions in companies involving higher risk but potentially higher returns, according to the people.

Neither the London-based KIO or KIA make their performance or portfolios public. However the Satellite Fund — which was set up eight years ago — has lost between $500mn on an absolute return basis and over $1bn compared to its benchmarks, in the year to March 2022, taking the assets in its portfolio to around $7bn, according to people familiar with the performance. The S&P 500 rose 10.37 per cent over the same period.

The fund had previously made billions for Kuwait betting on US and European growth stocks, and had outperformed benchmarks by several percentage points, according to the sources.

One reason for the dip in performance, say the same sources, was a pivot to making sizeable bets on Chinese tech stocks from 2020, which have been battered this year, including Alibaba and a peer-to-peer lending platform Lufax, which saw its share price fall after listing.

A person close to the KIO said that the Satellite fund is the best performing fund in 2022 of the 130 that the organisation manages: “Investments in the Satellite portfolio are investment committee decisions . . . That a single KIO fund is loss making on any scale is not extraordinary.”

“This probe [by the KIA] is a clear witch hunt,” another Kuwaiti ally of Ateeqi said. “The track record of KIO speaks for itself — the performance over the period of coronavirus is good compared to the broader market.”

In response to the escalating conflict, Ateeqi took matters into his own hands, drafting in law firm Quinn Emanuel to launch a separate investigation into the complaints by Legbelos. The allegations “were found to have no merit” in a report delivered on July 15, a person with knowledge said, adding Ateeqi’s dismissal “was patently to settle scores and eliminate rivals”. Quinn Emanuel declined to comment.

But that verdict was not enough to change opinions in Kuwait where the affair has left the KIA exposed to a rare level of public scrutiny and underlined the difficulties of modernising state institutions that can quickly become factionalised.

“The bigger picture is that we are in the mode of change and dismantling of structures built up over decades,” the fund manager said. “Important institutions, like ministries, the courts and the KIA are now undergoing change.”

Additional reporting by Stephen Morris

Staff in Boston Consulting Group’s London office have complained about “nepotism” after the children of dozens of top partners flew in from across the world for an exclusive week-long work experience programme.

The US-based consultancy ran the programme, consisting of days of workshops, this month for about 30 children of the firm’s managing directors and partners, triggering an internal row over BCG’s commitment to social mobility and tackling climate change.

“They received office tours, dinners and stuff that wouldn’t normally be given to [job] candidates. They basically made it a bit of a holiday for the partners’ kids who came over,” one current BCG employee told the Financial Times.

The children were participating in BCG’s “Bruce Henderson Summer Programme”, named after the firm’s founder. The daughter of one partner based in France who attended wrote on LinkedIn that she had learned about “strategic consulting basics” and presented a project to “a panel of senior consultants”.

Three BCG staff members worked for two months to prepare the programme, work that would cost external clients well more than £1mn, according to the BCG employee.

“It’s caused a lot of internal disquiet both among more junior staff [and at] more senior levels, particularly in the London office, and concerns were simply overruled,” the employee said.

BCG, which employs 25,000 people in more than 100 cities around the world, said: “The Bruce Henderson Summer Programme has been in place for many years and is designed to help children have a broad educational and professional experience. Parents cover the primary costs, such as travel. Participants stay in college dorms, and the programme is focused on education.”

The firm added that consultants who worked on the programme had volunteered their time: “BCG did not staff a team to organise this.”



The firm reported sales of $11bn for 2021. It has also tightened its travel policies for staff as part of efforts to reach net zero carbon emissions by 2030. Trips to cities such as Florence and Lisbon for prospective recruits to the London office have been axed.

Chief executive Christoph Schweizer said in February that he wants BCG to hire climate activists to work for corporate clients and that he expects the firm will earn up to a third of its fees from climate consulting within five years. BCG said it “remains committed, and is on track, to reach net zero climate impact no later than 2030, and we are on target to halve our carbon emissions by 2025”.

Last year, BCG also signed up to a programme run by the UK’s Sutton Trust to help people from lower-income backgrounds enter consulting.

“This kind of behaviour makes a mockery of the work that the [Sutton] Trust does to advance social mobility in finance and consulting,” said the employee, adding it is “also completely against the spirit of our very publicly stated net zero ambitions”.

Staff writing anonymously in a private group on the Fishbowl app, which requires users to register with their work email addresses, made similar complaints that the work experience programme was inconsistent with the firm’s public positions.

“People would take the net zero commitment more seriously if there was more consistency across the board,” said one BCG staffer. “We get our global trainings killed and [managing directors/partners] kids get flown to London for a fun day?” said another.

A third labelled the programme “super nepotism”, noting: “Our recruiting programme aimed at the same age group is oversubscribed 40:1.”

One person describing themselves as a senior partner defended the firm saying: “We are paying our own way if we want our children to go.”

But a fourth BCG employee wrote: “Let’s advertise it and see what the public response is? Join BCG to babysit the bosses’ kids!”

“Shocking use of resources,” wrote a fifth, who said they had worked on the events.

Big Oil is gushing cash. ExxonMobil and Chevron are the latest supermajors to bank record quarterly profits. The pair handily trounced expectations with a combined net profit of nearly $30bn, more than three times what they brought in a year ago.

Investors — particularly those who stuck with energy stocks during the pandemic-induced oil price crash — will be forgiven for feeling smug. The S&P oil and gas index has more than quadrupled from its 2020 lows. Shares in Exxon and Chevron both set new highs last month.

This may be as good as it gets. With the US in a technical recession and consumer wallets squeezed by inflation, the rally in crude prices is starting to ease. Brent crude climbed above $120 a barrel during the April to June period. Since then, it has retreated about 11 per cent.

The oil industry’s record profits have also become a political flashpoint. President Joe Biden, who in June accused Exxon of making “more money than God”, says lowering gas prices at the pump is a key focus for his administration. Meanwhile, costs are expected to go up as oil service companies look to pass on their higher operating expenses to their clients.

Even so, investors should stick around. Unlike the last oil price boom in 2008, current record profits are not only the result of higher commodity prices. While Exxon and Chevron together generated nearly $34bn in cash from operations in the second quarter, the groups spent around $8.5bn on capital expenditure during the period.

Soaring refining margins — the difference between the cost of buying crude oil and selling refined fuel — are also padding the bottom line. This will moderate as demand slows. But the boycott of Russian oil will put a floor on how low fuel prices will go.

At between 7 and 8 times forward earnings, Exxon and Chevron remain good value. Throw in the enlarged share buybacks and dividends, and they look like reliable cash gushers for at least another year.

History does not record whether Grigori Rasputin, the hardy monk whose misguided ideas about statecraft reputedly helped seal the fate of the Romanov empire, believed in transmigration of the human soul. But if he did, we can guess how he would have wanted his spirit to be revived: as a seemingly impossible-to-kill, multibillion-dollar giveaway for private equity that ranks among the most widely derided clauses of the US tax code.

Congressional Democrats promised this week to kill the tax break that allows investment firms and their executives to receive millions of dollars a year while paying a lower rate of tax than rank-and-file employees.

The subsidy has few defenders even inside the gilded circle. Bill Ackman, the hedge fund manager, on Thursday called the handout “an embarrassment”. Michael Bloomberg, a billionaire former investment banker and sometime US presidential hopeful, told an interviewer some years ago that his friends in the private equity industry “think this is such a joke, even they can’t keep a straight face”.

Your correspondent has spent an entertaining evening with one of the policy’s more poker-faced defenders. He traced a lineage between carried interest and medieval Venice, likening private equity performance fees to the share of the cargo that merchant seafarers received as pay for their perilous labour. The American Investment Council, a lobby group, put the point less poetically this week, calling the Democrats’ proposal “a new tax on the private capital that is helping local employers survive and grow”.

Those comparisons are mostly baloney. Unlike ships’ captains who risked everything, managers of even a medium-sized fund receive tens of millions of dollars a year in fixed management fees. When their bets go wrong, clients typically shoulder almost all of the losses, while the bungling investment managers strive to wipe the slate clean by raising a new fund. A 2008 study of hedge fund fees by two Oxford academics found that generous incentive schemes were of little value unless they were accompanied with stinging penalties for underperformance.

Whether or not Wall Street executives deserve their danger money is a less important question than whether taxpayers should pay for it. Instead of cash, private equity executives receive a portion of their pay in the form of rights to participate in their clients’ investment profits. The Internal Revenue Service ruled three decades ago that those earnings be taxed as capital gains, attracting a top tax rate of 20 per cent, far less than the 37 per cent that the best-paid Americans owe on their cash income.

That logic might have appealed to a convoluted thinker like Rasputin. Rather than defend it, investment firms have assumed an air of studied indifference towards the expected demise of their longstanding tax break. Curtis Buser, Carlyle Group chief financial officer, was asked about the Democrats’ proposal on a long-planned conference call on Thursday. “We got people all over the world, subject to all kinds of different tax rates,” he shrugged.

But the tax break has proved as hard to kill as the mad monk himself, who is said to have devoured a platter of cyanide-laced cakes and lived long enough to demand a healthy pour of Madeira wine. Barack Obama promised to finish off the carried interest subsidy during his 2008 presidential campaign, but never followed through. His successor Donald Trump made the same pledge, yet settled for an adjustment that limited the giveaway to investments that were held for at least three years.

Joe Manchin, the conservative Democratic senator, sounded positively gleeful on Thursday as he administered what finally appeared to be a killing blow. “Enough is enough for the one-tenth of 1 per cent of the wealthiest people in the country having an advantage,” he said at a press conference to announce the surprise legislative deal. “It was long overdue to get rid of and you can’t justify it any more.”

But this proposal, too, turns out to be a feint. A close reading shows that investment firms will keep receiving the subsidy on investments that they hold for at least five years. Even that modest change hinges on the support of Kyrsten Sinema, the Democratic senator who has received donations from Wall Street, and was apparently not consulted in advance.

Private equity was little more than a cottage industry when the IRS handed down the 1993 ruling that helped mint the fortunes of a generation of financial billionaires. Since then, Wall Street firms have attained unimaginable scale, employing more than 10mn workers and imposing an investor-friendly economic logic on industries that shape every facet of American life.

Eliminating the carried interest subsidy would hardly touch the investment industry’s awesome power. The Democrats expect to raise $14bn in extra tax revenue over the next decade if their proposal passes. That is less than half the estimated fortune of Blackstone founder Stephen Schwarzman.

Yet abolishing the reviled tax break would be welcome if it marks the breaking of the spell that Wall Street has cast on Washington.

Author's email: mark.vandevelde@ft.com

Samsung Electronics has reassured markets over the competitiveness of its semiconductor business, after a series of warnings from investors, analysts, and employees that the Korean company is losing its technological edge.

The South Korean conglomerate is the global market leader in memory chips, and harbours the ambition of closing the gap on key rival Taiwan Semiconductor Manufacturing Company in the foundry sector, where companies are contracted to produce chips designed by others.

Illustrating the company’s importance to the global economy, US president Joe Biden visited its Pyeongtaek semiconductor plant during a visit to South Korea in May.

But earlier this year the company lost its two biggest foundry customers, Qualcomm and Nvidia, to TSMC, according to analysts, who have suggested the companies were disappointed by Samsung’s inability to deliver stable volumes of 4-nanometer and 5-nanometer chips that make up computers’ central processing units.

TSMC captured 54 per cent of the foundry market in the first quarter of 2022, more than three times Samsung’s market share, according to market researcher TrendForce.

Last year, Samsung announced a Won171tn ($151bn) investment plan for foundry chips by 2030. But its Taiwanese rival is planning to invest up to $44bn this year compared with Samsung’s estimated $12bn, according to Seoul-based SK Securities.

And in the D-Ram business, traditionally Samsung’s strength, rivals Micron Technology and SK Hynix have been quicker to unveil some of the most-advanced chips. D-Ram technology enables short-term storage for graphic, mobile and server memory chips.

Issues with its flagship Galaxy S22 smartphone, launched in February, suggest that the South Korean group is also falling behind Apple on hardware competitiveness, while the performance and sales of Samsung’s Exynos 2200 mobile processor chips, which were launched this year, have been disappointing.

Investors including hedge funds Petra Capital Management and Dalton Investments have raised concerns about what they describe as Samsung’s rigid corporate culture under the leadership of Lee Jae-yong, Samsung’s vice-chair and de facto leader.

They argue that the company has prioritised rapid development and cost savings over quality and innovation.

“Designing their own chips requires creativity and engineering prowess but Samsung’s risk-averse culture has deepened under Lee Jae-yong’s leadership, with engineers avoiding new attempts at innovation,” said Chan Lee, managing partner at Seoul-based Petra Capital Management.



Investors have raised concerns about what they say is a rigid corporate culture under Lee Jae-yong, Samsung’s vice-chair and de facto leader © Jeon Heon-Kyun/Pool via AP
In April, a junior engineer who worked at Samsung’s semiconductor technology development team wrote a letter to the company’s leadership complaining that Samsung researchers were under enormous time pressure to meet “impossible” targets to develop new technology and products, and that “a sense of failure” permeated the organisation.

“It seems that the top decision maker is not able to grasp the root cause of the problems,” the engineer added. “I’ve heard quite a few stories of ‘crisis’ but I think this moment is more dangerous than ever.” 

“Cultures at a design house and fab are critical to success. These genius engineers need the correct motivation, direction and leadership,” Dylan Patel, chief analyst at SemiAnalysis, wrote in a recent report. He attributed Samsung’s problems to a “toxic” culture in which different business units blame each other “in the face of mistakes” for its weakness in the non-memory sector.

Samsung’s share of the smartphone application processor market has almost halved since 2019 and last year ranked fourth with 6.6 per cent, compared with Qualcomm’s 37.7 per cent, MediaTek’s 26.3 per cent and Apple’s 26 per cent, according to market research company Strategy Analytics.

“[Samsung’s] technological advantages are all falling apart,” wrote Patel. “Samsung is slipping on all aspects of technology development including the one area they have historically crushed all competitors, D-Ram.”

Samsung Electronics reported a smaller-than-expected operating profit for the second quarter of 2022, as inflation damped consumer demand for electronic devices.

It is also bracing for waning demand in response to global price rises following the pandemic-driven surge in the tech sector over the past two years.

But company executives argue that its memory business still enjoys a technological edge over its competitors, citing its faster adoption of extreme ultraviolet lithography technology for memory chip production and its dominant D-Ram market share of around 40 per cent.

Kang Moon-soo, vice-president of Samsung’s foundry business, has described market concern about the loss of key customers as “overblown”, telling analysts in April that it had an order backlog for the next five years, or eight times last year’s revenue from the business.

Analysts said that TSMC’s faster transition to mass production of 4nm and 5nm chips had affected the Korean company’s ability to produce cutting edge chips at sufficient volumes for its most prominent customers.

But Samsung told the Financial Times it was now able to produce stable quantities of the chips and would be “maximising” supply. An executive told analysts on Thursday that the company is “reorganising” its chip design business to strengthen its longer-term competitiveness.

Earlier this week, the company held a ceremony to celebrate its first shipment of 3-nanometer chips, having beaten TSMC to bring the next generation of non-memory chips to market.

“Samsung still has a chance to draw customers in again if it can boost the yield rate of advanced chips,” said James Lim, an analyst at California-based hedge fund Dalton Investments. “No one wants to shoulder the risk of completely relying on TSMC.”

Samsung also said it was making efforts to create an “inclusive challenge culture” through “open communication” with employees. It said it continued to talk to employees about the company’s vision and business direction.

There is optimism within the company that Lee, a scion of the company’s founding family, will receive a pardon from President Yoon Suk-yeol next month.

Lee was released from prison on parole last year, having served 60 per cent of his sentence for bribing former President Park Geun-hye to secure his family’s control of Samsung Electronics.

But he remains under restrictions concerning his employment and business activities, complicating his ability effectively to oversee the management of the sprawling Samsung conglomerate. Presidential pardons are traditionally granted ahead of South Korea’s independence day in mid-August.

Europe’s lenders have endured a painful decade waiting for interest rates to rise.

But just as central banks finally start to move, the long-awaited earnings windfall is being threatened by looming recession and fears that cash-strapped governments might hit lenders with new taxes.

Last week, the European Central Bank raised interest rates for the first increase since September 2011, by half a percentage point to zero. That followed more aggressive hikes at the Federal Reserve and the Bank of England in attempts to control inflation that is forecast to soon break into double digits.

“The world will have to relearn banking,” UBS chief executive Ralph Hamers told the Financial Times. “The eurozone being in negative territory for eight years, Switzerland being in negative territory for seven years now, where people didn’t value deposits, savings accounts.”

Bankers “that have joined us over the past seven years here in Switzerland, they have never worked for a bank in a positive rate environment”, he added.

The parallel developments of beneficial rate rises and harmful consumer and corporate distress have split opinion on how Europe’s banks will fare after a decade that has seen their earnings stagnate and their share prices dramatically underperform their US peers.



Many are bullish for the first time in years. The rate hikes were hailed as a “game changer” for the sector by Morgan Stanley analyst Magdalena Stoklosa. Higher base rates mean greater profits as net interest income (NII) improves, a measure of the difference between what a bank pays for deposits and charges for loans.

“We think Eurozone rate hikes are . . . the biggest structural catalyst for European banks,” said Stoklosa. She predicts the “inexpensive” sector “sits on 52 per cent upside” to its current depressed stock market valuation.

Those with large balance sheets and loan books stand to benefit the most. HSBC, for example, sits on a global deposit surplus of $700bn and has estimated that a 1 percentage point jump in rates would generate an additional $5bn of NII annually — equivalent to a tenth of last year’s $50bn of revenue.

Lloyds Bank estimates that a one percentage point base rate rise adds £675mn to its earnings in the first year.



Rising rates and the resultant market volatility are also good for investment banks. Barclays, BNP Paribas and Deutsche Bank have generated billions in revenue through their large trading arms as client activity has surged.

On Thursday, Barclays said revenue from fixed-income trading jumped 71 per cent to £1.5bn in the second quarter. Similarly, Deutsche Bank reported a 32 per cent quarterly rise and Goldman Sachs posted a 55 per cent gain in the same business earlier in the month.

“Whether you’re an asset manager or a corporate, a long sustained rates trend means you need to rebalance your portfolio more often, which has driven revenues meaningfully for us and the industry,” said Ram Nayak, co-head of investment banking at Deutsche.

Such optimism from analysts and investors has not been seen for years. Hamstrung by anaemic profits, misconduct scandals and higher capital requirements, major European and UK banks have traded well below the book value of their assets. Few consistently make a return on equity greater than 10 per cent, seen as the bare minimum by investors.

After the financial crisis, the region was slow to restructure and has fallen far behind Wall Street in investment banking. The lack of cash to invest in technology has left banks vulnerable to competition from fintech start-ups and big technology companies such as Apple, Google and Amazon.

However, an end to years of ultra-low or negative rates “turns their core franchise from a lossmaking prospect to neutral,” said Bank of America analyst Alastair Ryan. Based on the current projections for further hikes, BofA expects that within a year EU banks will be generating a much-needed extra €17bn in NII income every quarter.

Back to the 1970s?

But even as optimism mounts, a big question remains unanswered: how much of the interest rate windfall will be eaten by higher loan losses. Consumers face an acute cost of living crisis and small businesses are beginning to struggle with lower spending and snowballing inflation soon after global Covid-19 lockdowns.

Some believe the sector can cope, as it did during the worst of the pandemic.

“Even with slower lending, we expect the recurrent revenue benefit of higher interest rates to significantly exceed the one time impact of higher provisions,” BofA’s Ryan said.

Others are less sanguine.

“It is not easy to forecast the impact of provisions and bankruptcies. The situation is like Covid; it is completely new, we have never been through this since the 1970s,” said Jérôme Legras, head of research at investment company Axiom. “When something is unpredictable, markets have a sharp risk aversion.”

One portfolio manager at Capital Group led a €7bn sell-off in European bank stocks this year on fears that the region’s economy had turned and lenders would be saddled with vast losses and increased costs due to inflation.

Economic and political risks — such as in Italy, where prime minister Mario Draghi’s resignation has caused a crisis that has spread to the government bond market and banking system — have continued to mount.

“Recessions in both the US and Europe look increasingly likely . . . [and] history tells us that the European banking sector’s earnings typically drop 50 per cent,” said Autonomous analyst Stuart Graham.

“Current sentiment is overwhelmingly bearish,” he added. “Investors see plenty of things to worry about — principally a ‘Russia switches off the gas’ driven recession, but also 1970s stagflation, bank taxes etc — and few if any positive catalysts.”

However, there is little evidence of customer distress so far and much of the tens of billions in Covid-related bad debt reserves remain in place ready to absorb losses. European banks that have reported second-quarter results have, for the most part, beaten expectations, despite warnings of economic pain to come.

“The indicator that matters most for banking asset quality is overall employment. We need to see how that plays out, but if the labour markets continue to hold up as economists expect, credit quality should remain resilient,” Santander’s executive chair Ana Botín told the FT.



Barclays added no extra reserves to cover bad loans in the UK in the second quarter. Finance director Anna Cross told the FT that “customers are acting in a very rational way”, for example by repaying their credit card balances swiftly.

“We are seeing a real build up of savings by consumers and corporates and a pay-down of unsecured debt, so they are going into this environment in much better shape than pre-pandemic,” she added.

Another UK bank executive said “we see no signs of strain in our portfolio yet. The earliest is usually an uptick in people only making minimal payments on credit cards, but whilst this is moving up a bit, it isn’t back to pre-pandemic levels.”

The BoE and ECB have already written to banks warning them against treating distressed customers harshly and the industry is keen not to lose goodwill it generated during the Covid crisis.

There is also the potential for more extraordinary government assistance for those struggling — as was introduced during the pandemic — which will cushion banks’ exposure to insolvencies.

“Most likely there will be subsidies to businesses struggling from energy crisis, guaranteed loans etc,” said Axiom’s Legras. “I think the public sector’s reaction will be helpful for banks.”

Easy targets

However, a widespread fear among bank executives is that higher profits will attract new levies. Spain has proposed a windfall tax of 4.8 per cent on banks’ fees and interest charges, designed to recapture some of the benefits from higher rates.

When announced it wiped billions from the valuations of the country’s five largest lenders such as Santander and BBVA. Hungary has taxed its banks while Poland is putting a moratorium on mortgage repayments to help out struggling homeowners.

“Banks are easy targets and the prospect of even more taxes is terrible for banks’ [valuation] multiples,” said a hedge fund manager that specialises in European financials. “Blaming big corporations is always a proven path in a recession to deflect from a government’s own policy failures.”

Bruno Le Maire, the French finance minister, told the FT in a recent interview he has not ruled out windfall taxes next year and that “the burden of inflation must be equitably shared between the state and business”.

The UK already has both a bank levy and a 3 per cent surcharge on bank profits, recently reduced from 8 per cent, but at risk of being reset if the Treasury needs cash.

Regulators are also moving to cut off another potential rates-linked windfall.

The ECB is examining how it can prevent banks earning billions of euros of extra profit from its €2.2tn subsidised lending scheme, which was started to avoid a credit crunch during the pandemic. Some analysts had estimated that lenders could earn a collective €24bn by depositing cheap debt back with the central bank to benefit from the current higher rates than when the loans were issued.

But, while there remains much debate over the profitability of the European financial system, few are concerned about its solvency. Recent stress tests indicate most lenders could shoulder even extreme economic strain after being forced to build substantial capital buffers after the 2008 crisis.

Some even see surviving yet another crisis as an opportunity for banks to shake off the persistent negativity surrounding them.

“A ‘good recession’ might even be a longer-term positive for the sector,” said Graham. “If the European banks can weather it with no worse than 25-50 per cent hits to earnings, no major equity raisings, no regulatory blanket ban on payouts and limited bank bashing and financial repression, this might finally lay to rest some of the lingering doubts harboured by many investors.”

“But that’s the lovely thing about European banks — you can always find plenty of things to fret about.”

Additional reporting from Owen Walker and Siddharth Venkataramakrishnan

Bain & Co, the Boston-based global management consultant, has been hit with a three-year ban from tendering for British government contracts because of its “grave professional misconduct” in a major corruption scandal in South Africa.

Jacob Rees-Mogg, Cabinet Office minister, told Bain that the affair had rendered the company’s integrity “questionable” and that he was not convinced that it had taken its role in the scandal “sufficiently seriously”.

Britain is the first western country to impose such penalties on Bain for its role in the “state capture” scandal in South Africa and there is already pressure on the US to follow suit.

In a letter seen by the Financial Times, Rees-Mogg told James Hadley, Bain’s UK managing partner, that the three-year ban would apply retrospectively from January 4 2022. “I trust that after three years have elapsed Bain & Co will have restored its reputation,” he wrote.

Rees-Mogg’s intervention came after pressure from Lord Peter Hain, the veteran anti-apartheid campaigner, who had urged Boris Johnson’s government to punish Bain for its “despicable” behaviour.

Initially, Cabinet Office officials advised that no action against the company was necessary but Rees-Mogg sought further advice, including from an external QC.

He told Hadley that the company would be banned from Cabinet Office contracts under 2015 legislation on the basis that “Bain & Co is guilty of grave professional misconduct which renders its integrity questionable”.

Rees-Mogg, who will advise all government departments to apply the same three-year ban, said he was particularly concerned at the way Bain’s South African division “colluded” with the regime of former president Jacob Zuma to undermine the country’s revenue service.

The consultancy has been awarded UK public sector contracts worth up to £63mn since 2018, including £40mn worth of Brexit consulting work for the Cabinet Office, but the damage to the company will be mainly reputational.

In a letter in February to Hain, the then Cabinet Office minister Steve Barclay wrote that the company was “not a strategic supplier to the government and is not currently undertaking any substantial work for the government”. 

Hain said: “I’m very pleased. This sets down a marker for all companies which behave in an unlawful, unethical and unprofessional way that they won’t be able to tender for government contracts.

“I commend Jacob Rees-Mogg for doing this and I want the US government to do the same thing.”

Bain said: “We were disappointed and surprised by the minister’s decision . . . We will be responding to express our concern about the process and its outcome and to address inaccuracies in his letter.

“If necessary, we will then consider other options for review of the decision. In the meantime, we will continue to work with the Cabinet Office to ensure that we do what is required to restore our standing with the UK government.”

This year an inquiry into South Africa’s biggest post-apartheid corruption scandal found that Bain had helped to undermine the country’s revenue service through advisory work that aided Zuma’s allies.

Bain’s work on a restructuring of the South African revenue service was “a clear example of how the private sector colluded” with the breakdown of public institutions, said the inquiry.

It added that Bain sought to use a relationship with Zuma to acquire further government business.

Bain has previously admitted failings in its work in South Africa and repaid fees, but said that the inquiry’s findings mischaracterised its activities. Zuma has denied any involvement in corruption.

Other international consulting companies have been embroiled in corruption scandals in South Africa.

McKinsey agreed in 2020 to repay about R650mn ($39mn) over irregularities in contracts it had entered into with a local partner at government-owned companies.

Auditor KPMG apologised in 2017 for “mistakes” in work for businesses linked to the Gupta family, accused of serious corruption through ties to Zuma.

UK public relations company Bell Pottinger was brought down by its work for the Guptas, which led to accusations that it had stoked racial tensions in South Africa.

Banning a company from bidding for public sector contracts is rare. Security group G4S was temporarily barred in 2013 after overcharging the government for the electronic tagging of criminals, some of whom were dead or still in prison.

Consultancy Deloitte stopped pitching for public work for six months in 2016 after a note was leaked in which its consultants criticised the government’s Brexit strategy.

Accountants should stop complaining about extra scrutiny and fines for audit failures and improve the quality of their work, said the head of the sector’s UK watchdog, which imposed record financial sanctions on the industry last year.

Auditors have faced heavy criticism in recent years after failing to raise the alarm in a series of corporate failures, such as retailer BHS and outsourcer Carillion. The ensuing clampdown led to senior executives complaining that the Financial Reporting Council’s more robust approach was making the profession unattractive to recruits.

But Sir Jon Thompson, the watchdog’s chief executive, said he had no sympathy with them over the level of fines imposed. “It’s no good complaining about the fines,” he said in an interview with the Financial Times. “The solution is entirely in [the audit firms’] hands. Do a good audit and you don’t get in trouble with us.” 

His comments came after figures published last month showed that the FRC imposed a record £46.5mn of fines on accounting firms and partners in the 12 months to March. Fines after discounts for co-operation also reached a new high of £34.6mn.

An industry tribunal last month handed KPMG its largest-ever UK fine — £14.4mn — for deliberately misleading the regulator during inspections of its audits of collapsed outsourcer Carillion in 2017 and UK-listed Regenersis in 2015.

The FRC has stepped up enforcement action since it was branded a “ramshackle house” in a review of the regulator in 2018 by Sir John Kingman, the chair of insurer Legal & General, and has almost doubled in size since then, employing about 400 staff.



Most of the sanctions in recent years have been against the Big Four — Deloitte, EY, KPMG and PwC — which have monopolised the market for large company audits and been criticised for poor-quality work.

But more recently the watchdog has switched some of its focus to mid-tier accounting firms, which it hopes will eventually compete with the Big Four for work on large company audits, and their smaller rivals.

The FRC’s latest quality inspections found that more than 80 per cent of audits at three of the Big Four were good or required only limited improvement. But last month, it criticised work by BDO and Mazars, two of the three main challengers to the Big Four, as “unacceptable”. Both firms said at the time they were disappointed with the findings and were investing to improve their auditing.

But consecutive years of poor inspection results at both firms, which have expanded their audit practices substantially, have led to senior auditors privately questioning whether the midsized players can withstand the regulator’s demands as they try to compete to audit large listed companies.

Underlining that point, they said, was the fact that the other main challenger, Grant Thornton, had the best inspection results of all the top seven firms after heavily cutting back the number of large companies it audits since poor results in 2019 and a series of fines.

“The FRC’s big stick approach has promoted audit quality . . . but the question is do they just persevere with this or do they now have to change their approach a little bit?” said a senior figure in the accounting industry. “Otherwise they’re never going to get any new entrants into the market.”

But Thompson, who took over in 2019 after heading HM Revenue & Customs, said that auditors’ complaints about the FRC criticising their scores in the inspections was “like blaming the doctor for saying you’re ill”.



But he acknowledged that there was a trade-off between improving audit quality and helping to build up potential competitors to the Big Four, which would help ensure that companies were still able to find auditors if one of the dominant players were to collapse or exit the market.

“We’re going to have to make some choices about what’s more important. And to be frank about it, our board’s view is that audit quality is more important at the minute,” he said.

Thompson’s pledge to prioritise quality concerns over competition follows a series of fines and investigations into smaller firms that sit below the mid-tier of BDO, Grant Thornton and Mazars. At least seven smaller audit firms have been penalised or investigated in the past 18 months.

Taking action against smaller firms is in the public interest, said Thompson, citing the FRC investigations into King & King, the high street firm that signed off the accounts of companies in the business empire of Sanjeev Gupta, which is the focus of a fraud investigation.

Part of the problem was that the biggest firms were “de-risking” by dropping clients whose audits they deem more difficult or whose management is resistant to scrutiny, Thompson added. These companies are left with a choice between a small audit firm or being unable to find an auditor at all.

Some auditors feel the FRC should have anticipated this problem. “This situation may have been an unintended consequence but it was certainly not unforeseeable,” said a senior Big Four auditor.

The regulator last year dismissed accountants’ request for leniency on higher risk audits. The FRC would like the most capable auditors to check the accounts of higher risk companies but is reluctant to lower its standards to encourage them to do so, said Thompson.

Instead of resigning, auditors should be more willing to qualify their opinion on the accounts and do more to encourage companies’ management to improve their governance, he said. “It’s unbelievably rare to find a qualified audit. Auditors will resign rather than give a critical audit opinion.” 

Although legislative reforms to replace the FRC with the more powerful Audit, Reform and Governance Authority “could have been done quicker” and have yet to be passed, the watchdog was now “pretty close” to the regulator envisaged by Kingman in his scathing review four years ago. Arga is not expected to be created before April 2024.

Samsung Electronics and SK Hynix are re-evaluating their investments in China as leading Korean chipmakers respond to incoming US restrictions on the production of advanced semiconductors.

The Chips and Science Act passed by congress last week, which envisages $52bn in grants to support advanced chip manufacturing in the US, also contains qualified “guardrails” prohibiting recipients of federal funds from expanding or upgrading their advanced chip capacity in China for 10 years.

The provisions have led Samsung and SK Hynix to rethink their exposure to China, according to people familiar with the views of both companies.

A senior Korean official added that over time, several Korean investments in chip manufacturing in China were likely to be “abandoned”. “If China is unhappy, they will have to take it up with the US,” said the official.

The moves suggested that Washington’s efforts to encourage leading chipmakers to pivot away from China and towards the US were bearing fruit.

“The guardrails against China will accelerate Korean chipmakers’ shift to the US from China,” said Kim Young-woo, head of research at SK Securities in Seoul and an adviser to the Korean government on semiconductor policy.

“They have been rethinking their strategies because of the US-China technology war and they are now tilting further towards the US because of geopolitical risks.”



Kim added that Korean groups such as Samsung and SK Hynix “will build more US plants because they cannot mass-produce cutting-edge chips without US equipment and technology. If they have to make a choice between the US and China, they have no choice but to opt for the US”.

The Biden administration has used export controls, investment screening and generous subsidies for non-Chinese companies in an effort to increase domestic chip production and make it harder for China to obtain advanced semiconductor technology.

The measures are part of a wider campaign to secure US supply chains and slow down Beijing’s military modernisation efforts.

Yeo Han-koo, a former Korean economic official who served as South Korea’s trade minister until May, said that the “recalibration” of Korean chipmakers’ strategy vis-à-vis the US and China had already begun.

Samsung Electronics, the world’s largest memory chipmaker, announced last year it was investing $17bn in a new plant in Texas in a bid to catch up with Taiwanese rival TSMC in the foundry sector. Joe Biden visited the Korean conglomerate’s Pyeongtaek facility during a trip to South Korea in May.

Last month, Chey Tae-won, chair of SK Hynix parent SK Group, held a virtual meeting with the US president to announce $22bn in semiconductor, electric vehicle battery and green technology investments in the US, including a new advanced chip packaging plant.

SK Hynix’s Dram memory chip plant in Wuxi in eastern China is widely regarded as the Korean-owned facility most vulnerable to the effects of US restrictions.

“This new economic order is still being formulated, and the companies are re-evaluating and recalibrating their strategy accordingly,” said Yeo.

Lee Jae-min, a law professor at Seoul National University and an expert in international trade disputes, said the US was using subsidies to “lure” Korean chipmakers into its regulatory orbit.

“Once they receive US subsidies, they will come under stronger US control for their decision-making and business activities, which will restrict their investment and production in China,” said Lee.

“Chipmakers like Samsung and SK Hynix have to constantly upgrade their plants to produce cutting-edge chips, but it is difficult to upgrade their Chinese facilities without introducing high-tech equipment.”

In a statement, SK Hynix said of the Chips and Science Act: “As the legislation was recently passed in the House and some details remain publicly undisclosed, we are closely monitoring the situation.”

Samsung declined to comment.

In the sweltering Asia summertime of mid-June, Taiwan Semiconductor Manufacturing Co urgently dispatched a team to Japan to visit some of the company’s equipment suppliers. Why, it wanted to know, were these companies saying they could not deliver vital machines on time? TSMC is the world’s largest chip manufacturer, and its suppliers had always bent over backward to provide what the powerful company was demanding but, for the first time, it was being met with apologetic messages.

The situation was highly sensitive. TSMC is in the midst of a $100bn expansion, spurred on by governments in the wake of last year’s alarming shortages of crucial chips. But the Taiwanese giant has found its own supply chains to be plagued by bottlenecks, affecting items that range from lenses so precise they could focus a laser beam on a pingpong ball on the moon, to apparently mundane valves and tubes.

The June mission followed on the heels of a similar trip by the company’s supply chain management chief, JK Lin, and a task force to the US in March, to investigate why the chipmaking machines TSMC ordered there were taking up to 18 months to turn up.

In Japan, suppliers including Tokyo Electron, the country’s largest chipmaking equipment manufacturer, and Screen Semiconductor Solutions told TSMC they might miss even the elongated delivery times they have promised, sources familiar with the tricky meetings told Nikkei Asia.

Screen — one of the few companies in the world making the chemical cleaning machines that are vital in chipmaking plants — reeled off a list of obscure components that it was having trouble securing from its own supply chain. Valves, tubes, pumps and containers made of special plastics — all are in short supply.



The problems are cascading from supplier to supplier and making it hard to resolve the global shortage of chips, the hearts and brains that power electronic devices from PCs and smartphones to automobiles.

The difficulties underscore a series of inconvenient truths, not just for TSMC and its rivals and suppliers, but for policymakers around the world. Amid US-China trade tensions and pandemic disruptions, governments in China, the US, Europe and elsewhere have determined to “onshore” semiconductor manufacturing. So-called supply chain resilience has become a central aim of policy. But such resilience is a myth.

These new national efforts are backed by huge subsidies and state-backed investments. The US Senate at the end of July approved the $52bn CHIPS Act. Japan’s government will back TSMC to the tune of ¥476bn ($3.5bn) to build a factory there for the first time.

The trouble is these efforts touch only the visible end of the semiconductor supply chain. Behind chip production sits a network supplying equipment and other items encompassing hundreds of raw materials, chemicals, consumable parts, gases and metals without which the bogglingly precise process of chipmaking could not function. China is directing a combined Rmb1.5tn ($221bn) of public and private investments to replicate a chip supply chain within its own borders, with modest results to date.



While a globalised semiconductor industry used to run smoothly across dozens of countries, the effort to replicate this architecture inside single countries or regions has revealed and exacerbated bottlenecks in the supply chain, according to Nikkei Asia’s investigations and interviews with more than two dozen senior industry executives from the major chip economies of the US, EU, Taiwan and Japan over the past five months. At the same time, there are questions over the long-term wisdom of the policy, and fears about whether, if they can be gotten up and running, many of these factories might ultimately sit idle.

JT Hsu, head of semiconductors and materials at Boston Consulting Group, said even a goal of reaching 70 to 80 per cent self-reliance is “extremely tough . . . It could be extremely challenging for any country or region to get all the fronts covered.”

“It’s not only the [factories] that manufacture the chips but it’s everything that goes in there,” said Jens Liebermann, vice-president of semiconductor materials at the electronic materials business unit of BASF, the German chemical group. “All the materials, chemicals, gases and their raw materials. All have to be there. It comes down to, where is the source, where is the raw material, where is the manufacturing, and who can handle the logistics?”

Morris Chang, an elder statesman of the semiconductor industry who founded and formerly chaired TSMC, put it most bluntly in remarks addressed to the US.

“If you want to re-establish a complete semiconductor supply chain in the US, you will not find it as a possible task,” he said at an industry forum last year. “Even after you spend hundreds of billions of dollars, you will still find the supply chain to be incomplete, and you will find that it will be very high cost, much higher cost than what you currently have.”

Bottlenecks upstream

Despite how insignificant they might sound, those valves, tubes, pipes, pumps and containers are a case study in complexity — and they are driving executives mad.

“I am not kidding! We are still receiving valves and tubes that we ordered more than a year ago,” one executive with a Taiwanese supplier to TSMC told Nikkei. “When opening the box, we are often very shocked. The box might contain only 10 pieces out of a 100-piece order.”



With only a handful of specialist suppliers able to meet anti-contamination standards and deal with the red tape of manufacturing items that also have potential military use, it has been no easy task to increase capacity, especially with limited supplies of the raw materials behind them.

These items are made of special plastics called fluoropolymers and are indispensable to the handling of corrosive chemicals and ultrapurified water that flows in all chip manufacturing facilities and chipmaking machines, where standards keep going up and up.

The most advanced chips, those used to build the latest iPhone and MacBook processors, for example, are now at the 5-nm level. Nanometre size refers to the line width between transistors on a chip. A nanometre is roughly 1/100,000 of the thickness of a piece of paper or human hair. The smaller the nanometre size, the more cutting-edge and powerful the chips are, and thus more challenging to develop and produce. In turn, chipmakers need to place billions of transistors on a chip. The tolerance for a defect or microcontamination is extremely low.

“The size of a Covid virus is about 100 nm,” Kevin Gorman, senior vice-president of integrated supply chain transformation with Merck Electronics of Germany, told Nikkei. “You can then see how refined the chip manufacturing work is and why all the materials are critical.”

When it comes to semiconductor-grade valves and tubes for handling chemicals, it is crucial they do not become a source of contamination. Only a few suppliers worldwide have the capability to reach the exacting requirements, according to Nikkei Asia analysis. CKD and Advance Electric of Japan and Entegris of the US, are qualified suppliers of valves; Iwaki of Japan is the dominant supplier for chemical-handling pumps; industry sources referred to Agru of Austria and Georg Fischer of Switzerland as essential providers of the critical piping systems for chip plants.



The Wassenaar Arrangement, a multinational agreement signed by more than 40 nations to avoid such components being shipped to rogue states for military use, adds red tape that provides another barrier to new entrants.

Follow the supply chain upstream, and further chokepoints emerge with regard to the fluoropolymers from which these components are made. One such material, known as PFA, is only supplied by Chemours of the US and Daikin Industries of Japan. It requires extensive knowhow to process, and no competitors are on the horizon.

Other key fluoropolymer material makers include Solvay of Belgium, 3M of the US, Gujarat Fluorochemicals of India and HaloPolymer of Russia. But not all of them are qualified to build semiconductor-grade materials and they must supply to a wide range of other industries beyond the tech sector. Sources from Russia have dropped away due to the disruption and sanctions caused by its war in Ukraine.

Hsu Chun-yuan, chief business development officer of United Integrated Services, a leading cleanroom builder for TSMC and rival chipmaker Micron Technology, told Nikkei that “sources of fluoropolymers are constrained” and there have been “demand hikes from both the chip and battery industries, driven by the electric vehicle boom”.

And further upstream still? Fluoropolymers are processed from fluorspar, also known as fluorite, a mineral of which China controls nearly 60 per cent of the global production output, according to data from market research company IndexBox. China has long identified fluorspar as a strategic resource and back in the late 1990s limited exports due to its importance to industries from agriculture, electronics and pharmaceuticals to aviation, space and defence. The mineral is often labelled as a “semi-rare earth”.



According to IndexBox, Mexico is the second-largest producer of fluorspar with about 10.8 per cent of the market last year, followed by Mongolia and South Africa. In Europe, Bulgaria and Spain together control some 5 per cent of the global market. In a supply chain review paper published by the White House in 2021, the US flagged the risks of critical materials subject to foreign domination and identified fluorspar as one in a list of “shortfall strategic and critical materials”. The report did not point out its deep link with the chipmaking industry. It said increasing sources of critical minerals, strengthening stockpiles, and ramping up North American manufacturing, processing, and recycling capacity could result in fewer disruptions during “future worldwide crises”.

Similar issues arise in the handling of gases such as neon, used in lithography, and C4F6, a fluorine gas used in etching. Both count either Ukraine or Russia as a major source of supply, which has been disrupted by the war. The equipment for moving them around is also highly specialised.

Only a handful of companies — including Rotarex of Luxembourg and BBB Neriki Valve and Hamai Industries of Japan — are qualified to supply the ultra high purity valves for the gas cylinders that the semiconductor industry uses, Nikkei Asia supply chain checks show. Rotarex controls close to 80 per cent of the market and only produces these specific items in Luxembourg.

The valves, built with stainless steel and other alloys, must endure extensive verification processes and need to be government certified because of the dangers of leaks and explosions. It would take “10 to 20 years” for a new entrant to meet the standards and tests of different government authorities for certification, some industry executives told Nikkei.

To be continued...[I]

...Continued from last post above

Trade tension, pandemic and war

The call for chip supply chain resilience emerged amid the US-China tech war when former US president Donald Trump’s administration clamped down on Chinese tech champion Huawei Technologies in 2019 and blocked its use of American technologies, especially chips, citing national security. The drastic move spurred an aggressive nationwide Chinese campaign across sectors to cut dependence on the US and build a secure, self-controllable supply chain.

The self-sufficiency movement evolved into a global campaign in late 2020, as unprecedented chip shortages stalled car production and hurt a wide range of industries, crimping global economic growth and threatening jobs. The US Department of Commerce said the shortages wiped an estimated $240bn off the country’s gross domestic product in 2021. The automobile industry alone made 7.7mn fewer cars than the year before.

The Ukraine war has further amplified demands for supply chain security. The war drove up prices of energy, metals, chemicals and crucial gases that many chip-related suppliers needed. It also increased the sense of urgency.

For most major economies, chips are essential for building everything from computers and data centres to appliances and cars. They are central to the battle for supremacy in space, science, artificial intelligence and EVs, and will be crucial to the military and defence equipment of the future. Advanced chips are integral to an array of critical national security capabilities “including sophisticated weapons systems such as the Javelin antitank missiles the US is supplying to Ukraine to defend itself against Putin’s invasion”, the US Department of Commerce pointed out in a recent report.

Governments so far have promised to pour more than $100bn into subsidising the building of local chip supply chains. As well as the US CHIPS Act, the EU adopted the €45bn ($46bn) European Chips Act, Japan had budgeted ¥600bn and India set up a $30bn funding programme for semiconductors and other tech sectors.



Major chipmakers from Intel, Micron and Texas Instruments in the US to TSMC and South Korea’s Samsung Electronics have separately announced more than $650bn in investments. These include several outside their home bases. TSMC is building in the US and Japan, Intel plans to expand in Europe and south-east Asia, and Samsung has construction plans in the US. According to SEMI’s estimate, some 91 new chip plants are set to go online worldwide from 2020 through 2024.

When the European Chips Act was enacted earlier this year, European Commission president Ursula von der Leyen acknowledged that “no country — and even no continent — can be entirely self-sufficient”. The hope is that parts of the supply chain that cannot be brought onshore will at least run through friendly nations.

“Europe will always work to keep global markets open and to keep them connected. This is in the world’s interest; it is in our own interest, too,” she said. “Europe will build partnerships on chips with like-minded partners, for example the United States or for example Japan. It is about balanced interdependencies and it is about reliability.”

US Treasury secretary Janet Yellen has floated “friendshoring” as a compromise concept. “We cannot allow countries to use their market position in key raw materials, technologies, or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage,” she said in April. “Let’s build on and deepen economic integration and the efficiencies it brings, on terms that work better for American workers. And let’s do it with the countries we know we can count on.”



Russia’s fall from western favour demonstrates that alliances can shift over time and spats can emerge even between nations ostensibly committed to free trade.

Japan limited the export of photoresists, a crucial chipmaking chemical dominated by Japanese suppliers, to South Korea during a Tokyo-Seoul trade war in 2019.

An assessment by BCG suggests there are at least 50 chokepoints in the semiconductor supply chain across design tools, manufacturing, packaging, materials and equipment. These points are defined as areas where 65 per cent or more of a particular item is concentrated in a single country or region.

The US dominates chip design tools and at least 23 types of essential equipment, it found. Japan is a leader in the production and critical formulation of critical materials that include wafers as well as photoresists. Europe is the leader in industrial gas.

The extreme ultraviolet (EUV) lithography machine exclusively built by ASML of the Netherlands provides a prime example of how difficult it is to switch a component in the chip supply chain. Sometimes it is just impossible to find alternatives.

The EUV machine is indispensable in the production of cutting-edge chips of 7 nm and below, helping project the complicated patterns of integrated circuits on a microscale. Production delays are hampering the ability to add new capacity, lengthening the current chip crunch and setting back the introduction of more cutting-edge chips.



ASML has extended the waiting time for several models to two years due to constraints on vital parts including optical mirrors and lenses, people familiar with the matter told Nikkei. A company spokesperson acknowledged some delays and said constraints on the industry were “very diverse and across multiple tier suppliers”.

Creating EUV light inside a vacuum chamber within a machine is exceptionally challenging, relying on Germany’s Trumpf for a powerful laser source and another German partner, the optics specialist Zeiss Group, for a system of mirrors to reflect and direct the light.

Since even the smallest irregularities cause aberrations, Zeiss boasts that its product is the world’s “most precise” mirror. “If one of these EUV mirrors were to redirect a laser beam and aim it at the moon, it would be able to hit a pingpong ball on the moon’s surface,” CEO Andreas Pecher told Nikkei. Zeiss and ASML have been working together for nearly 30 years.

Even if ASML wants to strengthen its own supply chain resilience and looks for other optical partners, it will require at least five to 10 years of co-development work before getting initial results, several executives told Nikkei.

“Actually it’s almost not replaceable in the many years to come,” Nikkei heard from one executive at a Japanese lens maker.

There is almost no part of the chipmaking process that does not require deep specialisation and no part of the supply chain that can be simply and quickly duplicated.



Chemicals and solvents used in chip plants need to reach the so-called part-per-trillion (PPT) grade — one particle to 1tn drops. Gases need to reach a purity of up to 99.9999 per cent — the so-called 6N — when it comes to cutting-edge chip production. For silicon wafers, the basic substrate materials that chips are fabricated on, all need to be as pure as 9N, or 99.9999999 per cent, an executive with the chip material distributor Wah Lee Industrial told Nikkei.

“If you want a resilient chip supply chain, you not only need chip plants, you also need a whole string of suppliers from critical chemicals and precision components all coming along,” said an executive at Japan’s Daikin. “Building a semiconductor plant takes several years, but building chemical plants will take even longer given the extensive environmental assessments and regulations for handling chemicals.”

The long road to onshoring

China’s efforts demonstrate that the practical difficulty of building a chip supply chain cannot be overcome by throwing billions of dollars into the effort. As early as 2014, Beijing launched the first phase of the China Integrated Circuit Industry Investment Fund, nicknamed the Big Fund, with Rmb138.7bn. Another Rmb204bn followed in 2019. The first national seed fund stimulated more than Rmb500bn of investment from the private sector and local governments; the second phase of the fund is expected to encourage a further Rmb1tn.

China indeed increased local chip production — to 16.7 per cent of its domestic needs in 2021 from 12.7 per cent a decade before, IC Insights data show.

The mathematical implication of having many countries creating new onshore chip supply chains is that capacity is going to be much greater than the world as a whole actually needs.

The industry has indicated that these are often noneconomic investment plans by saying that, in many cases, factories will only be built if they are heavily subsidised. With consumer spending on electronics apparently slowing sharply and recession talk in the air, the outlook for actual chip demand, at least in the short term, is suddenly uncertain.



Gorman of Merck Electronics acknowledged questions about whether local plants could reach economic scale, but said it still makes sense to localise if its key customers could together shoulder the risks.

“Keeping the supply line short is also better for our environment,” he told Nikkei. “Our customers . . . will favour a local supply over one that has to cross international borders.”

Building an onshore chip supply chain is a “very large-scale and long-term journey”, BASF’s Liebermann told Nikkei. “It will take a lot of time and a lot of costs and the cost will only be justified if the utilisation rates of those new plants are meeting the demand, and the demand is high enough.”

Most industry executives believe a long-term increase in chip demand is locked in, regardless of the current economic environment, as everyday items become more connected and complex and as cars go electric and, ultimately, autonomous. A semiconductor industry that had revenues of nearly $600bn in 2021 is widely projected to be at $1tn by 2030.

“If we really believe that the industry will be reaching $1tn . . . we should be able to have some level of regionalisation of the manufacturing and have the right leverage,” Bertrand Loy, CEO of Entegris, told Nikkei. “But we won’t be able to have manufacturing everywhere and get the right leverage. We are investing in some countries, some products, but not in all countries for all products because we cannot afford [to do] that.”

ASML believes regional investments “can coexist, if connected to a global ecosystem”, its spokesperson said. “Compartmentalisation leads to sub-optimisation, which leads to higher cost and slower innovation for consumers and companies and governments who rely on this innovation.”

‘No longer an era of free trade’

Simon HH Wu, president of San Fu Chemical, a Taiwanese chipmaking chemical supplier, reckons geopolitical conflicts and trade barriers are prevailing over globalisation, upon which the chip industry was built. “It’s no longer an era of free trade,” he told Nikkei, warning that policymakers and the industry should be under no illusions about the difficulties ahead.



“Any country that controls certain natural resources or key technologies would want to protect and leverage those resources for economic and political benefits,” Wu said. “What companies could do is to look for allies and partners to alleviate the potential disruptions.

“There’s always something you need to import and ship from another place, country or even continent. If you don’t have phosphate rock how do you produce chipmaking phosphoric acid? If you don’t have fluorspar, how do you produce fluoropolymers? At the end of the day, you can’t move all those mines and natural resources . . . next door.”

JT Hsu, the head of semiconductors and materials at BCG, said the chip crunch shows it is about time to build some “redundant” capacity to give the industry a buffer to absorb shocks. “However,” he said, “it’s nearly impossible and unrealistic that any country or region could reach a point of 100 per cent self-reliance, in terms of making everything about chips from the start to the end. That’s not possible now and that is not likely to be possible in the future.”

A version of this article was first published by Nikkei Asia on July 27. ©2022 Nikkei Inc. All rights reserved.

For much of the EU, the economic outlook is grim with fears of a recession mounting and government finances constrained. Then there is Ireland.

The republic is enjoying an €8bn corporate tax windfall after bumper pandemic-enhanced revenues from tech and pharmaceutical companies. The tax take from companies attracted by Ireland’s 12.5 per cent corporate rate has soared since 2015 and leapt a further 30 per cent last year compared with 2020.

Ireland’s economy expanded by 6.3 per cent over the second quarter, against an EU average of just 0.6 per cent. So great was the impact from multinationals that Ireland’s numbers distorted EU figures, despite the nation of 5.1mn making up less than 3 per cent of the region’s economy.

With employment and foreign investment also at record highs, “the economy is even hotter than the weather”, said Danny McCoy, head of employers’ confederation, Ibec, noting recent record temperatures.

Yet Ireland is not without its problems. Prices rose by 9.1 per cent in the year to June. Families feel priced out of the housing market in Dublin and other cities.

“We’re not on bad wages,” said Mark Murphy, 39, a regional manager at a charity, based with his wife in West Cork. He delayed getting married and starting a family to save for a “very modest” home around the €300,000 mark. “But now, the same houses are €400,000 — we just can’t get the credit,” he said.

Consumer spending contracted by 1.3 per cent in the first quarter compared with the previous three months. Modified domestic demand, a measure of the size of economic activity that excludes some multinationals’ expenditure and is considered a better indicator than gross domestic product, fell 1 per cent over the first quarter.

Officials warn that the corporate tax is vulnerable to fluctuation. Half of the corporate tax receipts of €15.3bn last year came from just 10 companies — among them Apple, Google, Intel, Meta, Amazon and Pfizer.



But for now the healthy tax receipts give Ireland a handy cushion, with a very modest fiscal surplus expected if spending levels are maintained, although Ireland, following some EU neighbours including Spain, is now considering an extra tax on energy companies in the 2023 budget on September 27.

Dermot O’Leary, chief economist at brokerage Goodbody, said Ireland had no need to go down the “Robin Hood route” because it can use the corporate tax windfall to fund nearly €7bn of spending already announced for the budget.

Even after stripping out the multinational sector, Ireland’s domestic economy contracted less in 2020 and rebounded faster in 2021 than the EU average, said rating agency DBRS Morningstar.

Leo Varadkar, deputy prime minister, in an event last month presenting record inward investment data, said: “The jobs and revenue created by multinationals helped to keep us out of recession when the pandemic hit and are now giving us the financial firepower to ease the cost of living crisis and avoid recession once again.”

But if the world economy experiences a downturn Ireland’s multinational sector could be its Achilles heel. The threat of a recession in the EU and US is mounting. Any downturn would hurt the profits of companies invested in Ireland and feed through into a lower tax take.

The central bank said corporate tax receipts, which have exceeded expectations for the past seven years, were €8bn higher than expected last year and brought in nearly €9bn in the first half of this year alone.

The government has been reluctant to say whether or how it will use the tax windfall in the budget but the central bank and the Irish Fiscal Advisory Council have warned over reliance on a tax take that could prove volatile.

“There is nothing on the horizon that suggests that corporate tax revenues are going to rapidly fall,” said Seamus Coffey, a lecturer at University College Cork and an expert on corporate tax. “But five, six years ago, there was nothing on the horizon that suggested they were going to rise.”

John Fitzgerald, a Trinity College economics professor, said the worst-case scenario of a drastic drop in corporate tax receipts would be a loss of 3 to 4 per cent of national income — a big hit to public finances.

Ibec cautioned that the Irish economy faced a “turning point”, and that “for Ireland, as a small open economy, shifts in the flow of capital through the global economy can have an outsized impact on our growth model”.

The central bank has also warned that construction of homes to tackle Ireland’s chronic housing shortage is flagging. Varadkar calls Ireland a “homeowning democracy” but the Economic and Social Research Institute, a think-tank, recently forecast that one in three people now aged between 35 and 44 will not own a home by the time they retire.

Ireland could stay lucky. Although the government forecast that its decision to join an OECD global corporate tax accord setting a minimum 15 per cent rate could cut revenues by €2bn, implementation has been delayed.

Foreign direct investment continues to surge, with the number of investments in the first half up 9 per cent on the same period in 2021, including an 18 per cent jump in new names locating in Ireland. Conall Mac Coille, chief economist at brokerage Davy, said he saw “no real reason” that taxes paid by foreign companies investing in Ireland would “collapse any time soon”.

For now, Ireland faces the problem of administering abundance. “We’re the equivalent of a household that’s just won the lottery,” said McCoy. “Are we the household mature enough to say ‘actually, this good fortune can be put to work for future generations’? Or are we just going to go daft for half this generation and have so much regret?”

Oil rig and support vessel suppliers have been big beneficiaries as fossil fuel and renewables producers seek to boost output to tackle the global energy crisis, according to Clarksons, the world’s largest shipbroker.

Andi Case, chief executive of UK-listed Clarksons, said the offshore shipping sector had experienced a turnround on the steep rise in global oil and gas prices, which has been exacerbated by Russia’s invasion of Ukraine.

“We’ve seen a very significant change in the outlook. There were 10 years of under-investment and oil was in a bad place,” he said on Monday. “Now the world needs energy. We are seeing a reinvigoration of that trade.”

Clarksons Offshore index, which tracks the rates paid to lease rigs, subsea vessels and offshore supply vessels, has hit its highest level in seven years.

The improved business conditions for its clients have also benefited Clarksons, with underlying pre-tax profit increasing by half to £42mn on revenues of £267mn in the first six months of the year.

The group had flagged last month that its profits would be “materially ahead” of expectations, which sent its share price soaring. Its shares dropped 3.5 per cent on Monday.

Oil and gas producers have been attempting to increase output to make the most of high prices, while chartering activity indicated that governments and developers were trying to accelerate offshore wind projects.

International oil benchmark Brent crude exceeded $120 per barrel in June, before easing off to reach $95 per barrel on Monday. European gas prices are about 10 times the level of the previous decade.

Case said Saudi Arabia had taken 38 jack-up rigs in the first half of the year, a sign of its intention to boost oil production. “They are increasing production as quickly as they can,” he said.

The boom for offshore vessels comes amid a wider uplift for the shipping industry, which has been supported by the longer voyage distances after Russia invaded Ukraine in February.

The average shipping stock has gained 20 per cent in the first half of this year, while the S&P 500 index dropped 19 per cent. A decade of lower investment in the global shipping fleet means most sectors have fewer vessels in supply, causing a steady rise in freight rates.

“Although a global slowdown has the potential to impact demand in the shipping sector, we still think supply-side dynamics are set to remain extremely favourable for Clarkson over the medium term,” said James Beard, an analyst at Numis.

Investors are selling stakes in private equity and venture capital funds this year at the fastest pace on record, as the downturn in equities spreads to the private markets that boomed during the era of low interest rates.

Pension and sovereign wealth funds were among those that sold $33bn worth of stakes in private funds in the first six months of the year, up from $19bn in the same period in 2021, according to Jefferies, typically selling them below their face value.

The sell-off follows a decade of surging allocations to private markets, which have grown in influence since the financial crisis and cover everything from buyout firms to venture capital and real estate funds.

It casts doubts on the ability of these groups to sustain the fundraising that has transformed them into a major force in global dealmaking.

Pension funds say the move to ditch stakes has been partly triggered by the steep decline in stock markets, leaving their overall portfolios too exposed to buyout funds and other private investments whose value has not been marked down in the same way.

“We’ve never had to do this before, and we hoped we would never have to do it,” said the head of private equity at a pension fund that sold some of its holdings in buyout funds at a discount. “We’re also going to reduce the amounts we commit to new private equity funds this year and next.”



At the same time, pension funds that had committed money to buyout firms have had to actually stump up the cash far more quickly than expected over the past two years because of the frenzy of dealmaking.

That has sparked fears of a funding squeeze, according to a senior executive at an endowment fund that invests in private equity, as some pension funds worry they may not have enough cash on hand to meet future capital calls from the buyout funds they have committed to.

Investors “are desperately worried that they’ll get themselves into a complete cash crunch and have to start selling things, so they’re trying to get on top of that” by selling the stakes now, he said.

“Distributions [money handed back to investors from successful deals] were at an incredible pace for the last five years” and investors assumed this would continue, enabling them to meet new calls on their funds, he said. “Instead they’ve almost completely turned off.”

In contrast to publicly traded securities that can be easily bought and sold, investments in private funds are typically locked up for about a decade and their value is determined using a process of sophisticated guesswork.

However, the holders of these illiquid stakes can quietly sell them in a secondary market, either to other pension funds and sovereign wealth funds or to specialist groups known as “secondaries” businesses. These niche investment groups are sitting on about $227bn, raised partly for such transactions, according to Jefferies.

While some investors routinely sell their older stakes in private funds, almost half of this year’s transactions involved a first-time seller, Jefferies estimates. The volume of such sales is always higher in the second half, putting this year on track for a record if the pattern is repeated.

On average, stakes in buyout, venture capital and real estate funds were disposed of for just 86 per cent of their face value in the first half, the biggest discount since the period of market turmoil at the start of the coronavirus pandemic, according to Jefferies.

Stakes in venture capital funds were sold at 71 per cent of their most recent valuation, underlining how rising interest rates and fears of a recession have curbed investors’ willingness to back often unprofitable start-ups.

Private equity groups typically estimate that an investor makes more money if they hold the stake until the end of a fund’s life. But the seller does not necessarily lose money overall because the fund may already have repaid enough from successful deals to earn a positive return.

For decades, cracking the US has proved to be a step too far for London’s top corporate law firms.

But Freshfields Bruckhaus Deringer, Clifford Chance and Allen & Overy are all in the midst of a renewed assault on the world’s most lucrative legal market as the “magic circle” firms seek to build on their past strength in Europe and become global heavyweights.

Their push is multipronged and expensive, with the firms poaching star US lawyers on record pay deals and opening offices in Los Angeles and San Francisco for the first time.

For the generation of lawyers leading the latest charge, which began in 2019, the potential rewards are compelling: a larger share of the US market and the kudos of achieving what their predecessors could not.

But chasing the prize is laden with risks. Deep-pocketed and more profitable US rivals have already forced London firms to rip up the conventions that for decades governed how they paid their lawyers. They also have deep relationships with American companies that are hard to muscle in on.

Tim House, US senior partner at Allen & Overy, does not underestimate the hurdles facing the UK-based insurgents.

“[The US] is a very sophisticated, very deep market well served by high-quality firms who’ve had very strong relationships with US-headquartered clients so that’s a market that is challenging to [break into], coupled with the fact [US law firms are] extremely profitable and have [operated] a different remuneration model,” he said.

Since abandoning a merger with US law firm O’Melveny & Myers in 2019, Allen & Overy has backed its American ambitions with investment. Offices in Boston, San Francisco, Los Angeles and Silicon Valley have been added since the start of 2021 while it has recruited 40 US partners over the past two and a half years.

Freshfields has proved equally aggressive in its approach. Under new senior partner Georgia Dawson, the almost 300-year-old institution has poached 20 US partners since 2020. It swiped five from leading law firms, including Latham & Watkins, to launch a Silicon Valley office as it targets a share of the work generated in the world’s tech capital.

Ethan Klingsberg, who was lured by Freshfields from US firm Cleary Gottlieb Steen & Hamilton with a reported $10mn pay deal, smashing its previous pay ceiling in the process, says the expansion is paying off.

Freshfields is “competing and unseating folks . . . And the folks we’re boxing out are not UK firms, it’s [top US firms] Wachtell [Lipton, Rosen & Katz]; Sullivan & Cromwell; Paul, Weiss [Rifkind, Wharton & Garrison],” said Klingsberg. “The point [of the US strategy] wasn’t just to hire a couple of people who’ve done a lot of deals but to build a platform with broad depth.”

The London-based global firm secured a role in 2020 on drugmaker AstraZeneca’s $39bn acquisition of US pharma group Alexion Pharma, one of the biggest deals of the year. According to Bloomberg data, Freshfields was one of the top 10 legal advisers on US M&A last year, working on $164bn of transactions.



The head of one top Wall Street law firm admits that the recruitment of Klingsberg by Freshfields, along with other signature hires such as Damien Zoubek, a leading M&A lawyer from Cravath, Swaine & Moore, “certainly got people’s attention”.

“I know folks here who recently suggested Freshfields for [work] for a private equity portfolio company that we couldn’t handle; that’s not something that we ever would have done a few years ago,” they said.

But the established US firms, which include Sullivan & Cromwell and Simpson Thacher & Bartlett, are not “exactly quaking in terror”, the person added.

While Klingsberg brought with him a valuable stream of work from Google, which he had previously advised, his recruitment also exposed the controversial changes to remuneration structures that London firms are making in pursuit of their US ambitions.

Clifford Chance, Allen & Overy, Freshfields and Linklaters have all made changes to the “lockstep” remuneration model that for decades meant partners were paid by time served, rather than performance. By contrast, an “eat what you kill” model driven by the amount of work you bring in has long prevailed at most big US firms.



“To join one of the magic circle firms to build a US domestic practice is a much riskier exercise than simply staying at a firm like Cravath because you’re building something from the ground up,” said Jon Lindsey, co-founder of recruiter Major, Lindsey & Africa. “So to make up for that, they have to make it financially attractive.”

The changes made by the firms have allowed them to increase remuneration for top partners regardless of time served. In 2020, Allen & Overy extended the range of equity points, each then worth about £45,000, that it could hand to star lawyers from beyond its previous range of 20 to 50 and extended its bonus pool.

“We realised we had to become much more ambitious with our lateral hiring programme and to change our compensation model to facilitate that,” said House.

Wanting to conquer America is not a new ambition for London firms accustomed to ruling their own backyards — but lacking a major US presence — and unable to crown themselves global powerhouses.

Magic circle firms first entered New York in the 1970s, with Linklaters opening an office in 1972, followed by Freshfields in 1977 and Allen & Overy in 1985. All struggled to make inroads.

More than four decades later, elite firms such as Sullivan & Cromwell, an adviser to top Wall Street banks and Fortune 500 companies, and Chicago-based giants such as Kirkland & Ellis, which have a roster of valuable private equity clients, remain formidable obstacles.

“You can’t claim to be a global law firm without at least 20 per cent of your revenue coming from the States,” said Tony Williams, former managing partner at Clifford Chance and founder of consultancy Jomati. “The magic circle is not there yet.”

Linklaters has not proved as aggressive as its London rivals in pushing into the US. According to its latest results, Allen & Overy generated 13 per cent of its total revenue in the US, up from 9 in the previous financial year.



The US also accounted for 13 per cent of Clifford Chance’s revenue in the 2021-22 financial year, the same level as the prior period. It was the only magic circle firm to disclose any information about its US profits, which have grown 80 per cent over the past seven years, to the Financial Times.

Williams left Clifford Chance at the time of its merger in 2000 with New York firm Rogers & Wells, a tie-up that created a firm with 2,700 lawyers globally. While the deal prompted partners to leave and led to clashes over culture, it also forged a larger US presence which the firm has built on. Key US clients include private equity groups Apollo and Carlyle as well as banks such as JPMorgan.

House pointed out that merging with a US firm is one means of expansion but brings risks. “[A merger] gives you a transformational step forward in scale and capability,” he noted. “If you can do it and you can hold true to your values and culture in doing it, it’s the optimal way, but in setting those preconditions . . . you realise the complexity.”

Smashing their pay ceilings has only ratcheted up the pressure on the firms to ensure the top and bottom lines keep growing in the US.

“I don’t know what [London-based partners’] tolerance is to watching other people get huge pay cheques,” said the head of a US law firm. “It’s a bunch of sensitive fragile egos in this industry.”

US firms may not be shaken by the big pay cheques London firms are prepared to write to capture star lawyers, or their ambitions in Silicon Valley, but the magic circle firms show little sign of taking a step back.

“It’s a tough ask given the size and the depth of the US market and the differences in profitability,” said Williams. “They’re making good progress, but they’re not yet transforming the market.”

*This article has been amended since original publication to change the name Kirkland & Watkins to Kirkland & Ellis

Sweden’s junior market became Europe’s hottest market to raise funds for growth companies in the first half of the year as retail investors took advantage of favourable tax policies to snap up the index’s tech and healthcare stocks.

Companies on Nasdaq’s First North Growth Market, based in Stockholm, have raised £1.6bn to date this year, compared with £1.5bn on London’s Aim, the traditional market leader, according to Dealogic data*.

Retail investors’ participation in global equity markets has slowed this year as the war in Ukraine, a global economic slowdown and rising energy and food costs dampen investors’ appetite for taking punts on the small and often lossmaking companies.

But they have kept faith in First North companies, including Embracer, Europe’s largest gaming group and the most actively traded name on the index, and a series of tech and healthcare companies.

The total raised is a considerable swing from last year, when companies raised more than £9.5bn on Aim, almost double the £5.4bn raised on First North. While retail investors have stepped back from Aim, they accounted for half of all flow into small-cap listed companies in Sweden in July, Nasdaq figures show.

“The Nordic market seems to have weathered the tribulations of the past few years better than the rest of Europe,” said Thomas Thygesen, head of strategy at Swedish investment bank SEB. “The investor base is more confident and has more capital available for risk.”



Tax policies encourage Swedes to invest in stocks, including investment products that do not require investors to pay capital gains taxes on transactions. This has meant that the proportion of the market made up by retail investors tends to be higher than on rival markets, although Aim also offers tax breaks on capital gains.

Retail traders represented between 31 and 52 per cent of trading in the 10 days after Volvo Cars’ listing on the main exchange in 2021, according to data from Nasdaq.

Nasdaq said the ready supply of retail investment was encouraging companies to raise money on the First North index. “London has such a huge capital market and it’s competing with Stockholm. Something’s got to be setting us apart: that something is retail participation.”

In contrast, Christopher Raggett, co-head of corporate finance at FinnCap, a stockbroker for Aim companies, said: “One thing driving the bubble of the pandemic was the amount of retail capital waiting to be deployed . . . people aren’t trading in as lively a fashion as previously.”

But First North, like others, has not been totally immune to the declines in global equities markets.

The index has seen capital raising fall by more than half in 2022 and its main index is down by more than 30 per cent this year. The Aim index has fallen more than 24 per cent so far this year.

“It’s a tricky year for markets generally,” said Raggett. “The amount of capital raised on Aim fell off a cliff from September last year to January this year.”

Despite capital raising on First North surpassing that of Aim, “people who are in the market in the Nordics, who don’t compare with anyone else, are finding this is a horrible year”, said SEB’s Thygesen.

*This article has been amended since original publication to clarify that the source of the data was Dealogic

When buyout groups Hellman & Friedman and Permira began stalking a takeover of business software giant Zendesk in February, they tried to bring in a third partner for what would be a large deal. They called Blackstone, a firm that manages more than $125bn in private equity assets and that they each knew well from previous transactions.

Blackstone was initially interested in Zendesk but in the end it passed on the investment. However, the firm’s involvement did not end there. When H&F and Permira eventually announced their $10.2bn acquisition of the software company in June, the press release did not name any of the Wall Street banks that would usually provide the bridge loans to complete such a deal.

Instead, H&F and Permira said that amid choppy capital markets they had secured more than $4bn of debt financing. The debt came from a group of would-be competitors led by Blackstone.

Firms like Blackstone and Apollo, another lender in the deal, made their names as swashbuckling takeover artists. The industry was founded from the 1970s to the early 90s by small teams of mercenary dealmakers, who then duelled with each other to win control of large corporations such as RJR Nabisco, Alliance Boots, and Philips Semiconductors.



Private equity firms have since grown to manage almost $10tn in assets and have become the dominant force in global financial markets.

But as the industry has expanded, its character has been transformed. Firms that once bludgeoned opponents now nurture complex business relationships with their competitors. Private equity has become just a fraction of their overall assets under management, with credit investing businesses now managing hundreds of billions of dollars, including providing loans for leveraged buyouts.

The result of these sprawling empires is that once heated rivals increasingly see the benefits of a level of co-operation between different business units that once seemed inconceivable.

“Private equity started 35 years ago as a dark art. Now it is an asset class,” Marc Rowan, chief executive of Apollo Global, told an audience earlier this year. “There are no permanent friends or permanent enemies anymore.”

With private equity deals now accounting for over 25 per cent of global M&A activity — a record market share — the collective power of the leading groups is starting to attract the attention of regulators.



Private equity takeovers, once rubber stamped by antitrust authorities, are now being treated with the scrutiny reserved for large corporations, competition watchdogs have told the Financial Times.

It is a striking reversal for a sector that has more often in the past been criticised by politicians for its ruthlessness rather than its clubbiness.

“When you have repeated relationships, you are just not going to go to war with the same ferocity,” says Josh Lerner, a professor at Harvard Business School, who has studied private equity for decades.

Relationships that run deep

The Zendesk takeover is illustrative of how deep the ties can run between leading private equity firms.

The origins of the takeover go back to 2016 when Permira invited H&F to make a minority investment in a call centre technology company called Genesys, which it had bought from Alcatel-Lucent four years earlier. H&F invested $900mn in Genesys at a $3.8bn valuation, more than double Permira’s initial investment.

H&F and Permira initially studied merging Genesys with Zendesk, according to sources directly involved in the deal. When the idea did not advance, they turned to Blackstone, which helped arrange more than $4bn in debt financing that is now the largest private financing on record.



For Blackstone, it meant supporting a deal led by two of its most important customers. Blackstone Credit, the buyout firm’s $230bn in assets lending arm, is a reliable lender to both firms. It provided the majority of $1.2bn in financing for H&F’s takeover of NPD Group in October 2021 and $2.2bn in debt for Permira’s take-private of cyber security group Mimecast two months later.

H&F co-led the largest leveraged buyout of 2021 alongside Blackstone, taking control of medical supplier Medline Industries for $34bn. A year earlier, the two firms struck an equally ambitious deal to merge their combined investments in human resources IT company Ultimate Software and cloud software specialist Kronos, in a $22bn deal.

To buy Zendesk, H&F and Permira raised billions in debt against a business that generated just $80mn in profits last year, far more than what regulated banks could offer, according to three people involved in the deal.

Blackstone, which considers H&F a skilled partner for takeovers, took part in the financing, as did Apollo, which financed more than $750mn of the takeover, and counts both firms among the 25 private equity firms to which it has lent over $40bn. Famed for its ruthless tactics with debtholders, Apollo now aspires to become a go-to financier for the deals organised by competitors.

“The zero-sum game mentality of old school dealmakers that always assumed that for them to win someone had to lose is really an outdated point of view,” says an executive at one of the industry’s largest global firms. “There are so many opportunities. Today you are competing and tomorrow you will bring them in as a partner on a deal. It is the new reality.”



Aggressive outsiders

The modern day private equity buyout traces to Michael Milken’s Drexel Burnham Lambert, the investment bank that popularised the “junk bond”. Drexel financed small teams of dealmakers targeting corporate giants such as Disney, Texaco and then RJR Nabisco, the signature LBO of the go-go 1980s.

Milken, and many of Drexel’s clients, were considered aggressive outsiders, unafraid to gatecrash Wall Street.

“The Drexel guys that Milken was backing were pretty non-genteel types,” says a buyout executive who worked in that era. “It was like the Gold Rush. The guys who couldn’t make it in the city went off to look for gold.”

By the 2008 crisis, private equity had become part of the financial mainstream as it pulled off a string of ever-larger takeovers. These so-called “club deals” hinted at the willingness of some firms to co-operate out of self-interest.



Buyout firms, then privately owned partnerships almost exclusively focused on corporate takeovers, could not always afford to purchase on their own some of the companies they considered attractive targets — such as hotelier Hilton, utility TXU, retailer Toys “R” Us, and hospital chain HCA. However, by assembling consortiums of competitors that each contributed a slice of the equity, almost any deal became possible.

These club deals led to some legal battles. A 2007 civil lawsuit in Massachusetts led by a pension fund in Detroit accused 16 private equity firms of forming consortiums that rigged bids in sale processes.

The case centred on the $33bn LBO of HCA, which was won by Bain Capital, KKR and Merrill Lynch, after there were no other competing bids. Emails unearthed by lawyers showed competitors refraining from outbidding each other.

“I don’t want to be in a pissing battle with KKR at the same time we are teaming on other deals,” said David Rubenstein, one of Carlyle’s founders, in an email unearthed during the litigation.

These deals were not all successes. Toys “R” Us, for instance, fell into restructuring. Moreover, to settle the Massachusetts litigation, Goldman Sachs and Bain Capital paid $121mn, while KKR, Blackstone and TPG agreed to pay $325mn, all without admitting or denying guilt.

By the time of the financial crisis, club deals had mostly vanished as investors found themselves exposed to the same failing investments in multiple funds and called for an end to the practice.

But the crisis also opened a window for buyout firms to transform themselves into much broader operations that are shifting the balance of power in finance towards private markets.

Investment banks, hamstrung by new regulations like the 2010 Dodd Frank Act, were curtailed from holding risky assets such as low-rated debts, which has limited their ability to finance many deals. As a result, corporations and private equity buyers have had to seek new ways of issuing debt. Blackstone, Apollo, KKR and Carlyle stepped into the void.

They bought billions of non-performing loans from banks in the US and Europe, betting that the portfolios would stabilise. As markets recovered, they shifted to originating new loans, underwriting midsized private equity takeovers that banks would not finance.

It set off private equity’s march into new businesses such as lending, insurance-related investments, real estate and infrastructure, which were far from their original speciality in buyouts.

Blackstone acquired debt manager GSO in 2008, seeding its expansion into credit and insurance-based investments, which now comprise 28 per cent of the group’s $940bn in assets.

Apollo, under current chief executive Rowan, built an insurer called Athene that was designed to invest fixed-rate annuity premiums into complex debts, like senior loans. These credit investments are now Apollo’s biggest and fastest growing business.



In private lending markets, the fastest growth has come from financing software takeovers, like Zendesk, which banks cannot handle due to the level of leverage involved. Several other large software deals this year, like Thoma Bravo’s $10.4bn takeover of Anaplan, were financed by private lenders because the leverage ratios on the debt are beyond what banks are comfortable handling.

In these deals, lenders will “club up” by assembling a consortium of competitors, resembling the consortiums of the pre-crisis era.

These private financings have continued as interest rates rise — just as many investment banks have been refusing to make new lending commitments until loans from deals struck earlier in the year have been sold on. The result has been a halt in the market for bank-financed takeovers and the private lenders winning market share.

“The idea that we would work with KKR and Blackstone to provide debt for us once seemed like a crazy idea. Today, people don’t even think about it,” says the head of one private equity firm. “There are no clean lines. Everyone is a competitor, a collaborator and a partner.”

This web of relationships has changed the character of the industry. “It is costlier than ever to be a jerk,” says Steven Kaplan, an expert on private equity who teaches at the University of Chicago. “If they behave badly in one deal, they will be treated differently in the next deal.”

The ties stretch far beyond lending. The fastest way for buyout firms to deploy their nearly $2tn in “dry powder,” or funds they have raised that have yet to be invested, is to buy companies directly from other private equity firms. A record 442 of such deals worth $62bn were struck last year, according to Refinitiv.

These deals can close in less than three months, say bankers, versus as long as nine months to acquire a public company. They can also be expedient: sellers sometimes look to quickly lock in gains and show strong returns as they raise their next fund, notes one private equity firm executive.



“A lot of times you have good companies that a sponsor owns, but they need to sell to show dollars realised for their fundraising,” says the executive.

There has also been a surge in so-called “GP-led secondary transactions,” where one private equity firm sells a large stake in an existing investment to another firm at a higher valuation.

One of the industry’s earliest major deals was H&F’s 2014 sale of a $750mn minority interest in Kronos, a seller of cloud-based time sheet services, to a group of buyers led by Blackstone, that were willing to take lower governance rights and leave H&F in control of the deal.

Five years later, H&F led a deal to acquire Ultimate Software for $11bn, bringing in Blackstone and GIC, its same partners on the Kronos stake sale. Blackstone’s debt arm co-led $900mn in financing for the riskiest piece of the deal’s $3.4bn total debt package, helping to get it over the line.

The two private equity firms then merged Ultimate Software with Kronos a year later, generating billions of dollars in gains, underscoring how close relationships can get deals done.

Can it last?

The first test of the private equity industry’s new co-operative structure was the coronavirus pandemic. Broad swaths of the global economy closed, threatening to create a wave of defaults for private lenders that had financed a flurry of takeovers.

What occurred instead was a mass forbearance as private equity borrowers and their lenders amended loans to give companies breathing room. To smooth the new and more lenient liquidity measures and show good faith, some borrowers added additional equity to the deals.

“The whole concept was we’re not going to foreclose,” says one borrower involved in numerous negotiations. “They’re in the business of ideally doing multiple deals with your portfolio companies. They know that if they act poorly, my job is to not show them future business.”

One such example was a company called European Wax Centre, an operator of hair removal salons that was acquired in 2018 by private equity firm General Atlantic with a $180mn loan from private lender Blue Owl. When the pandemic shuttered the company’s salons, Blue Owl voluntarily amended the loan to forestall a cash crunch and General Atlantic made an over $10mn cash infusion as a concession.



After the economy reopened, European Wax recovered and its debts were refinanced at par. Last year, the company went public, valuing General Atlantic’s stake at $639mn, several multiples of its original investment.

Young Soo Jang, a PhD student at the University of Chicago, has studied private lenders’ behaviour by examining over 200 deals that fell into distress during Covid.

He found private lenders were twice as likely as the broadly syndicated loan market to ask for borrowers to agree to inject new capital into deals, forestalling restructuring. Five per cent of distressed private deals led to bankruptcies, according to the research, half the rates of bank financed deals.

“A lot of the direct lenders put out a lot of capital . . . They were extremely nervous,” adds one executive involved in these deals. “Everyone benefited from the fact that there was such a sharp snap back in the economy.”

The global economy sidestepped a brewing financial crisis during the pandemic thanks to an unprecedented policy response.

But as financial markets enter another troubled moment amid the war in Ukraine and central bank tightening, the ties between firms will be tested again.

“This increased co-operation and cosiness is really a bull market phenomenon,” says Lerner, the Harvard professor, who expects falling markets will unearth new conflict as deals sour, pitting parties against each other.

However, the firms involved in the Zendesk financing insist these new relationships will not break.

“It is very hard to be a credible direct lender and a hostile investor,” says the head of one firm involved in the deal. Another adds: “We’re just trying to get our money back and get a return.”

The Carlyle Group notably got its name from a New York hotel the founders were fond of. Like hotels, private equity groups have checkout times. Late Sunday night, Carlyle announced that its chief executive, Kewsong Lee, would leave his post immediately. His employment contract ran through to the end of 2022. He and the board could not agree to an extension.

Lee has worked to remake the group. Carlyle was among the US buyout pioneers which listed their shares about a decade ago. It has sometimes been seen as a laggard, too tied to its leveraged buyout roots. But its assets under management of $376bn are almost double the figure at the end of 2017.

More importantly, Carlyle has pushed into credit investing, including the kind that supports insurers. It has less dependence on volatile if lucrative carried interest and better support from recurring management fees. Public market investors prefer this — and the abolition of supervoting shares.

The suddenness of Lee’s departure is emphasised by co-founder Bill Conway, in his early seventies, taking the helm on an interim basis. Carlyle’s board, for all the forward thinking, still has four members who can trace their association with the business back several decades. Lee only joined nine years ago. His exit smacks of the old guard retaking control.

In the past five years, Carlyle shares have risen a healthy 68 per cent. However, that sharply trails the likes of Blackstone, KKR, Apollo and Ares. Private capital businesses have increasingly usurped banks as intermediaries. They have also replaced public markets as a place where institutional investors get disproportionate returns.

The leveraged buyout stars of an earlier era face a future away from pure private equity. Corporate lending and real estate matter too. In the last quarter, Carlyle’s credit division had slightly more assets than the buyout area.

This makes the decision confronting the board even harder. Choosing between an insider or outsider as the new chief would send a message about modernity, or the lack of it, at Carlyle.

Manrika Khaira regularly broadcasts live on TikTok to her following of more than half a million people. She uses the social media platform to demonstrate how she gets ready in cheerful tutorial-style videos, while marketing cheap or discounted beauty products.

In one livestream, testing out some heated hair crimpers sent to her, she realises her dark locks are burning and quickly snaps out of her smiley routine to warn those tuning in.

“If a product arrives and it is shit, I will say I don’t like it, don’t buy it,” she says in an interview. “I need to build a reputation of trust.”

Her approach has made Khaira, a UK-based influencer, one of the top sellers on TikTok Shop, the short video app’s live ecommerce feature. It allows her audience to buy the products she promotes directly on the app, through a clickable orange basket in the bottom left-hand corner of the screen.

It’s a scene familiar to anyone who has watched QVC or what used to be the Home Shopping Network, except this version involves social media influencers plugging products in livestreams, known as “lives”, featuring heavy discounts, flash sales and gifts in mystery boxes.

Social media platforms are betting on this model as the future of shopping, hoping to reap the rewards of an industry that has had huge success in China, where live ecommerce sales are expected to reach $423bn this year, according to management consultancy McKinsey.

Yet efforts to bring this model to western consumers have had a turbulent start, with low viewing numbers, poor sales, clunky tech and logistical challenges. Several employees and people close to the company say TikTok Shop’s expansion into Europe and the US was put on hold after setbacks and controversy in the UK, though a TikTok spokesman denies the company has “paused, delayed or withdrawn the planned rollout of TikTok Shop into any other international markets”.

While TikTok says plans to expand may have been discussed with businesses, it says its focus is on making the feature successful in regions where it is already available.



Major players in the sector — influencers, brands, merchants — are sceptical, but a reliance on Big Tech for their livelihood means they are reluctant to miss out. Some insiders are resigned to the idea that social media giants are simply too powerful to let their foray into live shopping fail.

As well as TikTok, platforms including Amazon, YouTube, Facebook and Instagram have all been trialling live ecommerce, which brings together entertainment and shopping underpinned by the pulling power of influencers.

“When phones came into our hands, the power dynamic completely shifted,” says Shimona Mehta, European head of Shopify, which provides the software used by social media companies to enable quick purchases and live updates on stock and shipping.

“We don’t go shopping any more, we are shopping all of the time,” says Mehta, who considers social media platforms the new shopping malls.

“Rather than driving consumers away from where they’re trying to spend their time, [live ecommerce] allows consumers to convert right there in what they’re doing without disrupting what’s got their attention in the moment.”

Experimental phase

Social media-driven shopping is not new. Almost two-thirds of consumers say they have bought something via social media, according to an Accenture survey of more than 10,000 global users.

The popular #TikTokMadeMeBuyIt hashtag has been clicked on more than 18.5bn times and average daily uploads on YouTube featuring the words “Shop With Me” in the title have increased more than 60 per cent in 2021, compared with the year before.



Consumers have historically left these platforms to complete their purchases, using links to websites such as Amazon, but social networks want the transaction to take place inside the app, where they can take a cut of the revenue. Amazon, the dominant force in ecommerce, is now courting big-name influencers to get a piece of the live shopping action.

“We basically see YouTube as a place where shopping activity has been taking place for a long time, and our goal is to . . . make that shopping activity more seamless and natural,” says David Katz, vice-president of product management at YouTube Shopping.

Features that allow users to click on product links while watching a live broadcast on YouTube are available in the UK and the US, where Katz admits it is still in an “experimental phase”. Interaction with the tools are trailing behind countries including South Korea, Brazil and India.

“It is still very early to draw conclusions,” he adds. “The behaviour is more advanced in some markets . . . [and] we’ll have to learn whether there are intrinsic differences or if it’s simply a matter of developing user understanding and enthusiasm.”

A livestreaming event on YouTube last year featured Gordon Ramsay showing viewers how to cook a festive dinner using “his favourite line of pans”, which users could then purchase by clicking on links in the video. The week-long event generated 2mn live views — a tiny proportion of YouTube’s 2bn users — and Katz considers it a success.



YouTube, TikTok and Instagram all say live shopping is a nascent feature and none has provided figures on the amount of sales or revenue that have been generated through livestreams.

Estimates from TikTok employees suggest the company has been running the feature at cost, with some livestreams resulting in zero sales, while one person with knowledge of Instagram’s trial says it is failing to drive any meaningful sales.

“Our hope is that commerce continues to be an opportunity for creators to earn a sustainable living — whether that’s through branded content partnerships or their own product lines,” says Ashley Yuki, co-head of product at Instagram.

Meta, which will stop live shopping on its Facebook platform from October to focus on short form video, is pressing on with the feature on Instagram. Its focus is “getting the experience right” in the US before rolling it out in other markets, Yuki says.

A series of FT investigations have revealed that TikTok Shop has been failing to gain traction since launching in the UK last year, its first live shopping market outside Asia.

Staff spoke of a culture clash with the company’s Chinese owner ByteDance in its efforts to bring its ecommerce model — and working practices — to western markets. London-based employees, complaining of poor conditions and unrealistic targets, quit in their droves and the head of the department was replaced after telling his colleagues he didn’t believe in maternity leave.

These issues are in stark contrast to live shopping in China, where it is a mature and established sector across platforms such as Taobao, Pinduoduo and Douyin. The latter, TikTok’s Chinese sister app, has enjoyed a 300 per cent rise in sales year on year, with users buying more than 10bn products — proving it can be a lucrative business if you get it right.

The platforms in China, however, are supported by a sophisticated live commerce ecosystem involving dedicated talent agencies, academies providing specialised courses for livestream presenters, as well as studios, lighting and production companies.

Aggressive selling

At the heart of successful livestreams are the people in front of the camera. China’s most popular influencers such as Austin Li sell more than $1bn worth of goods in a single broadcast. Influencers are paid a commission, which varies depending on the platform, how many followers the influencer has, and how many sales they make.

Livestreams can take place in an influencer’s home or a professional studio, often with bright lighting, an appealing backdrop and a colourful array of products in the background, which the influencer can pull out and interact with.



The presenting style is animated and aggressive, with a flurry of deals such as bundling items, random gift boxes and flash giveaways to draw in sales. Influencers respond to questions in the comments and call out usernames to thank people for their orders.

Scott Guthrie, head of the Influencer Marketing Trade Body, says that live shopping influencers require a particular skill set. An influencer who is good at creating aspirational content with product placement in an edited video, for example, might be terrible at direct sales.

“Someone in Selfridges selling Clinique might be much better than an influencer because . . . they are used to holding an audience, they are used to talking to someone and trying to upsell,” Guthrie says. “[Influencers] can’t just pour old skills on to a new format.”

British influencers have complained that Livestreams on TikTok, which can last for hours, were repetitive, exhausting and difficult to host. Many have stopped altogether, saying the time invested wasn’t worth the commission. Meanwhile, sellers such as Khaira and the two sisters known as the McLoughlin Girls, who have more than 3.1mn followers, have generated tens of thousands of pounds in sales.

“If you select the right influencer, they have much more reach than we would on our own platform . . . they are the revenue drivers,” says Luke Williams, founder of Justmylook, a UK-based beauty retailer who has been taking part in TikTok Shop. “Live shopping is new and exciting but it is still in its infancy. It is one to watch but there’s a long way to go.”

Khaira agrees. “I think [livestream] is the way forward with selling products; it is a brand new marketing strategy,” she says. “Because certain people spend most of their time on TikTok, it is a way to get in front of those consumers.”

TikTok’s launch in the UK best captures the issues facing the fledgling sector. A lack of infrastructure and experienced studio staff in Britain has meant that TikTok Shop lives sometimes end abruptly because of technical glitches. One influencer says they arrived at a studio to find the cameras and lights were broken, so an inexperienced assistant filmed them using a computer turned on its side, to recreate TikTok’s portrait-style video format. TikTok says its studio staff have extensive levels of experience and expertise and that it has no record of this particular case.



Some merchants say that the cost of holding livestreams in studios, along with paying influencers and crew, was not worth the return on investment.

“We wanted to be first adopters but TikTok has underestimated just how much technology businesses would need,” says one luxury brand, speaking under the condition of anonymity. “It isn’t just uploading your products, you need massive infrastructure.”

In response, TikTok says it is working to make things better for merchants, but believes it is possible to succeed without massive infrastructure.

TikTok Shop customers have also complained of delays in receiving items, sometimes not receiving them at all, and issues with unresponsive sellers when asking for a refund. The platform receives about 200 complaints from customers in the UK each day, many involving fraudulent sellers, according to a person at the company.

There is also an issue with counterfeit products available on the platform, leading to complaints from brands including Dyson and L’Oréal. These livestreams are recommended by the platform’s algorithm and are easily found within seconds of logging on to the app.

“When it comes to counterfeits, fake or unauthorised replicas of an authentic product are forbidden on TikTok Shop,” says Patrick Nommensen, senior director of ecommerce operations at TikTok. “We make this absolutely clear in our policies . . . and we remove such cases when found.”

Several merchants say the Chinese live ecommerce model was a “race to the bottom” on pricing, which devalued their products and made it hard to compete with bad actors selling counterfeit or cheaply made items.

“Trying to drag and drop the Chinese model into western markets isn’t how it is going to work long-term,” says one TikTok Shop merchant.



Too big to fail

Olly Lewis of The Fifth, a creative influencer agency, predicts that UK social ecommerce will grow from £4.2bn in 2021 to about £6.1bn next year, with live shopping increasing its share from 29 per cent to 45 per cent. But he says the sector will not change much in the next 12 months, calling it a “long-term play”.

“Some of the technology is clunky, the fulfilment partners are not in place,” he adds. “But the [main] issue is the consumer appetite to buy [in] one click.”

Ease of purchase is fundamental to making livestream shopping work: users should be able to watch content with a featured item and purchase it immediately, creating the “seamless” experience the industry strives for.

In web design, there is an established “three-click rule”: unless a user can find the information they want within three clicks of a mouse, they will leave the site. This rule was revolutionised by ecommerce websites such as Amazon, which reduced this to one click. For businesses getting into the ecommerce game, there is an increasing body of research that reinforces the idea that the fewer clicks needed to complete a transaction, the more likely the customer is to finish their purchase.

Brands and retailers who were slow to adapt to the online shopping boom by launching their own websites are nervous about missing the boat a second time. They are now conflicted over whether to jump into live ecommerce: they want to be visible on the platforms popular with young people, but they aren’t seeing the sales promised.

The platforms also take a cut of any sales made. YouTube wouldn’t disclose its fees but TikTok and Meta, which owns Facebook and Instagram, receive 5 per cent of each sale made on the platform.



Merchants worry they aren’t getting click-throughs back to their websites, which means the consumer data generated belongs to the social media platform. How long a customer’s mouse hovers over a dress, or the pair of shoes added to the basket before logging off, are insights brands are wary to lose.

Personalisation is social media platform’s bread and butter, with powerful algorithms that can predict which content you are likely to interact with, making it perfect for recommending items to add to a person’s shopping list and generating targeted advertisements.

Since Apple introduced software that allows people to opt out of how data on their phones is used to sell personalised advertising, these companies have taken a hit to their primary form of revenue. Meta estimates that it would create a $10bn reduction to advertising growth this year.

Bringing shopping to social media has the potential to create a lucrative revenue stream for those platforms providing access to consumer data, which can be used not only to sell products but also advertising.

Instagram’s Yuki says shopping features can generate insights to “personalise [user] experience” on the platform, including for ads.

“Your activity, including purchases, may influence what you see,” she says. “For instance, if you look through collections of bicycles in shops [on Instagram], you might see more content about bicycles on other Facebook products.”



Despite a rough start, platforms are still pushing on with these features, hoping that the livestream experiment will eventually pay off.

“It is a second coming for social media, it is all going to change rapidly over the next few years,” says one brand, who spoke under condition of anonymity for fear of falling out of favour with the social media companies.

“As a brand, you have to be on board: these platforms are so big, they will make it work.”

Alex Blyth thought his company had a genius strategy to reinvent cancer treatment. By examining the immunity of the lucky few who had no family history of the disease, Lift Biosciences discovered a potential treatment to destroy tumours for everyone else. Then the cell therapy hit a snag: it did not work when tested on mice.

The bad news came just as Blyth was about to sign a £20mn-plus fundraising round for his Cambridge-based biotech. Investors were shaken by the poor data from the pre-clinical study and, suddenly, he could only raise £5mn, at a lower valuation.

But Lift’s chief scientist Oxana Polyakova turned to a novel technology that replicates a miniature human tumour in a dish: a tumoroid. When used on the tumoroid the drug “totally trashed” the cancer, Blyth says, to the point where a patient would have been in complete remission.

“It showed we had something that really worked. Investors were thrilled: they had just come in at the lower round,” he says. “I wasn’t so thrilled.”



Blyth felt obliged to rely on the traditional way of testing a drug on animals to persuade regulators to let him begin a human trial of the innovative therapy. But the mice’s white blood cells ate the therapy, so it never had a chance to work, while the therapy could signal to the human white blood cells not to touch it. “The mouse doesn’t recognise that human language,” he says.

Animal experiments have long been the only permissible way to test whether a drug is safe and effective before giving it to people at the clinical trial stage. But their patchy reliability is shown by the industry’s poor productivity rate: many drugs that are effective in mice don’t work well in humans and vice versa. In cancer, the statistics are particularly stark: studies have shown tumoroids are about 80 per cent predictive of how effective a drug will be, far surpassing the average 8 per cent accuracy rate in animal models.

As scientists learn better how human biology works, they are coming to understand the unreliability of animal models. The search for alternatives has accelerated because innovative therapies, based on human genes and cells or even personalised for patients, may not work in animals at all.

At the same time, researchers in universities and industry remain under pressure from animal rights activists. “They are not as vocal and aggressive in their tone today as some antivivisectionists were 20 years ago but some of the language used is still very emotive,” says Anthony Holmes, science and technology director of NC3Rs, the UK’s National Centre for the Replacement, Refinement and Reduction of Animals in Research.



While there are no reliable figures for most of the world on animal testing and experiments, estimates suggest the global total is above 100mn, with little change in recent years, says Kerry Postlethwaite, regulatory affairs director at the pressure group Cruelty Free International.

European countries do publish detailed statistics and, in the UK, researchers carried out 3.06mn procedures on animals in 2021, up 6 per cent on 2020, though well below the peak of 4.14mn reached in 2015.

Academics and pharmaceutical companies hope that technology based on human cells will help them phase mice and monkeys out of their labs.

Scientific milestone

The umbrella term for the new field is microphysiological systems or MPS, which includes tumoroids, organoids and organs-on-a-chip.

Organoids are grown from stem cells to create 3D tissue in a dish resembling miniature human organs; heart organoids beat like the real thing, for example. Organs-on-a-chip are plastic blocks lined with stem cells and a circuit that stimulates the mechanics of an organ.



“We need to move away from animals in a systematic way,” says Salim Abdool Karim, South Africa’s leading infectious disease expert. “That . . . involves regulators being given the data to show that non-animal biological systems will give us compatible, if not better, information.”

Nathalie Brandenburg co-founded Swiss start-up Sun Bioscience in 2016 to create standard versions of organoids, which makes it easier to trust that results are comparable, and convince scientists and regulators to use them. “When we started we had to tell people what organoids were,” she says, referring to the early stage of her research journey.



In the past two years, and particularly as scientists emerged from lockdowns — when many had time to read up on the technology — demand from large pharmaceutical companies for Sun’s products has soared, she says.

Companies are becoming more interested in reducing their reliance on animals for ethical reasons, says Arron Tolley, chief executive of Aptamer Group, which creates artificial antibodies for use in diagnostics and drugs.

“People are becoming more responsible now, from a corporate governance point of view, and looking to remove animal testing when necessary,” he says.

Using larger animals, such as monkeys, is particularly problematic, Tolley adds. “The bigger and cuter they get, the more people are aware of the impact.”

Rare diseases are especially fertile ground for models based on human tissues, says James Hickman, chief scientist at Hesperos, an organ-on-a-chip company based in Florida. “There are 7,000 rare diseases and only 400 are being actively researched because there are no animal models,” Hickman says. “We’re not just talking about replacing animals or reducing animals, these systems fill a void where animal models don’t exist.”



His company recently helped French pharmaceutical group Sanofi receive approval from the US Food and Drug Administration for a clinical trial to extend approval of an existing drug to a new disease, a rare autoimmune condition, chronic inflammatory demyelinating polyneuropathy, or CIDP, on the basis of organ chip data alone. CIDP causes muscle weakness that impairs walking and hand function.

Hesperos made a tissue chip with two cell types derived from patients’ stem cells, motor neurons and Schwann cells, which represent the functional characteristics of CIDP. When Sanofi’s antibody drug was applied to the chip, it restored neuronal function, enabling a clinical trial to go ahead.



“An important milestone has been reached,” says Thomas Hartung, head of the Center for Alternatives to Animal Testing at Johns Hopkins University in Baltimore. “The first drug has entered clinical trials based only on data produced from organs-on-a-chip.”

The industry is attracted by the potential to cut wasted R&D spending. Mark Treherne, a research scientist and biotech executive, says that within five years the technologies could have a huge impact on productivity, allowing the industry to test many more potential drugs and “sort the chaff from the wheat”.

“By enabling real biological tests far earlier in the drug discovery process, you could get to a position where instead of writing off 90 per cent of R&D, you could write off 50 per cent, which would be transformational for profitability initially and, downstream, the cost of therapies,” he says.

Holy Grail

Stefan Platz, the senior vice-president of clinical pharmacology and safety sciences at AstraZeneca, is keen to stress that animal models have saved millions of lives. But in the past four or five years, scientists’ growing ability to interpret human genomes and deep data on areas such as proteins have raised more doubts about how similar people are to the animals we test on.

“We now understand with all this information in humans that quite often the animal model is not pharmacologically relevant,” he says, meaning it does not show which drugs will work in people.

AstraZeneca is using simple organoids, such as one for bone marrow now, and working on longer-term projects to develop organoids that are more complex. These will used for predicting how safe a drug will be in the brain or kidneys, or creating a model of the immune system.

But organoids are not ready to represent complex neural networks, says Maria Leptin, the biologist who leads the European Research Council. “You cannot study the function of the brain and its interconnections, even though you can grow brain organoids,” she says. “It will be a long time before questions that require organ interactions or perception can be studied in this way.”

German pharma group Merck decided in 2020 to phase out animal testing, although it has not set a deadline for completion. All teams developing new drugs must present alternatives to animal experiments where possible, and the company is already making limited use of organoids, tumoroids and organs-on-a-chip, as well as animal and human tissue to test the effect of compounds on cartilage.

To begin modelling more extensive human systems, Merck is collaborating with Israeli start-up Quris, which is experimenting with predictive AI technology called “patients-on-a-chip”.



The companies “are actually simulating the patient, not just the key organs on a chip”, says Danny Bar-Zohar, Merck’s global head of healthcare R&D. This allows them to assess “what will be the impact of this small molecule after it is metabolised in the liver and after it crosses the blood-brain barrier and gets into the brain”.

The method could also allow Merck to test interactions between dozens of drugs before administering a new compound to humans. “That is really the Holy Grail,” he says.

Swiss drugmaker Roche is also investing heavily in new tools to reduce reliance on animal testing. In the long run, Roche hopes to create a model of Alzheimer’s disease and all the key cell types that are involved in immune regulation in cancer.

Matthias Lutolf, scientific director at Roche’s Institute for Translational Bioengineering, warns that animals will remain central for some time. “We’re still working very hard to mimic organ-level complexity and function. Then you add the other layers of the organism — multiple organs that interact like the gut-brain axis,” he says. “This will be the long-term effort of the entire field.”


Question of safety

The most important reason to test drugs on animals is to ensure they are safe — and it will take a lot of data to convince regulators to use human technology instead.



“It is important to realise that it’s going to take longer for safety than for efficacy but we are on that path,” says Hickman of Hesperos. “The last test that’s going to go is systemic toxicity [which measures toxic effects on the whole body]. Now, the FDA requires a small animal model and two large animal models for safety. What we’re trying to do is replace one of the large animal models with one of these systems.”

But the field of toxicology is also changing. When Platz started work in the late 1990s, toxicologists were doing basic calculations based on adjusting for body weight, exposure to the drug and tracking changes in organs. Now, the discussions are focused on the level of each molecule, how it is distributed in the body and whether it could bind to places where it is not wanted.

This creates more data for new algorithms searching for reasons why a drug might not work. By using modelling and artificial intelligence, AstraZeneca has cut its failure rate in the first stage of human trials dramatically. In 2011, 30 per cent of drugs failed in phase 1 on safety grounds, but in the past seven years, none have.

Only a few of the most advanced organoids have been used in safety testing — and then in narrow circumstances. AstraZeneca has made most progress replicating bone marrow in the lab, validating it with human and animal data.

For example, when researchers were testing a potential new cancer drug in combination with an existing leukaemia treatment, they wanted to understand whether giving both together would cause problematic side-effects. Tests on bone marrow organoids showed they needed to give the drugs a week apart. This sped up the process by many months — and meant fewer animals were used.



Regulators are learning more about how organoids work and how to compare them with their animal alternatives. The FDA has been able to use its own labs to explore the technologies in-house, helped by the US National Institutes of Health, which has been working for 10 years on tissue chips.

The US regulator is so committed to advancing the field that its employees made up about a tenth of the attendees at the first World Summit on Microphysiological Systems, held at the end of May in New Orleans, according to Hartung, one of the organisers.

Industry insiders predict it could take a couple of decades or more to ditch the mouse. Indeed, Holmes does not believe there will be a complete replacement in his lifetime. “These systems face several barriers to adoption,” he says. “There are issues of validation and a lack of standards that need to be addressed. But organisations like NC3Rs are working alongside researchers, industry and regulators to accelerate their adoption where there is scientific evidence to support it.”

One hurdle, according to Bar-Zohar of Merck, will be to persuade the medical community to rely on data gathered without animal experiments. “Convincing physicians that you can start a clinical trial on your patients . . . based on data that came from a chip, we won’t be able to do that overnight,” he says.

“I don’t anticipate we’ll be relying completely on alternative technologies any time soon,” agrees Abdool Karim, “but if we don’t make those baby steps now, we’ll never get to the point of phasing out animals altogether.”

Fund managers are reducing pay packages and delaying hiring decisions in an attempt to curb costs, as pressure mounts from customer withdrawals and falling global stock markets.

With inflation soaring to its highest level in four decades, putting upward momentum on wages, a number of asset managers are clamping down on expenses to protect profit margins,

Major stock markets have endured a tough year so far, with the S&P 500 index down nearly 12 per cent, while the MSCI All World index has lost 13.5 per cent.

BlackRock, the largest fund manager in the world, reported an 11 per cent drop in assets under management in the three months to the end of June, representing its second consecutive quarterly decline.

The US-based fund group, led by chief executive Larry Fink, said it would postpone hiring for more senior roles and would fill other available positions with less expensive junior employees, in an attempt to save costs.

“We are delaying certain senior hires into next year,” said Gary Shedlin, chief financial officer at BlackRock. “We’re also trying to juniorize a number of other roles where appropriate.”

State Street reported an 11 per cent drop in assets under management in the second quarter compared with the same period a year earlier. The Boston-based asset manager said pay and employee benefits fell 15 per cent. “We have been proactively managing our expenses, including lowering our incentive compensation,” said chief executive officer Ron O’Hanley.

T Rowe Price said staff numbers rose over 3 per cent in the first half, but the investment manager is now sounding far more cautious on hiring, because the number of voluntary resignations in the US fell over this period.

The US fund group’s chief executive Rob Sharps said the decline in the voluntary attrition rate “means our headcount can go up pretty meaningfully”.

As a result, Sharps said he will be “careful” on “the roles that we fill between now and the end of the year . . . unless the market context changes.”

However, companies face the challenge of keeping costs in check while supporting employees through the cost of living crisis.

British investment platform Hargreaves Lansdown made a “breathing space” payment to some lower-paid employees in May.

Asset manager Abrdn announced that it would bump up base salary by £1,500 for all staff paid below £75,000 in October. The FTSE 100 listed company, which reported a £320mn pre-tax loss in the first half, is planning to close or merge about a fifth of its funds to trim costs.

Abrdn has also reduced its headcount by 500 in the past year, largely through selling off non-core businesses and natural attrition. It plans to shrink by another 500 over the next 18 months.

Jupiter Asset Management, which has suffered from high costs and consecutive quarters of customer withdrawals over the past few years, said it hoped to flatten variable pay by the end of the year.

“We are carefully balancing shareholder returns with the need to ensure appropriate rewards to employees,” said Jupiter’s chief financial officer Wayne Mepham.

But the tougher market environment has not just affected fund performance and prompted investor outflows. It has exposed asset managers with higher costs in particular.

“Those companies that started the year with problems now have bigger problems,” said Rae Maile, analyst at Panmure Gordon. “All it has done is crystallised issues that were already there rather than created new ones.”

Richard Rogers’ buildings are known for their inside-out architecture. The Inmos microprocessor factory in Newport, south Wales, completed in 1982, is no exception. Like the Pompidou Centre in Paris and the Lloyd’s headquarters in the City of London, the factory’s services run on the building’s exterior through multicoloured pipework, freeing the chipmaking “clean rooms” of internal columns.

It does not take much imagination, though, to see the ageing factory as an expression of the UK’s inside-out, upside-down policy on semiconductors.

It belongs to Britain’s largest semiconductor producer, Newport Wafer Fab, which was bought last July by Nexperia, a semiconductor maker controlled by China’s Wingtech Technology. The company’s fate has sparked debate over whether a policy to support the British semiconductor industry with grants, takeover protections or direct investment is necessary.

At a time of renewed economic nationalism and pandemic-related supply disruption, the global chipmaking industry has been caught in a geopolitical storm, which is affecting the production of smartphones, cars and computers. The US, EU and China are all scrambling for what may be an illusory goal of chip resilience.



Semiconductors range from ubiquitous silicon chips, of which the most advanced are made by big companies such as Taiwan Semiconductor Manufacturing Co, South Korea’s Samsung and Intel of the US, to chips made from other materials and used in products such as electric cars or solar panels.

Tensions between the US and China have intensified since former US president Donald Trump blacklisted the Chinese telecoms group Huawei in 2019 citing national security concerns, a move that resulted in a ban on global chip supplies to the company. This month Chinese military drills around Taiwan, home to TSMC, which accounts for 90 per cent of the world’s cutting-edge chip capacity, have underlined the rest of the world’s dependency on a few large manufacturers mostly based in Asia.

Western countries have sought to boost domestic manufacturing in response. In July, the US passed the Chips and Science Act that included $52bn in grants to support advanced chipmaking and research and development. The EU has its own Chips Act — a €43bn plan to subsidise production in the trading zone. That plan was in the spotlight last month after STMicroelectronics and GlobalFoundries combined to build a semiconductor factory in France, with hefty government support.



In the UK, political attention has focused on the Nexperia takeover of Newport Wafer Fab, one of four companies that made up the Welsh compound semiconductor “cluster”, alongside IQE, SPTS Technologies and Microchip. A government inquiry into the deal decided in April that it should be allowed to stand — only for a retrospective probe under new national security legislation to be set in motion that could yet unwind the agreement.

Last month Kwasi Kwarteng, secretary for business, enterprise and industrial strategy, extended that inquiry. He must rule by early September on whether there is a reasonable suspicion that the takeover “may give rise to a risk to national security”. 

Americo Lemos, chief executive of IQE, which makes semiconductor materials in Newport and Cardiff, says that while “every government has started to put measures in place to support the industry . . . the UK is behind, and I’m sure they know that, in terms of coming out with concrete policies to support the sector.”



Tom Tugendhat, chair of the UK parliament’s foreign affairs select committee, has tried to highlight the risk that Newport Wafer Fab’s new Chinese owners could close it down. But Nexperia, which also operates a semiconductor plant in Manchester, has said it is “here to stay”.

Tugendhat concedes that Newport Wafer Fab is not a cutting-edge silicon chipmaker. Even the most ardent advocates of British semiconductor design and manufacture do not believe the UK will ever be able to match Asian giants such as TSMC or Samsung in silicon chip manufacture. It may even be a stretch for the US and EU to scale up to that level.

But, Tugendhat says: “If you want to have a domestic microchip capability, you have to start somewhere. You can start with a couple of 18-year-olds and a bucket of sand or you can start with what you’ve got.”

Buckets of sand

The original Rogers-designed factory is now mostly empty. Newport Wafer Fab’s production of delicate silicon sheets that are chopped up into individual chips takes place in a neighbouring building staffed by some 500 technicians in protective glasses and full-length white “bunny suits”.

Yet inside the older building, information panels still trumpet its potential as an “innovation village” — an open-access facility that UK start-ups could use to scale up the next-generation compound semiconductors that underpin power systems, self-driving cars and quantum computers.

The debate over the future of Newport Wafer Fab reflects a broader concern about the destiny of another British company: the internationally known chip designer, Arm.



It is generally agreed that Arm — at the opposite end of the chip supply chain from Newport Wafer Fab — is a valuable asset. It operates a high-margin business model, licensing its intellectual property to some of the world’s largest mobile phone companies. Its designers could as easily work out of Silicon Valley as Silicon Fen, the technology cluster near Cambridge where Arm is headquartered.

Yet in 2016, days after the UK voted to leave the EU, Japanese tech investor SoftBank swooped in to buy Arm. At the time, Theresa May’s government seemed more relieved than preoccupied, heralding it as a vote of confidence in post-Brexit Britain. But many champions of British technology countered that that attitude was a mistake.

The UK government now sees a chance to correct course. Facing troubles of its own, SoftBank first tried to sell Arm to Nvidia of the US. That deal met opposition from competition authorities and was abandoned earlier this year. Now, SoftBank hopes to float Arm on the stock exchange, keeping a majority stake. Defenders of Arm want to protect it better this time.



The UK government is trying to persuade SoftBank to list Arm at least partially in London and has considered invoking the new national security legislation to convince it to do so. But, after Boris Johnson’s resignation as prime minister caused political turmoil, SoftBank put the London IPO of Arm on hold.

Meanwhile, some chipmakers, including America’s Qualcomm and Intel, have expressed an interest in forming a consortium to buy shares when Arm is floated, to maintain its neutrality and safeguard part of their supply chain.

Tugendhat describes the sale of Arm to SoftBank as one of “the two worst strategic mistakes” made by the government in the past decade (the other being that of DeepMind to Google). He believes the UK should buy a “golden share” in the group to allow it to defend against an unwanted future bidder.

To be continued in next post...[I]