30/09/2024

BIZ & FINANCE MONDAY | SEP 30, 2024

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Assets in actively managed ETFs top US$1 trillion globally

US rate cut, China stimulus lift Asia private equity deals SINGAPORE: US interest rate cuts and China’s economic stimulus package for markets will be conducive to private equity deals in Asia, with lower funding costs and better market sentiment expected to make exits easier, industry players said. The US central bank last week cut interest rates for the first time in more than four years, with more easing expected. High interest rates over the past two years have weighed on private equity firms’ financing costs, making leveraged buyouts trickier. China, on the other hand, this week unveiled broader-than-expected monetary stimulus and property market support measures to restore confidence in the world’s second-largest economy, with more fiscal measures expected to be rolled out soon. Private equity firms typically exit from their portfolio firms via initial public offerings of shares and trade sales, which have been made tougher due to the volatile market conditions. “With the Fed entering a rate-cut cycle, we expect financing conditions to improve which will likely drive a recovery in exit activity and asset valuations, narrowing the valuation gap between buyers and sellers and creating more opportunities for dealmaking,“ Janice Leow, head of Swedish private equity firm EQT Private Capital Southeast Asia, told Reuters. She added that liquidity would improve, creating a more favorable backdrop for private equity firms to achieve strong exits. A senior private equity investor, focusing on Asia, said the rally in the Asian stock markets would be helpful to get companies listed and get the “valuations back up to reasonable levels” for a lot of the portfolio companies. PE-backed mergers and acquisitions in the Asia Pacific, including Japan, jumped 14% on-year to US$105 billion (RM433 billion) in the first three quarters this year according to LSEG data, largely boosted by the US$16 billion takeover of Australian data centre provider AirTrunk by a Blackstone-led consortium. Still, the number of new deals plunged 43% from the same period last year. Asian markets have climbed this week following the unveiling of China’s stimulus measures, and latest data showing consumer confidence dropped by the most in three years have fueled expectations of another bumper rate cut in the US “We are hopeful and optimistic that rates coming down will be positive for exits by GPs,“ said an executive at one of the world’s biggest institutional investors, referring to general partners or fund managers which make the investment decisions for a PE firm. Blackstone is one of the GPs active in monetising their assets recently. In July, the US private equity firm announced it was selling Japanese drugmaker Alinamin Pharmaceutical to a North Asian buyout fund. “We have sold multiple companies in Japan and Korea to the other sponsors. So overall for us, I would say that finger cross (it is a) very robust exit environment,“ Blackstone’s senior managing director Amit Dalmia said at a Singapore conference this week.

2019 regulation popularly known as the “ETF rule,” which streamlined the complex process of winning approval for active ETFs from the US Securities and Exchange Commission. Assets in the active ETF category have grown about 10-fold since 2019, according to data from ETF.com. Growth has continued this year. As of Aug 31, active ETF assets soared 42%, data from ETFGI showed. The more relaxed regulations have also fueled innovation, Bartolini said, encouraging issuers to take novel approaches to products as they vie for investor dollars. Active ETFs run the gamut from the plain vanilla such as the BlackRock Large Cap Value ETF to more niche offerings, like the AdvisorShares Vice ETF, which invests in shares of companies involved in the alcohol, tobacco and cannabis industries. “These regulatory rule changes have actually accelerated some of the more novel approaches that ETF issuers can bring to the marketplace,” Bartolini said. Active ETFs include products that have been wildly volatile such as Ark Innovation ETF, which soared 152% in 2020, only to slump 23% the

following year. So far in 2024, it has lost 9.74%, compared with a 20% gain in the S&P 500. Some can also magnify risk such as leveraged ETFs tied to the performance of individual stocks like Nvidia. Nor are all active ETF issuers faring well. The 10 largest issuers accounted for 75% of active ETF assets, according to a Morningstar report from earlier this year. The bottom half of active equity ETFs have only 3% of all the group’s assets. “ETFs that repackage old-fashioned stock picking have struggled to attract assets,” said Jack Shannon, manager research analyst at Morningstar, in a report published last Tuesday. Tim Huver, senior vice-president of ETF Servicing at Brown Brothers Harriman said active ETFs may require investors to do more due diligence. Nonetheless, he believes the category has reached a turning point. A Brown Brothers survey found that more than 90% of ETF investors intended to increase their allocation to active ETFs, Huver said. “I think the second trillion is going to arrive much more rapidly than it took us to get to the first trillion,” Huver said. – Reuters

NEW YORK: Assets in actively managed exchange-traded funds (ETFs) worldwide hit a record US$1 trillion (RM4.1 trillion) at the end of August, according to data provider ETFGI, boosted by easier regulations and a wave of product innovation. Active ETFs seek to outperform the indexes they are benchmarked to including the S&P 500, the Nasdaq 100 and the Russell 1000 Growth Index. Bear Stearns launched the first active ETF in 2008. While they make up just 7% of all global ETFs, active ETFs have accounted for 30% of all inflows into the funds as a whole for the last several years, Matthew Bartolini, head of SPDR Americas Research at State Street Research, told Reuters in the latest episode of Inside ETFs. A key growth catalyst, analysts said, was the o Record growth spurred by regulatory changes and the launch of innovative products Global shortages are hurting plans for most airlines, but the problem is “more acute” for Air India, CEO Campbell Wilson said, as India’s flag carrier is nearing the halfway mark of a five-year turnaround plan but starting a generation behind rivals like Dubai’s Emirates and Qatar Airways. “Our product is obviously a lot more dated. These aircraft haven’t had a product refresh since they were delivered in sort of 2010, 2011. And so it’s more of an acute need for us,“ CEO Wilson said in an interview in Sydney. “If we’ve got legacy seats and legacy in-flight entertainment systems, we’re operating with one arm tied behind our back,“ he said. The challenges are the biggest at the premium end of the plane as Air India looks to lure high spending travellers, added Wilson, a former Singapore Airlines executive. Air India has already placed mammoth orders to upgrade its fleet and just this month kicked off a US$400 million plan to refit old planes to drive its transformation. The carrier’s restructuring after decades of decay under state ownership is being watched by manufacturers and lessors, as well as investors in Singapore Airlines – which is set to own a 25% stake in the Indian carrier from November and has agreed to invest an additional up to US$600 million in the turnaround. “Air India has a long way to go before being closer to international standards for which it needs to complete the process of re-kitting with new and retrofitted aircraft,“ Singapore-based independent aviation analyst Brendan Sobie said. Rebuilding Air India’s reputation hinges on getting planes with top-notch premium seats and service in the skies as fast as possible to lure flyers who are reluctant to book the carrier, even if it offers non-stop flights on key international routes, due to poor product and risk of delays. Of the 470 new planes the airline has ordered, 70 are widebody jets. It has already taken delivery of six Airbus A350s and leased 11 Boeing 777s. It is refitting about 67 planes starting with 27

Outdated fleet and seats, supply woes hobble Air India’s turnaround NEW DELHI: Two years after Tata Group took control of Air India in a US$2.4 billion (RM9.9 billion) deal, re-kitting an ageing fleet amid parts shortages and persistent flight delays stand in the way of the former state-owned carrier’s intent to become “a world class airline”. Air India needs better planes, service to compete with Emirates and Qatar Airways. – UNSPLASH PIX

narrowbody ones that will be completed by mid 2025, allowing it to better compete with domestic rival IndiGo’s larger and more modern fleet. The start of the 40 widebody refits, originally slated for this year, has been pushed to early 2025 due to delays in getting its customised business and first class seats. Seat manufacturers have said they are grappling with a shortage of skilled labour and capacity, Wilson said. Once the refit starts, it will take about two years to bring the widebody fleet to international standards, he added. Older jets have led to lower utilisation by about an hour per day on average across Air India’s fleet, and even more for planes flying long-haul routes like to the US, Wilson said. As an interim solution, Air India is ring-fencing some of its most profitable long-haul sectors like Mumbai to San Francisco and Delhi to London by guaranteeing modern planes. In the year ended March, Air India increased its capacity by 21% from a year ago and pushed up passenger load factors, or the percentage of seats filled, narrowing net losses by 60% to US$532 million and growing its revenues by 24.5% to US$6.15 billion. “When we can command the prices the product deserves and people have a good view of the reliability and service proposition, we can fly to more high-yield routes and bring back the high yield customer,“ Wilson said. He did not give a target date for reaching

profitability. Air India, founded in 1932 by Tata Group’s late chairman JRD Tata, was once among the world’s best airlines. Since its nationalisation in 1953, it entered a long decline mainly due to lack of investment. When Tata regained control in 2022, the airline’s systems were antiquated, offices scattered and there were 30 aircraft on the ground for want of spare parts. “It was just in absolute shambles. We’ve had to really spend the first six months to stabilise the ship,“ Wilson said. By Oct 1, Air India will have completed the merger of its low-cost carriers Air India Express and AirAsia India, and by Nov 12 it will add Vistara to the fold, which Tata currently jointly owns with Singapore Airlines. Flight delays are still an issue, with only 18% of Air India’s flights to Europe and 48% to North America arriving within 15 minutes of the scheduled time in August, according to aviation data provider Cirium. A shift to Air India’s own maintenance and repair facility should help reduce maintenance related delays, Wilson said. The facility, which it is building with help from Singapore Airlines subsidiary SIA Engineering, will be ready by 2026. Air India is contractually obligated to use government-owned Air India Engineering Services Ltd until the end of 2024. “Two years in, I think we’re in a good place,“ Wilson said. – Reuters