August 19 (The ethics of debt)

Greetings all,

It is Friday, August 19th, and the week has come to a close. Today's subject of choice is the economic phenomena of debt and the ethics of a monetary system built upon structural debt. But first, here are today's headlines in Private Equity and Venture Capital:

American private-equity firms are acquiring more capital from abroad, as the high price of oil has provided foreign sovereign-wealth funds additional capital to invest at the same time as some domestic institutions struggle. Public pension funds in the U.S., long a prime source of fundraising for many private-equity managers, have suffered this year as equity prices have fallen. These funds, which manage money for teachers, firefighters and other public employees,?lost 7.9% in the 12 months ended June 30, making it more difficult to invest money to new buyout funds. But sovereign-wealth funds, which are typically state-owned and whose assets correlate with national wealth, have intervened partly to fill the fundraising gap created by the struggles of U.S. pension plans, say private-equity firms. State-owned funds in the Middle East and other oil-producing regions have been particularly active investors this year, because of the cash surplus created by high oil prices. While part of this oil windfall is?absorbed by state budgets and investment in public equities, much of it has also flowed into alternative investments such as private equity, real estate, private credit and infrastructure, say people who follow the market closely. “The prolonged oil-price increase is really benefiting the sovereign-wealth funds, while pension plans and endowments have found the environment more challenging,” said Michael Maduell, president of the Sovereign Wealth Fund Institute, which researches the sector. Assets held by Middle Eastern sovereign-wealth funds have appreciated by 20% so far this year, to about $3.75 trillion, according to the institute’s data. That increase closely tracks the price of Brent crude, the global oil benchmark, which has risen by about 23% this year to trade just over $97 a barrel on Thursday. “With all of that additional liquidity, the oil-based sovereign-wealth funds are putting a lot more money into large private-equity funds,” said Fraser Van Rensburg, a managing partner at placement agent Asante Capital Group, which helps private-fund managers raise capital. Reliable information on how much sovereign-wealth funds invest overall in private equity is scarce, because typically these funds don’t make their finances public. But there is little question that state-managed funds have taken on new prominence in private-equity fundraising this year. Private-equity firm?TPG?Inc.?has been raising a larger proportion of capital from sovereign-wealth funds and a relatively smaller amount from pension funds than during its previous fundraising efforts, Chief Financial Officer Jack Weingart told analysts in an Aug. 9 conference call. Money from U.S. investors has accounted for about 35% of the capital raised for TPG’s ninth buyout and second healthcare funds so far, Mr. Weingart said. Both vehicles remain in the market for commitments. In the firm’s previous fundraising cycle, which ended in 2019, domestic sources provided about 47% of the capital for those strategies, he said. “We’re definitely seeing a bit of a mix shift in the [limited partner] base, given that the current dynamics in the fundraising market are affecting some segments of the market more than others,” Mr. Weingart said. “The composition of our LP base is much more international this cycle than it was last cycle." For other firms, the balance is more weighted toward foreign investors. Alternatives manager?StepStone Group?Inc.?has over the past year raised about 80% of its capital from outside of the U.S. and North America and 20% from the U.S., firm Chief Executive Scott Hart told analysts in an Aug. 4 earnings call. “The international [fundraising] market has ample room to grow, as allocations are rising and new pools of capital are coming,” Mr. Hart said. Of the 10 sovereign-wealth funds with the most significant private-equity holdings—including both direct and fund investments, five are located in the Middle East, according to Sovereign Wealth Fund Institute data. The largest is Abu Dhabi’s Mubadala Investment Co., with about $97 billion in private-equity assets, followed by the Kuwait Investment Authority, with about $71 billion.

In Europe, a battery startup at the center of U.K. efforts to erect an electric-vehicle industry is decreasing its targeted valuation by about a fifth and its founder is stepping down, according to people familiar with the matter. Backed by mining giant?Glencore PLC, Power by Britishvolt Ltd., commonly known as?Britishvolt, is seeking to raise ￡200 million, equivalent to $237 million, in a deal that would value the company at ￡1.5 billion, the people said. That would exceed its original valuation of around ￡800 million achieved last year from a previous fundraising, but is below the initial ￡1.9 billion target, the people said. “No business is immune from the current market conditions,” said Ben Kilbey, a Britishvolt spokesman. However, he said that rising energy prices illustrated the need for U.K.-based battery-cell production to pivot from fossil fuels. Britishvolt has encountered operational difficulties at the site of a former coal power plant where it is constructing its main electric-vehicle battery factory. With the rising cost of raw materials and energy, the company has pushed back its original target for starting to produce battery cells in late 2023 in part to conserve cash, one of the people said. Britishvolt was founded in 2019 by financier Orral Nadjari, chief executive and a company director. The company is expected to announce Mr. Nadjari’s departure as soon as Friday, according to people familiar with the matter.? President of global operations and former?Ford Motor Co.?executive Graham Hoare will assume the CEO role on a temporary basis until a permanent successor is chosen, one of the people said. Mr. Nadjari said that he was proud of what Britishvolt had achieved and that it was time for someone else to lead the company. The new funding is meant to help finance construction of Britishvolt’s planned lithium-ion battery plant in northern England. It aims eventually to make enough cells to allow its automaker customers to make more than 300,000 battery packs a year, and has preliminary deals with carmakers including Lotus Cars Ltd.?Britishvolt says the facility is essential to ensuring car makers in Britain are able to satisfy the government’s ban on sales of new diesel and petrol cars starting in 2030. The company gained cachet in British Prime Minister?Boris Johnson’s government by choosing to?build its factory in a struggling former coal-mining town, tapping into Mr. Johnson’s aim to resurrect regional economies impacted by the decline of the U.K.’s mining industry and manufacturing base. In January, the government agreed to provide the company with ￡100 million to help finance the factory. The funding provided the foundation for a deal in which asset managers?Abrdn PLC?and Tritax Group agreed to invest additional money for the factory.

Elsewhere, Lux Capital has commenced a $5 million seed financing for cancer clinical-trials startup Trial Library Inc., part of a series of investments the venture-capital firm has made in companies with technologies that will enhance participation in medical research. Clinical trials typically are conducted at urban academic medical centers, which can make participation strenuous for people who live far from them. Mistrust of clinical research and the time and resources required to travel to trial sites also are significant barriers, medical researchers say. Such obstacles compound efforts to enroll diverse study populations. Racial and ethnic minorities are historically underrepresented in biomedical research, according to the FDA. One result of this is that researchers can miss opportunities to learn how various groups of patients respond to a new drug. Variations in genetic coding can make a treatment more or less toxic for one racial or ethnic group than another, according to the FDA, which in April said enhancing clinical trial diversity would be an area of focus for the agency. Pharmaceutical companies also have stepped up efforts?to enroll diverse populations for trials?through community outreach and tools to widen the reach of clinical studies. Lux Capital has been investing in companies seeking to help researchers with trial enrollment and make studies more diverse. They include?Science 37 Holdings?Inc.,?which enables patients to join studies from their home; and H1, whose technology platform helps drugmakers identify doctors who can help with clinical trials. San Francisco-based Trial Library aims to increase clinical trial participation among patients treated in community oncology practices, which have been rare participants in cancer trials. “If we don’t start by enabling inclusive trials, we’ll never be able to achieve the broader goals of health equity,” Lux Partner Deena Shakir said. Trial Library, founded and led by Hala Borno, a University of California, San Francisco oncologist and health-equity researcher, seeks to remove obstacles to clinical trial participation. Oncologists in community practices receive little or no reimbursement for screening patients for clinical trials, so this task falls down their list of things to do, according to Steve Buck, co-founder and chief product officer for Trial Library. The company, drawing on funding from its drugmaker customers, plans to reimburse community oncology practices for the time and effort of screening patients, Mr. Buck said. Trial Library doesn’t seek to steer people toward specific trials, leaving the decision of whether to participate in a trial, and which study to join, to doctors and patients, Mr. Buck said. Trial Library doesn’t charge patients or healthcare providers for its products and services, according to Dr. Borno.

Exceptional growth in Latin America’s venture-capital industry has surpassed that of private equity, supported by an emerging middle class that drove demand for new information and financial technologies even as traditional buyout activity struggled in recent years, a new report showed. AUM at venture-capital firms in the region reached $9.25 billion by last September, up nearly 48% from $6.27 billion a year earlier, according to Preqin Ltd. While private-equity strategies, with $25.52 billion under management last September, still represent the largest share of the region’s alternative assets, the venture-capital funds expanded faster by 15.6% annually on average over a five-year period ending in 2020, compared with a 0.7% average annual decline for private-equity assets, the data revealed. Venture-capital firms raised a total of $1.65 billion across 17 funds in Latin America last year, more than the $980 million that their private-equity competitors collected for 10 funds, according to Preqin. Buenos Aires-based?venture firm Kaszek?alone acquired $1 billion across two funds last year. Latin America’s technology startups have benefited from increased demand for products that enable a young, aspiring middle class to overcome the region’s bureaucracies and lack of digital infrastructure, said Charles McGrath, who wrote the Preqin report. He cited buying a used car, renting an apartment, opening a checking account, or getting health insurance as examples of tasks made simpler by new digital products. “You have this eager middle class that wants upward mobility, and there’s a lot of administrative and logistical constraints holding it back,” Mr. McGrath said. “That has sparked a lot of the consumer-tech and financial-tech innovation in the area.” Venture-capital firms are responding by investing more in the region,?driving up the number of unicorns, or privately owned startups with valuations at $1 billion or more. Latin America had 16 new unicorns last year, Preqin said. Investments by venture-capital firms in Latin America exceeded $15.8 billion last year, more than triple the $4.2 billion invested through the strategies in the previous year, according to the Global Private Capital Association. Through June of this year, venture firms invested another $5.4 billion, according to the group. One startup that reached unicorn status last year is Hotmart BV, a provider of cloud-based infrastructure that help users start and run businesses online. The company is capitalising on an increased urge by people to identify alternative ways to make a living outside conventional jobs, a trend that the pandemic has accelerated. Based in Amsterdam, Hotmart has a large presence in Latin America. It is backed by growth investors General Atlantic and Technology Crossover Ventures, or TCV, as well as Singapore sovereign-wealth fund GIC. “We saw a lot of people becoming creators and teachers and online instructors, using previous knowledge that they had accumulated during their lives and creating a product to sell,” Mr. Resende said. “A lot of people discovered the opportunity of creating a business online around topics that they know and they love during the pandemic.” Several factors could slow venture capital’s momentum in the region, according to Preqin. Inflation, cooling economic growth, and rising interest rates increase investment risks and cripple the middle class, while a decrease in technology company valuations “may deter some investors,” Preqin said. “If you make any changes [affecting fund limited partners’] ability to invest offshore, then it really opens up a huge new opportunity set,” said Cameron Joyce, deputy head of research insights at Preqin. “Just having more international allocations is attractive for a lot of LPs in the region.” Broader access to capital was a driving factor in venture-capital firm Dux Capital’s move to Austin, Texas, from Mexico City last year, said José Luis Silva, a Dux managing partner and co-founder. The firm plans to raise dollar-denominated funds and invest in U.S.-based startups led by Latin entrepreneurs, Mr. Silva said. But Dux will continue to back businesses that operate in Mexico as the country’s population of nearly 130 million, many located in or near Mexico City, makes it a lucrative market, he said.

Finally, a brief discussion on the ethics of debt:

Philosophers have traditionally approached the topic of debt in two ways, both of which focus on the ethics of lending money at interest. The first criticises lending as an exploitative and unnatural activity. Plato, for instance, argues that the business of lending is deplorable and questions whether debts must always be repaid. Aristotle further argues that lenders demonstrate the vice of meanness, since they seek money for its own sake and will lend to anyone from whom they can profit, even the poor, without regard for the borrower’s well-being. Moreover, he contends, there is something deeply flawed about the business of lending money for profit. If money is essentially a medium of exchange, then those who lend money at interest debase the productive economy by using money to generate more of itself. Aquinas subsequently synthesises these criticisms with prohibitions on lending that appear in Deuteronomy, Exodus, Ezekiel, Leviticus, and Psalms. Building on Aristotle, he argues that lending is a sin because it violates God’s order and exploits others, especially the poor. Elements of this critical approach persist today in the form of critiques of financialized debt. Maurizio Lazzarato and Randy Martin, for instance, argue that the growth of persistent and widespread indebtedness, especially when debts are owed to impersonal corporations and investors, has eroded social bonds and distorted self-understandings. Drawing upon Nietzsche’s critique of debt as essentially a form of social exploitation, such thinkers criticise fnancialized debt by examining the ways in which it undermines our social lives. Other critics focus on the exploitative effects of debt, especially on the less fortunate. Ilsup Ahn and Richard Wolf, for instance, speak of the inescapability of debt for many people today, arguing that this phenomenon primarily serves the interests of those who profit from lending, servicing, collecting, and investing in debt. And it is the poor who are especially harmed by indebtedness, argue researchers who focus on the harmful impacts to the poor of high interest loans, aggressive debt collections, and debts imposed by courts. Some scholars argue for expanding bankruptcy protections or debt relief programs, while others go so far as to argue that the harms of debt can only be remedied by instituting widespread debt jubilees or coordinated campaigns of debt refusal.

In contrast, a second philosophical approach to lending has its roots in the early modern period. This approach regards lending not as exploitative and unnatural, but rather as potentially beneficial to borrowers as well as lenders. Bacon, for instance, argues for a loosening of constraints on lending, suggesting that biblical prohibitions merely reflect economic and political concerns from an earlier time that have since lost relevance. Echoing this view, Grotius and Pufendorf focus on responding to the charge that lending is exploitative. They argue that charging interest, even at high rates, merely provides legitimate compensation for the risks that lenders assume when they allow others to use their money. Lenders, moreover, provide an economically valuable service, one that meets market demands and creates opportunities for investment and growth. Bentham and Smith subsequently expand on this idea, emphasising the potential for credit to provide financial opportunities to the poor especially, who are otherwise without means for investment. They also defend lending by introducing a now-familiar distinction between debt for the purpose of investment and debt for the purpose of consumption. The harms suffered by debtors are not caused by exploitation, they argue, but rather by prodigality, i.e. by the debtor’s own mistake of borrowing for the purpose of wasteful or unwise consumption. This second approach thus responds to criticisms of lending by denying both the charge of exploitation and the charge of unnaturalness. Lenders charge interest as fair compensation for the services they provide, services which meet a market demand and contribute to economic growth. If some borrowers are harmed in the process, it is likely due to their own wastefulness and poor judgment. Today, the influence of this approach can clearly be observed in economic, political, and popular thought. The scholar William Goetzman, for instance, echoing Grotius and Pufendorf, argues that lending has funded the key developments of human civilisation throughout the world. Meanwhile, financial advisors offer tools and advice to individuals hoping to avoid the prodigality that Bentham and Smith blamed for the apparent harms of debt. At a time when consumer spending, much of it fueled by debt, constitutes an ever-growing share of the U.S. economy, this industry of advisors emphasises strategies of judiciously using debt. And in the wake of the 2007 financial crisis, prominent economists and economic advisors, such as Ben Bernanke and Adair Turner, argued not for the forgiveness or repudiation of household debts that critics called for, but instead regulations to reduce the prevalence of riskier forms of debt.?

My view on the subject is rather simple: The act of lending money at interest is not and should not be considered unethical for two reasons: 1) On its own account, offering people access to capital at a price is something good. It is good and right for people of less wealth to gain access to capital in order to start a business and use the capital in fiscally responsible ways. 2) The borrower who is seeking this capital is doing so, for the most part, voluntarily and for very specific reasons. They are completely aware of the interest rate and the terms of the loan agreement for which they are seeking procure. However, it does become problematic when this indebtedness becomes a ubiquitous and pervasive reality across the entirety of a society. A monetary system, like that of all nation-states today, built on the existence of debt and financialized debt is absolutely unethical and should be reevaluated on ethical and economic grounds. If for no other reason, this type of system is unethical because it enables a select class of individuals and officials to profit quite significantly from the existence and financialization of debt spread across the marketplace. That concludes today's discussion on the subject of debt!

I hope you found today's article stimulating and edifying intellectually and otherwise!

With gratitude,

Will