Jul 22, 2021

Axios Capital

Situational awareness: It's official: We're not in a recession. In fact, the 2020 recession was the shortest of all time.

  • In this week's newsletter: The impact of ESG investing; Hong Kong's status as a financial center; the future of trading shares in private companies; the Texas two-step; and much more. All in 1,792 words, a 7-minute read.
1 big thing: Big investors seek impact

Illustration: Aïda Amer/Axios

It's not enough to invest in sustainable businesses. Instead, asset managers sometimes have a legal responsibility to actively influence the sustainability outcomes of the businesses they invest in. That's the message of new analysis from law firm Freshfields Bruckhaus Deringer.

Why it matters: Large investors at insurers, pension funds, and non-ESG mutual funds are understandably very conservative when it comes to changing the way in which they invest the trillions of dollars under their control. A sober 564-page presentation from a major law firm is exactly the sort of thing to help them change their ways.

Background: Freshfields conducted the definitive legal study on environmental, social, and governance investing in 2005. In an era when many lawyers and compliance officers were worried that ESG investing might conflict with fiduciary duties, Freshfields showed that legally it was nearly always permitted, and was sometimes required.

  • The same broad verdict applies now, to the narrower field of investing for impact. The big message is that using investors' money as a way to force change is a natural part of what any fiduciary should do when faced with the reality of global warming.

The big picture: Investing for sustainability impact means that investors understand themselves and their money to be an integral part of a complex global system in need of radical change.

  • Large global investors, including those in the Net Zero alliance, are uniquely placed not only to coordinate a collective sustainability approach, but to use their influence over their portfolio companies to ensure that it's enacted across sectors and continents.
  • Even passive investors can do this; in fact, given their size, it can't work without them. While they can't threaten divestment, they can certainly vote against the management of portfolio companies that don't buy into the sustainability agenda.
  • The catch: Measuring the impact of such actions is extremely hard.

What they're saying: "If it was once possible to approach the goal of earning a financial return in isolation from other valued goals, that time is not now," write Freshfields lawyers David Rouch and Juliane Hilf.

  • What they found: "Where sustainability impact approaches can be effective in achieving an investor’s goals, the investor will likely be required to consider using them and act accordingly."

The bottom line: Investing for sustainability impact is always going to be a subset of broader ESG investing. Not all ESG investors will do it, in part because it involves extra expense. But at least it's largely settled now whether it's legally permissible.

2. Hong Kong's status as a financial center seems safe

Illustration: Sarah Grillo/Axios

Given its assault on democracy, imprisonment of publishers, and a slew of human rights violations, "stable" might not be the first word that springs to mind with respect to Hong Kong. But amid social and political turmoil, one key part of the economy has remained unfazed: its legendary financial services sector.

Why it matters: Beijing's increasing control and influence over Hong Kong is seen by many banks and investors as more of a feature than a bug. While there are certainly downsides to staying, for the time being the upside seems to be even greater.

Where it stands: Western investment banks are hiring thousands of new employees in Hong Kong, many of them hailing from mainland China.

  • They're very unlikely to make any kind of pro-democracy waves, after seeing what happened to local banking giant HSBC when it fell afoul of the Chinese Communist Party.
  • Hong Kong has already seen $27.4 billion of IPOs in the first half of this year, per EY's latest global IPO report, making it the third most popular IPO venue in the world. (That's nothing new: It's been in the top 3 every year since 2013.)
  • At this pace, Hong Kong is going to set a new IPO proceeds record this year, especially given the fact that, as EY Asia-Pacific IPO chief Ringo Choi notes, "geopolitics and tightened regulatory oversight encourage Chinese companies to switch from the U.S. to Hong Kong for their IPO."

The other side: Recent moves by Beijing are weakening some of the core transparency tenets that have provided a foundation for Hong Kong's financial services sector.

Threat level: Hong Kongers and foreign bankers are openly talking about leaving the country, for fear of the new national security law or just of not receiving a balanced and honest education for their children.

  • In a recent American Chamber of Commerce survey, 42% of members said they were considering moving away.
  • The pandemic didn't just hurt Hong Kong's economy; it also closed many international borders, making it much harder for Hong Kongers to leave. Once countries like Australia reopen, expect a pickup in emigration from Hong Kong.
  • At the same time, however, there's no shortage of highly qualified mainland Chinese eager to take their place.

The bottom line: Hong Kong has comfortably retained its top-tier status as a global financial center s0 far — it's in fourth place in the latest Z/Yen ranking, behind only New York, London and Shanghai.

  • "So long as there’s money to be made here, money’s going to come here," says Michael Schuman, the Hong Kong-based author of Superpower Interrupted. "The finance center can run perfectly nicely here being run primarily by mainlanders."

Go deeper.

3. Nasdaq gets serious about private-company share trading

Illustration: Aïda Amer/Axios

It's one of the biggest competitions out there: Who will be the go-to platform for buying and selling stock in private companies? A consortium of giant banks is now teaming up with Nasdaq to try to ensure that the answer is to be found on Wall Street, rather than in Silicon Valley.

Why it matters: No matter how many companies go public, the total valuation of private companies only ever seems to go up. Which means there's big money to be made in trading stakes in those companies.

The big picture: More than $2 trillion in wealth is tied up just in the equity of unicorns — private companies worth more than $1 billion. Many early employees and other shareholders would love to sell at today's valuations, while a long list of investors is desperate for any opportunity to buy some of the world's hottest and fastest-growing companies.

  • It’s not just unicorns: Other privately-owned companies, such as those emerging from bankruptcy, also need ways to easily trade their equity.

Flashback: The company with the greatest-ever volume of pre-IPO share trading was almost certainly Facebook. Its shares were traded on a platform called SecondMarket, which was later sold to Nasdaq and became Nasdaq Private Market.

  • Nasdaq said Tuesday that it’s spinning out Nasdaq Private Market into a separate, stand-alone company. Further investment in the new entity is coming from some of Wall Street's biggest names: Citigroup, Goldman Sachs, Morgan Stanley and SVB Financial Group.

Where it stands: There's a lot of competition in the space. Retail investors are served by companies like OurCrowd, MicroVentures and EquityBee, while institutions use platforms such as EquityZen — when they're not negotiating directly with companies or going via big investment banks.

By the numbers: One of the largest institutional players, Carta, recently raised money at a $7.4 billion valuation.

The bottom line: It's not too late for one platform to dominate the asset class. Most buyers and sellers will naturally gravitate to the venue with the greatest liquidity and the deepest client book, creating a winner-takes-all dynamic.

  • With Tuesday’s announcement, Nasdaq is putting Carta on notice that it intends to be that winner.
4. The Texas two-step

Illustration: Aïda Amer/Axios

Johnson & Johnson just managed to release itself from all legal liability for distributing opioids by paying $5 billion as part of a bigger $26 billion settlement with state attorneys general. Now, per Reuters, it's looking to Texas to help it cap its liabilities with respect to distributing asbestos in its baby powder.

Why it matters: If J&J successfully attempts what's known as the Texas two-step, that would effectively allow it to declare bankruptcy just for the purposes of its talc liabilities and nothing else. The rest of the company could sail on with no further risk of talc-related lawsuits down the road.

By the numbers: The potential size of such lawsuits is mind-boggling: Just one suit with 22 claimants resulted in an award of $2.12 billion, reduced from an initial jury award of $4.69 billion.

  • There are some 30,000 claims still outstanding, and an unknowable number of future claims. After all, it can take years after exposure to asbestos before ovarian cancer and mesothelioma show up.

How it works: J&J would effectively split in two. All of its talc-related liabilities would be in one company that would then file for bankruptcy, while the rest would carry on as normal, listed on the stock exchange.

  • That would normally be a "fraudulent transfer" — but under Texas law it would be a "divisive merger" and therefore wouldn't count as a transfer at all, fraudulent or otherwise.

The big picture: J&J would have to put billions of dollars into the subsidiary declaring bankruptcy. But the exact amount would be determined by a judge carefully jurisdiction-shopped by J&J. And then the company would never need to worry about any future talc-related lawsuits.

  • It's a legal gambit that might not work, but from J&J's point of view it's probably worth a try, given how bad the alternative currently looks.
5. Coming up: The Olympics

Illustration: Annelise Capossela/Axios

The controversy-laden, no fans, no fun Olympic Games in Tokyo begin Friday with the opening ceremony, writes Axios' Hope King. (Although the U.S. women's soccer team has already lost, 0-3, to Sweden.)

Why it matters: More than half of the Japanese public oppose the delayed summer Olympics, fearing that officials won’t be able to control coronavirus infections. Tokyo organizers haven’t ruled out canceling the games last minute.

6. Building of the week: Athens Indoor Hall
Photo: Alastair Philip Wiper/View Pictures/Universal Images Group via Getty Images

Athens Indoor Hall was constructed in 1995 and then extensively rebuilt by Spanish starchitect Santiago Calatrava for the 2004 Olympic Games.

  • The largest indoor venue for the 2004 Games, the structure was later used to host the Eurovision Song Contest, and as a home for the Greek professional basketball club Panathinaikos.

It's far too big for the Athens suburb of Marousi, and stands as a monument to the way in which the Olympics haven't made financial sense in decades.

  • Host cities spend billions preparing for the games — some $28 billion, in the case of Tokyo — inevitably suffering massive cost overruns and going deep into debt, with a lasting legacy of little more than a group of buildings ill-suited to any other use. Go deeper.