 Welcome back to the deal room and in this episode, we're basically going to go to the FT the financial times and actually try to explain some of these stories. We've picked three in particular, the latter two are linked. So the first one being big headline about Barclays last week. And this is exploring a plan to drop thousands of clients from its investment bank as part of a strategic overhaul. So looking to cut costs, why are they doing it? What impact is that going to have Steven's going to explain that for us? And then we're going to talk a little bit about why there's a title in the FT where there's it's entitled Norwegian SWF heart emoji, private equity. So this is about the sovereign wealth fund of Norway. And for those who don't know, they're huge, but it will explain the context of why they're so big and then why the heart emoji for private equity. And that will lead us nicely onto an FT headline that led with Saudi public investment fund, the PIF. So again, sovereign wealth fund related and European private equity giant, Ardian, are to buy a 25% stake in Heathrow Airport for just shy of 2.5 billion pounds. And that led me to think about what is it about airports that gets people excited. So I'll look to also deconstruct that for you all. So maybe Steven, we can start with Barclays. So what exactly is the deal here? Yeah, it's a good place to start. And it's also it's nice. We've just finished our four part explainer on why companies do acquisition. So it's quite nice just to zoom out a little bit and talk maybe more strategically and look more at the entire industry. And a good place to start is with banks and Barclays is obviously one of the largest banks in the UK. And it's been under pressure from investors for the last few years to boost its profitability, to boost its share price and to increase its crucial price to book ratio. So a really important ratio for banks and we'll talk a little bit why that is so important. But I just wanted to start by laying a little bit of doing a little bit of background. So I'm going to compare Barclays with JP Morgan. JP Morgan obviously is the leading light in terms of successful bank operations profitability size over the last 10 or 15 years. So Barclays market capitalization, 21.2 billion pounds. Really? Hold on, 21 billion? You're kidding me, it's that small? It's remarkable, isn't it? Compared to HSBC 140, JP Morgan 445, Barclays is a minnow. It's a real and it's been going backwards for a number of years. Its price earnings ratio, price per share over earnings per share is four, just over four times, JP Morgan over nine times. So in terms of the valuation that investors are putting on the core earnings of Barclays, they don't think much of the company. And then its price to book ratio, which is the price per share over effectively equity or net assets per share, is 0.31 relative to JP Morgan's 1.53. Which basically means that Barclays is trading at a significant discount to its assets minus its liabilities, which is quite strange. Because you often think about, you know, a company should be based on its equity, it should be valued based on its equity value. And then maybe there's a premium attached for intangibles and other factors, which is why JP Morgan maybe has a price to book of 1.53. So this is the hinterland of why such a storied investment bank, a global investment bank like Barclays, is really trying to figure out how to bump up its market cap, how to bump up its price earnings, and how to bump up its price book to get even close to the likes of JP Morgan. So it's batting in a totally different field at the moment. So a number of options, quite radical options have been discussed by the management team at Barclays. I mean, they mooted ideas about buying an asset manager, buying a wealth manager. Yeah, I was going to say, if you think of Barclays, what is it where they dominate? Like, could they make their strategy more single-minded instead of being a big, expansive bank covering all areas? Could they double down and have an area of focus that is asset management like a natural feed of their commercial bank? Yeah, it's a really interesting one. So as we've discussed on the podcast before, a global bank will tend to service three types of clients. Services retail clients through the retail bank, your normal branches and things like that, mortgages and lending and deposits, services companies through its corporate bank. So that's normal business banking, but also some more exotic investment banking, IBD, the stuff that we talk about on a weekly basis. And then it services its institutional investors through its investment banking, its global markets, its sales and trading operations. Now, the issue that Barclays have got is that they have been ever more focusing on the third of those three types of clients. And in fact, two-thirds of Barclays risk-weighted assets, and we can explain what a risk-weighted asset is in a minute, two-thirds of its risk-weighted assets or 219 billion are tied up in its core investment banking, its global markets operations. So that's effectively working on behalf of institutional investors and working to market make and to settle trades and things like that. And that's an issue in part because it's a very volatile industry. And in part because when it comes to looking at the way that banks are run, it's much safer to lend to an individual with a mortgage, or it's much safer to do certain banking operations relative to more exotic or maybe more high-risk banking operations. And so a risk-weighted asset, if you're doing relatively high-risk stuff in your investment bank, your asset, which is a loan book, is going to be risk-weighted at 100%. A non-risk-weighted asset is cash. That's weighted at 0%. So Barclays is skewed massively towards the risk-weighted asset side of the bank's spectrum. And therefore, volatility, high-risk-weighted assets results in actually a low price to book. So in the end then, this explains why they've taken this carve out of the part of that business and dropping these clients to what? Slim down that operation and then focus more on the stability of the... Yeah, it's all about... So the headline goes after deciding not to massively invest in the asset management or wealth management side of the business, maybe by buying another company. Actually, there was a discussion about shutting down the majority of their trading operations, but that got tie-boshed by their head of trading, as you'd expect. Maybe there's a bit of incentive there. But what they've decided to do is to get rid of 2,500 of the bottom 2,500 of their investment banking clients out of a rule of dex of about 10,000. Now, this is going to free up about 20 billion pounds of risk-weighted assets. So if you think just to get a little bit technical for a second, if you think about price-to-book ratio, the way you can increase that is either by increasing your price per share or decreasing your book, i.e. decreasing the amount of assets that you hold. So this calculation is shedding 20 billion of risk-weighted assets, the denominator of the price book, and actually only decreasing the revenues of that division by 10%. So it feels like a kind of, all right, we're going to get rid of a little bit of revenue, but we're going to get rid of a lot of assets, and that should boost our price-to-book to get it up above 0.3, if you follow me. This sounds very like a well-trodden path. Surely this is common practice. Should we be surprised by this or isn't this just sensible? I mean, isn't it sensible to just shave off clients that aren't really at too high risk and aren't providing a source of genuine revenue? You just concentrate it in the ones that are more productive clients. Yeah, absolutely. This is part of the standard operating procedure of any bank, and Barclays has this internal client management system called Hector. It ranks customers based on platinum, gold, and silver, I think it is. There's no bronze, but silver is effectively the bronze. Basically, all of the silver, the clients that are not very revenue-generative and actually end up being loss-making, they're just getting culled, which makes sense. It will be part of any business, whether it's a bank or otherwise, thinking, all right, these clients are costing too much from a post-based perspective, too much from a risk-weighted assets perspective, and not enough from a top-line perspective. Let's get rid of them. It sounds to me that if Pierce listens to this episode, he's going to say, ah, it's the media pumping the headlines again. Because now that you've explained it, I feel a lot more comfortable with the situation at Barclays. Surprised by the size of Barclays, didn't quite comprehend about how small they are compared to some of their peers. The idea of this seems more like housekeeping, seems fairly sensible, doesn't seem as frightening as the headline was suggesting when it was like a lead headline on Tuesday last week. Yeah, I think Barclays does tend to grab headlines just because we all know what Barclays is. And it's been associated with the financial crisis, and it's definitely a headline generator. Behind the headlines is obviously the story, and it's just really interesting to think about banks. We obviously enjoy talking about the slightly more exotic part of banks, the slightly sexier part, where quite a few of our listeners probably want to end up as graduates, whether it's IBD and your M&A and things like that, or whether it's sales and trading. But actually, IBD and sales and trading, as we've discussed with Goldman Sachs, is a drag on bank ratios and bank share price. I was just looking at a chart that I've got in front of me. It says that Barclays' corporate and investment banking unit rarely outperforms their normal, boring UK banking operations. Things outperformed at one quarter out of the last 10. So if you want to hunt the money, as we kind of said in the last episode about the infrastructure deal, you want to hunt the money, do the boring stuff, and do it really, really well. Well, look, we'll come back to that ethos when we talk airports and stable cash flows in a moment. But let's move on then, and perhaps you could, first of all, just pitch me the scene of who the Norwegian sovereign wealth fund are first perhaps, and then the connection to private equity. All right. Well, before I do that, I'm going to set you a challenge. Okay. Can you list me? Can you give me the top five sovereign wealth funds in terms of total assets, the top five in the world? Okay, so Norway. A bit of a hint, by the way, Norway's one of them. Yeah, Norway, Saudi Arabia, Abu Dhabi. Well, the other ones, just trying to think of Middle Eastern countries that would fit within this. Who would the other two be? I'm going to give you a, I'll tell you what, I'll put you out of your misery. So Abu Dhabi, correct? Fourth? Abu Dhabi, I always see links to Sainsbury's in the news. They're always trying to do something, well, they have been for a while, but... Trying to buy Sainsbury's, yeah. Abu Dhabi Investment Authority, 850 billion. Obviously, Abu Dhabi is hosting COP28 and trying to do a lot of side deals at the moment. In first place is the Norwegian Government Pension Fund, or the Norwegian Sovereign Wealth Fund, with 1.47 trillion. Now, the Saudi Pif, which we talk about a lot because it is so active, it's actually only sixth, 776 billion. It's growing. It's growing very quickly and it is incredibly active. The ones that we missed, in fifth place, Q8 Investment Authority, similar logic to Abu Dhabi and Saudi. But in second and third, second, the China Investment Corporation, and third, the SAFE, the Safe Investment Company. Now, both of these are Chinese Sovereign Wealth Fund and between them, it's about 2.5 trillion. So the China Investment Corporation, you will see across a lot of deals if you look close enough. And they're just behind Norway at 1.35 trillion. Suffice to say, if you top up the top 10, with Qatar being number 10 at 475 billion, that's a decent amount of firepower to allocate to every single attic class under the sun, from golf to airports to private equity, which is what we're about to discuss. Quick question. If China is so big, which we know, and they've got deep pockets and we want some of that money here in the UK and in the West, but politically, we're almost at a confrontational point with the West and China. Could you use some kind of shell framework where China could use an entity to then invest in the UK that then politicians could kind of use a way to engineer that it's not so obvious that we're dealing with China. Only the people really who are sophisticated enough to know about the mechanics of a deal would be aware of that. I know I'm batting a little bit out of conspiracy field here, but it feels like you said a lot of people, you'll see a lot of headlines with China buying stuff. I don't see those headlines. Is it because that activity is happening? But no one wants to say that China is buying into a Western infrastructure or whatever it might be. Yeah, it's interesting, isn't it? There are certainly ways that you can hide corporate ownership behind holding companies and they're often in tax-advantaged areas and every so often there's a massive leak where you realise that the Russians own half of London through different shell companies and things like that. I wouldn't be surprised if there's a little bit of that going on with these sovereign wealth funds. However, I do feel like China, with its global investment strategy, remember I don't know the investment allocation of these two big sovereign wealth funds, but the majority is probably going to be in China itself. But you also have to think about its Belt and Road initiative and the Song power and that it's trying to exert across the rest of the world and maybe it doesn't see the UK as strategically a place where it can exert the power that it wants to as a return on its sovereign wealth fund investment. Okay, yeah, that makes a lot of sense now. So that big long-term infrastructure project they have to become the global trading partner for planet Earth is facilitated through these vehicles, I would imagine then. So yeah, it makes a lot of sense. Okay, cool. So yeah, what's the connection then about private equity and the sovereign wealth funds? Okay, so the Norwegian sovereign wealth fund, which is managed by Norgesbank Investment Management, that's the name that we are going to use, they have been trying to get the 1.4 trillion dollars of assets under management associated with the sovereign wealth fund. They've been trying to get a part of that allocated to private equity. Now this 1.4 trillion, none of it at the moment has been allocated to the ever-growing asset class that is private equity. You know, depending on where you look, it could be $10 trillion under management to $15 trillion under management. That's the size of private equity at the moment. And the sovereign wealth fund, they've been trying, they've tried to get private equity as part of their book. They need to get parliament, the government to sign off on what they can invest in. And it is a remarkably transparent operation. You can see exactly what they invest in right down to the pennies. This is the sovereign wealth fund and the Norwegian government want to be transparent. But they tried getting private equity as part of their allocation in 2005, said no, 2010, said no, 2018, said no. And now they're trying again to get private equity as an allowed alternative investment class. Now, maybe the bigger question, well, one of the questions is why is it being blocked? Almost every other looking down my list of the top 10 sovereign wealth funds, the other nine certainly have private equity allocations because it's part of a diversified mix of different asset classes and it's obviously been a good performer over the last 20 years. So why has Norway not been able to invest? Part of the reason is because Norway is historically being a social, democratic country, very transparent fund. Is private equity and maybe the sharp ends of private equity somewhere that they want to be investing in? Is it transparent enough? Is it going to add the social value alongside the monetary value of the other asset classes? So that's kind of one of the reasons why every time the sovereign wealth funds asked, they've been turned out. Is it going to be different this time? Well, they're putting together a pretty strong argument just in terms of why private equity is an important asset class. And they've mentioned that private equity is outperform the S&P and all of this kind of stuff, but we still don't know. The heart emoji on the FT article was still, it was the sovereign wealth fund asking for permission again. They still haven't been allowed to pump money into private equity and maybe when they finally are allowed, you'll see some pretty big allocations. Or you'll see when you've chased that person for so long, it then happens and you're like, oh, it's not everything it lives up to be. Well, this is really important. So there's speculation as to why would they want to. So there's a couple of good arguments here and there's certainly a couple of good learnings. The first is a sophisticated investor with 1.4 trillion under management. Why would it pay away 2%, 3%, 4% annual management fee when it could just do the direct investing itself? That will segue us perfectly to the next example, the Heathrow example. Why would they bother acting through intermediaries through private equity funds which take a nice big fee and some upside and they could just do it themselves? And also, has private equity performance been quite as good as we are all led to believe? And this is just a bit of a learning as to power of numbers and the power of selective data ranges. Give me that hockey stick, Steven. Yeah, so I was just looking at returns because you read the headline and you think, gosh, private equity is outperform the S&P and this is where I need to be putting my money. I was just looking the headline I saw was the US private equity index provided by Cambridge Associates shows that private equity produced annual returns of 10.48% between 2000 and 2020 relative to 5.91% in the S&P, S&P 500. So that's pretty, that's quite stark over the 20 year period. But if you shorten that period from 2010 to 2020, the S&P has actually outperformed private equity, not by a lot, but it certainly has outperformed. So it's just very, we should be very careful to look behind the headline and to see actually who's pushing their book. Are these the sales guys for private equity, boosting private equity because they want more inflows? What's actually going on? When does private equity outperform? And when does it actually underperform and do a little bit more digging and maybe the sovereign wealth fund might end up thinking, well, we can continue to sit on the sidelines and stick with our public equity investments. Yeah, that's really interesting. And I always think that, yeah, when you're looking at data sets, this is particularly something that I always try to teach when trading. It's about, okay, so, okay, quick example, if I was to give you a quiz question, how many jobs do you think were lost in non-farm payrolls in the height of the global financial crisis? So talking like 2009, what was the biggest single job loss print for one month, do you think, in the United States? Gosh. No, I've put you on the spot here. I think that maybe the natural thought process would be absolutely loads, but the reality is because it's on a month-by-month basis, it's not that much. So maybe 250,000, I don't know. Yeah, so good estimating because if you were a Gen Z now coming into markets, COVID, we were losing, I don't know, I can't remember what the max number was, it was like near 20 million in a month, jobs lost. And you're like, okay, that's the new norm, that's how much jobs can be lost in a given month in the heart of the financial crisis, which literally we're at the precipice of the global financial system breaking and society ceasing to function if that were to happen. And we lost about 800,000 at its worst because it was just a time frame of how many jobs were lost cumulatively over a longer period rather than an intense shock in a very short concentrated time. So I think you're right. It's like, I always think as well with economic cycles being over a period, COVID was accelerated but normally over several years, and then interest rate and inflation cycles that map on that timeline. You need to look at, okay, if there's anything like private equity dependent on interest rates and lending and borrowing, then you have to look it over a time frame applying a macro framework. So 10 years might not be appropriate. You need to see it over different cycles to then have a rough estimate. So absolutely, like data is whatever you want it to be, basically. Yes. Cool. All right, well, let's let's move on there. Let's talk a little bit about the headline I read in the FT was talking about Saudi Arabia. So their public investment fund, the PIF we talked about it, the lots before, but also a private private equity group called Ardean, and they're looking to both take a slight stake in Heathrow Airport in London. This is going to a total amount of around 2.4 billion pounds. Now, when I read this headline, I was kind of constructing a post to try and explain the deal and I thought actually, like, let's just reverse engineer that and step back for a moment like what is it about airports. I think as I run through this list, I think it's fairly, it's fairly obvious, but what I kind of want to do as an educational kind of angle is like this is the way to think about trying to peel away some layers and not just accept the information that you read. So that kind of curious mindset kind of kicks in. And then it's like a muscle, because that would be for a young person I think learning about finance is critical. It's more like, you don't need to know everything. It just needs to be like, that's interesting. Like, how, why, why does that happen? Or why are they doing that? Like, what's the rationale to them, the motivation to want to do this deal, not the deal itself, which is the end by product of that process. So a couple of things, I'll list them out and I'll give a brief kind of explain and there's a few I'll pull you in on Steven to add a bit of color. So stable cash flows, airports, when you think about them, steady stream of income, various sources, airline fees, retail rentals, parking charges, passenger services. So I guess like you've always described, and we have done here with Barclays, right, it's kind of like what parts of your business have clear revenue streams and consistent returns that we can map out quite confidently over time. The other thing is a high barrier to entry. Unfortunately, you can't just open an airport. There are, there's lots of things that come into it, not to speak of just the substantial capital to build out the infrastructure, the development, the regulatory controls, all these different types of things, availability of suitable land, government permissions, so on. So you've almost got this quasi monopolistic position in these regions. Then there's long term growth prospects. I think the, the exit here from some of the stake is over, they were holding for about 14 years. And it was interesting looking at air travel over the long term, because if you just again, just think of it much more top level. Economic growth tends to pick up globally over time. There's efficiency gets better productivity goes up. There's more affluent people. There's further advancements in technology, a rise in disposable income. And therefore, despite short term disruptions, like you might have with COVID, something like that, if you hold for the long term, the idea here being that the growth trajectory tends to be positive. So it's good for long term investments. However, you're going to have to sit tight in terms of for that to pay off in that way. I did see one about an inflation hedge was noted. And they were talking about here this idea that infrastructure investments like airports can serve as an inflation hedges. They have the power to raise prices in line or ahead of inflation due to their central nature of their demand kind of inelasticity. So one of the things that you do see this a lot. Whenever you look at a CPI data report very much in vogue at the moment to focus on inflation, you can definitely see these big outlying statistics around generally holidays. So if you go to Easter, you typically can see quite big pops in certain pockets of the category of CPI report around where we all know right you try to go home for Christmas if you're trying to book it now. And you're like, wow, it's like five times the price than it would normally be to go home because they know that they can take advantage of these things. But then you get a price shock, let's say like a Russian Ukraine crisis, they can move very quickly. And because of those, that previous example about the seasonality time of point of view. We as consumers, I think psychologically are very willing to accept price fluctuations, and therefore they can move the dial very aggressively. And we just accept it because we've almost been normalized to just do it in that way from a purchaser behavior point of view. We then got asset heavy investments at airports of substantial physical assets. They tend to appreciate over over time, and then regulated returns because airports are essential infrastructure. They're often subject to regulation that can offer a certain level of predictability in the returns investors can expect. So kind of similar to the one I mentioned before diversification. So I can bring you in on so for investment funds, airports can add valuable diversification element to their portfolios, which otherwise could be more traditional financial assets stocks bonds, other financial instruments. A comment on the post I made about this said, yeah, but the Saudi PIF I think they're referring to are investing like 0.2% of their funds. How is that diversification. What's going on this one is, is this then is diversification point 2% of a portfolio is a big chunk of change in terms of value, but is it more about the soft power plays that we've talked about before, where this is quite a critical infrastructure asset of the United Kingdom. What, what do they get out of that outside of just the kind of monetary gain in that respect. Yeah, I think I would, I would guess that that's relatively low down. I'm just trying to think about being working in the offices of the Saudi public investment fund, and I reckon they probably get access to almost every deal potential deal in the industry. And he throw came up, and he throws parent company, FGP Topco, it's already got public, it's already got sovereign wealth funds invested in it, the Qataris, the Singapore GIC, China Investment Corporation chunk. Just a shout out to the previous section. So, so I'll be looking at it from a PIF perspective and thinking, gosh, alright, this is, you've given all of the reasons. You know, this is a, this is an asset with stable cash flows, I can predict them out over a long term. It's regulated high barriers to entry, bit of an inflation hedge, natural hedge against, you know, against some of the activity in stock markets and interest rates. Yes, there might be a soft power element and it's quite a, you know, a bit of a trophy asset, but actually, first and foremost, I think in this, in this case, it's got to work as a cash flow deal. And it's got to work as a diversification play. So I think you're probably right that it's diversification. It may not be soft power. Okay, and then the other part of this, maybe bringing in Ardion is investment funds can leverage their expertise to enhance operational efficiency. And I believe that from some of the articles I was reading that Ardion are particularly prevalent in the European transportation space. Is that right? Yeah, yeah. And whenever you re leverage their expertise to enhance operational efficiency, just think firing people straight up. Okay, we won't, we won't, we won't pass the pod onto Elon, he might take that to the next level. And then one of the other points that was raised was ESG factors, which I was like, hang about, we're talking about flying airplanes here, like surely this is not an ESG play. But the, so the detail that I had was that modern airports focus on sustainability, reducing their carbon footprint and engaging in community development initiatives, and does that then align with investments that would fit into a ESG criteria? Yeah, I think this is rubbish, isn't it? Yeah, I don't know if you've, if you've spent a lot, a lot of time around the surrounding parts of Heathrow, I'm not sure how much community development initiatives are going on and things like that. But I mean, to call an airport an ESG factor, I think that's stretching, stretching ESG criteria to the very, very edges. And there is definitely a case to say, look, maybe you should be investing in bad things that are getting better. So airlines are one of the most polluting industries, and obviously they need airports to operate. And there is a massive push on sustainability. We just saw the first flight from New York to London that's been powered with waste oils from different processes and not your traditional extracts oils. So there is improvement being made, but this should not count as an ESG related investments in any stretch of the ESG playbook. Okay, understood. And then the final one was public-private partnerships. So this kind of makes sense again from an almost investment hedge perspective. The idea being here that the government's, the reason why they're open to these public-private partnerships for airport operations is it allows private investment funds to participate in the sector. And if you think about government expenditure budgets, things like that, surely then it's kind of like, well, if I'm investing in this, the government has to have this to function. It's kind of like a key catalyst for many other things related to the country. So therefore you've got the ultimate backstop where terms of regulation, terms of investment that they're going to be supportive in nature to a certain degree, of course, you would have thought to your initiatives to grow that business. Yeah, I think that's right. And that combined with all of the other factors make it feel like a good investment. The only caveat that I'd put is that the airport's actually been lost making for the last 12 months. And that's partly due to the high cost of servicing debt, some of which is going to be refinanced. But there has been a forced cut to landing charges, which is part of the stable revenue stream. So yes, it's good to have these stable forward-looking revenue streams like a utility company. But like a utility company, there can be different price caps and things like that, which might affect your future cash flows. So just a little note of caution on this deal. Yeah. So is this in a way then the Saudis going, okay, we can understand why a company saddled with debt has been impacted over the current period because the interest rates underpinned by rising inflation. And therefore, they're getting in for value now to enter for long term. And then from the Ardian perspective on the PE side, it's more like that this is our bread and butter play here. We're just going to come in, slash it back to its bare bones and it's going to generate money. And then again, we're in it for a longer period. And then they go in probably knowing that it's also got the PIF money involved, which helps, right, in their perspective. Yeah, yeah, it's good. You know, it's always a good time to buy an asset when it's when it's struggling because you're going to get it on the cheap. So I'm sure that's part of the part of the rationale. Cool. All right, we will end it there. Unless there's anything else in closing words to finish Stephen. Nothing from me. Buyer of airports or not a buyer of airports for you. Good question. Yeah, it's not 0.2% of my diversified portfolio. Yeah, why not? There you go. I will put your tender in. All right, thanks everyone and catch you next week. Take care. Thanks, Stephen. Thanks.