Sidekick Money · Better gender balance, too much dry powder and disruption in the transport sector...

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Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Our stories this week:

Inclusive Prosperity: A link between gender-inclusive practices and higher profitability
The Downside of Dry Powder: Private credit in a race to the bottom?
Solid-State batteries: Toyota's bet on disrupting transportation

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Read the full Market Pulse below, or if you want to access it on the go, download the Sidekick app.

Cyril (CIO), and the rest of the Sidekick team.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Inclusive Prosperity: A link between gender-inclusive practices and higher profitability

The spotlight is intensifying on sustainable investing. Leading financial institutions, like BlackRock, face mounting scrutiny over their commitment to integrating Environmental, Social, and Governance (ESG) factors into their investment decisions[1]. Some detractors argue that pivoting away from industries like tobacco and fossil fuels could mean these institutions are compromising their primary duty to maximise investment returns for their clients[2].

However, a recent study by BlackRock bolsters the argument in favour of ESG. This research showed a notable link between gender diversity – a key ESG metric – and a company's profitability. The research suggests that prioritising some ESG considerations might indeed align with investors' long-term financial goals.

The BlackRock study explored the relationship between return on assets and gender equity at more than 1,000 major corporations. Taking into account country and sector differences, BlackRock's researchers showed that firms exhibiting a balanced gender ratio had a higher return on assets than those dominated by either men or women[3].

BlackRock isn’t the first company to say gender diversity matters to the bottom line. Both McKinsey and Bank of America have previously identified a positive correlation between gender diversity and superior profitability[4]. As such evidence accumulates, it increasingly suggests that businesses championing ESG metrics, like gender equity, are acting in the best long-term financial interests of their stakeholders.

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2) The Downside of Dry Powder: Private credit in a race to the bottom?

Recently, we highlighted the meteoric rise in assets managed by private credit funds, with assets more than doubling since 2018[5]. All this growth, however, is creating a big headache. Finding enough high quality lending opportunities.

Currently, private credit institutions manage approximately $1.6 trillion. Remarkably, about a third of this sum, nearing half a trillion dollars, remains unallocated[6]. This uninvested money, often called ‘dry powder’, is urgently looking for a home. As a private credit fund you are under constant pressure to deploy available capital. If you don’t, it could make future fundraising much more difficult[7].

This pressure to deploy capital means there is a risk that private credit companies might start lending to lower quality borrowers. Moody’s, one of the largest credit rating agencies, recently warned that increased competition with traditional banks could encourage riskier deals and result in systemic risks[8].

Assessing the risk associated with private credit transactions can be challenging since the specific terms and covenants between a private credit fund and a borrower are typically undisclosed. Private credit funds often extend loans to entities backed by private equity firms and they tend to carry more debt compared to their publicly listed peers[9]. If these companies start struggling to meet their debt obligations, it could cause a surge in unemployment, with potential ramifications for the broader economy.

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3) Solid-State batteries: Toyota's bet on disrupting transportation

The global pivot towards electric vehicles (EVs) is gaining momentum. While in 2020, electric cars accounted for less than 5% of all new global car sales, projections for this year hover close to 20%[10]. However, a predominant concern persists: the average EV range, which hovers around 300 miles, lags behind the 400 to 500 miles that traditional petrol or diesel cars offer[11]. The limited driving range coupled with the extended charging times remains a deterrent for many prospective EV buyers[12]. This could be about to change.

Toyota, an automotive giant, claims to be on the brink of a transformative advancement: the solid-state battery[13]. Present-day EVs rely on lithium-ion batteries, which, in essence, haven't changed much from the ones Sony had in its 1990s Walkman. The game-changer with solid-state batteries lies in their composition. While still lithium-based, these batteries utilise a solid electrolyte, replacing the liquid one. This transition offers dual benefits: enhanced safety and a considerable uptick in energy density. The potential implications? EVs with a 750-mile range and sub-10-minute charging times[14].

However, the journey to affordable, mass-produced solid-state batteries isn't without its critics who highlight Toyota's decade-long promises regarding these batteries[15]. Even if manufacturing hurdles are overcome, achieving a cost structure that competes with lithium-ion batteries might take a long time. Toyota's leadership concedes that, at least initially, solid-state batteries will cater to high end luxury cars, while everyday EVs will continue to use current lithium ion batteries[16].

If Toyota has its way, the automotive world stands on the precipice of a revolution. While challenges persist, the promise of a more sustainable and efficient EV market could be within reach.

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Notices

Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.

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