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UPS can only look on with wonder at Goldman Sachs. On Friday, the US Securities and Exchange Commission announced it had fined the shipping company $45mn for improperly carrying an acquired company at a value hundreds of millions of dollars above what management knew it was worth. As such, the audited financial statements that its public shareholders rely on were deemed inaccurate and misleading.
The rules are different in private equity. The Financial Times reported over the weekend that Goldman Sachs would write down its $900mn investment in troubled battery maker Northvolt to zero. Earlier this year, Goldman had told the limited partners in its private funds that its investment in Northvolt was worth more than four times what it had paid for it, and that it expected its value to reach six times by 2025.
It may be that Northvolt took a serious turn for the worse in recent months. But accounting in private capital has increasingly come under fire since the era of zero interest rates ended in 2022 and speculative companies were suddenly subjected to a harsher light. Listed companies that have retail ownership bases are mandated into regular financial reporting, according to stringent rules. Supposedly “accredited” wealthy investors and institutions that participate in illiquid private markets only really know how their funds performed when — years later — it is time for them to get their cash back.
UPS had acquired a freight business called Overnite Corp in 2005 which it had since been carrying at $1.4bn. However, according to the SEC in its complaint, internal analysis done by UPS in 2019 and 2020 suggested that the freight unit was worth much less than $1bn. But consultants who conducted annual goodwill impairment testing were given rosier projections which spat out a $2bn valuation.
In 2020, UPS was in the process of selling the freight segment to TFI International for just $650mn, yet still did not tell outside advisers. When it did eventually announce the sale, the company took a near $700mn charge, enough to slash a third off the group’s book shareholders’ equity. UPS, which did not admit or deny the findings, agreed to avoid future violations and to training requirements for staff, said the SEC.
Private equity and private debt groups insist that they rigorously engage outsiders to perform portfolio valuations. And there are all sorts of art and science applied and even smoothing techniques may not be such a bad thing in moments of public market volatility. Still, the Northvolt experience is an embarrassing moment for the champions of private markets whose scale, influence and intrinsic opacity only continue to grow.
sujeet.indap@ft.com
https://www.ft.com/content/33de9bfc-bc03-4d01-8867-6270e95ea49c
