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Hudson Lockett explains why Beijing put a stop to the biggest listing in history

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Probes, restructuring, morale: new KPMG UK chief’s overflowing in-tray




Bill Michael’s straight talking and off-the-cuff remarks were admired by some, but were ultimately his undoing at KPMG. Days after telling staff to “stop moaning” about pandemic work conditions in February, the Australian resigned as the firm’s UK chair and chief executive.

In Jon Holt, installed as UK chief executive on Monday, KPMG has chosen a somewhat more understated leader — one who is “guarded” in his choice of words, according to a senior auditor at a rival firm.

One partner at KPMG is more blunt: he is “night and day from Bill in how he goes about things. He’s literally the exact opposite.” A former colleague describes him as a “steady Eddie”.

But Holt — who has led the Big Four firm’s 7,000-strong audit practice since 2019 — is an accomplished “political operator” and should not be underestimated, the partner adds.

Column chart of Profit before tax and members' profit shares (£m) showing KPMG UK recent performance

Holt will need all of his quarter of a century of experience at KPMG to revive the fortunes of a group where he has spent his entire career and even met his wife.

Less than four years after joining KPMG’s executive leadership team, when he was promoted from running the Manchester office to become head of financial services, he must now guide the firm as it grapples with internal strife over its workplace culture and a slew of investigations and lawsuits.

Probes by the Financial Reporting Council into its work as auditor of Carillion, and a separate £250m legal claim by the UK agency charged with liquidating the collapsed outsourcer, are among the biggest headaches.

The firm is also under investigation by the FRC for its audits of companies in the Rolls-Royce group between 2010 and 2013 and its work on the 2017 financial statements of Conviviality, the owner of Bargain Booze, which went into administration in 2018.

KPMG declined to comment on those investigations and the claim.

Inside the firm, Holt will need to repair morale after high-profile exits under Michael following investigations into bullying by a partner and allegations of misconduct on private WhatsApp messages. KPMG declined to comment on those departures and allegations. The firm has made efforts to improve its culture, including through the appointment of 120 “ethics champions” and making it easier to report misconduct.

KPMG’s board surprised some partners by putting Holt forward as the only nominee for chief executive. The decision denied them the chance to vote for Mary O’Connor, who became the first woman to lead a Big Four firm in the UK when she stood in for two months after Michael’s departure. Less than a quarter of KPMG partners are women.

The Black Lives Matter movement has also intensified the spotlight on diversity at the firm, whose report on its ethnicity pay gap shows staff with a black heritage are paid an average of 39.3 per cent less than colleagues due to a lack of diversity in senior roles.


Average distribution to KPMG partners last year

Aware of the focus on diversity, Holt said on the day of his appointment: “There must be no limit in business to where talent, achievement and hard work can take you, whoever you are and whatever your background.”

Holt will run KPMG’s day-to-day operations until September 2025 while Bina Mehta will take over Michael’s responsibility as chair of the board until next February.

Like their Big Four rivals — Deloitte, EY and PwC — KPMG’s management team will need to navigate the political and regulatory upheaval sweeping through the industry.

Ensuring the firms’ UK arms retain as much influence within their global empires following Brexit is a key challenge, says Karthik Ramanna, professor at the University of Oxford’s Blavatnik School of Government.

“Now that the UK offices no longer represent the European landscape, if they’re going to keep their seat at the table . . . it’s going to be entirely on the analytical heft that they can bring to solve the most complex problems in accounting globally,” he says. “The jury’s still out as to whether there is a legitimate claim to that argument.”

The Financial Reporting Council is conducting a long-running probe into KPMG’s role in the collapse of Carillion, the government contractor © Bloomberg

Closer to home, Holt will need to steer KPMG through the operational separation of its audit division from its advisory units to reduce conflicts of interest in the industry, following an intervention from the accounting regulator.

His experience as head of audit equips him well for this task but there is a question mark over how he will approach other parts of the business such as the tax and consulting divisions, says the partner.

The other big strategic decision will be whether to continue selling off parts of the advisory business. KPMG’s pensions and restructuring divisions have fetched more than £550m from private equity buyers in the past 13 months. A sale and leaseback of its Canary Wharf headquarters in 2017 generated another £400m.

The deals helped to prop up partner pay but have meant “selling our crown jewels”, the partner adds, criticising it for being “too short-term”.

Others believe the carve-up could continue. To head off pressure for more disposals, Holt will need to boost profitability. Partner pay was cut by 11 per cent last year as the firm spent money on protecting jobs during the pandemic without using the government’s furlough scheme. The drop was in line with a 10 per cent reduction for PwC’s partners and better than a 17 per cent fall at Deloitte.

It means that despite heavy cost cutting, average profit distributions to KPMG’s partners have now fallen from £690,000 in 2018 to £572,000 in 2020.

The chief executive will “live or die by that number”, says one former KPMG employee. “That’s all [partners] care about. If you keep that number high, you’re fine.”

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US signals new approach to war with Afghan withdrawal




When asked whether members of Joe Biden’s national security team disagreed with his decision to withdraw all American troops from Afghanistan, the White House press secretary acknowledged there had been dissent.

“[T]he president welcomed the advice, welcomed at times disagreement about what the appropriate path forward should be,” Jen Psaki said on Wednesday, adding that Biden had asked his national security team “not to sugarcoat it”.

Psaki may have been underplaying their opposition. Over nearly two decades, influential military strategists in Washington and senior officers at the Pentagon have used Afghanistan to change the way the American armed forces fights its wars, and steadfastly resisted efforts to withdraw without signs Kabul could stand on its own.

Discarding Cold War-era doctrines focused on set-piece manoeuvre warfare, top US commanders in Afghanistan like generals David Petraeus and Stanley McChrystal turned the US army into a counterinsurgency force, which needed boots on the ground to pacify the local populace.

Biden fought that troop-heavy strategy since his early days as vice-president more than a decade ago, where he lost out to the military brass in then-President Barack Obama’s Afghan war review.

But on Wednesday, Biden made clear his views have never changed. Asked as he visited the graves of America’s recent war dead if it had been a hard decision to make, the US president said: “No it wasn’t. It was absolutely clear. Absolutely clear.”

The US president’s certainty is not shared by those who disagreed with him a decade ago, some of whom are back in his own administration.

Biden’s own CIA director Bill Burns told the Senate this week that a decision to pull out would hamper US intelligence efforts trained on the threat from Islamist groups in the region, including some who can trace their lineage back to the September 11, 2001 attacks masterminded on Afghan soil.

“When the time comes for the US military to withdraw, the US government’s ability to collect and act on threats will diminish. That’s simply a fact,” Burns told the Senate intelligence committee.

But even Biden’s critics — which include counterinsurgents such as Petraeus as well as some liberal internationalists advocating nation-building and interventionist rightwing hawks — acknowledge he has never wavered.

Michael O’Hanlon, a senior adviser to the bipartisan Afghanistan Study Group which recommended extending the US presence earlier this year, said Biden was taking on retired generals such as McChrystal and Petraeus who had “star power” as well “the conventional wisdom of the establishment”.

“It wasn’t so much generals versus civilians as one worldview versus another,” he said, adding Pentagon officials, uniformed military and civilian advisers had also been divided over the troop surge at the time.

“From the very beginning, you may recall, I never thought we were there to somehow unify . . . Afghanistan,” Biden said during Wednesday’s cemetery visit. “It’s never been done. It’s never been done.”

The president’s decision to withdraw the remaining 2,500 US troops in Afghanistan by September 11 — the 20th anniversary of the attacks — achieves something both of his predecessors failed to achieve.

By acceding to the military’s insistence to a “conditions-based withdrawal”, Obama and Donald Trump found themselves outflanked by the uniformed military, forced to keep troops on the ground until conditions changed to the generals’ liking.

Biden made clear he viewed the conditions-based criteria as a way for America to continue “the cycle of extending or expanding our military presence in Afghanistan”.

Unlike Obama and Trump, who were comparatively new to Washington’s foreign policy debates when they took office, longtime observers say Biden escaped being steamrollered by Washington’s foreign policy establishment thanks to his long foreign policy pedigree, including as lead Democrat on the Senate Foreign Relations Committee for 12 years.

“President Biden has been to this rodeo before,” said Frederick Kagan, an early advocate for a counterinsurgency strategy at the conservative American Enterprise Institute who served as a civilian adviser to McChrystal in Afghanistan.

Despite campaigning on a US withdrawal, Trump sent an additional 3,000 troops to Afghanistan in 2017 before bringing the numbers down to 2,500 by the end of his term in office.

“I think Trump was turned around: I think it’s clear that he did want to order all the forces out and then ended up bowing to contrary advice,” added Kagan, who called Biden’s decision “catastrophic”.

At the roots of Biden’s policy has been the strict limits to what he thought the US could and should achieve militarily. Instead of a nationwide counterinsurgency, he has long argued for tactics focused solely on ending any safe haven for terrorists and hunting down September 11 organiser Osama bin Laden.

According to the diaries of Richard Holbrooke, the state department’s top Afghan hand in 2009-10, partially published in a 2019 biography by George Packer, Biden believed the US military had been given a remit that was beyond its competence, including social goals such as gender rights.

“When I mentioned the women’s issue [in Afghanistan], Biden erupted. Almost rising from his chair, he said, ‘I am not sending my boy back there to risk his life on behalf of women’s rights, it just won’t work, that’s not what they’re there for’.”

Biden confirmed Holbrooke’s recollection in an interview last year with CBS, adding he bore “zero responsibility” for the fate of women in the country should the Taliban return to power as a result of US withdrawal.

“He can take the hit,” said Joe Cirincione, a longtime antiwar campaigner who is now at the Quincy Institute, of the mounting political criticism of Biden’s decision. “He is confident enough in himself.”

Cirincione also said policymakers should not underestimate the president’s personal experience, something Biden touched on in announcing his decision: “I’m the first president in 40 years who knows what it means to have a child serve in a war zone.”

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US oil drillers ‘dying on the vine’ as PE flight prompts funding drought




A vital source of funding for the US oil sector is drying up as private investors retreat, prompting stricken operators to make “last gasp” efforts to boost production and cash flow to lure in buyers.

The exodus mirrors shale’s experience in public markets, where even before last year’s crash investors had soured on an industry notorious for poor returns and weak environmental, social and governance performance.

“Private equity has been decimated in this downturn,” said Wil VanLoh, head of Quantum Energy Partners, one of the largest PE investors in the shale patch. “The total quantum of money available out there to private companies has shrunk and is going to stay much, much smaller.”

Now scores of oil producers are “dying on the vine”, said Ben Dell, managing partner at rival Kimmeridge, as they are left without the regular cash infusions to bankroll the capital spending needed to keep on drilling.

The private flight comes despite oil’s recovery to $60 a barrel — a price that allows many operators to break even and has raised investors’ hopes of a profitable final exit from the sector.

Those notions gained strength this month when Pioneer Natural Resources, a large listed operator in the prolific shale fields of Texas’s Permian Basin, agreed to buy privately owned rival DoublePoint Energy for $6.4bn — the biggest public-private deal in the US upstream oil and gas business in a decade.

DoublePoint, which made national news last year when Donald Trump delivered a stump speech in front of one of the company’s rigs in Texas, was backed by VanLoh’s Quantum, Apollo Global Management, Magnetar Capital and Blackstone credit.

But investors say deals of that scale are unlikely to be repeated.

“DoublePoint is one and done,” said Adam Waterous, head of the Calgary-based private equity group Waterous Energy Fund. “There’s a risk that people will see it as a return to 2013”, when private equity enjoyed a bumper shale harvest. “It’s not.”

The private mood has been shifting for some time.

Between the start of 2015 and the end of 2019, 136 private funds closed after raising an aggregate of $86bn to spend in US oil and gas, according to Preqin, a financial data provider.

The influx helped to finance an unprecedented surge in American oil production to a record high of about 13m barrels a day last year.

US private equity is ditching shale

But the “dry powder”, as PE groups refer to investors’ capital, has diminished and the same “war chest mentality” is not evident in this recovery, according to Raoul LeBlanc, head of North American unconventionals for the consultancy IHS Markit.

Just 11 funds closed last year and only $4.5bn was raised as oil prices crashed, according to Preqin. Production plunged and remains around 11m b/d now.

“What’s different this time is there’s very little new private equity going into forming new private companies, because they don’t have capital to deploy,” said Kimmeridge’s Dell. “They are not confident they can raise more capital.”

Some private oil operators are spending an unexpected bounty from higher oil prices into more drilling, hoping extra output will lift valuations and attract buyers — a “last gasp” effort to secure a profitable exit, said Van Loh.

Rigs operated by private companies have climbed to about 50 per cent of the contiguous 48 states’ total this year, according to the consultancy Enverus.

While public operators slashed capital spending and output last year, some private ones did the opposite. Quantum’s portfolio companies boosted total output by a quarter to 500,000 b/d by December, according to the consultancy Rystad Energy.

The strategy paid off for DoublePoint, one of the most active drillers in the Permian even during the bleakest months of the price crash.

The tail of weak assets across the Permian shale patch is long — and was exposed by last year’s price crash © Nick Oxford/Reuters

But exits are dwindling. According to PitchBook, another data provider, private equity deal values last year amounted to just $13bn from 35 exits — a fraction of previous years.

The market does not seem to be rewarding dealmaking if investors think it points to more growth from public companies, analysts say.

Pioneer’s shares are down more than 10 per cent since April 1, the eve of the DoublePoint deal, partly because of a perception that the company — which will be by far the Permian’s biggest producer after the deal closes — was chasing supply gains again.

The company stressed the acquisition was done to lift free cash flow, not just output. Pioneer said it would reduce the number of rigs DoublePoint was operating.

Initial public offerings, the other main exit route for private equity, are also difficult given capital markets’ lack of enthusiasm for fossil fuel producers and a shale sector that generated such poor returns in recent years.

Shares in Blackstone-backed Vine Energy are down about 16 per cent since its mid-March IPO, the first from a shale producer since 2017, far underperforming the sector.

Another underlying problem, investors say, is the lack of assets of sufficient quality to attract public operators that have sworn off the fast-growth strategy and land-grab mentality of previous years.

Line chart of Number of operating rigs showing Private drillers are speeding up

The list of juicy private operators includes CrownQuest, Endeavour Resources, Mewbourne Oil and a few other smaller operators, which each own large Permian positions that have been poured over by public suitors.

But the tail of weak assets across the shale patch is long — and was exposed by last year’s price crash.

Private money is behind as many as 500 producers in the US, accounting for about a third of total American oil output in recent years. The bulk are now lossmaking and will never repay the cash ploughed into them, said Waterous.

“We think about 80 per cent of them are illiquid,” he said. “There is no bid. So 400 of the 500 are unsaleable.”

Recent transactions included sales by Bruin E&P, a PE-backed company that went bankrupt in July, and Grenadier Energy Partners II, backed by EnCap and Kayne Anderson, two big private oil industry investors.

Some PE firms are also spending unused fund capital instead of returning it to limited partners, according to investors, or are taking advantage of divestments from public operators that are streamlining portfolios. That has triggered a flurry of small deals.

“What you’re seeing is this little bit of a last gasp of the capital that was committed to funds three or four or five years ago,” said VanLoh, referring to recent deals in which private equity groups have bought assets from public operators. “It’s spend it or lose it.” 

Failing companies are likely to be starved of capital and forced into “blow down” mode, said Waterous, producing what oil they can as quickly as possible and as long as possible, just to keep some cash trickling in.

“This business is broken,” said Waterous. “The industry is going through a multiyear process of wringing capital out of the sector, not bringing new capital in.”

Specialist funds will remain in the sector, some investors say, but the generalists are moving on, seeing greater opportunity outside a volatile fossil fuel business and in fast-growth and low-carbon businesses favoured by ESG-minded investors.

It is the end of an era in which private equity was often the shale sector’s crucial financier. The available cash pile has dwindled.

“There’s not a lot of dry powder left,” said VanLoh. “And once it gets spent, these guys aren’t going to be able to go reload.”

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