Latest / Bloomberg Intelligence / GM Sees Up to $2 Billion Profit Jump in 2026, More Buybacks

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GM Sees Up to $2 Billion Profit Jump in 2026, More Buybacks · Bloomberg Intelligence

• 0:00
  Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You're listening to the
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  Speaker 1: or watch us live on YouTube.
• 0:24
  Speaker 2: Earnings Palooza in full swing here. General Motor is the
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  Speaker 2: latest report as well. It expects profit to grow as
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  Speaker 2: much as two billion dollars this year, and like RTX,
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  Speaker 2: plans to return more of that to shareholders with the
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  Speaker 2: higher dividend as well as buybacks. Earlier, GM's CEO Mary
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  Speaker 2: Burra joined Bloomberg's Matt Miller to discuss their earnings and
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  Speaker 2: their push on EV's remember those. For more on the
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  Speaker 2: company's earnings and what she had to say, let's bring
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  Speaker 2: in our Steve Man. He covers autos for us here
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  Speaker 2: at Bloomberg Intelligence. He's the Bloomberg Intelligence Global Autos and
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  Speaker 2: Industrials Analysts. Steve. When Mary was talking about their portfolio
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  Speaker 2: of internal combustion engines and their portfolio of EV vehicles,
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  Speaker 2: what does that portfolio actually look like? I mean, is
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  Speaker 2: it seventy thirty ICE engines to EV's eighty twenty.
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  Speaker 3: Oh, it's actually Ice enginees much greater. I know they
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  Speaker 3: have a full portfolio of EV's, but you're talking about
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  Speaker 3: like eighty five ninety percent ICE versus ten fifteen percent evs,
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  Speaker 3: So you know, they do have a big portfolio, but
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  Speaker 3: it was just at the beginning of rolling them out.
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  Speaker 3: You know, they do have still they do still have
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  Speaker 3: one more major rollout coming out, which is the Chevy
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  Speaker 3: Bolt of smaller vehicles, which the industry and GM thinks
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  Speaker 3: that that's where the market is going, a cheaper, more
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  Speaker 3: convenient EV.
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  Speaker 4: GM stock up nine percent today to a fifty two
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  Speaker 4: week and an all time high.
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  Speaker 5: So the street likes what they're hearing.
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  Speaker 4: Steve, It's almost to the point where the street rewards
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  Speaker 4: these companies if they not just not fully back away,
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  Speaker 4: but at least slow down the evolution to EV and
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  Speaker 4: just focus on what's making money today.
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  Speaker 5: Is that kind of what where the industry is today?
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  Speaker 3: Yeah, exactly, like Trump actually did the auto industry a
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  Speaker 3: major favor by relaxing the miles per gallon the mandate.
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  Speaker 3: So basically every vehicle in the Big three portfolio are
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  Speaker 3: currently meeting those mandates, and what it means is less
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  Speaker 3: penalties right, and no need to buy EV credits going forward.
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  Speaker 3: Huge savings. And what that means is it could translate
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  Speaker 3: into a slower increase in car prices for consumers, especially
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  Speaker 3: for big trucks. Makes the big trucks a lot more
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  Speaker 3: attractive to sell for the Big Three, So they're going
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  Speaker 3: to sell as many as possible given this opportunity. I
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  Speaker 3: know we talked about hybrid for GM's, it's going to
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  Speaker 3: be a huge a sinkhole for them if they invest
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  Speaker 3: in that technology today. So let's not do that. Maintain
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  Speaker 3: whatever they can do with evs and really push the
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  Speaker 3: ice vehicles.
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  Speaker 2: Maintain what they can with ev so that you know,
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  Speaker 2: small ten to fifteen percent of their overall portfolio. Forget
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  Speaker 2: about hybrids and just focus on the mammoth gas guzzling
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  Speaker 2: vehicles that Matt Miller likes driving. I know he talked
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  Speaker 2: about how he drove electric versions of that. But let's
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  Speaker 2: face it, what happens then if gas prices do turn
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  Speaker 2: up higher unexpectedly, and I know that the administration is
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  Speaker 2: doing all it can to prevent that from happening, but
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  Speaker 2: I'm looking at triple A gas prices and they bottomed
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  Speaker 2: at around two seventy nine and have now made their
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  Speaker 2: way back up towards two ninety.
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  Speaker 3: Yeah. I mean historically, when gas prices go up, it
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  Speaker 3: does impact ice sales, and you know, it may it
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  Speaker 3: may push some buyers into evs, you know, depending on
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  Speaker 3: how how where the expansion of the EV charging network
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  Speaker 3: is at. But I think at the end of the day,
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  Speaker 3: if gas prices do go up, actually benefits the Japanese
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  Speaker 3: companies like Toyota and Honda, where they have a full
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  Speaker 3: suite of hybrid vehicles that actually consumer love.
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  Speaker 6: Yeah.
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  Speaker 5: I just leased the Honda CRV hybrid.
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  Speaker 4: Uh huh.
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  Speaker 5: My son who drives in California all the time where
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  Speaker 5: the gas is really exp Yes, that's right, he probably
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  Speaker 5: wanted it.
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  Speaker 2: And how often does he have to fill up?
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  Speaker 4: Not that often? I mean just not that often. It's great,
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  Speaker 4: it's a great tech technology. Steve. Let's just while we
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  Speaker 4: got you here, what's the call these days on Tesla
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  Speaker 4: as we talk about this EV business? But really for Tesla,
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  Speaker 4: we're talking about so so much more.
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  Speaker 3: Yeah, looking at GM as a as a backdrop, you know,
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  Speaker 3: GM's earnings for twenty twenty six is probably a little
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  Speaker 3: bit light. There's probably some more upside on the shift
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  Speaker 3: mix for more ice. So what means for Tesla it's
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  Speaker 3: an uphill battle for them. I know the stock is trading,
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  Speaker 3: you know, at an astronomical valuation at the moment. Investors
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  Speaker 3: are very focused on their robo taxi autonomous vehicle build out. Uh.
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  Speaker 3: They people feel that, you know, they can actually outcompete
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  Speaker 3: the likes of Uber and Lyft. So you know, sales
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  Speaker 3: will be weak in the fourth quarter for Tesla, but
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  Speaker 3: I believe the you know, the investors are actually looking
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  Speaker 3: over past that into you know, what is the what
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  Speaker 3: is the catalyst or what is what is Elon Musk
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  Speaker 3: going to talk about in their next earning calls on
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  Speaker 3: the robotaxi.
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  Speaker 2: Yeah, it's always about the Elon Musk narrative, his vision
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  Speaker 2: going forward of what this company is going to be.
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  Speaker 2: I wonder, you know, my Mary Borrow talked about that
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  Speaker 2: charging infrastructure in the network and how we're not there
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  Speaker 2: in the United States. Tesla is offering the supercharger and
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  Speaker 2: that's part of its business model to be able to
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  Speaker 2: make that charger available to other automakers. How big a
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  Speaker 2: contributor is that to its revenue to its profitability when
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  Speaker 2: it's problems.
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  Speaker 3: Yeah, it's still still a small amount.
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  Speaker 2: It is.
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  Speaker 3: What they do is they want to expand that business.
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  Speaker 3: So they are talking to you know, gas stations like
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  Speaker 3: wah wah out in Pennsylvania are actually you know, buying superchargers,
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  Speaker 3: installing it into next to the gas gas pumps and
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  Speaker 3: next to the stations. So they are trying to expand
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  Speaker 3: it in terms of charging, selling these supercharging business, and
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  Speaker 3: in the in the revenues from the charging, it's still
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  Speaker 3: really really small. I would say around ten percent maybe less.
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  Speaker 4: Hey, what do we know about how important are incentives here?
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  Speaker 4: I look at other countries around.
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  Speaker 5: The world and they have got these huge evy.
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  Speaker 4: Percentages of China sales China, the Nordic countries. How important
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  Speaker 4: are government incentives to get there?
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  Speaker 5: It is very important.
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  Speaker 3: I think the Germans are actually putting back the incentives
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  Speaker 3: and it has lifted EV sales in Europe, in Germany.
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  Speaker 3: But at the end of the day, you really want
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  Speaker 3: to build a sustainable growth environment for for these cars.
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  Speaker 3: And Mary Barr is right, you know, we actually publish
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  Speaker 3: a very extensive report on EV charging, comparing charging network
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  Speaker 3: in the US versus China night and day, right, So, uh,
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  Speaker 3: you know, it's about convenience, it's about costs for the
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  Speaker 3: US consumer. It's great to have it's great for consumer
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  Speaker 3: to have some subsidy, you know, help pay for for
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  Speaker 3: the for the cars that they're buying. But I think
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  Speaker 3: long term, you know, it really needs the consumer to
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  Speaker 3: really buy into the product.
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  Speaker 5: Stay with us. More from Bloomberg Intelligence coming up after this.
• 7:50
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 7:54
  Speaker 1: weekdays at ten am Eastern on Applecarclay, and Android Auto
• 7:57
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• 8:00
  Speaker 1: you get your podcasts, or watch us live on YouTube.
• 8:04
  Speaker 4: Well, a lot of newsflow in the airline space, the
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  Speaker 4: aerospace areas.
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  Speaker 5: Let's get right to it with somebody who knows this stuff.
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  Speaker 4: Stid Fillip, Deputy team leader for Global Aviation, Bloomberg News.
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  Speaker 4: I think he's in my hometown, Dublin, Ireland, back when
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  Speaker 4: my peeps were fun way back in the day. So
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  Speaker 4: good for him. Hey, Sid, let's talk to us about
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  Speaker 4: the airlines. American airlines, they said their pois for a
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  Speaker 4: pretty strong year, yet Jet Blue had a wire than
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  Speaker 4: expected loss. Here.
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  Speaker 5: What's going on with these two airlines here?
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  Speaker 7: So the airline industry is actually in a sort of
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  Speaker 7: bit of a flux at the moment. I mean, you've
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  Speaker 7: obviously had the impact of all these storms, you've had
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  Speaker 7: the impact of the government shutdown, and you've got the
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  Speaker 7: uncertainty about the year ahead. And so American Airlines is
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  Speaker 7: taking a more bullish view of the year ahead. They
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  Speaker 7: sort of following their peers United and Delta in targeting
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  Speaker 7: the most premium end of the spectrum, and they sort
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  Speaker 7: of hope that by aiming their product at the premium
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  Speaker 7: end of the market, they can sort of offset the
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  Speaker 7: sort of downturn that's happened in the bottom end of
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  Speaker 7: the market. Jet Blue also talking about how at the
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  Speaker 7: moment things look a bit shaky, but they're talking about
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  Speaker 7: how they see a road to profitability and a free
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  Speaker 7: cash flow by the end of twenty twenty seven, so
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  Speaker 7: slightly more long term view of when the recovery might happen,
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  Speaker 7: and that sort of explains the dichotomy in the earnings
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  Speaker 7: podcast for both these companies.
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  Speaker 2: And of course Jet Blue is also doing what it
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  Speaker 2: can to premium premiumize if that's a verb, it's experience
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  Speaker 2: for customers to with absolutely opening up that New Lounge
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  Speaker 2: and JFK. So that is the story with airlines, and
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  Speaker 2: it's been fairly consistent too with what we heard from
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  Speaker 2: Delta and United. Where does that leave the smaller carriers
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  Speaker 2: that need to either team up or fade into oblivion.
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  Speaker 2: I'm thinking Spirit, I'm thinking Frontier. Is there still a
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  Speaker 2: market for these discount carriers?
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  Speaker 7: So the market at the moment is very tough for
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  Speaker 7: the discount carriers. So essentially what's happening is that the
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  Speaker 7: top end of the market is going to Delta and
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  Speaker 7: United for their premium products like first class in business class,
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  Speaker 7: and on the other end of the market you have
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  Speaker 7: sort of everyone else competing to get the lowest cost
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  Speaker 7: tickets into the hands of the passengers, and that sort
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  Speaker 7: of eroding margins, especially as costs for both pilots and
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  Speaker 7: Cavin Krue are hurting the ultra low cost carriers and
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  Speaker 7: the low cost carriers, and sort of that's sort of
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  Speaker 7: been explained by this gase shaped recovery that airline executors
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  Speaker 7: are talking about, and so Jet Blue and the others
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  Speaker 7: are sort of trying to get the premium end of it.
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  Speaker 7: I mean, we've seen even Spirit Airlines talking about how
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  Speaker 7: they're adding a so called business class product, They've added
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  Speaker 7: Wi Fi, they've added all sorts of things to keep
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  Speaker 7: people coming back to them, and so they're hoping that
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  Speaker 7: by slightly differentiating themselves from just very commoditized ultralow cost carriers,
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  Speaker 7: they can be able to get in those customers.
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  Speaker 4: Well, then it kind of goes back to the point,
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  Speaker 4: is there a need for her real true low cost
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  Speaker 4: carrier out there? Some of these supposed ones are going
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  Speaker 4: kind of mid market higher market. Is there a market
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  Speaker 4: demand for that or is everybody just willing to pay
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  Speaker 4: up for travel?
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  Speaker 7: At the moment, it looks the people who are willing
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  Speaker 7: to pay up for travel are the people willing to
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  Speaker 7: pay up for travel, and so at the bottom end
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  Speaker 7: of the market. I mean, everyone talks about how there
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  Speaker 7: will be a recovery of the ultralocalst carriers and that
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  Speaker 7: once people are more certain about the economy, and once
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  Speaker 7: people at the bottom end of that kay start to
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  Speaker 7: see some stability in the economy, people will travel because
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  Speaker 7: I mean, remember during the pandemic, there was as we
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  Speaker 7: exited the pandemic, there was this boom in travel for
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  Speaker 7: across the board, and that sort of has further split up,
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  Speaker 7: and so we will see that demand coming back. We
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  Speaker 7: just don't know when and what sort of shape that
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  Speaker 7: will be.
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  Speaker 2: So sid you also cover Boeing, and it came out
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  Speaker 2: with its results and in terms of the numbers for
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  Speaker 2: the fourth quarter a free cashlow topping estimates. It generated
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  Speaker 2: cash for a second straight quarter. That sounds like it's
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  Speaker 2: good news. How far along this recovery, this long awaited
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  Speaker 2: covery is Boeing?
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  Speaker 7: Actually, so Boeing is on the road to recovery. They're
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  Speaker 7: still not there yet, but they are recovered. They are recovering.
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  Speaker 7: I mean their fourth quarter results and their folio results
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  Speaker 7: were boosted by the sale of their Jefferson Digital Aviation
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  Speaker 7: subsidiary and that sort of gave them a nine point
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  Speaker 7: six billion dollar boost. And at the same time, the
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  Speaker 7: Boeing is sort of ramping up production. They are ramping
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  Speaker 7: up sales. I mean they've seen a surgeon sales. I
• 12:30
  Speaker 7: mean in the last ever since the Trump administration came in,
• 12:35
  Speaker 7: we've seen a surgeon Boeing sales. And so Kelly Outberg,
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  Speaker 7: the new CEO, is sort of pushing Boeing to improve production,
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  Speaker 7: ramp up production at a steady pace. I mean they've
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  Speaker 7: gone to about forty two seven three seven Max jets
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  Speaker 7: a month, and they are sort of further boosting those
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  Speaker 7: production numbers and that will get them on at the
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  Speaker 7: sort of where they want to be in the Kelly
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  Speaker 7: Oudberg's talked about how ten billion in free cash flow
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  Speaker 7: is his target companies on its way there.
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  Speaker 4: Sid I'm glad you mentioned deliveries because I guess I
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  Speaker 4: learned long ago about this aircraft manufacturing business. It's not
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  Speaker 4: the sales you announced, it's the orders that you actually deliver.
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  Speaker 4: You mentioned kind of on a seven thirty seven, which
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  Speaker 4: is the key aircraft for Boeing, that around forty two
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  Speaker 4: a month. Here, where does a company want to get
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  Speaker 4: to and by what timeframe?
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  Speaker 7: So Boeing still way below it used to be above
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  Speaker 7: fifty pre pandemic when they sort of shut down production
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  Speaker 7: of the Max because of the grounding that happened after
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  Speaker 7: those two fatal crashes, and so they need to get
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  Speaker 7: to beyond that. I remember Airbus is talked about seventy
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  Speaker 7: five a month by twenty twenty seven on their arrival
• 13:42
  Speaker 7: a three twenty model, and so Boeing would have to
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  Speaker 7: sort of ramp up production to some some of those
• 13:48
  Speaker 7: levels to target that backlog. I mean they've got a
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  Speaker 7: massive they've got a record breaking six hundred and eighty
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  Speaker 7: two billion dollar backlog of customer orders, and so that's
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  Speaker 7: actually when airlines get the Airframers like Boeing and Airbus
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  Speaker 7: only get paid when they actually deliver those planes. So
• 14:05
  Speaker 7: when they book those orders, they don't really get the
• 14:08
  Speaker 7: money from the airlines. The airlines pay them when they
• 14:10
  Speaker 7: get those planes. And so we're Boeing to actually start
• 14:13
  Speaker 7: generating that free cash. They need to actually get those
• 14:15
  Speaker 7: planes out the door, and that they need to do
• 14:18
  Speaker 7: by ramping up production very quickly.
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  Speaker 2: You mentioned that backlog record six hundred and eighty two
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  Speaker 2: billion dollars. How much of that is customers trying to
• 14:25
  Speaker 2: curry favor with the Trump administration by buying US aircraft
• 14:29
  Speaker 2: or at least announcing plans to do so.
• 14:32
  Speaker 7: Some of it may be some of the customers trying
• 14:35
  Speaker 7: to carry fair with the administration. I mean, we saw
• 14:37
  Speaker 7: that massive cut our order. At the same time, there
• 14:41
  Speaker 7: is only the only two planemakers in town, and Airbus
• 14:43
  Speaker 7: is sold out until the end of the decade and
• 14:46
  Speaker 7: sort of into the next decade. And so the only
• 14:48
  Speaker 7: way for an airline to actually get planes is to
• 14:50
  Speaker 7: either buy planes from either Boeing or Airbus, and Boeing
• 14:54
  Speaker 7: is similarly sold out, and so airlines are placing their
• 14:57
  Speaker 7: bets with either manufacturer and hoping that they will get
• 15:00
  Speaker 7: those plans. Whenever they actually get those plans in front
• 15:03
  Speaker 7: of the delivery focus.
• 15:06
  Speaker 5: Stay with us. More from Bloomberg Intelligence coming up after this.
• 15:13
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 15:17
  Speaker 1: weekdays at ten am Eastern on Apple Coarclay, and Android
• 15:20
  Speaker 1: Auto with the Bloomberg Business App. Listen on demand wherever
• 15:23
  Speaker 1: you get your podcasts, or watch us live on YouTube.
• 15:27
  Speaker 4: Still on the earnings front, UPS Big Brown sees better
• 15:31
  Speaker 4: than expected sales amid a network overhaul. Thomas Black Joints
• 15:34
  Speaker 4: is Bloomberg Opinion calumnist Thomas what'd you see? What you
• 15:37
  Speaker 4: learn from the UPS earnings here?
• 15:42
  Speaker 6: UPS continues to shrink to become more profitable. That's the
• 15:46
  Speaker 6: big takeaway there. They're reducing their Amazon business and they're
• 15:52
  Speaker 6: trying to retrench with more profitable packages, and that's probably
• 15:56
  Speaker 6: a move away from some of the e commerce where
• 16:00
  Speaker 6: the competition is fierce and there's lots of little companies
• 16:03
  Speaker 6: that are out there competing.
• 16:06
  Speaker 2: So how far along this journey of shrinking to become
• 16:09
  Speaker 2: more profitable are they? Are we in the third inning?
• 16:12
  Speaker 2: Are we in the seventh inning?
• 16:15
  Speaker 6: This will be the last year of this, so I
• 16:17
  Speaker 6: would say we're in the sixth inning heading toward the ninth.
• 16:21
  Speaker 6: So after this year, Carol to May, the CEO at UPS,
• 16:25
  Speaker 6: said we're going to be a leaner company and ready
• 16:28
  Speaker 6: to grow. So well, it's going to be a little
• 16:30
  Speaker 6: bit painful this year, she walked analysts through it. The
• 16:34
  Speaker 6: first half is going to be more painful as they
• 16:36
  Speaker 6: glide down from Amazon and they take some right downs
• 16:39
  Speaker 6: and so forth. As you know, they retired their fleet
• 16:43
  Speaker 6: of MD eleven's, which is this old plane that assisted
• 16:47
  Speaker 6: they had a crash. So they're going through all of
• 16:49
  Speaker 6: this in the first half, and then the second half
• 16:52
  Speaker 6: things should start to turn around. They're also they're not
• 16:55
  Speaker 6: only shrinking their Amazon business or shrinking their footprint, their
• 16:59
  Speaker 6: facility and the older ones are being retired and the
• 17:03
  Speaker 6: replacing those with new automated facilities. And that's going to
• 17:06
  Speaker 6: allow them to lay off more union workers. So that
• 17:10
  Speaker 6: big union contract where the teamsters push through a big
• 17:15
  Speaker 6: labor increase is turning around to bite them a little
• 17:18
  Speaker 6: bit because UPS is dealing with that by shrinking its workforce.
• 17:23
  Speaker 4: How does this UPS strategy differ from that of FedEx.
• 17:31
  Speaker 6: They're similar in the sense that they're both cutting costs aggressively.
• 17:36
  Speaker 6: Of FedEx is a little bit different because it doesn't
• 17:38
  Speaker 6: have the labor costs from the union workforce, so it's
• 17:43
  Speaker 6: a little bit more flexible. And fed X is undergoing
• 17:47
  Speaker 6: a major overhaul that's probably in its last innings as well,
• 17:52
  Speaker 6: and the last part of that is the most difficult part,
• 17:54
  Speaker 6: where they're going to combine there two separate networks, the
• 17:58
  Speaker 6: ground network and the express network. They're in the middle
• 18:00
  Speaker 6: of that, but so they're going to be coming out
• 18:02
  Speaker 6: of that as well. So we're going to have two
• 18:04
  Speaker 6: parcel companies that are restructured and ready to grow at
• 18:07
  Speaker 6: the end of this year.
• 18:08
  Speaker 2: Every time there's some kind of headline regarding UPS laying
• 18:11
  Speaker 2: off workers or cutting positions, it's in it's these massive
• 18:14
  Speaker 2: numbers right this time around. It's up to thirty thousand
• 18:17
  Speaker 2: positions this year, and as you mentioned, Thomas, this is
• 18:20
  Speaker 2: all due to trimming down and small downsizing the scope
• 18:25
  Speaker 2: of the company at what point, are we looking at
• 18:28
  Speaker 2: job cuts tied to AI or have we not got
• 18:31
  Speaker 2: even gotten there yet?
• 18:33
  Speaker 6: Well, I would instead of saying AI, I would say
• 18:36
  Speaker 6: automation and that those are these new facilities that handle
• 18:40
  Speaker 6: packages automatically. You even have the induction of packages where
• 18:45
  Speaker 6: you have robots putting the packages on the conveyor belts
• 18:48
  Speaker 6: and taking them off. So those are the steps toward
• 18:52
  Speaker 6: more automation. This is that physical AI that people talk about, right,
• 18:56
  Speaker 6: And an interesting stat that Carol to May gave the
• 19:00
  Speaker 6: cause that those automated buildings are twenty eight percent more
• 19:04
  Speaker 6: efficient than the older buildings. So the more automation is
• 19:07
  Speaker 6: what they're leaning into. So it's part of it shrinking
• 19:11
  Speaker 6: some of the low profit volume plus more automation to
• 19:16
  Speaker 6: replace the human workers.
• 19:17
  Speaker 4: Basically, e commerce continues to grow, and I guess Double digits,
• 19:22
  Speaker 4: who's handling all these packages of ups, is maybe backing
• 19:26
  Speaker 4: away a little bit.
• 19:27
  Speaker 6: Well, Amazon has its own delivery network. It tends to
• 19:32
  Speaker 6: want to deliver into those big urban areas where it
• 19:36
  Speaker 6: just takes things from a warehouse to a residential home,
• 19:41
  Speaker 6: so they do that very well. Where they want help
• 19:44
  Speaker 6: is on the rural areas. That's where they turn to
• 19:47
  Speaker 6: folks like ups and the postal service, so obviously Amazon
• 19:52
  Speaker 6: is a big player there. We'll also have lots of
• 19:54
  Speaker 6: smaller companies. These are gig type companies that have apps,
• 19:58
  Speaker 6: and workers show up and they have an app on
• 20:02
  Speaker 6: their phone and it gives them a delivery route and
• 20:04
  Speaker 6: they throw packages in their car or their truck and
• 20:07
  Speaker 6: they go delivers. There's a lot of those companies that
• 20:10
  Speaker 6: tend to operate in urban areas, so there's actually a
• 20:14
  Speaker 6: lot of capacity out there for retailers or people who
• 20:17
  Speaker 6: are really smart on their inventory management to tap into.
• 20:20
  Speaker 5: Stay with us more from Bloomberg Intelligence coming up after this.
• 20:27
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 20:31
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• 20:34
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• 20:37
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• 20:41
  Speaker 2: Whenever we talk about universities and their investments their endowments,
• 20:46
  Speaker 2: the one name always comes up, and that is Yale.
• 20:48
  Speaker 2: Yale created this endowment model that was predicated on lots
• 20:52
  Speaker 2: of private assets, long term investments that paid off handsomely
• 20:57
  Speaker 2: years down the road, except they're now questions marks over
• 21:00
  Speaker 2: whether this Yale endowment model is still relevant, whether it's
• 21:04
  Speaker 2: debt or not. Janet Lauren is Bloomberg News's higher education
• 21:08
  Speaker 2: finance reporter, and today's big take really focuses on that idea. Janet,
• 21:13
  Speaker 2: there's question marks about the Yeale endowment model because the
• 21:16
  Speaker 2: better performing endowments of late are those that invest in
• 21:19
  Speaker 2: just plain old stocks and bonds.
• 21:21
  Speaker 8: Yes, and you know, occasionally from time to time we've
• 21:23
  Speaker 8: seen that in certain years where simple just outperformed private
• 21:28
  Speaker 8: equity and other VC. And in twenty twenty one, remember
• 21:33
  Speaker 8: the outstanding returns that these schools had. But now higher
• 21:37
  Speaker 8: interest rates, fewer exits, You've got a huge amount of
• 21:40
  Speaker 8: money locked up in private equity, in some cases forty percent.
• 21:45
  Speaker 8: And you know, look, these schools would like a little cash.
• 21:48
  Speaker 8: They're looking, you know, perhaps they want to change managers.
• 21:51
  Speaker 8: They need the cash to do other things as well
• 21:53
  Speaker 8: and refresh their portfolios. But when you have, you know,
• 21:56
  Speaker 8: in the forty percent locked up, you know, time to
• 22:00
  Speaker 8: think about other things. And that's perhaps why you saw
• 22:02
  Speaker 8: Yale doing its first ever sale last year, which was
• 22:04
  Speaker 8: a big deal.
• 22:06
  Speaker 4: So again this sale, Yale unloaded about two point five
• 22:09
  Speaker 4: billion dollars in LBO funds at a discount that is brutal.
• 22:14
  Speaker 5: Well, is that unprecedented or other? Well, well, Yale.
• 22:18
  Speaker 8: Has done it for the first time. You know, others
• 22:20
  Speaker 8: had been doing this before. Harvard has unloaded a lot
• 22:23
  Speaker 8: in previous years. But it's sort of a new normal
• 22:28
  Speaker 8: in some ways looking at secondaries. The secondary market is
• 22:31
  Speaker 8: very popular right now, and you know, they in the
• 22:36
  Speaker 8: hunt for potential cash and liquidity. You know, you look
• 22:39
  Speaker 8: at the UC Endowment where we talked about this eighty twenty.
• 22:42
  Speaker 8: They call it the Blue and Gold Fund, very proud
• 22:44
  Speaker 8: of it, and in the height of the pandemic when
• 22:48
  Speaker 8: they wanted some liquidity, they gave almost two billion dollars
• 22:52
  Speaker 8: in cash to the campuses for liquidity. Compare that to
• 22:56
  Speaker 8: two thousand and eight when schools were forced to sell
• 22:59
  Speaker 8: on this secondaries or borrow. That's kind of a stark
• 23:03
  Speaker 8: example right there.
• 23:04
  Speaker 2: When you need money, when you need money, And I
• 23:06
  Speaker 2: think that's a key phrase here, especially in twenty twenty six,
• 23:09
  Speaker 2: because this White House has been targeting higher ed and
• 23:13
  Speaker 2: even though Yale has not been targeted to the extent
• 23:16
  Speaker 2: that Harvard has, for instance, or Columbia, these schools need
• 23:20
  Speaker 2: money in a way that they didn't before for nothing
• 23:22
  Speaker 2: else to pay taxes on their endowment.
• 23:24
  Speaker 8: Yes, and that's a huge game changer. You know, a
• 23:27
  Speaker 8: year ago we may not be having this conversation. Yale
• 23:30
  Speaker 8: and Harvard each had pegged their bill for the endowment tax,
• 23:34
  Speaker 8: which is now eight percent of net investment returns, to
• 23:37
  Speaker 8: be about three hundred million dollars a year.
• 23:41
  Speaker 2: Wow.
• 23:41
  Speaker 5: And is that is that enforced? Is that happening right now?
• 23:44
  Speaker 8: Absolutely? That happened July first, when the big beautiful ACCT.
• 23:49
  Speaker 4: How about the the the actual I guess halting payments
• 23:54
  Speaker 4: to some of these universities that President Trump administration I
• 23:56
  Speaker 4: talked that for some of their funding.
• 23:59
  Speaker 5: Has that happened?
• 24:00
  Speaker 8: So many schools have had settlements. Harvard famously has not yet.
• 24:07
  Speaker 8: There there was a lawsuit in last September. The district
• 24:11
  Speaker 8: court ruled in favor of Harvard. Late December the government appealed.
• 24:15
  Speaker 8: So that's still in flux. But there's a huge concern
• 24:18
  Speaker 8: of Harvard in all universities. Are we still going to
• 24:21
  Speaker 8: get this federal research funding going forward? And Harvard may
• 24:26
  Speaker 8: have temporarily solved their problem, still very unclear, but what
• 24:31
  Speaker 8: is the money going forward school. Our universities, these large
• 24:35
  Speaker 8: research universities still going to be able to count on
• 24:37
  Speaker 8: hundreds of millions of dollars. You know, Northwestern, which settled
• 24:41
  Speaker 8: around Thanksgiving, had been self funding their research the tune
• 24:46
  Speaker 8: of something like thirty or forty million dollars a month.
• 24:49
  Speaker 8: So we're talking, you know, lots and lots of money.
• 24:53
  Speaker 2: Yeah, they need the money in a way that they
• 24:55
  Speaker 2: didn't before. And going back to the Yale endowment strategy
• 24:58
  Speaker 2: and how well it worked at least initially when David
• 25:01
  Speaker 2: Swinson launched it back I think in the eighties and nineties,
• 25:04
  Speaker 2: those were the heydays of the Yell and domit model.
• 25:07
  Speaker 2: Maybe it made sense when private equity, private investing was
• 25:12
  Speaker 2: not a big thing yet, was not yet mainstream, or
• 25:14
  Speaker 2: maybe it makes more sense in a low rate environment.
• 25:16
  Speaker 2: But times have changed and that's a big part of it.
• 25:18
  Speaker 8: Right absolutely, first mover advantage. You know, there weren't as
• 25:21
  Speaker 8: many institutional investors doing what he was doing. He was
• 25:25
  Speaker 8: He saw inefficiencies in the market and he said, look,
• 25:29
  Speaker 8: this is what we can do. We have the ability
• 25:31
  Speaker 8: to lock up money for a while. We're very long
• 25:35
  Speaker 8: term investors. We invest in sent in for centuries. We
• 25:38
  Speaker 8: can do this, they and it was extremely successful, and
• 25:42
  Speaker 8: others tried to copy. Certainly more money piled into private equity,
• 25:46
  Speaker 8: sovereign wealth funds, pension funds, foundations, and when you have
• 25:51
  Speaker 8: a lot of money chasing returns, it just it just
• 25:54
  Speaker 8: isn't a successful especially at this higher interest rate when
• 25:58
  Speaker 8: there are fewer exits.
• 25:59
  Speaker 5: What is the l model in terms of asset allocation?
• 26:02
  Speaker 5: And is it dead?
• 26:03
  Speaker 4: Now?
• 26:03
  Speaker 8: Well, you know, we had the head of a very
• 26:06
  Speaker 8: large pension fund say it's not dead. It's perhaps on
• 26:10
  Speaker 8: life support, but it's you know, it's it's it's looking
• 26:14
  Speaker 8: at inefficiencies in the market. Now, typically Yale has not
• 26:17
  Speaker 8: been a big investor in US equities, you know, tiny
• 26:22
  Speaker 8: share of you know, we don't know the details because
• 26:25
  Speaker 8: unfortunately they stopped publishing their asset elogition when David Swce
• 26:30
  Speaker 8: had died. You know, a huge loss for me personally
• 26:33
  Speaker 8: because it gave me some great insight. But they, you know,
• 26:37
  Speaker 8: typically had a very very tiny investment in US equities. Now,
• 26:41
  Speaker 8: look at the University of California eighty percent in global equities.
• 26:45
  Speaker 8: But you know who is who are they trying to emulate?
• 26:49
  Speaker 8: You know, some investor in Omaha who's been pretty successful,
• 26:54
  Speaker 8: you know, betting on America.
• 26:55
  Speaker 2: Just blind cheap index funds. I guess what's not immediately
• 26:58
  Speaker 2: obvious to people is that an dowmon is more of
• 27:00
  Speaker 2: a fund of funds rather than just a fund like
• 27:04
  Speaker 2: the Ucy fund, the Blue and golds On you were
• 27:05
  Speaker 2: talking about. That's almost like a very basic personal account
• 27:08
  Speaker 2: where you're just putting money into index funds and not
• 27:11
  Speaker 2: dealing with it.
• 27:12
  Speaker 5: For a long time exactly.
• 27:13
  Speaker 2: But Yale is like they're picking fund managers like it's
• 27:16
  Speaker 2: very very complex.
• 27:17
  Speaker 8: Well, it's actively managed. And Yale is very famous for
• 27:21
  Speaker 8: you know, having managers for ten or more years. They
• 27:24
  Speaker 8: did a story maybe ten years ago that talked about
• 27:26
  Speaker 8: the length of managers and it's often ten years. And
• 27:30
  Speaker 8: you know, Yale very smartly came up with a new
• 27:33
  Speaker 8: program they call it the Prospect Fellowship, and they're looking
• 27:36
  Speaker 8: for new talent. And we had a comment from a
• 27:39
  Speaker 8: former Princeton manager who talked about, you know, they look
• 27:43
  Speaker 8: for talent and they grow with them. So maybe a
• 27:45
  Speaker 8: small allocation to a manager today think hill House at Yale,
• 27:50
  Speaker 8: it turns when they're successful into you know, billion dollar
• 27:54
  Speaker 8: investments and especially when they've done well. You know, you
• 27:57
  Speaker 8: can grow with a successful manager, and then all of
• 28:00
  Speaker 8: a sudden, your allocations are much larger as you're growing
• 28:04
  Speaker 8: with them, and that's what they're seeking, So that's sort
• 28:06
  Speaker 8: of like a refresh for them.
• 28:08
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