"You're doing amazing, sweetie!"
Kim Kardashian is in her finance bro era
Good morning. As pumpkin spice-flavoured lattes, cereal, popcorn (and many other grocery staples that have no business being pumpkin spice flavoured), return, beware of the rumoured pumpkin spice tax.
A 2020 analysis discovered pumpkin spice flavoured items from popular retailers, including Whole Foods and Walmart, can be around 8.8% more expensive than their non-autumnal counterparts. At Starbucks, a pumpkin spice-themed drink cost 15.9% more than a non-pumpkin version. How's that for a pre-Halloween scare?
In this edition: 🚀 From reality TV to private equity 📈 Goldilocks goals
— Vindhya Kolluru, Editor
* Market data as of 9:00 pm ET Sunday, September 11.
Kim Kardashian swaps SKIMS for slacks
We can't not talk about Kim Kardashian's newly launched private equity (PE) fund. A mom-made celebrity, influencer, entrepreneur, lawyer, and now a PE fund founder: what can’t this woman do?
What happened: Last week, Kardashian announced via Twitter that she launched SKKY Partners with Jay Sammons, a former partner at PE giant Carlyle Group (yes, that Carlyle Group). SKYY Partners, according to Kardashian, will invest in companies in the consumer, hospitality, luxury, media, digital and e-commerce sectors — all of which are right up the KUWTK star's alley.
Wait, what even is PE? As its name suggests, PE describes all kinds of funds that pool money from investors—including endowments, ultra-rich people, and pension funds — to amass millions (or billions) of dollars that are then used to invest in promising private companies. PE firms, like SKKY Partners, are owned by their founders (in this case, Kardashian and Sammons) or a group of investors. It also means that while there are some exceptions, these firms aren’t public (or traded on the stock market).
PE is often confused with venture capital (VC). Technically, VC is a form of PE that typically provides financing to startups and earlier-stage businesses (versus mature, revenue-generating companies).
PE investors tend to gravitate toward struggling companies that have the potential for high growth. The most common PE deal type is a leveraged buyout, in which an investor buys a stake in a company using a significant amount of debt. In the meantime, the investor tries to make money by making the company more profitable and efficient. The goal is to eventually sell the company or offload it another way, but that rarely happens to be the case — more often, it leads to drastic cost-cutting measures that involve job losses.
Why it matters: With more than US$4.5 trillion in investments worldwide, PE is all around us—and not just where the headlines expose it, like in the battle Taylor Swift raged against Carlyle for her music rights or when 30,000 people lost their jobs at Toys R Us more than a decade after it was sold to a group of investors. To an extent, PE was involved in the demise of RadioShack, and is behind other well-known businesses like Burger King, Panera and heck, even your dental office.
So, if PE gets such a bad rap, what’s Kim doing? To be fair, we don’t know much about SKKY’s fund as it hasn’t started raising money just yet. What we do know is that even if a PE deal falls apart, Kardashian could still make some serious cash: If a deal goes south, PE firms still pocket 2% of the investment. And if the investment pans out, the PE firm could nab up to 20% of that.
SKKY will likely look to the American market, but that doesn’t mean PE does not have a place in 🇨🇦 (for better or worse). Recently, as interest rates have risen and capital is becoming harder to come by, we have started to see a slowdown in PE activity in the country. PE investments hit a record low in the first quarter of 2022 at $1.4 billion in Canada.
Zoom out: The Kardashian-Jenners aren’t the first celebs to get into PE. Ashton Kutcher, LeBron James and Serena Williams are a handful of A-listers that have founded their own PE firms. If the Kim Kardashian is getting involved, it could be a sign that PE is on track to become the 🔥 new investment class.
— Hannah Rosen
On our radar
Last week, Indigo founder Heather Reisman stepped down as CEO of the Canadian book retailer. Indigo president Peter Ruis took over as CEO, while Reisman will become executive chair.
Calgary-based The51 Ventures, which supports women-led businesses, appointed Danielle Gifford as the new executive director for Movement51 (M51). Established last year, M51 is a not-for-profit organization that addresses inequalities in financial education and entrepreneurship. Gifford, who previously held roles at AltaML and Creative Destruction Lab, will lead the next phase of growth at M51.
How do interest rates work—and what do rate hikes mean for your finances?
The 411 dishes, well, the 411 on a personal finance topic you need to know by cutting through the jargon and empowering you to take control of your finances. Have a topic you want us to tackle? Let us know!
Last week, the Bank of Canada (Boc) hiked its key interest rate by 75 basis points (finance-speak for 0.75%) to 3.25%. Here, we'll break down what that means for your wallet and how interest rates are set at your bank.
Let's get one thing out of the way: As you read headlines about the BoC's rate hikes, you may have noticed terms like "trendsetting interest rate," “key interest rate,” “policy interest rate,” "benchmark rate," or “overnight rate” being thrown around. They actually all mean the same thing — so use whatever term floats your boat.
What's the overnight rate? In short, the overnight rate is the interest rate at which big banks charge one another for loans. Banks or financial institutions are constantly moving money among themselves when you, for example, e-transfer your pal for your half of brunch and mimosas or use your debit card. To settle (or balance) the payments at the end of the day, banks can take out overnight loans from each other.
The interest rate at which the banks charge each other for these overnight loans is based on the target interest rate that the BoC sets. The BoC's desired range for the overnight rate is 2-3%. With every rate hike, the interest rate that banks pay each other goes up.
What does this mean for you? When the interest rate goes up, it becomes more expensive for banks to borrow from each other, which means that financial institutions have to somehow cover that added cost. As you may have guessed, that cost is then passed down to us through a higher prime rate, which is typically a few percentage points higher than the overnight rate. The current prime rate among major Canadian banks is 5.45%. (Prior to the pandemic, the prime rate was 3.95%). You might see this in the form of higher interest rates you pay for things like:
Variable loans, including a variable-rate mortgage
Lines of credit
Certain credit cards
Why does the BoC raise or lower the overnight rate? Raising interest rates is the BoC’s answer to stamping red-hot inflation, which sits currently sits at 7.6% in Canada. The hope is that as rates increase consumers will think twice before purchasing or borrowing. As personal finance expert Jessica Moorhouse told the Star, if the BoC is lowering the key interest rate, it wants you to spend. If the BoC, is raising the key interest rate, it wants you to spend less and save more.
The bottom line: On paper, it all looks simple...want to tame inflation? Hike the overnight rate! But IRL, it's much more complicated. There's a risk that the BoC could "overshoot" by raising interest rates too fast and too high, sending the economy into a recession. But doing the opposite, leaving inflation unchecked, is just as bad. What the BoC is aiming for is a 'soft-landing,' or a Goldilocks-esque situation where inflation returns to the central bank's 2% target without tipping us into a recession.
— Harsimran Garcha
Other things we read and we liked
🎥 This timely read on the changing cinema industry — and whether the Toronto International Film Festival can keep up.
😬 What could go wrong when you house two dozen young tech founders in a sprawling mansion? The answer, according to a Vox investigation into a social club and incubator called Launch House: a lot.
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