Investments in joint ventures (JVs) are often reported in a way that may not fully reflect a company’s financial exposure from shareholder loans, guarantees, and other commitments, such as leases. A study encompassing 50 companies revealed a total exposure of $612 billion from JVs, significantly higher than the $351 billion in reported investments. Analysts are urged to evaluate the full scope of obligations and the financial capacity of partners to meet their commitments.
JVs play a critical role in the industrial economy, with more than 75% of copper and nearly 66% of lithium production generated from such arrangements. In the oil and gas sector, major companies like Shell, ExxonMobil, and Chevron report that about half of their output comes from JVs they do not directly manage. The trend is not limited to natural resources; over half of new AI-infrastructure partnerships and most new battery plants are formed as JVs. This surge, nearly 550% since 2020, was driven by high costs, risk-sharing, and a decade of low-interest rates.
However, rising interest rates are impacting the debt associated with these structures, adding pressure particularly on weaker partners. As a result, the challenges faced by these entities signify the first significant stress test since the years of easy funding. Portfolio managers and analysts are encouraged to delve beyond the reported investments in JVs, recognizing that the apparent reduction in leverage and improved return on capital can mask actual economic exposure tied to loans and guarantees—critical factors that determine financial risk amidst unstable conditions.
Why this story matters
- The financial stability of JVs is crucial for the industrial economy, affecting production in key sectors.
Key takeaway
- Analysts must look beyond reported figures to understand true financial exposure from joint ventures.
Opposing viewpoint
- Some may argue that JV partnerships provide necessary diversification and risk-sharing that enhances financial stability.
