The Humm-Latitude saga is much bigger than simply that a deal...

The Humm-Latitude saga is much bigger than simply that a deal fell over.The $900m Latitude post float paper loss by US giant KKR is another signal that global private equity mistakes are starting to bite. Australian superannuation funds that made recent private equity investments are vulnerable.And even more significantly, global sharemarkets are clearly worried about the future fortunes of both banks and non banks and, as shown by the collapse of both Latitude and Humm shares, the market has extra concern about non-banks.The dangers are now out in the open with Federal Reserve Chairman Jerome Powell admitting that the interest rate increases required to tame inflation could trigger a US recession.American inflation and expected Australian inflation are at similar levels so the US sentiments apply to Australia and our Reserve Bank. An error has occurred. Please try again later. This has been an underlying fear in New York for sometime. So, when Humm founder and major shareholder, Andrew Abercrombie, pressed Latitude’s 63 per cent main shareholder, KKR, for a higher price to take into account potential index-related buying of Latitude shares because of higher capitalisation, KKR said “no!”.KKR floated Latitude in March last year but, unlike most private equity deals, it remained a 63 per cent shareholder. The shares have fallen from the float price of $2.60 to a sickening $1.24 after the Humm deal fell over.And it is not the only KKR global disaster so in New York trading, its shares have fallen around 45 per cent from their November peak. Its rival Blackstone has also fallen sharply. To the extent that Australian superannuation funds have invested in private equity via listed shares like KKR and Blackstone, valuation is easy.But where investments have been made via non-listed private equity there is now a clear risk of over valuation. The Humm-Latitude saga is an alert to APRA that global private equity is now under pressure to perform in a very different environment.There will be casualties.It is ironic that one of the signals of the new environment now facing many non-bank lenders, particularly those operating in the buy-now-pay-later sector, was the statement earlier this month by Humm directors urging shareholders to support the sale of their consumer operation to Latitude in exchange for Latitude shares and cash.After announcing an unexpected loss in the Humm consumer operation in the four months to April 30, directors said that after pay, which had been the focus of the Humm consumer group’s growth plans, was “intensely competitive with margins declining across the industry.....and the negative effects of this competitive environment on profitability are likely to be amplified by increasingly challenging economic conditions.”That statement not only increased the rate of decline in Latitude shares but enraged Andrew Abercrombie.The Latitude share decline shows the market is worried about its dividend. Last year Latitude paid a fully franked dividend of 15.7 cents a share so at $1.24 theoretically it is yielding more than 12.5 per cent plus franking credits. Rightly or wrongly the market does not expect Latitude to hold its dividend in the current environment.But difficult economic circumstances are not new to Latitude’s chairman Mike Tilley and CEO Ahmed Fahour and they may even be relieved not to be managing a major acquisition at the same time as a downturn.The origins of Humm date back to the 1990s when the Abercrombie family inherited a two per cent interest in a tiny NSW leasing company that was about to go into liquidation at the petition of Westpac.Andrew Abercrombie convinced Westpac that he had a business plan that would return their money. Unusually Westpac agreed to give the troubled minnow a chance. Abercrombie then secured a financing deal to enable Optus to offer mobile phones on instalments. It boomed and Telstra was forced to respond.The Optus deal led to the development of the Humm consumer business that now embraces major funding of Harvey Norman, Fight centre and other corporate financing offers to consumers. And the original leasing business has also boomed.Humm was perfectly placed some years ago to be an early participant in the buy now pay later boom. But Abercrombie was suspicious because he believed the costs of collecting small debts would eventually make the business uneconomic.In the end Humm joined the rush, but the current problems have created an “I told you so” situation. When Abercrombie early this month increased his shareholding from 22 to 23 per cent of Humm, the writing was on the wall that the Latitude deal was over.Now, with his money on the line, Abercrombie has the responsibility to show that he can make the Humm consumer business worth more than Latitude was prepared to pay. It will be fascinating to see what happens to Humm CEO Rebecca James who was given the task of running the proposed combined Latitude-Humm consumer business – an unusual aspect of the proposed and ill-fated deal.Rea