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In today’s newsletter:
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Private equity’s tactics under investor scrutiny
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Warburg Pincus keeps it old school
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The wave of UBS/Credit Suisse lawsuits
Private equity’s financial engineering plays face scrutiny
Investors in private equity funds have been clamouring to get cash back from their portfolios, but the industry’s reliance on financial engineering to unearth this money is creating concern.
Limited partners are scrutinising the industry’s use of complex financial engineering, like margin loans and net asset value financings, to extract cash from their investments, DD’s Antoine Gara and Will Louch report.
These stop-gap solutions amid a slowdown in dealmaking are leading to worries that the industry has drifted too far away from simply improving companies.
The Institutional Limited Partners Association, an industry body representing private equity investors, was examining borrowing strategies and drafting detailed recommendations, said two people familiar with the details.
Advisers to large investors have also been checking contracts to assess whether they can stop firms from using net asset loans — secured against their asset portfolios — to return cash without their consent.
The FT has covered many of these tactics closely. Last year, DD’s Kaye Wiggins revealed collateralised fund obligations, which created a minor industry furore.
In July we reported on private equity firms’ use of NAV loans to finance cash distributions to investors. And last month came our latest chapter on how firms are pawning assets to raise cash to deleverage individual companies.
But wait, there’s more.
Private equity firms are also using margin loans to conjure cash. Many of the industry’s biggest names, including Blackstone, Apollo Global Management, Warburg Pincus and General Atlantic have taken out such loans in recent years, according to securities filings.
These loans come with big trade-offs. A firm will typically pledge all of its shares to a bank as collateral for a loan that usually amounts to 20 per cent of the total shareholding. The borrowing can improve an investment’s internal rate of return by realising profits more quickly, but is risky because a large share price fall can trigger a collateral call.
Blackstone has been a heavy user. It borrowed against all of its shares in Bumble to secure a $860mn loan from Citibank after the dating app’s 2021 initial public offering.
But a disclosure in March showed Blackstone had sold millions of Bumble shares and repaid some of the loan. Bumble’s stock has fallen more than 40 per cent since early March. The firm has also borrowed against shares in Alight, Gates Industrial and Viper Energy, filings show.
Apollo has also historically turned to the borrowings, pledging its shares in ADT, Rackspace, Hilton Grand Vacations, TD Synnex and OneMain Financial to secure loans, according to the filings. Blackstone and Apollo declined to comment.
Some consider all of this borrowing risky. “It is a real short-term opportunity, but the pain comes at the absolute worst time,” said one private equity executive.
Warburg Pincus bucks a poor fundraising market
A number of old-line private equity firms, including Warburg Pincus, are bucking a poor fundraising market.
The New York-based firm has just raised $17.3bn, the largest fund in its 57-year history, joining a handful of established players such as Clayton, Dubilier & Rice, GTCR, CVC Capital Partners and TA Associates that have beaten fundraising targets while others have struggled to raise money.
Warburg, unlike many competitors, resisted the urge over the past 15 years to drift far from its private equity roots.
While that has meant competitors like Blackstone have grown to more than 10 times its size by rapidly expanding to areas such as credit, Warburg has managed to avoid certain mishaps like overinvesting at nosebleed valuations in 2021 when markets were buoyant.
“We were very mindful of trying to lean against the incrementalism, momentum and relativism that creeps in,” chief executive Chip Kaye told the FT last year.
There are big changes under way inside the buyout group nonetheless, including some that nudge it towards diversifying beyond traditional private equity.
It is raising money for a so-called capital solutions fund that will focus on structured equity investments intended to benefit from rising interest rates. Last month, Warburg seeded a new insurance group called Prismic that will use it to manage a portfolio of private equity investments.
Warburg is also undergoing succession planning. Earlier this year it named Jeffrey Perlman as president, replacing Timothy Geithner, the former US Treasury secretary, who will be its chair.
Warburg plans for Perlman to eventually succeed Kaye and to promote a number of top dealmakers in the coming years.
Credit Suisse investors want their money back
Swiss politicians labelled UBS’s emergency rescue of Credit Suisse the “deal of the century”. But bondholders who lost billions of dollars in the process may have a different view.
Less than two months after the takeover helped UBS post the largest-ever quarterly profit for a bank, lawsuits are stacking up. More than $9bn in legal claims have been filed, largely by debt investors who lost out when Credit Suisse debt was marked down to zero to make the rescue more palatable for UBS.
Finma’s decision to wipe out $17bn worth of “additional tier 1 bonds” (AT1) — a form of bank debt that can be converted to equity or cancelled when lenders run into trouble — has made it a target for bondholders.
The Swiss regulator is also facing the wrath of another group: current and former Credit Suisse staff who received a bonus that was similar to AT1s and therefore lost hundreds of millions of dollars in the takeover.
Finma isn’t alone. The Swiss government itself, which brokered the deal and introduced an emergency law to make it happen, is also facing claims. Law firm Quinn Emanuel Urquhart & Sullivan, which has filed complaints in the Swiss court on behalf of 1,000 investors with more than $6bn of AT1 holdings, could take the unusual step of filing a lawsuit against Switzerland by the end of this year.
The third target is UBS itself. UK firm Pallas is close to initiating proceedings against the bank in Switzerland and groups of Credit Suisse equity investors are arguing in Zurich’s commercial court that they should be compensated by UBS for the bargain deal it negotiated.
That record-breaking quarterly profit UBS posted last month could be used against it in proceedings.
Job moves
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Moelis & Co has hired Moaath Alangari, the former vice-president of Saudi National Bank’s investment banking arm, as head of its Saudi Arabia business.
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TPG Growth has named Aaron Matto as a partner in San Francisco. He joins from technology-focused private equity firm True Wind Capital.
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EQT has hired Maarten de Jong and Mark Braganza to its private capital healthcare team, based in London. They join from Moelis and Sun European Partners, respectively.
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Investec has hired First Republic Bank’s Olivia Deroy for an origination and relationship management role on its new US private equity team, based in New York.
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Goldman Sachs has hired HSBC senior banker James Keller for a private debt role, Bloomberg reports.
Smart reads
War and crypto The Hamas militants behind the attack on Israel raised millions in cryptocurrency, highlighting how governments have struggled to cut off such groups from foreign funding, The Wall Street Journal reports.
Time to reflect Japan has been working hard to attract major financial players such as BlackRock, Blackstone and KKR. But the country should look inward to restore faith in its market, writes the FT’s Kana Inagaki.
Risk-takers wanted India’s burgeoning IPO market is dependent on foreign investors as domestic funds remain cautious about backing lossmaking young ventures, Nikkei Asia reports.
News round-up
Birkenstock valued at $8.6bn after pricing IPO in middle of range (FT)
SEC disclosure changes press activists to reveal big stakes faster (FT)
Ex-Patisserie Valerie finance chief and three others appear in court on fraud charges (FT)
Deloitte US staff paid bigger share of revenue after hiring battle (FT)
Investors flee hedge fund Pelham Capital after losses (FT)
Australia’s richest person raises stake in lithium producer, threatening $4.3bn takeover (FT)
Daily Mail publisher invests in fast-growing sport of padel (FT)
UK private equity groups sell assets to themselves as exit routes dwindle (FT)
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