Hedge funds crash the Silicon Valley party

admin 10 September 2021 Technology & Digitalization 0

First, a dispatch from the Elizabeth Holmes trial:

On Wednesday I made the trek down the San Francisco peninsula to a federal courthouse in San Jose. The main attraction: Holmes, the Theranos founder who is now on trial for allegedly defrauding investors and patients by lying about the company’s blood-testing technology and finances.

The trial’s opening arguments drew a crowd of journalists, attorneys and interested observers, including three women dressed in all-black outfits, an apparent homage to Holmes’s trademark style. Both sides presented spirited arguments, but one of the greatest revelations of the day came from the defence’s first witness: a former Theranos controller who testified that KPMG, its outside auditor, declined to provide an opinion on the company’s financials for six straight years.

I’ll be following the trial closely, so stay tuned for further dispatches. — Miles Kruppa, FT venture capital correspondent

Elizabeth Holmes has arrived at the courthouse and is surrounded by cameras. Three of her fans try to catch a glimpse without losing their spot in line. pic.twitter.com/O5AbR4XTJw

— Dorothy Atkins (@doratki) September 8, 2021

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Hedge funds’ private eye

For hedge funds competing with venture capital and private equity, it’s increasingly becoming a case of “if you can’t beat ’em, join ’em”.

A new wave of investors led by the likes of Tiger Global Management, Coatue Management and Altimeter Capital Management are elbowing their way into Silicon Valley at an unprecedented pace, with a record-smashing $153bn worth of investments in private companies by hedge funds in the first six months of 2021.

Data from Goldman Sachs Prime Services highlight how hedge funds, typically known for investments in publicly traded assets, have been drawn to private markets in an effort to fire up largely lacklustre returns.

Hedge funds make more investments in private companies

It also shows how private equity and venture capital have exploded in popularity over the past decade, particularly within the past three years. The asset class has soared to more than $7tn in value and is expected to double again by 2025, while the number of US public companies has roughly halved since 1996.

All in all, it’s resulting in increasingly blurry lines between different asset classes, said Diana Dieckman, Goldman’s global head of capital introduction in prime services.

The biggest players such as Tiger Global and Coatue have raised billions of dollars for dedicated venture capital and private equity funds — separate from their traditional, evergreen hedge funds — helping to fuel the steep increase in dealmaking this year. Tiger Global is now attempting to raise a record $10bn fund for venture-style investments.

Chase Coleman, the founder of Tiger Global, has made huge bets on technology start-ups © FT Montage; Bloomberg

It’s worth noting that only a relatively small set of hedge funds are responsible for these private investments, with 75 per cent of the capital invested by just 10 firms.

Competition is also an issue. Roughly three out of every four private deals done by hedge funds are in early-stage companies, and there’s a record amount of private capital looking to invest in start-ups.

In Silicon Valley, where venture capitalists have marked their turf, hedge funds’ two-pronged pitch to companies is this: they can hold their shares well beyond a public listing, a point at which many VCs drop off, and coach executives on the ins and outs of being a public entity, according to Goldman.

Based on the sheer amount of capital flooding into an industry that has been culled over the past decade, that pitch appears to be working.

EasyJet leaves Wizz Air on the tarmac. Where to next?

While the Covid-19 crisis sent most of the aviation industry into a tailspin, the Hungarian low-cost carrier Wizz Air used its ultra-low-cost model to aggressively expand in western Europe.

Guided by the dangling carrot of a £100m reward if he can double its share price over five years, Wizz’s chief Jozsef Varadi has been on a breakneck tour to rival Ryanair’s Michael O’Leary as king of the budget-friendly skies.

But Váradi’s latest efforts turned fruitless this week, the FT’s Philip Georgiadis and Oliver Ralph report, when UK rival easyJet revealed it had rejected a takeover bid from an unnamed suitor, which was later revealed to be the Budapest-based airline.

As easyJet’s chief Johan Lundgren put it to the FT: “From an M&A transaction point of view, we’re not against that but it has to deliver value for the shareholders. And this wasn’t even close to this.”

Despite its firm rejection of Wizz’s proposed takeover, the Luton-based carrier hasn’t ruled out the prospect of M&A altogether. EasyJet’s leadership has signalled it could become a target or an acquirer in a future deal, said another person familiar with the situation.

EasyJet, still reeling from the pandemic, expects to fly less than two-thirds of its normal flight schedule for the rest of the year © Bloomberg

The group also announced plans on Thursday to raise £1.2bn in a rights issue to help quell its money problems after losing more than £2bn during the pandemic.

Yet the rights issue is priced at 410p a share — an inconvenient 36 per cent discount from the airline’s closing share price on Wednesday and a sore deal for shareholders.

Shareholders caught between a rock and a hard place are undoubtedly hoping easyJet’s newly installed chair and turnround specialist, City veteran Stephen Hester, has some tricks up his sleeve to steer them out of the red.

888/William Hill: fourth (or fifth?) time’s the charm

It takes a gambler to go beyond the “third time lucky” rule.

The online gambling group 888 has held deal talks with the UK bookmaker William Hill “three or four times”, according to 888 chief executive Itai Pazner, but it finally hit the jackpot this time around with a £2.2bn reverse takeover of its sports betting rival, the FT’s Alice Hancock reports.

London-listed 888 announced on Thursday that it would buy William Hill’s non-US assets including businesses in the UK, Europe and an embryonic presence in Latin America using debt financing and a £500m equity raise. The deal comes after the US casino giant Caesars Entertainment snapped up William Hill for £2.9bn last year.

Caesars said at the time of that deal that it would sell William Hill’s non-US business as soon as the transaction completed.

888 fended off rival bids from the buyout group CVC Capital Partners, a previous owner of William Hill, and Apollo Global Management. Caesars had threatened to cut its joint venture in the US with the UK bookmaker if Apollo won the deal.

For digital-only 888, the acquisition brings with it an 87-year-old brand well-loved by British bettors and 1,400 UK betting shops at a time when the high street is making a slow recovery from the pandemic.

The sports betting market has grown rapidly in the US following a Supreme Court ruling two years ago that overturned a ban on the practice, paving the way for lucrative deals across the gambling industry © FT Montage

Pazner insisted that 888 had no intention of selling the shops. They’re part of the “attractiveness” of William Hill, he said, and a way to cross-sell between retail and online.

For Caesars, offloading William Hill’s non-US assets for £2.2bn makes its acquisition of the American business look like a steal. By the metrics of the 888 deal, it paid £700m for the US part of the company.

If you take valuation multiples for DraftKings — a rival betting brand in the fast-growing US market — and William Hill US’s 2019 revenues, the bookmaker’s American assets could be worth at least four times that.

Job moves

KKR has appointed Kerryann Benjamin as its chief diversity officer and head of talent management. She was most recently head of human capital management for Goldman Sachs’ consumer and wealth management business.
Blackstone has named three new senior leaders within its private credit unit.
Samir Desai, the founding chief executive of the UK business lender Funding Circle, will step down at the end of the year.
Centerview Partners has hired three senior bankers from BofA Securities (formerly named Bank of America Merrill Lynch) as partners, based in Palo Alto: Jack MacDonald, Gary Kirkham and Steve Miller.
Ropes & Gray has recruited Kate Withers as a partner in its global private equity practice. She joins the firm’s New York office from Latham & Watkins.

Smart reads

Closed for business The Saudi banker Ali Shihabi moved to the US to advocate for the kingdom among the Washington elite. But his foundation mysteriously folded following the murder of the journalist Jamal Khashoggi, in which he defended Crown Prince Mohammed bin Salman, among other controversies. (Business Insider)

CEOs, unfiltered From Richard Branson’s dispatches from space to Elon Musk’s unfettered tweets, chief executives’ impromptu statements offer more insight into what goes on behind closed doors than their press offices would prefer. (FT)

Sinking ship Last year three cryptocurrency enthusiasts purchased a cruise liner on the cheap in a quest to build a sailing libertarian utopia free from taxes, regulators and mainstream society. It didn’t go as planned. (The Guardian)