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© Bloomberg

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Private equity: sell with the left hand, buy with the right

One of the oldest rules in the leveraged buyout book is that your investors want their money back after about a decade (ideally with some profit). 

It’s fundamental to the private equity model. Dealmakers say the time pressure requires the kind of talent and acumen that warrants hefty fees and carried interest payments — the lucrative 20 per cent profit share that goes to executives. 

But it can get you in a sticky spot. 

Say you buy a company in year two of 10 and do some major M&A with it in year four. By year seven you want out. By the beginning of year nine you start needing to get out. 

And by the end of year nine, well, that’s where BC Partners is now with Springer Nature, the world’s second-largest academic publisher by revenue valued at about €6bn. 

The buyout group first invested in 2013, from a 2011 fund. Springer Nature has called off plans to list three times in less than three years. But BC, which owns 47 per cent of the company, needs an exit route. 

So it’s turned to a new buyer. Wait for it . . . BC Partners.

© Financial Times

The private equity group is in talks to set up a new fund that it would control and invest in, alongside new external investors, existing solely to hold the Springer Nature stake. 

Catch up on all the details with this scoop from DD’s Kaye Wiggins and the FT’s Olaf Storbeck and Patricia Nilsson. 

It would be one of the largest examples of “continuation vehicles”, a private equity trend that essentially provides a place to shift companies when original investors want their money back. 

A classic case of this occurred last year when Bridgepoint sold Dorna Sports, which holds the exclusive rights to promote and manage the elite motorcycle racing series MotoGP, from one of its funds to another.

The pandemic, which makes it even more difficult to sell or list companies, has only furthered the strategy’s popularity.

© Reuters

Not everyone is happy. The point of a leveraged buyout fund “is to buy companies, spruce them up and sell them to third parties”, said Eamon Devlin, a lawyer at the asset management consultancy MJ Hudson.

For the pension funds that invest in private equity, he says, one thing can stick in the craw. If a buyout group makes a profit by selling a company to itself, its dealmakers can sometimes pay themselves — you guessed it — carried interest. 

Expense it: Ali Rashid’s wild ride at Apollo

A $10,049 flight to Brazil for New Year’s Eve, a trip to New Orleans for the Super Bowl and a bachelor weekend in Montreal.

Those are among the $290,000 in expenditures that Mohammed ‘Ali’ Rashid ended up paying back to his former employer, the private equity firm Apollo Global Management, after an internal investigation concluded that he had submitted “business” expenses claims for spending that was in fact personal.

The bogus expenses claims were initially reimbursed by Apollo’s outside investors, although all the money was returned, and the firm reported the affair to the Securities and Exchange Commission in 2013. 

But it’s back in the news because a federal judge has ordered Rashid to pay a $240,000 civil penalty after the SEC took him to court for securities law violations related to the claims.

G2320_20X A map showing an Apollo partner's intercontinental spending spree

DD readers will know that the private equity giant has had a difficult year in comparison to some of its Wall Street peers — brush up on the relationship between its founder and chairman Leon Black and the late paedophile Jeffrey Epstein with this deep-dive from DD’s Mark Vandevelde, Sujeet Indap and Kaye Wiggins.

The latest development in the Rashid saga doesn’t make things much easier for the buyout group, as Mark and Sujeet detail — a New York judge stated in September that the firm ought to bear some of the blame for presenting investors with the bill for Rashid’s extravagant spending spree.

Rashid left Apollo in 2014, and neither the firm nor any of its current employees were defendants in the SEC case. Apollo told the FT that it had “absolutely no tolerance for this type of unacceptable behaviour” and that the court’s ruling “was solely focused on a former employee’s liability for purposefully falsified business expenses through ‘a pattern of lies’ nearly 10 years ago”.

The evidence suggests that the $290,000 that Rashid paid back exceeds the amount he improperly received. Still, the latest ruling is bound to make uncomfortable reading.

“It appears that private-equity funds were billed regardless of the nature of the expense, in contradiction to the limited partnership agreements that governed the funds,” Judge Kevin Castel wrote, referring to vehicles managed by Apollo yet largely owned by institutional investors including many of America’s biggest public pension funds.

“Maybe there should be more defendants in this case,” he mused in court.

Nikola sponsors: the fast and the furious

There are two things you should never skip in finance — Due Diligence (the newsletter) and due diligence (the process). 

The latter has become a hot topic in the booming world of special purpose acquisition companies. The general perception is that private businesses that go public via a traditional initial public offering get more scrutiny than those that choose the quicker Spac route

It raises the question: how much due diligence do Spac sponsors and their advisers do on a potential target?

Trevor Milton © Reuters

With electric truck start-up Nikola, we’ll let DD readers make up their own minds. Nikola went public via a Spac in June with its founder Trevor Milton at the helm. On the face of it, he’s your typical eccentric chief executive with the ability to sell ice to an Eskimo. 

But beyond that, there were some other details about Milton that should’ve perhaps come to light — such as his previous business dealings — before his company went public. DD’s Ortenca Aliaj and the FT’s Claire Bushey and Peter Campbell have the details in this big read

Some investors appear to have been lax with their background research. One investor said Milton’s exuberance was a “yellow flag”, but the firm skipped due diligence and invested anyway while another said they were satisfied with the cache of other investors in the company. 

To be clear, Nikola shares are trading at just above $18. That’s a nice return on anyone who bought into the Spac at the usual $10 a share.

Nikola  annotated share price chart

That being said, the US Department of Justice and the Securities and Exchange Commission have launched separate investigations into the allegations swirling around the company.

Job moves

  • Ivan Glasenberg is stepping down as chief executive of miner and commodity trader Glencore. He will be succeeded by Gary Nagle, head of the company’s coal business. More here from the FT and Lex.

  • Julia Hoggett was appointed as chief executive of London Stock Exchange, a subsidiary of LSEG. She was previously director of market oversight at the UK’s Financial Conduct Authority. Separately, Deutsche Bank’s head of non-financial risk management Balbir Bakhshi will join as LSEG’s chief risk officer, reporting to CEO David Schwimmer.

  • CVC Credit Partners has hired John Empson as a partner and co-head of private credit, and Miguel Toney as a partner on the private credit team. Empson was previously head of European, Middle Eastern and African capital markets at BlackRock. Toney was a partner at Park Square Capital.

  • Allen & Overy has appointed Nick Marchica as a partner in its US private equity group based in New York. He joins from Baker McKenzie.

Smart reads 

Stuck in the past Disney has charged headfirst into the streaming wars with Disney Plus, its digital platform set to rival Netflix. But it’s unclear where some of the media empire’s television channels fit into its campaign for digital supremacy. (FT)

The life of Tony Hsieh The Zappos visionary that inspired millions of people as an insatiable entrepreneur, devoted his life trying to hack his way to happiness. Details surrounding his tragic death show it was also a life spent battling addiction and mental health issues. (Forbes)

In the red York Capital Management’s pullback from hedge funds is a cautionary tale underlining a struggle spanning the asset class as profits dwindle and clients stray to more systematic investment strategies. (Wall Street Journal)

News round-up

Universal Music buys Bob Dylan’s music catalogue in ‘9-figure deal’ (FT + Lex

Bill Foley-backed Spac agrees $9bn deal to buy Paysafe (FT) 

Moncler to buy Stone Island in deal that values rival at €1.15bn (FT)

Uber abandons effort to develop own self-driving vehicle (FT)

Wirecard fugitive Jan Marsalek took bank lending decision (FT)

Exxon under pressure from new activist fund (WSJ) 

Goldman plots Florida base for asset management in a blow to New York (Bloomberg) 

SocGen to shut 600 French branches and cut €450m in costs (FT + Lex)

Altice Europe $2.5bn buy out faces further challenge (FT)

Lance Uggla, a financial geek spinning data into gold (FT)

Due Diligence is written by Arash Massoudi, Kaye Wiggins and Robert Smith in London, Javier Espinoza in Brussels, James Fontanella-Khan, Ortenca Aliaj, Sujeet Indap, Eric Platt, Mark Vandevelde and Francesca Friday in New York and Miles Kruppa in San Francisco. Please send feedback to due.diligence@ft.com







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