One thing to start: Welcome to the second to last edition of DD for this year. After tomorrow’s edition, you won’t hear from us again until Tuesday, January 12.
We’d love to hear your feedback on DD as we keep thinking of ways to expand this community. Drop us a line: Due.Diligence@ft.com. Thanks for reading!
The best of DD’s private capital coverage in 2020
In the halcyon days of February 2020, private equity was having fun.
There was fine dining, karaoke, and a private Usher concert at the industry’s SuperReturn conference in Berlin. Not to mention that €17.2bn mega-deal for Thyssenkrupp’s lifts business, one of largest leveraged buyouts in years.
But suddenly, everything changed. The coronavirus pandemic threatened to end a decade-long dealmaking boom, and highly-leveraged portfolio companies faced the bleakest economic outlook since the Great Depression.
Meanwhile, debt financing dried up, shares in Blackstone, Apollo, Carlyle and KKR tumbled, pre-crisis deals for Amex’s business travel unit and Victoria’s Secret were called off, and the hit to portfolio companies wiped out accrued carried interest on some funds, meaning executives would stand to receive minimal performance fees if investments were realised at current valuations.
Cinven, one of the Thyssenkrupp lifts unit buyers, struggled to sell down a stake it had bought at pre-crisis prices.
Raymond Svider, chairman of BC Partners, probably spoke for many when he told the FT in mid-March: “It feels like the world is falling apart.”
It didn’t take the industry long to get back to aggressive manoeuvring, though.
Silver Lake and Sixth Street Partners ploughed funds into hard-hit Airbnb, and KKR constructed a complex deal that won it the stake in cosmetics business Coty that it had been seeking for years. “Our active investment pace since the beginning of Covid has been quite intentional,” Joe Bae, co-president and co-chief operating officer of KKR, said in June.
For Silver Lake’s Egon Durban, it was a make-or-break moment, as he bet big on the recovery of some hard-hit companies.
Remarkably, in a year of shutdowns and a global recession, the value of private equity deals soared to its highest level since 2007.
Enormous government stimulus packages, and sweeping central bank crisis measures, meant that in dealmaking terms, the worst global pandemic since 1918 ended up being a mere blip.
The Federal Reserve’s historic decisions to cut interest rates to zero, and buy investment grade bonds and exchange traded funds that own riskier junk debt, gave companies a lifeline — and ensured private equity’s continued access to cheap debt for new deals.
Many could also access bailout loans — after a protracted and highly controversial but ultimately successful lobbying effort, in the case of the UK — and furlough funds for portfolio companies. The idea that deep-pocketed buyout groups should be bailed out raised serious public policy questions, as did the topic of carried interest, private equity’s lucrative tax break.
For groups such as Apollo, whose co-founder Marc Rowan had sought a hearing with the Trump administration for his ideas about how the US authorities should respond, policy responses made a huge difference.
The dealmaking recovery paved the way for aggressive moves by individual, private equity-backed chief executives.
Stephan Crétier, chief executive of BC Partners-backed security group GardaWorld, launched a hostile takeover bid for its far larger UK rival G4S.
In a similarly bold play, Mohsin and Zuber Issa, the brothers who run the TDR Capital-backed petrol stations business EG Group, made their most audacious acquisition yet: buying Asda from Walmart — days before Deloitte resigned as their auditor over governance concerns.
It wasn’t all smooth sailing, though. Apollo saw investors stepping back over its founder Leon Black’s links to the late paedophile Jeffrey Epstein, while Robert Smith, the founder of Vista Equity Partners, admitted to hiding $200m from the taxman offshore and evading some $43m in taxes from 2005 to 2014.
Meanwhile Blackstone’s Steve Schwarzman courted controversy by defending Donald Trump’s response to losing the election.
And Silver Lake and Thoma Bravo faced embarrassment when it was reported they had sold some of their shares in IT group SolarWinds to their longtime backer, the Canada Public Pension Plan Investment Board, just days before the US issued an emergency warning that a “nation-state” hacked one of its products.
As 2020 ends, the large listed buyout groups’ share prices have rebounded, and Blackstone and KKR are trading at all-time highs. Low interest rates have created such demand for higher-yielding debt that buyout groups are increasingly able to load companies they own with fresh loans and use the money to pay themselves dividends.
The industry’s seemingly unstoppable momentum was capped with the news that Goldman Sachs’ top investment banker, Gregg Lemkau, was leaving to help run part of billionaire Michael Dell’s massive investment office.
Of course, there’s no guarantee that the glut of 2020 deals will end up going well. But for now, the industry is back in bullish form.
’Twas a make-or-break year for hedge funds
For years hedge fund managers have mourned the disappearance of their old friend — volatility.
The former masters of the universe, dethroned as the kings of finance by private equity groups, promised they would start to outperform once volatility was reintroduced into the market.
Then in March, market volatility returned with a vengeance as the coronavirus pandemic engulfed the global economy. For some hedge funds, prayers had been answered. For others, it was more a case of “be careful what you wish for”.
The Covid crisis widened the gulf in performance between hedge fund managers to levels not seen in over a decade. Some companies made so much money that nostalgic allocators were reminded of the industry’s “golden age”.
Some of the highlights include Bill Ackman’s bet on corporate credit, which saw Pershing Square reap $2.6bn — one of the most successful trades of the year.
Then there was his now-infamous interview with CNBC, where Ackman warned that “hell is coming” while funnelling his winnings back into the stock market. He has emerged as one of the biggest success stories of this year and has a similar bet going now.
Meanwhile, some of the industry’s biggest names struggled to navigate the market chaos. Bridgewater Associates and Renaissance Technologies, both considered among the best hedge funds in the world, suffered steep losses.
As the markets staged a recovery, stockpickers and multi-strategy funds pared back some of their losses with performance numbers turning positive. An extra boost came in November with the announcement of a vaccine and the election of Joe Biden as US president.
As well as volatile markets, there were volatile tempers. Dan Kamensky, who messaged an unnamed Jefferies executive “DO NOT SEND IN A BID” while both groups were competing to buy out securities issued by the bankrupt retailer Neiman Marcus, closed his hedge fund and could now face prosecution.
Whether market volatility was a friend or foe this year, the hedge fund industry has once again found itself at the centre of the action.
White & Case has hired Clara Shirota as a partner in its global debt finance practice. She joins the Tokyo office from Clifford Chance, where she was counsel.
Interview: Sundar Pichai The Alphabet boss is engaged in an elaborate dance with internet watchdogs as an onslaught of antitrust litigation often supersedes his big plans for artificial intelligence. Sometimes, “regulation can get it wrong”, he tells the FT’s Richard Waters. (FT)
Forever the underdog It may be an ecommerce Goliath, but Amazon operates with the energy and bite of a scrappy start-up, squashing and undercutting its rivals at every opportunity. Refusal to acknowledge its power may just be its secret to success. (WSJ)
Shaking down Main Street Goldman Sachs has historically entangled itself with the financial plights of governments and large corporations. But a pandemic-fuelled string of defaults on loans by its retail lender, Marcus, has the investment bank bringing everyday Americans to court. (Bloomberg)
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 firstname.lastname@example.org
Get alerts on Mergers & Acquisitions when a new story is published