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One scoop to start: Elliott Management, the US hedge fund founded by billionaire Paul Singer, is closing its Hong Kong office, the FT’s Leo Lewis and Tabby Kinder report. It’s one of the first large financial institutions to shutter operations in the territory since it entered a period of civil unrest and political tension in 2019.

Paul Singer, founder and president of Elliott Management © Bloomberg

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Private equity’s best client: itself

We’ve written before about a private equity trend that’s taken off amid the coronavirus pandemic: complex financial structures that allow buyout groups to sell their portfolio companies, essentially, to themselves. 

It works by creating a new fund, controlled by the same private equity group, which raises money from specialist investors and then buys the company or group of companies from the old fund. (If you missed it over the holiday, read this deep-dive from DD’s Kaye Wiggins.)

Hellman & Friedman’s latest such deal is an example of how lucrative they can be. Just before the holidays, it sold Verisure, a Swedish alarms company, from its seventh fund to a group of its other funds including its $16.5bn Fund IX.

Column chart of $bn showing Total value of continuation fund deals*

In the process, Verisure’s owners — H&F’s funds, as well as GIC and the Spanish investment group Alba — will take out a more than €1.6bn dividend. The cut will be one of Europe’s biggest “dividend recapitalisations”, in which companies take on more debt to hand money to their shareholders. 

The idea is to give a discount on buying the company’s shares to H&F’s ninth fund and the specialist investors buying into the deal. 

“It’s enormous,” said one bond fund manager. “The owners have been quite transparent that they’re going to take all the dividends they can get.” 

It shows private equity capitalising on two facets of the low interest rate world. First off, there’s a willingness from Europe’s debt investors — who are searching for higher-yielding assets — to fund the dividends. Secondly, there’s a flood of capital from pension funds into specialist investment groups that finance so-called continuation fund deals, in which private equity groups sell to their own funds. 

After the latest dividend, Verisure will have paid out at least €3bn to its owners since 2015. 

But investors in H&F’s older fund are hardly losing out in the sale to its new funds. The transfer values the company at a hefty €14bn, or 14.5 times its favoured heavily-adjusted earnings figure of €968m. That’s a big jump from its $5.3bn valuation in 2015 when H&F took a majority stake — and likely translates into a sizeable return. 

The conundrum of how to keep both sides of a transaction happy becomes a lot easier when you’re selling to yourself. 

Read the full story by the FT’s Nikou Asgari and DD’s Rob Smith and Kaye Wiggins here

MGM: the house doesn’t always win

The current state of the US sports betting market is the stuff of dealmaking dreams: easing regulations, fast-growing online platforms and more states eager to get in on the action in the name of fresh tax revenues.

But one of the country’s biggest players, MGM, is struggling to deepen its footprint.

The US casino group remains locked in an exclusive joint venture with UK gambling group Entain after finally admitting defeat in its attempt to combine the two companies.

© Bloomberg

The cards were stacked against MGM ahead of the £8bn bid’s failure, as Barry Diller, the billionaire chairman of its largest shareholder IAC, aptly predicted.

For one, MGM’s offer fell significantly below Entain’s expectations, sources told the FT’s Alice Hancock and DD’s Arash Massoudi, as a combination of the US sports betting boom and expectations of further industry consolidation sent the UK group’s shares up sharply in recent months.

Then there was the unexpected departure of Entain’s chief Shay Segev, who earlier this month announced his plans to jump ship for sports streaming platform DAZN while talks were still under way.

“His departure threw everything up,” a person close to the negotiations.

Bill Hornbuckle took over as acting chief executive at MGM just as the pandemic hit © Brandon Magnus/Getty

Just weeks ago, MGM’s chief Bill Hornbuckle was betting on sealing the deal with Entain as a way into the ring with sports betting heavyweights like Flutter and Spac poster child DraftKings.

MGM ought to be “taken out and shot” if it didn’t manage to cinch a leading position in the red hot market given “all the opportunities” it had, Diller told the FT earlier this month.

It turns out Hornbuckle may have jumped the gun. Now he has to go away for six months under UK takeover rules. But we imagine we’ll be hearing about this deal again in the second half of the year. 

David Solomon speaks for the Spac sceptics 

When someone who worked for Michael Milken questions whether things have “gone too far”, it might be time to listen. 

Goldman Sachs chief executive David Solomon has thrown cold water on the blank-cheque vehicle boom, calling the pace of listings unsustainable. 

If anyone is keeping track, special purpose acquisition companies have raised $15bn so far this year. Though we’d like to think otherwise, we’re just three weeks into January and Spacs have already raised a fifth of the $78bn the vehicles accumulated last year.

David Solomon says he believes the incentive structure for special purpose acquisition companies is ‘still evolving’ © Kyle Grillot/Bloomberg

Solomon said what a lot of people are thinking — there will be some sort of event that will bring the level of activity down. 

For example, a clog in the PIPEs (short for private investment in public equity) would likely bring Spac dealmaking, which relies heavily on these investments, to a standstill. 

The other challenge is competition for good companies. With more Spacs on the hunt, there are fewer targets, at least good ones, to take public.

Column chart of Proceeds from special purpose acquisition company IPOs, by year ($bn) showing IPOs of shell companies ballooned in 2020

Solomon touched on this during Goldman’s quarterly call with analysts. He drew a distinction between companies that go public through Spacs by choice and those that don’t have other alternatives. 

“Those are things that the market will have to wrestle with,” he said. 

Solomon’s concerns about the Spacs haven’t kept Goldman out of the game. It advised on 30 blank cheque initial public offerings last year that raised $7.7bn and the bank has two Spacs of its own. 

Job moves 

  • Simon Wolfson, the chief executive of fashion chain Next, joined the board of Deliveroo as a non-executive director as the food delivery app gears up for an expected IPO. More here.

  • Fraud investigator Martin Stapleton has departed UK hedge fund Gladstone, where he was one of six partners at the group. His future plans are unclear. More here.

  • Linklaters promoted Madrid-based partner Ben Crosse and London-based senior banking partner Philip Spittal to global co-heads of banking for a four-year term, succeeding Davide Mencacci.

  • Cooley has hired Sean Murphy as a partner in its global fund formation practice based in Singapore. Murphy arrives from Shearman & Sterling, where he was a member of its Asia asset management and investment funds practice.

Smart reads

MAGA merch While social media groups like Twitter and Facebook have moved to ban Donald Trump on grounds of inciting violence, similar battle lines are being drawn in the world of ecommerce, as sites including Shopify, Amazon and Etsy try to curb sellers of “MAGA Civil War” T-shirts and other wares of the far-right. (NYT)

Family feud An ongoing rift has deepened within Singapore’s wealthiest dynasty as the heir to the city-state’s richest family scrambles to salvage a Chinese property deal amid a series of board departures. (Bloomberg)

Put it all on credit From Pelotons to a pair of sneakers, nearly everything online can be bought now and paid for later thanks to the onslaught of interest-free lending start-ups like Klarna, Afterpay and Affirm. But are they too good to be true? (The Atlantic)

News round-up

Office Depot rejects $2.1bn takeover bid from rival Staples (FT)

Outgoing US trade chief says leading WTO candidate lacks experience (FT)

Microsoft invests in $30bn driverless car company Cruise (FT)

LME plans to permanently close historic ‘Ring’ metals trading floor (FT)

Hedge fund industry assets surge to record $3.6tn (FT) 

Occidental claims green push ‘does more than Tesla’ (FT)

Chinese investors pull more than $3bn from funds that missed out on Ant IPO (WSJ) 

Glencore sells Zambia copper unit to state in $1.5bn deal (FT)

Moonpig confirms London IPO with £1.2bn valuation target (FT)

Birkenstock: foot long (Lex)

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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