Oil Deals and Liquid Alternatives
Back before the oil crash, Royal Dutch Shell's stock price hit a one-year high of 2,453 pence in September; yesterday it closed at 2,094, down about 15 percent. BG Group got as high as 1,296.5 last May; yesterday it closed at 910.4, down about 30 percent. Now Shell has agreed to buy BG for 383 pence in cash and 0.4454 Shell shares per BG share, worth about 1,367 pence per BG share, and I guess a simple dumb lesson is that when all the oil and gas stocks crash, the companies that crashed less have a valuable currency with which to pick up the companies that crashed more.
Shell/BG will be a liquefied natural gas behemoth, and Shell chief executive officer Ben van Beurden promises a "focused, streamlined company" that "will be able to manage capital discipline with much higher precision." Shell expects $30 billion of non-core divestitures over the next few years. In the long run you might think that that stuff would be bad for the prices of marginal oil and gas assets, but the mood now seems cheery, as people expect this deal to kick off a new wave of energy deal-making. I've never quite understood the model here, in which people sit around not doing deals, and then one company does a deal, and then everyone realizes "hey we can do deals too" and they do, but I guess it works well enough.
Elsewhere in M&A.
Yesterday Berkshire Hathaway agreed to pay $560 million for 8.7 percent of Axalta Coating Systems, a public company currently majority-owned by The Carlyle Group. Berkshire is buying its shares from Carlyle, not the company, at $28 a share, the same price that Carlyle got in a public secondary offering just last week. The way public stock offerings normally work is that the selling shareholders agree not to sell any more stock for a while -- here, 90 days -- because investors who buy in the offering don't want to see the market flooded with additional shares. But the underwriters on the deal have the power to waive the lockup for good reason, and I guess "Warren Buffett wants some shares" is a good reason. (Berkshire agreed not to sell its shares for 90 days, which I guess also soothed the underwriters.) Shareholders seem to have agreed; the stock was up almost 10 percent yesterday.
And then there's the FedEx's deal to buy TNT Express for 4.4 billion euros ($4.8 billion); one popular view seems to be that the euro's decline has made TNT (and European companies generally) cheap for FedEx (and U.S. buyers generally), giving U.S. buyers an advantage in buying European companies. (Though here is an argument that TNT is still no bargain.) I am old enough to remember when we were all talking about how foreign companies had an advantage in buying U.S. companies because of their more favorable tax treatment. (It was last month.)
Oh and Twitter's stock was up due to "unsubstantiated chatter" about how it hired advisers to fight a possible hostile takeover bid. Twitter is a little unusual for a modern Internet company in that it has a single class of stock that is not majority-owned by its founders, so a hostile takeover is a theoretical possibility, though I would not personally hold my breath for one. A hostile takeover fight for Twitter conducted on Twitter would be pretty fun though.
Some asset management.
Here is a profile of Fidelity Investments chief executive officer Abigail Johnson and her existential crisis, which is that Fidelity is where you go for actively managed stock mutual funds, and nobody goes anywhere for actively managed stock mutual funds any more. "Ms. Johnson believes investors’ push into passive funds is a temporary trend and will reverse when performance improves," which is basically a respectable opinion -- investors chase after the latest hot investing style as much as they chase after the latest hot asset class -- but still sounds strange to me. I'm with this guy, even though he's talking his book:
“I can’t come up with a scenario that says active funds are going to get a disproportionate share [of investor money] again,” said Todd Rosenbluth, director of mutual-fund and ETF research at S&P Capital IQ.
But on the other hand there is this story about David Bonderman's family office slipping the surly bonds of being a family office to start a public liquid alternatives business, because for some reason liquid alts are "one of the fastest-growing areas for money managers" even as index funds are taking market share from regular actively managed funds. The lesson is that people want either a ton of management, or none at all. Here is a nice transition (James Velissaris is the chief investment officer):
“We think the hedge fund industry is undergoing a significant change due to a high fee structure and several years of underperformance,” Velissaris said.
Infinity Q’s Diversified Alpha Fund has an upfront sales charge of as much as 5 percent and an annual expense of 1.99 percent for its Class A shares, which require a $1,000 minimum investment. The fund has gained 1.7 percent this year as of April 2, trailing 63 percent of peers, according to data compiled by Bloomberg.
I see. Elsewhere in family office news, Steve Cohen's Point72 is hiring even more people to provide nonbinding "recommendations to Mr. Cohen on management, ethics, compliance and technology issues." Point72's governing philosophy seems to be that they'll keep hiring vague floaty compliance figureheads until everyone forgets all the insider trading, which I guess creates incentives for me to keep bringing it up until they hire me? I feel like I could totally float around Point72 being like "hey guys, we're not insider trading today, are we?" for a few million dollars a year.
Elsewhere, Bridgewater had a nice first quarter, the former head of foreign exchange at Citi has delayed the launch of his macro hedge fund ("Silver Ridge Asset Management," try to be more of a hedge-fund stereotype than that!) because of the Financial Conduct Authority's foreign-exchange investigation, and OneRepublic will headline the SALT conference.
I feel like people have left big banks and asset managers to start their own banks and asset managers for as long as there have been banks and asset managers, but now that Silicon Valley is famously For Entrepreneurs and Wall Street is famously Not, there's more angst about those moves. Here is a fun story about people leaving big firms to start little firms; one such person is "getting reacquainted with the New York City subway," while another "confessed to missing his old firm’s in-house shoeshine service." (Same, actually.) And then there is the saga of Milton Berlinski, a former financial institutions and sponsors banker at Goldman Sachs:
The 58-year-old worked on one of his first deals after Goldman out of his home on Manhattan’s Upper East Side. He then moved to a conference room in the midtown offices of law firm Wachtell Lipton Rosen & Katz LLP, where he and two partners launched Reverence Capital Partners, a private-equity firm focused on financial-sector investments. He later moved to the office of Avenue Capital, the New York hedge-fund firm run by Marc Lasry, a Reverence investor.
(Disclosure: I worked at Goldman and Wachtell.) I like the idea that Wall Street startups, like Silicon Valley ones, have incubators and shared work spaces and so forth. It's just that Wall Street's incubators are law firms, and their shared workspaces are full of 58-year-olds in suits.
Well, an alleged Ponzi. The Securities and Exchange Commission brought a case against former Giants and Dolphins cornerback Will Allen for allegedly running a Ponzi scheme, Capital Financial, whose cover story was that it basically did high-end payday lending, lending money to professional athletes at outrageous interest rates until they got paid money guaranteed to them under their contracts. The SEC complaint says that "the stated interest rate on the loans ranges from 9% to 18%," and "Because some loans are for only a few months, the annualized interest rate can exceed 100% in some cases." Apparently Capital Financial actually did make a lot of these loans; it's just that, according to the SEC, it made fewer than it claimed, and Ponzied it up with the rest of its investors' money, using some to pay back other investors and some for its managers' personal use.
So I mean first things first, if you are guaranteed millions of dollars in a few months, maybe just hold off on buying the Ferrari for a bit? Or, like, can't you get a mortgage? I get that there are people without access to traditional banking who rely on payday lending, but why are some of them millionaire professional athletes?
Second, this is a good reminder that the more generic the name of the thing you're investing in, the more suspicious you should be. Would you give your money to "Capital Financial"? I might -- Capital Group, no relation, is a giant investment manager -- but I'd want to check it out a bit first.
Third: Why are so many Ponzis like this, where the underlying activity is itself high-risk and sort of shady? I guess the answer is along the lines of "you can't fool an honest man": The people who want to invest in high-interest payday loans to pro athletes are the people most likely to give their money to a Ponzi scheme. Still, I've said before that my dream Ponzi would be fake S&P 500 index fund. It just has more mass appeal, no?
The repo market is shifting to shadow banks. Greek banks are funding themselves with short-term debt and regulatory arbitrage. JPMorgan Algorithm Knows You’re a Rogue Employee Before You Do. U.S. companies are selling debt in Europe for lower nominal interest rates (previously). Big companies are demanding better payment terms. Buybacks Are Not Just an Accounting Trick. China tech companies trade at a 220 P/E. Dan McCrum on the arbitrariness of pyramid-scheme laws. FXCM executives have shiny new golden parachutes after the, y'know, unpleasantness. Happy 10th birthday, Pegu Club. Don't have unusual job titles. Don't check e-mail after work. No, totally.
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