Private equity’s new power play: the twice-leveraged buyout

One scoop to start: Goldman Sachs reported rival Wall Street bank Morgan Stanley to Hong Kong’s financial regulator over a series of block trades, according to people familiar with the matter.

Shadow banks for shadow banks

Until recently, one big paradox of the booming private equity industry was that dealmakers used copious amounts of leverage to buy large companies and earn big windfalls, even though they carried their own affairs on a virtually debt-free basis.

Known for ruthlessly squeezing corporate working capital accounts or priming balance sheets, buyout firms sat on idle cash. Did they secretly believe financial engineering to be a dangerous drug, best used only with other people’s money?

Now there’s an answer: Dealmakers were simply waiting for the cheap debt and structured financing to roll in.

Debt markets are now wide open to private equity firms and their own funds, much in the same way that leveraged buyout financing markets are on fire.

On Wednesday, DD’s Antoine Gara had the scoop on the newest form of debt available to private equity practitioners. London-based 17Capital has closed a $2.9bn private credit fund dedicated to lending money to private equity funds.

The Oaktree-owned firm will lend up to 20 per cent of a private equity fund’s net asset value on a senior secured basis, allowing the fund to finance additional acquisitions among its portfolio companies without calling new capital from limited partners.

For private equity fund investors, it’s a nice arbitrage. They can borrow at between 5 and 9 per cent to strike deals they expect to earn 15 per cent rates of return or greater.

This leverage also allows private equity groups to deploy 100 per cent of investors’ capital commitments without leaving any dry powder in case a good deal surfaces in the middle years of a fund.

“Leverage is extremely efficient if it is used properly,” Pierre-Antoine de Selancy, managing partner of 17Capital, told the FT. “If it is used properly, carefully and with good purpose, it is a really good thing.”

Private equity funds also have their own credit facilities, called “subscription lines”, which give them the ability to strike deals without immediately drawing capital from their limited partners.

Furthermore, buyout firms can now borrow against their management fee streams at rates as low as 2 per cent for a decade, the FT showed earlier this year, conjuring internal cash to invest into new funds. Firms expect the positive carry will yield large windfalls.

17Capital also lends money to directly to private equity firms themselves, instead of their funds, allowing them to raise as much as $200mn to be repaid as management and performance fees roll in. This cash is an alternative to selling a minority equity stake or going public.

DD has also heard debt financing is available to firms to pay distributions to investors while markets are closed to initial public offerings.

Meti: The officials who could make or break a monster deal

Japan’s powerful ministry of economy, trade and industry is facing a stark choice.

Over the next several weeks, it can either support or block the buyout of one of Japan’s most storied names, Toshiba, which is being pursued by overseas private equity groups in what could be the country’s biggest take-private deal.

Toshiba said this month it would set up a special committee to assess potential offers from private equity and other investors, with US group Bain Capital a likely bidder.

At stake is the ministry’s reputation for successfully shaping Japan’s industrial policy, which dates back to its role in driving the country’s transformation from postwar ruin into one of the world’s most powerful economies, the FT’s Tokyo team writes in this Big Read.

The decision is important for the ministry, known as Meti, because it could help it fortify its position within the Fumio Kishida administration.

The looming decision is likely to expose a rift within Meti between protectionists wary of selling out Japan Inc, and a strong contingent that wants the country to be more open to foreign investors. The protectionists have historically wielded the most influence.

Meti’s senior officials were last year accused of colluding with Toshiba to pressure foreign investors to shun activists in a pivotal vote on the company’s future, further complicating the situation.

Toshiba has lurched from crisis to crisis since it was caught in an accounting scandal in 2015.

In 2017 Meti scored a success when it forced through the $18bn sale of Toshiba’s prized memory chip business to a private equity consortium led by Bain Capital.

The move relieved worries that Japan’s most famous conglomerate could go bust and restored Meti’s reputation as a problem solver that could play a critical role in Japan’s industrial strategy.

To solve its many problems, Toshiba’s largest investors and a growing contingent of the company’s management increasingly believe the group must be taken private.

Meti has so far seemed to step back from the fray. But Toshiba does business in two areas that are critically important: nuclear power and semiconductors.

The question, say both Meti officials and Toshiba investors, is for how long the interventionist ministry will be able to resist intervening.

Just Eat Takeaway / Grubhub: A cautionary tale

As Just Eat Takeaway’s share price tumbled this month and activist pressure to shed assets mounted, its chief executive Jitse Groen checked into a five-star hotel in the Swiss Alps.

The Dutch billionaire had decamped to the resort of Arosa along with hundreds of employees for a corporate retreat and some spring skiing, despite the company’s share price chart itself resembling a ski slope, as the FT’s Bryce Elder points out.

Not invited to the all-expenses-paid fête were JET’s investors, including hedge funds Tiger Global and Baupost, as well as Cat Rock Capital, which holds a five per cent stake in the company and has been publicly lobbying Groen to sell or spin off its Grubhub division in the US since late last year.

Asked by the FT about the jamboree on Wednesday, Groen defended what he called a “very important event” for maintaining JET’s “strong company culture”. He also disputed a report by Bloomberg that the event cost $16mn, but refused to provide an alternative figure.

Nonetheless, Lucerne Capital Management announced last week that it would oppose the reappointment of the company’s chief financial officer Brent Wissink and the entirety of its six-person supervisory board to “send a clear message to the board” expressing its disappointment in the company’s financial performance.

Whether because of shareholder pressure or, as Groen insisted, simply responding to inbound interest, the company confirmed it would consider selling Grubhub after spending $7.3bn to acquire the US group less than two years ago. It has appointed advisers to run a formal sales process.

The Anglo-Dutch delivery group has been on a downward piste since its glory days in the height of the lockdown-driven food delivery boom. Its share price has fallen 70 per cent over the past year.

Groen, who founded Takeaway.com, sealed the multibillion-dollar deal with Grubhub just weeks after his merger with Just Eat was greenlit by UK regulators.

Just Eat has collaborated with Snoop Dogg on raps about getting tacos sent to his château and pizza served in a hot tub.

But while the California rapper may delight in such luxuries, most consumers are ordering less. Rivals such as DoorDash and UberEats have encroached upon its market share and margins have also shrunk, the FT’s Helen Thomas writes.

Fellow pandemic darling Netflix has also been hit hard, as the streaming service shed $54bn in market value on Wednesday following dismal quarterly results.

With the era of binge-watching and takeout fading, not even Snoop’s latest campaign to “get delivery like a G” seems to be luring customers back to their couches.

Job moves

• HSBC has appointed Geraldine Buckingham as an independent non-executive director. She was previously chair and head of BlackRock’s Asia-Pacific operations.

• Tim Tu, chief executive of Credit Suisse’s securities venture in China, has quit after less than two years on the job, per Bloomberg.

• EY has promoted Raj Sharma to vice-chair of Americas consulting.

• Tej Arora and Katherine Chan, both managing directors within Blackstone Alternative Asset Management’s special situations unit, have quit, per Bloomberg.

Smart reads

Out-of-network After a ski accident required being airlifted to the hospital, Kathleen Hoechlin was stuck with a $97,269 bill. Surprise charges like hers have become more common as private equity continues its dealmaking spree through the US healthcare sector, New York Magazine writes.

Putin’s payment system In the absence of Visa and Mastercard, the Kremlin has seized on the opportunity to bolster its own domestic payments system. The move could be a strategic win for Beijing, the FT reports.

Fraud-busters Accounting scandals and other dodgy activities have run rampant in the start-up world. A Hungarian fraud detection company has shaped its business model around just that, the FT’s Sifted writes.

News round-up

Bill Ackman sells entire Netflix stake at roughly $400mn loss (FT)

KKR-led group launches $15bn bid for Australia’s biggest hospital company (FT + Lex)

Credit Suisse warns of first-quarter loss as legal provisions balloon (FT)

Biden administration urged to ban UK lawyers who ‘enabled’ oligarchs (FT)

Abramovich associate says he doesn’t hold any of the oligarch’s assets (Wall Street Journal)

Muzmatch loses trademark battle with dating giant Match (FT)

Petershill: Goldman vehicle can close value gap with better disclosure (Lex)