Can a private equity firm cut ties with its biggest investor?

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In today’s newsletter:

• LetterOne’s feud with Pamplona

• Brookfield doubles down on commercial property

• The Church of England dabbles in bonds

Pamplona’s predicament 

Ask a private equity firm to hand back more than 90 per cent of its investors’ capital, and its dealmakers would probably scratch their heads over whether that’s even possible.

But that seems to be what buyout group Pamplona Capital Management is trying to do.

LetterOne, the UK-based investment group that counts sanctioned Russian oligarchs Mikhail Fridman, Petr Aven and German Khan among its top shareholders, accounts for more than 90 per cent of the money in Pamplona’s funds, LetterOne told DD’s Kaye Wiggins and the FT’s Daniel Thomas.

After Russia invaded Ukraine, Pamplona said it would hand back LetterOne’s money, moving to a position where it would have “no direct or indirect exposure to any Russian capital”. 

There are at least a couple of ways of bringing that about, in theory.

You could sell LetterOne’s stakes to other investors. Or you could sell Pamplona’s portfolio companies. Or perhaps some combination of the two (private equity lawyers reading — we’d be keen to hear your thoughts). In any case, Jefferies is advising on how to cut the ties.

But now there’s another complication. LetterOne — which is led by former UK Labour government minister Lord Mervyn Davies and has not itself been sanctioned — is suing Pamplona, saying it wants to inspect the private equity firm’s “books and records” just as Pamplona seeks to sell its investments.

It accused Pamplona of an “ongoing and unjustified refusal to share information with its largest limited partner”.

Pamplona responded that it was “quite surprised and puzzled by LetterOne’s new requests” but would “of course comply fully to the extent provided for” in its investor agreement with LetterOne.

It said LetterOne would “shortly receive almost all material elements of that request”. 

Ties between the two groups go back years: Pamplona was founded by Alex Knaster, who used to run Alfa-Bank, the sanctions-hit lender where Fridman was founder and president.

The whole episode stands to be a fascinating experiment in how a private equity firm can distance itself from an investor that has provided the overwhelming majority of its funds — a highly unusual set-up in the industry.

Whatever comes of the court case, it sheds light on one thing in particular: the fracture in relations that has developed between the two groups in the wake of the war-related sanctions.

Can Brookfield have its cake and eat it too?

Cracks are appearing in the real estate market. Fast-rising interest rates mean investors who agreed deals just a few months ago are looking at very different sums today. Some are renegotiating prices, others are abandoning deals altogether.

“We’re expecting transaction volume to decelerate pretty significantly — it already has,” said Brad Hyler, head of Brookfield’s $52bn European real estate portfolio, in an interview with the FT’s George Hammond this week.

Hyler was realistic about the harsher economic reality and its potential effect on property values, but also insisted that the Canadian private equity firm’s own investments will fare well.

Can both of these arguments be true?

According to Hyler and his peers at rival private equity houses that have come to dominate trade in European real estate, investors and tenants will gravitate to high-quality properties and shun older stock. Conveniently, their portfolios include almost exclusively the former.

That means modern offices, housing and shops can retain their value even while older, less in-demand stock is hammered.

Brookfield has been testing that theory in the US. It closed a deal 49 per cent stake in New York’s One Manhattan West office tower, which it co-owned with the Qatar Investment Authority, to Blackstone in March. The 67-storey building had drawn in blue-chip tenants including Big Four auditor EY and law firm Skadden Arps, even as the city’s older buildings struggled to survive the pandemic.

Few argue against the idea that the value of outdated offices or past-their-prime retail spaces are at risk. But the deterioration of the economy and the continuing fallout from the pandemic will test even the most desirable commercial spaces, too.

One of those is now on the horizon as UBS looks to sublet two floors of its top-spec offices in the City of London. It is one of a number of companies to lease out “grey space” that exceeds their requirements as a result of the pandemic changing working practices now that hybrid and remote working arrangements have taken hold.

Hyler remains confident there will be a market for “higher-quality assets”. We’ll soon find out.

Searching for salvation in the corporate bond market

It’s not often that bond investors have to consider the “threat of, or actual, disestablishment of the Church of England from the State” among the risk factors in corporate debt.

They do now. The Church of England’s main investment foundation is tapping debt markets for the first time.

The Church Commissioners for England already manages about £10bn in assets — with large funds tied up in real estate and rural land. The new move, called “Project Cranmer”, will raise about £500mn for further investment activities.

The moniker for the historic debt raising is a nod to Thomas Cranmer, the Tudor-era Archbishop of Canterbury who helped Henry VIII divorce the first of his six wives, Catherine of Aragon, and led the Church of England’s breakaway from the Roman Catholic Church in the process.

But when Henry and Catherine’s daughter Mary Tudor — a Catholic Queen — ascended to the throne, Cranmer was burnt at the stake.

Fast forward 500 years and Project Cranmer faces a very different environment: icy cool market conditions. Corporate issuance has slumped in Europe — down 16 per cent in the first half of the year, according to Refinitiv data.

The bonds haven’t yet priced so terms on the debt are unclear. But rising interest rates and inflation jitters are forcing companies — or churches, in this case — to issue debt at more attractive rates for investors. It’s “pretty brutal out there” for anyone on the syndicate side, in the words of one banker.

The bonds’ expected Aa1 rating from Moody’s may dispel fears of default, but investors will face fairly unusual risk factors. If the Church of England were to lose its status as the UK’s official church, that could “lead to a dispersal of the Issuers’ assets”, according to the bond prospectus.

Job moves

• British Airways has hired René de Groot as its new operating chief. She joins from rival KLM, where she held the same position.

• Elysium Management, the family office of former Apollo Global Management boss Leon Black, has hired former JPMorgan Chase executive Nikolaos Vasilatos as a partner and head of venture capital, per Bloomberg.

• Bank of America has hired Goldman Sachs dealmaker Nick Hopkins as a managing director on its technology, media and telecoms team, per Financial News.

Smart reads

Technical difficulties The crypto crash has tested investors’ faith in the blockchain networks that underpin digital assets. There are fears it could derail the so-called Web3 movement that utilises the same underlying technology, according to this FT Big Read.

Cloak and gavel For years litigants seeking an ethically questionable edge in courtroom battles have turned to cyber security whizz Sumit Gupta and his team of skilled hackers. A Reuters investigation digs deep into nearly a decade of corporate espionage.

And here’s one smart listen Spacs’ 15 minutes of fame has come to an end as investors pull out and regulators go on the offence. DD’s Ortenca Aliaj unpacks the blank-cheque bust on the FT’s Behind the Money podcast. Listen here.

News round-up

Boris Johnson’s premiership nears its end as allies urge him to quit (FT)

HSBC closes in on deal to sell Russian business to Expobank (FT)

GSK investor support for spin-off vindicates rejection of Unilever bid, says chief (FT)

Judge holds Cushman & Wakefield in contempt in New York Trump probe (FT)

Ben & Jerry’s sues owner Unilever over sale of Israel licence (FT)

Amazon to share more data with rivals after EU antitrust deal (FT)

Voyager Digital files for bankruptcy protection as crypto crisis deepens (FT)

Microsoft’s Activision deal, Amazon’s use of data face U.K. regulatory probes (WSJ)

Facebook asks US. court for old FTC merger documents in antitrust fight (Reuters)