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Jim Chanos vs private equity

Two scoops to start: First, Morgan Stanley has ordered an internal lawyer to shadow the unit entangled in a federal investigation into block trading, underscoring the gravity of the probe and the steps the lender is taking to increase supervision.

Next up, New York Yankees baseball franchise and a Los Angeles investment fund are investing in AC Milan alongside US private equity group RedBird, which is closing in on the €1.2bn acquisition of Italy’s football champions, people with direct knowledge of the matter said.

Olivier Giroud from AC Milan, left, scores a goal in a match against Bologna
Olivier Giroud from AC Milan, left, scores a goal in a match against Bologna. RedBird is set to take control of the team this week © MATTEO BAZZI/EPA-EFE/Shutterstock

And one special thanks to those who wrote in for our quiz competition last week to attend the premiere of Skandal!, the new film about the Wirecard fraud featuring the FT’s Dan McCrum and other colleagues. We’ve been in contact with the winners and hope you enjoy the film.

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In today’s newsletter:

Chanos challenges private equity’s data centre spree

Jim Chanos has a decent record of well-timed bets, among them gleaning $100mn from the downfall of Wirecard and spotting irregularities at Enron.

That’s not to say that he’s always right, however.

Assets at the 64-year-old’s hedge fund Kynikos Associates, which was burnt by a longstanding bet against Tesla, have fallen from a peak of $7bn at the end of 2008 to under $1bn. And this latest one is a bit of a head scratcher.

The “catastrophe capitalist” is raising several hundred million dollars for a fund that will take short positions in US data centre groups — a move that pits him against some of the world’s biggest private equity groups.

The FT’s Anna Gross has dug into the details of what Chanos says is his “big short right now”.

Jim Chanos
Jim Chanos © FT montage/Bloomberg

The way Chanos sees it, bricks-and-mortar real estate investment trusts such as Equinix and Digital Realty will become increasingly obsolete as tech behemoths such as Amazon, Google and Microsoft build their own data centres rather than leasing out space in existing ones.

Cash-rich Big Tech groups can build more cheaply, making independent real estate investment trusts — with their older technology — redundant, he argues.

This bet puts the veteran short seller at odds with private equity titans who’ve poured billions into data centre groups on the view that traditional players will maintain their grip over the land, labour and energy resources required to run massive data warehouses.

Blackstone Group bought Kansas-headquartered QTS Realty Trust for $10bn last year while KKR and GI Partners acquired Texas-based CyrusOne for $15bn in March.

Jon Gray, Blackstone’s president and chief operating officer, has repeatedly cited data centres as an important investment theme for the US buyouts giant.

But Chanos derided the transactions as “rash”, with valuations that were “stretched by any measure”, and predicted a “post-takeover hangover”.

Silicon Valley seems to have backed private equity’s theory. Tech groups including Meta, Microsoft, ByteDance and Twitter have made a noticeable shift towards greater leasing over the past six months, reversing a previous trend towards greater in-house construction.

“There’s a fallacy in the argument that we’re not growing as fast as the cloud providers which means we are threatened by them,” said Andy Power, president and chief financial officer at Digital Realty.

For now, soaring demand for cloud services mean Big Tech groups will continue to grow their own data footprints while still relying on established data groups for sought-after real estate.

But supply and demand dictate that the equilibrium won’t last for ever.

“Right now there is an undersupply, but it’s going to be like oil prices: everyone is going to drill, drill, drill,” said David Friend, chief executive of cloud storage group Wasabi. “And then it will force prices down until there’s greater consolidation in the market.”

JPMorgan and the grocery app IPO that didn’t deliver

In 2019, as Wall Street executives fell over themselves to woo Adam Neumann and his cash-burning start-up WeWork, it was JPMorgan Chase’s Jamie Dimon who ultimately secured the coveted lead advisory role on the company’s planned initial public offering, with the Wall Street bank pitching a valuation of up to $63bn.

DD readers remember the rest: investors baulked, the float was cancelled, and WeWork went public in a $9bn Spac deal two years later — a fraction of its mooted value.

Still, JPMorgan appears not to have fully learned its lesson on hyped-up but unprofitable start-ups. Let’s look at its client Missfresh, the Chinese grocery delivery group that collapsed last month.

Montage of driver packing Missfresh delivery bags on a motorcycle
Missfresh has run out of cash and can’t pay salaries © FT montage/Bloomberg

Missfresh raised money from a fund set up by California real estate mogul Carl Chang’s company, Kairos Investment Management, at a $3.5bn valuation shortly before the start-up’s IPO in June 2021.

“JPMorgan mentioned on our exclusive call last week they believe conservatively the value [is] around $12B,” Chang texted one investor in May 2021.

One of its bankers explained the valuation by saying Missfresh’s delivery segment deserved a similar valuation multiple as Amazon, according to this deep-dive by the FT’s Ryan McMorrow, Nian Liu and Gloria Li.

But, even based on the $3.5bn figure, Kairos was underwater before it began trading publicly: it went public on the Nasdaq at a valuation of just $3bn. 

Now, the picture is looking much worse. Missfresh told employees last month that it had run out of cash and couldn’t pay salaries. Its stock has fallen to about 12 cents.

Line chart of Share price ($) showing Missfresh’s long decline

Missfresh is now facing lawsuits from investors. A complaint filed in US district court in New York last month alleged Missfresh provided false financial figures in its IPO prospectus.

JPMorgan and fellow underwriter Citigroup declined to comment. Missfresh said the IPO process and all of its investor communications were compliant with regulations.

Missfresh won investment from funds run by Tiger Global and Goldman Sachs as it pioneered speedy grocery delivery in China, with mini-warehouses and pink-clad riders and a claim that it could make 30-minute delivery profitable.

It had become a symbol of a new generation of tech start-ups in the country — at least before Beijing’s crackdown on the tech sector. There are many differences between Missfresh and WeWork, but both episodes show the dangers of getting too caught up in the hype.

Job moves

  • Initialized Capital founder Garry Tan is returning to venture capital group Y Combinator, where he previously worked as a partner, to succeed Geoff Ralston as president and chief executive.

  • Nomura has named Andrei Milekhin, previously the bank’s head of telecoms and digital infrastructure investment banking for emerging markets, as global head of digital infrastructure. He is based in London.

  • Barclays has hired Citigroup’s head of high yield credit trading Vivek Dasani for the same role, per Bloomberg. He will be based in London.

  • Law firm RPC’s head of competition Lambros Kilaniotis is leaving to jointly lead Quinn Emanuel’s UK competition practice with partner Kate Vernon, per The Lawyer.

Smart reads

Crypto for the climate? New tech ventures are aiming to use Web3 technology to fight climate change. But “tokenising” carbon offsets adds another layer of complexity to an already little-understood market, creating rife opportunity for greenwashing, the FT reports.

PE’s identity crisis A generational power struggle at Carlyle Group underscores private equity’s bumpy transition from a secretive sector of clubby partnerships to a multitrillion-dollar industry grappling with regulatory scrutiny and a new generation of leaders, the New York Times writes.

Lost youth Thirty-year-old crypto billionaire Sam Bankman-Fried is an outlier among peers as fresh-faced founders age out of Silicon Valley, writes the FT’s Elaine Moore.

News round-up

Elon Musk’s lawyers subpoena Twitter whistleblower (New York Times)

Companies attack Texas over ‘politicised’ ESG blacklist (FT + Lex)

Light Street Capital to vote against Zendesk $10.2bn go-private deal (Reuters)

Hong Kong tycoon calls bottom of China’s property slump (FT)

Singapore to tighten retail access to cryptocurrencies (FT)

Prada: ‘Milan, darling, Milan’ may ring hollow if listing dilutes valuation (Lex)

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