TheChek News Flow

Saylor’s latest strategy for Strategy: selling new shares to pay dividends

Isn’t there a word for that?

Michael Saylor’s company Strategy, formerly known as MicroStrategy, doesn’t just believe in bitcoin — it has staked its entire future on it. Since pivoting from enterprise software to crypto back in August 2020, it has transformed into a bitcoin investment vehicle, with its shares surging more than 25-fold. But beneath the euphoria lies a capital structure that’s becoming increasingly self-referential.

Strategy’s approach to financing has had three key elements. First, it has issued ever larger amounts of common stock to raise money for buying bitcoin, taking advantage of its shares trading at roughly twice the company’s net asset value (NAV). 

Second, it has issued huge sums of convertible bonds, exploiting the high volatility of its own shares to secure phenomenally favourable terms. Initially these convertibles were secured against its bitcoin holdings, but today the outstanding bonds are unsecured, removing the risk of margin calls. If the share price fails to rise enough for the bonds to convert, the company still has to repay the money, but maturities have been pushed out, giving Strategy breathing room (at least until the first investor put in September 2027) even if bitcoin prices drop sharply. 

Third, it has issued three classes of perpetual preferred shares — Strike (STRK), Strife (STRF) and Stride (STRD) — with high, discretionary dividends, some of which can be paid in kind.

The logic was simple: raise as much money as possible to buy bitcoin. Strategy is now by far the largest corporate holder of bitcoin anywhere. Yet its latest move may mark a shift.

Earlier this week, Strategy announced a $4.2bn at-the-market offering of Stride. On the surface, it looks like yet another bid to raise cash for more bitcoin purchases. But tucked away in the announcement was a telling clause: proceeds may also be used to pay dividends on other classes of preferred shares, namely Strife and Strike (Alphaville emphasis added):

This isn’t a refinancing, where a company swaps expensive capital for cheaper funding. Nor is it a typical dividend recapitalisation, where a company borrows to pay shareholders dividends. A dividend recap usually assumes the business generates enough cash to support more debt. Strategy’s legacy software division doesn’t produce enough free cash flow to cover these preferred dividends, and bitcoin, of course, pays no income.

Instead, this manoeuvre is something different. Strategy is effectively reserving the right to use money from new securities to prop up old ones, reassuring investors that it can keep issuing fresh paper to cover dividend payments. This in turn is meant to give them confidence to buy the future rounds of preferred shares.

The whole structure rests on two pillars. First, Strategy’s market capitalisation consistently trades above the value of its bitcoin holdings — a rare occurrence in what’s supposed to be an efficient market. The best explanation for the NAV premium is that Saylor commands a loyal following and his bitcoin strategy has a powerful narrative momentum. Second, Strategy must maintain perpetual access to capital markets. It needs to keep finding new buyers for its paper, whether common stock, convertible bonds, or preferred shares. 

Dependence on these two factors carries obvious risks. The company has no hedge, no diversified income, and no plan B. Its fate hinges on the assumption that capital will always be available and bitcoin’s price will either rise or, at the very least, stay elevated. A prolonged downturn or shut-off from funding could force the unthinkable: selling bitcoin to meet dividend payments. This would represent an existential crisis for a “buy and HODL” maximalist.

For now, the music plays on. Bitcoin’s rally boosts both Strategy’s NAV and the stock’s premium to NAV, and investors continue to clamour for Saylor’s paper. But each new layer of financial engineering makes the structure shakier. Strategy has proven its approach pays off in a bull market. The question is whether it can withstand the storm when the tide inevitably turns.

Virtu lends its support to IEX after Ken Griffin’s firm criticised planned exchange’s ability to cancel and reprice trades

Virtu Financial has come out against rival Citadel Securities’ attempts to block the opening of a new US options exchange, as the high-speed trading giant wades into a dispute over market structure that has sucked in some of Wall Street’s biggest names.

The disagreement hinges on the implementation of a 350-microsecond so-called “speed bump” that US exchange operator IEX — made famous by the Michael Lewis’s bestseller Flash Boys — hopes will protect traders on its proposed exchange from buying and selling options at stale prices.

This mechanism will allow IEX to cancel and reprice a small proportion of orders, but critics of the plan, including billionaire Ken Griffin’s Citadel Securities, say it would end up harming ordinary investors while enriching IEX’s shareholders and market makers.

New York-headquartered Virtu on Wednesday wrote to the Securities and Exchange Commission in support of IEX, which says it wants to shield investors from the cost of latency arbitrage — the exploitation by high-frequency traders of the microseconds it takes prices to reflect broader market moves.

Virtu’s intervention comes three weeks after Citadel Securities criticised what it described as IEX’s “nefarious” and “unlawful” plan “to introduce an unprecedented quote cancelling scheme” into the ballooning US options market, in a letter to the SEC.

Retail broker Charles Schwab, the New York Stock Exchange and Nasdaq have also said that IEX’s plan to launch a new equity options exchange should not be approved. 

But in its letter, Virtu said IEX’s proposal “represents a well-intentioned effort to advance” market transparency and improve “the investor experience”. 

It added: “The introduction of new trading venues has the potential to promote competition, foster innovation and possibly deliver better trading outcomes for all market participants.” Virtu was co-founded by Doug Cifu and Vincent Viola, former chair of the New York Mercantile Exchange and the owner of ice hockey team the Florida Panthers.

Citadel Securities and IEX have clashed before. In 2015, Citadel Securities sought to block IEX’s application for registration as a national securities exchange, writing at the time that a new entrant would “create confusion for the marketplace, and for retail investors in particular”. 

Citadel’s attempt was ultimately unsuccessful, although 11 years later IEX remains a small player in US equities, with a market share of roughly 2.6 per cent, according to the firm.

Citadel’s latest attempt to shut down IEX’s planned move into the options market has drawn the ire of pressure group We The Investors, which wrote to the SEC on the subject earlier this month.

“Almost 10 years since the first comment letters were filed against the IEX Equities exchange application, and all we have are the same tired, recycled arguments,” said WTI chief technology office Dave Lauer in the letter.

“It has become clear that despite critics’ attempts to rewrite history and pretend that there is no such thing as latency arbitrage, such arbitrage does exist, and exploits both geographical and technological latencies in order to earn profits for the fastest traders to the detriment of slower traders,” he added.

John Ramsay, chief market policy officer at IEX, said: “For the people who complain that the quotes will be inaccessible, it’s worth asking inaccessible to whom and for what purpose. If the answer is they’ll be inaccessible to people who are using latency arbitrage, that is exactly the point.”

Fundraise values company at more than $7.5 billion

An early mover in the effort to open up private markets to individuals is now reaping the benefits of the industry’s push into the mainstream.

iCapital, a provider of private-markets financial technology for wealth advisers, has raised more than $820 million in a deal that values it at more than $7.5 billion, the company said. It was last valued at about $6 billion in 2022, according to PitchBook.

Asset-manager T. Rowe Price and technology-investment firm SurgoCap Partners led the new investment. iCapital, which has been profitable since 2019, plans to use the proceeds to do more acquisitions and expand its business globally, according to Chief Executive Lawrence Calcano.

“We believe we can create a marketplace and an infrastructure for people to buy and sell a complicated range of assets in their portfolio,” he said. “The new investors see that opportunity and view it as both a strategic one and a financial one.”

Private-equity firms are increasingly looking to wealthy individuals as growth from institutional investors such as pension funds and endowments levels off. Wealthy individuals, typically via financial advisers, are expected to increase their allocations to private markets to more than $20 trillion by 2030, up from $13 trillion today, BlackRock estimates.

iCapital was founded in 2013 to help independent wealth advisers get access to private markets. Its first set of offerings were feeder funds, which pooled commitments from wealthy individuals and invested them in private-equity funds. iCapital now also offers investments in funds specifically structured for individuals and has expanded to areas like credit, real estate and infrastructure. It has $945 billion in transaction volume on its platform and 114,000 users.

The company’s roster of existing investors is a who’s-who of the asset-management world, including Apollo Global Management, Blackstone, BlackRock and JPMorgan Chase. It is considered a likely candidate for an eventual initial public offering, according to people familiar with the matter.

iCapital has done 23 acquisitions, doubling its employee base in recent years to more than 1,800. It has 16 offices around the world.