TheChek News Flow

Private equity pioneer looks to exit more investments as it pushes for goal of $1tn in assets

KKR, one of the pioneers of the $15tn private capital industry, is hastening plans to sell large investments or take them public after higher interest rates caused a two-year slowdown in takeovers and initial public offerings.

Scott Nuttall and Joseph Bae, co-chief executives of the New York-based group, told the Financial Times they were seeing an improvement in activity to take portfolio companies public. KKR was also holding talks with large corporations and other private equity buyers about potential asset sales, they said.

“The IPO markets are starting to open up a bit, and leveraged credit markets have opened. We’re starting to get more [approaches] from strategic buyers,” Nuttall said in an interview. “You’re seeing that activity pick up. If it keeps going like this, monetisations will follow. It’s just a matter of time,” he added.

In 2023, private equity groups saw their stockpile of unsold investments surpass a record $3tn. Consultancy Bain & Co has warned of a “towering backlog” of companies that must be sold so cash can be returned to investors such as public pension funds which have become overexposed to unlisted investments.

Rising public equity market valuations and demand from credit funds to make new loans are fuelling a recovery in activity. “Valuations are reasonably robust for exits and the financing markets are coming back,” added Bae. “We have a lot of activity in flight.”

At its investor day this week, KKR laid out a goal to join Blackstone Group in surpassing $1tn in assets within the next five years. KKR has $553bn in assets.

Nuttall and Bae were named co-heads of KKR in October 2021, cementing a succession from founders Henry Kravis and George Roberts, the billionaire duo who brought leveraged buyouts to the financial mainstream in the 1980s by targeting poorly managed conglomerates.

While KKR will soon raise flagship buyout funds in North America and Asia, it is seeing its fastest growth in newer businesses targeting credit, insurance and infrastructure-based investments, which are expected to propel its increase in assets.

These businesses are benefiting from similar trends that KKR first exploited when Kravis and Roberts founded the group in 1976.

Large utility, telecommunications, energy and technology groups are selling off assets to private buyers to bolster profits, fuelling what KKR expects to be trillions of dollars in investment opportunities.

KKR’s funds plan to house assets moving off the balance sheets of corporations, banks and insurers looking to simplify their operations or fund stock buybacks.

Nuttall said US lenders were considering selling loan portfolios to repair their balance sheets, while potential acquirers were raising money for acquisitions. “We’re getting calls from folks that are wanting to be acquirers of some of those banks. They’re trying to free up capital now, to be able to be ready to make some acquisitions of the banks that need help,” he said.

Those asset sales are propelling the growth of KKR’s credit business, which has become the group’s largest business line by assets with $219bn under management.

Allan Levine, head of Global Atlantic, an insurer KKR recently fully acquired, said Japanese insurers were also in the process of selling off large blocks of assets to US buyers to buy back their discounted stock. KKR believes these insurers may unload hundreds of billions in such assets in the coming years.

KKR has prioritised growth in Asia and Japan has become one of its largest investment areas globally. The firm is excited by a recent rise in Japanese yields that has pushed local savers into listed and unlisted equities, or credit-oriented investments.

“I think most US investors don’t really get what’s happening from a macro standpoint in Japan right now and it’s exciting,” said Bae, who added that a “tidal wave” in shareholder activism had prodded local conglomerates to simplify their operations.

Though much of KKR’s investment activity will be aimed at assets moving off other balance sheets, it has built up its own stable of assets.

The group sits on an $18.4bn pile of investments, which Nuttall and Bae have bet will fuel earnings in the coming years. Earnings from its directly owned investments are targeted to rise from $15mn in 2023 to $300mn in 2026, and above $1bn by 2030, according to KKR.

The stockpile of assets, called “strategic holdings”, has been created by Nuttall and Bae to replicate the success Warren Buffett’s Berkshire Hathaway has had in compounding its assets, profits and market value. It was also a way to avoid overhiring, or straying too far from KKR’s strengths as its market value has reached $90bn and where other financial firms have struggled, they said.

Those struggles come mostly through overexpansion that leads to poor risk management and internal fiefdoms, they said, and KKR is betting such pitfalls can be avoided by sitting on its current investments as their dividends grow.

“Once companies, especially financial services companies, get to the $50bn market cap, their stock performance suffers,” Nuttall said. “Investor returns become more anaemic. Their growth slows.”

One tiny, lightly regulated African nation plays an oversized role in global token trade

The IMF last week published a working paper on cross-border bitcoin flows. Its main conclusion is interesting, but not that surprising: when there’s dollar volatility or a change in risk appetite, flows logged on the official blockchain (used mostly by whale traders/crypto exchanges) move inversely to regular assets’. Off-chain transactions, bitcoin’s equivalent of over-the-counter trading, carry on as usual. For a full discussion of how and why, the PDF is here.

What caught our attention, though, were the heatmaps. Here’s one:

That’s a map comparing countries’ on-chain bitcoin inflows to GDP, and a good place to start is with the distribution buckets. The lower three quartiles fall within the range of 0.0 to 0.1 per cent of GDP; the top quartile has a frankly absurd range of 0.1 to 2.5 per cent of GDP.

That’s the Seychelles effect.

Africa’s smallest and least populous country is a global crypto trading hub. Exchanges including Bybit and OKX have taken advantage of the Indian Ocean archipelago state’s low taxes and light-touch regulation.

As a result, Seychelles’ incoming on-chain bitcoin flows between 2019 and 2022 were equivalent to nearly 2.5 per cent of GDP, the IMF finds. Relative to everywhere else, that’s huge. Second and third on the list are Venezuela (0.8 per cent of GDP) and Moldova (0.7 per cent).

Tax haven use is common in both crypto and tradfi, of course. FTX’s global trading business was incorporated in Antigua and Barbuda, and the firm rather famously had its headquarters in Bermuda. Binance, the biggest crypto exchange, holds a Cayman Islands registration but has no local accreditation and, it claims, no fixed abode.

Seychelles’ crypto cluster is nevertheless notable, as is the international scrutiny that many of its operators attract. The local regulator says there are around 50 unlicensed virtual-asset service providers in its jurisdiction. It’s an estimate that looks very conservative.

Among them was HTX, the Chinese-founded exchange formerly known as Huobi Global. Crypto promoter and HTX “adviser” Justin Sun has claimed to have tokens with a value of $1.6bn deposited with the exchange, and said in 2022 that it was considering relocation. HTX has since been struck off the Seychelles corporate register and, like Binance, claims to be nomadic. The SEC last year charged Sun and three of his companies with fraud and violations of securities law.

The world’s second-biggest spot crypto exchange by web traffic is, according to CoinMarketCap data, Seychelles-registered Bybit. It has had a run-in with Canadian authorities, was recently censured by Hong Kong’s Securities and Futures Commission, and has been disowned by the British Virgin Islands where it was founded.

Its neighbours on Mahé island include KuCoin, whose founders are under investigation by US authorities over alleged anti-money-laundering failings. Founders of Seychelles-incorporated BitMex pleaded guilty in 2020 to the same charge. Seychelles-incorporated Atom Asset Exchange collapsed in 2022, with its unidentified founder allegedly still on the run.

Seychelles-incorporated vehicles also played supporting roles in the OneCoin pyramid scheme, the pursuit of Sam Bankman-Fried, the Craig “Fauxtoshi” Wright saga, and the £1.4bn Hampstead bitcoin mystery. Even Binance retains a Seychelles office (though, apparently, nothing crypto-related happens there).

Of the top 12 crypto exchanges incorporated in Seychelles, we could find physical addresses for six.

Seychelles has no legislative or regulatory framework for virtual assets and virtual-asset service providers, meaning it fails to comply with the Financial Action Task Force’s anti-money-laundering code. Last year it was blacklisted by the EU for non-cooperation on tax.

A risk assessment commissioned in 2022 by the national financial watchdog was scathing, finding a “very high” risk that its unlicensed companies were using crypto for money laundering, terrorist financing, tax evasion and extortion via ransomware. In response, the regulator said it aimed to have legislation in place in 2023.

In December, Seychelles’ National Anti-Money Laundering and Countering the Financing of Terrorism Committee announced that it had opened a consultation on the possible licensing of operators. The plan was to finalise the text by February but, since the regulator was still holding briefings for National Assembly members in late March, it’s another target that looks to have slipped.

While we wait, the IMF data suggests that approximately $340 of on-chain bitcoin has been flowing into Seychelles per year for every one of its nearly 120,000 residents (along with all the difficult to trace off-chain volume, and the trade of alt-coins, memecoins, NFTs and native exchange tokens). How many citizens are benefiting from these outsized flows is a tricky thing to estimate.

Where to park your superyacht

As sizes relentlessly grow — some to Airbus scale — owners face a shortage of spots in the world’s pleasure zones large enough to berth them

“I recommend you try and track down Splinter Fangman,” says Martin Redmayne, chair of the Superyacht Group, which researches and publishes on the industry. “He’s made for TV.”

If you need to park your superyacht in the south of France, he’s one of a handful who are the brokers for berths large enough for billionaires.

Despite his Wild West name, Fangman is clean cut and gently tanned. He’s a broker for international yacht dealer Edmiston, the agent for new leaseholds for superyacht berths in Port Vauban in Antibes, between Cannes and Nice.

The port has one area known as the Quai des Milliardaires — the Billionaires’ Quay, officially called Quai Camille Rayon — recently redeveloped by the International Yacht Club d’Antibes. All the leases came up for renewal in the past two years.

That included A18, one of the “iconic” slips in the Mediterranean, according to Fangman. It can take a yacht of 160 metres and it was announced it had been sold last month.

Fangman won’t reveal the asking price. Smaller berths on the same stretch are A13, suitable for a 110m yacht, which is currently on the market for €13mn for a 10-year lease. A5, a mere 85m, is available for €8.4mn on the same terms.

There are only so many people with yachts that size.

One of them is Jeff Bezos, whose schooner the Koru, with three masts and sails, hit the water last year. At 127m, more than one and a half Airbus A380s, it is a prime example of the difficulties superyacht owners are facing. When he tried to moor in Fort Lauderdale in Florida, no berth was big enough, so the Koru had to take shelter in an industrial area of Port Everglades, with multicoloured shipping containers and steel gantries as its neighbours.

Yachting season is on its way, and the Koru has made its way across the Atlantic into the Mediterranean and, after passing by Gibraltar, at the time of writing it has stopped in a shipyard near Marseille. His is not the only big boat now on the move.

“Typically, now, you see a lot of marinas are still a little bit empty because a lot of the boats are in the shipyards,” says Fangman. “In about two weeks’ time, you’ll see all the marinas in the south of France and different cruising areas start filling up, with the boats kind of positioning themselves, waiting for charters, waiting for owner trips.”

The race for the largest yacht is well documented but the place to put that yacht is beginning to get more complicated. While ports such as Cannes and Ibiza rent spots for festivals and events, there is the question of where you station your boat longer term.

Most boats of all sizes only spend 10 per cent of their time cruising, says Martin Redmayne. The rest of the time is spent docked. “So therefore people have this thought process: we need a place called home.” That’s not just for the owners but also for long-term crew members — a place to buy houses and send their children to school.

The increase in numbers of the mid-sized superyachts, which are usually 40m-80m, means there’s increased competition to get a permanent spot. The “home berth” ports include Barcelona’s Port Vell, which has a good shipyard nearby, but is half a day’s sail from the cruising grounds of the Balearics. Porto Montenegro in the Bay of Kotor is also considered a prime leisure port. For the south of France, Vauban is one of the few that can accommodate the biggest boats.

“No more than 15 per cent of the berths will be on long lease,” says Redmayne. “But taken as a percentage of the bigger berths, above 50m, it may be 40 per cent.”

Leaseholders can rent out their spots to other boats to recoup some of their costs. At Port Vauban, around 80 per cent of subletting income is returned to the owner, according to Fangman.

A nine-year leasehold for a 100m yacht in Porto Montenegro is currently available for €7.72mn. But as with property, location is everything and Port Vauban remains the most sought after on the coast.

A18 is currently empty, according to open data maps that track ship positioning, at the time of going to press. Sitting alongside it in the Quai in other prime slots are the 78m-Montkaj, the 65m-Zazou and the Sibelle, a 67m yacht with five “staterooms” — more normally called bedrooms — and a wellness area. It is on sale for €27.5mn.

The Dilbar, the largest yacht in the world by volume, used to occupy the A18 slot, says Fangman. Gulbakhor Ismailova, the sister of Uzbek-Russian billionaire Alisher Usmanov, was placed under sanctions on the grounds that she was the legal owner of some of Usamov’s assets, including the Dilbar. It has left the port.

The problem facing marinas is how to accommodate the larger boats. It is due to the growing number of yachts above 40m, which are trying to dock in marinas that were built for much smaller boats.

“Owners are starting to understand that the berth supply is quite stagnant,” says Fangman. “It is extremely complicated to start a new marina, especially in the south of France [due to zoning issues and a lack of sheltered harbours]. With more and more boats on the water . . . the supply imbalances are getting out of proportion.”

Redmayne concurs. “Because we’re building so many boats here and we’re not able to reconfigure marinas quick enough. And to build a brand new marina takes 10 to 15 years of planning and local authority approvals so we’re heading for a bit of a logjam.”

Pressure is also building for mid-sized superyachts, “40m to 60m, of which there are about 1,000, and 60m-80m yachts, of which there are 500,” says Redmayne.

“These are relatively small numbers in the grand scheme of the number of ultra-wealthy, but you can see how the market has grown since 2000,” he says, referring to data from his research team.

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It isn’t just a safe harbour. Boat owners are also looking for facilities. While major repairs happen in shipyards, a marina needs to be able to provide some technical services.

But it also needs to provide a good place to hang out. Antibes’ port was getting “a little bit tired and old”, says Redmayne. “If you look at the south of France now, a lot of the marinas are close to the end of their concession, so this is the start of a whole wave of upgrades.” Concessions are granted to private companies to run the marinas for up to 50 years. They, in turn, sell on the leases.

The International Yacht Club d’Antibes, under its new 20-year concession, has given its section of a marina a €135mn upgrade, including a new reception area for helipad users, social and fitness areas for crew and a new club house built by the award-winning architect Philippe Prost. His other commissions include the Ring of Memory, a centennial first world war memorial in Ablain-Saint-Nazaire that takes the form of a 75m-wide ribbon of concrete.

Also added to the IYCA area of Port Vauban is privacy. It now has high-grade maritime security installed. “There are gates, you have to be registered to get in, which is quite attractive to large yacht owners,” says Fangman, who cites the issues around Kaos, a 110m superyacht moored in Ibiza that was vandalised with paint by eco-activists last summer.

For smaller boat owners, long-term leaseholds are less likely due to price. But for larger ones, buying a leasehold over renting seems relatively small beer.

“It’s a luxury, but it makes sense,” says Fangman, “if you have a boat for a few hundred million, to spend a bit extra and maybe even have multiple [berths]. There may be five favourite places where someone goes. It makes sense to buy in those main places where you have trouble getting a spot.”

Plane maker revises disclosures for personal trips by CEO David Calhoun and other executives after Journal investigation

An internal Boeing BA -1.96%decrease; red down pointing triangle review found that Chief Executive David Calhoun and other top executives took personal trips worth more than $500,000 on the company’s private jets and other planes that were improperly recorded as business travel.

The review and correction, which Boeing disclosed in a securities filing, was prompted by a Wall Street Journal investigation last year into the executives’ use of the company’s fleet of private jets, people familiar with the matter said.

Boeing’s review found that some flights by the executives in 2021 and 2022 “were not previously classified as perquisites by the company but should have been classified as such in accordance with SEC rules and guidance,” the company said in its proxy filing April 5.

Executives may dart between their residences, work sites and personal destinations such as vacation spots with portions of the trips being officially counted as personal or business trips. In general, private-jet flights taken for commuting purposes may be considered a perquisite, while flights between two company offices may not be. The pandemic and increased working from home has complicated the matter.

The company’s executive flight operations unit and its board of directors scrutinize personal use of company aircraft, the Journal previously reported. Boeing said in its proxy that flights to attend outside board meetings or speaking engagements may count as perquisites under SEC rules.

Boeing’s board requires Calhoun to use the company’s private jets for personal travel, not just business, for security reasons. The company recently said the CEO was stepping aside, part of a shake-up after a Jan. 5 midair blowout and production problems.

Other executives in the revised disclosure—finance chief Brian West; recently departed commercial chief Stan Deal and defense chief Ted Colbert—may also use Boeing’s fleet of private jets for personal trips.

Last year, Boeing said the company followed all laws and regulations when it came to classifying executives’ aircraft use: “As it relates to the tracking and categorization of flights, we have professionals and subject matter experts who help us strictly comply.”

In the September 2023 article, the Journal reported that Calhoun and other executives hadn’t relocated to the plane maker’s headquarters in Arlington, Va. Instead, flight records suggested the CEO flew from his two homes to the main office and other Boeing locations via the company’s fleet of private jets.

Some other company executives have worked out of offices near their homes, the Journal reported. Boeing opened a small new office near the Connecticut homes of West and treasurer David Whitehouse.

Calhoun addressed the Journal’s article at an internal meeting with employees in November, saying he wanted executives to travel and spend time visiting its operations.

“I don’t want anybody, by the way, to misinterpret a silly article that got published in The Wall Street Journal about me traveling a lot,” Calhoun said, according to a recording of the meeting the Journal reviewed. “That’s my objective. That is what I want to do. That is what I want everybody at the enterprise level to do.”

In its proxy filing, Boeing reported $514,000 in personal flights on company aircraft for Calhoun in 2023. The revised 2022 tally for Calhoun’s personal flights came to about $332,000, an increase of $93,000 from the company’s calculation last year, according to securities filings. For 2021, the tally increased by $49,000.

Israel’s use of an AI-enabled targeting system in Gaza has fed the debate about military technology

One of our worst nightmares about artificial intelligence is that it will enable killer robots to stalk the battlefield dispensing algorithmically-determined death and destruction. But the real world is a lot messier than the comic books. As Israel’s bombardment of Gaza shows, we may be moving towards more invisible and insidious forms of automated decision-making in warfare.

A chilling report published last week by the Israeli online magazine +972 highlighted the heavy reliance of the Israel Defence Forces early in the war on an AI-enabled mass target-generation system known as Lavender, which flagged 37,000 Gazans as suspected Hamas militants. As a result, many were bombed in their homes, often killing their families too.

Disaffected Israeli intelligence sources, interviewed by +972, said the system had an estimated error rate of 10 per cent, wrongly identifying some targets for assassination. They also alleged that the IDF would permit a strike on a junior Hamas militant, even at the risk of killing 15 to 20 civilians. That ratio rose from 1 to more than 100 for a senior Hamas commander. Human oversight of the automated target-identification process was minimal, sometimes lasting no more than 20 seconds, they claimed. “In practice, the principle of proportionality did not exist,” one told the magazine.

The IDF has contested several aspects of this report. “Contrary to Hamas, the IDF is committed to international laws and acts accordingly,” the IDF said in a statement. The “system” was a database that human analysts used to verify identified targets. “For each target, IDF procedures require conducting an individual assessment of the anticipated military advantage and collateral damage expected.”

What is indisputable is the horrifying loss of civilian life in Gaza that occurred in the first weeks of the war following the murderous Hamas attack on Israel on October 7. According to Palestinian authorities, 14,800 people, including about 6,000 children and 4,000 women, were killed in Gaza before the temporary ceasefire of November 24 when Lavender was most used. 

Many aspects of the Israeli-Gazan tragedy are unique, born of the region’s tangled history, demography and geography. But Israel is also one of the world’s most technologically advanced nations and the way it wages war feeds the global debate about the military uses of AI. That debate pits so-called realists against moral absolutists.

Realists argue that AI is a dual-use technology that can be deployed in myriad ways for both good and bad. Few, for example, would contest its use in defensive weapons, such as Israel’s Iron Dome that has intercepted multiple rocket attacks from Gaza. But the Lavender system appears to have contributed to  a “dramatically excessive” rate of collateral damage that is morally indefensible, says Tom Simpson, a former Royal Marine now philosophy professor at the University of Oxford. 

Yet Simpson opposes an outright ban of lethal autonomous weapons (LAWS), as some campaigners are demanding, given the likelihood that less law-abiding hostile countries will still use them. Implementing any such ban would create “an appalling strategic vulnerability”. “If liberal democracies are worth defending they should have the most effective tools,” he tells me.

Robots, like soldiers, are often instructed to do the dull, dirty and dangerous work. “If we can spend treasure to save blood we should do it.”

But the moral absolutists draw a clear red line at outsourcing any life-and-death responsibilities to error-prone machines. The experience of the Lavender system shows the tendency to over-trust the computer. It also highlights the difficulty of keeping “humans in the loop” in the heat of war. 

Mary Ellen O’Connell, a law professor at the University of Notre Dame who supports a ban on LAWS, says that realists tend to favour the projection of power over the protection of the rule of law. But, she tells me, for western democracies effective power rests on the rule of law. “The US has only won one war since World War II and that was the liberation of Kuwait. That was the only war we have fought lawfully in full compliance with the United Nations charter,” she says.

That is also a realist argument that should resonate in Israel, as much as the US. Soldiers should believe they are fighting for a just cause in a moral way. Those who spoke to +972 magazine clearly question the way that Israel has fought the war. Humanity must lead the technology, rather than the other way around.

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