TheChek News Flow

Senators assail consultants for helping Riyadh use ‘soft power’ to build influence in the US

The heads of consulting giants McKinsey and BCG told US lawmakers on Tuesday that their employees in Saudi Arabia could face jail if the firms handed over details of their work for the country’s sovereign wealth fund without approval from the kingdom.

Bob Sternfels of McKinsey and Rich Lesser of BCG had been summoned to appear before Congress, along with the chief executive of smaller consultancy Teneo and the dealmaker Michael Klein, after the four firms failed to comply with a subpoena demanding information about their work for the $700bn Public Investment Fund.

A Senate committee is investigating how Saudi Arabia is using “soft power” such as sports investments to extend its influence in the US, and lawmakers assailed the consulting groups for their work in the kingdom at a hearing on Tuesday.

“We want to determine what work these companies have done and are doing that allows a foreign sovereign to use instruments of commerce in the United States to increase its influence within our shores, and rebrand its tarnished image after years of horrific human rights abuses,” said Richard Blumenthal, the Democratic senator and chair of the permanent subcommittee on investigation.

“You say you are between a rock and a hard place but you have chosen sides; you have chosen the Saudi side, not the American side.”

The PIF sued the four firms in Saudi Arabia, claiming that documents demanded in the US were classified. It has allowed only a fraction of the requested material to be handed over, often with substantial redactions.

A PIF spokesperson said: “We have made, and are continuing to make, significant efforts to facilitate the production of requested information from our advisers consistent with the laws of Saudi Arabia, which should be recognised like those of any other country.”

Klein, a longtime PIF adviser who helped broker an agreement last year between the fund and the US PGA Golf Tour, said the Saudi court orders “expose me and my employees to not just civil liability, but criminal penalties, including a potential 20 years in prison. As I hope the committee can understand, that is simply not a risk I can take for myself or for my employees.”

Under fire from subcommittee members, the executives insisted they were fighting in the Saudi courts and pressing PIF to allow fuller disclosures. Only Teneo, however, responded to a request to reveal any of the fees they have made in Saudi Arabia. The firm said it made a little less than $10mn in 2022 from work for the PIF.

Lesser said BCG was a private firm and would not reveal revenue numbers, while Sternfels said McKinsey only broke out its financials regionally and would provide the committee with figures for the Middle East, Africa and eastern Europe at a later date. These amounted to less than 10 per cent of McKinsey’s global revenue, he said.

Saudi Arabia has leaned heavily on foreign consultants to help accelerate its ambitious plan to diversify its oil-dependent economy, creating a lucrative market that London-headquartered Source Global Research estimated was worth more than $2bn in 2022. 

Woodside and Santos call off merger talks to create Australian LNG giant

$52bn deal between country’s two largest oil and gas companies would have created dominant liquefied natural gas provider

Australia’s two largest oil and gas companies have called off merger talks, ending months-long negotiations to create a $52bn liquefied natural gas company.

Perth-based Woodside and Adelaide’s Santos entered negotiations three months ago over a merger that would have all but consolidated Australia’s independent LNG sector into one company.

Woodside, the larger of the two companies, said on Wednesday that it had “ceased discussion regarding a potential merger with Santos”. Woodside shares edged up 1 per cent, while Santos’ fell 6 per cent.

A combination of the two Australian companies would have created an LNG group with similar volumes to those of BP. The talks followed moves by US majors including ExxonMobil and Chevron to acquire smaller rivals and bulk up their portfolios as a consolidation wave has hit the sector.

A deal to bring together Woodside and Santos would have combined their assets in US oil, Senegal and Papua New Guinea, but analysts questioned whether the combination would have merit.

Some investors have publicly expressed concern that Woodside would have to pay too big a premium to secure a merger with Santos, which has struggled in recent years as its large Barossa gas project in the Timor Sea has faced significant opposition from indigenous groups and environmentalists.

Woodside merged with BHP’s oil and gas business in 2022 and has thrived as LNG prices soared in the wake of Russia’s invasion of Ukraine. Meg O’Neill, Woodside’s chief executive, has stressed in recent weeks that the company would be careful in judging the benefits of a merger with Santos.

“We continue to be disciplined in our approach to mergers and acquisitions and capital management to create and deliver value for shareholders,” she said in a statement after the Santos talks collapsed.

“While the discussions with Santos did not result in a transaction, Woodside considers that the global LNG sector provides significant potential for value creation.”

Santos said in a statement that the two companies had not found “sufficient combination benefits” to support a deal that would have been in the best interest of its shareholders. It said it would continue to review options to unlock value.

Saul Kavonic, an analyst with research company MST Marquee, said the talks’ collapse showed the two companies’ diverging paths. He expects investors to support Woodside if it wants to make other acquisitions, particularly in the US, because it has a record of being disciplined.

Kavonic added that Santos could continue to “languish” for some time and might consider asset sales or a break-up to strengthen its balance sheet in the absence of other bidders, he said.

Bordeaux incident highlights the need to accelerate technological innovation in aviation management

Apologies in advance for another depressing story about aviation. This one at least has a happy ending. Yet a near-miss at Bordeaux-Mérignac airport, outlined in a report by France’s aviation accidents bureau last month,  highlights the urgent need for modernisation of air traffic control systems.

On New Year’s Eve 2022, an air traffic controller at Bordeaux airport authorised an easyJet A320 aircraft carrying 179 passengers to land on runway 23. It had slipped his mind that he had already authorised a small, two passenger jet to approach the same runway. The leisure pilot, listening on the radio, reminded air traffic control of his presence. Luckily, easyJet pilots were able to abort the landing just 103ft from the tarmac, avoiding disaster. The pilot of the small aircraft, and his nine year old son, were shaken by the roar of the A320’s engines as it flew over their heads.

So that was the happy ending. Yet France’s Bureau d’Enquêtes et d’Analyses found that while some mistakes might be specific to Bordeaux airport, archaic technology, some of which is widely used across Europe, also played a role.

First, the conditions specific to Bordeaux: Controllers there had been working to an informal rota, which meant they had completed only about 60 per cent of their officially scheduled hours by the last day of 2022. Only three people were on duty at the time of the incident, when six were on the official rota. The backup controller, the reinforcement in case of emergency, did not even turn up for work. Worst of all, management knew about the practice, but ignored it to maintain “social peace”.

Even for militant French air traffic controllers this is shocking. 

But in dissecting the incident, the BEA investigators noted that Bordeaux and most French airports have no “reliable” means to identify which controllers have come into work, how long they stay or what functions they actually fulfil.

And like controllers across Europe, they still use slips of paper placed on a board to show where an aircraft is on a runway. The December 22 incident happened because one controller juggling four different jobs was so busy he forgot to place the slip on the board. 

The technology used in France is not unusually antiquated. For example, controllers across the bloc still communicate with pilots by voice radio, often not in their native languages, rather than giving instructions via a computer datalink to the aircraft.

“We have been in the process of implementing this for many years and it is still not complete,” one senior European aviation official told me. “That is an obvious safety enhancement that is not high tech.”

And ground technology such as surface radar, used to alert controllers to runway incursions and potential collisions, is still the exception.  Finally the air traffic management organisation Canso wants controllers worldwide to be allowed to use simulators much more for training, just as aircraft pilots do.

It is important to note that despite these flaws, flying is still far safer than driving a car. According to IATA, the global aviation trade body, on average a person would need to take a flight every day for 25,214 years to experience a fatal accident. Controllers are also highly trained to withstand the most stressful situations and they avert disasters daily.

But even if the existing system is safe, there is still a lot of margin for improvement, especially as the number of flights increases. 

The industry is understandably nervous of change when human lives are at stake. And then there is the difficulty of introducing change in a hugely complex ecosystem, where everyone needs to transition together for maximum safety — from airlines reluctant to pay more for navigation services, to governments and service providers unwilling to take on over-powerful unions.

But a major obstacle seems to be the absence of any incentive for change. “Some invest in new technologies and others don’t,” the aviation official said. “Those who don’t, suffer no consequences. There are no incentives to modernise.”

Europe has struggled for 20 years to implement the Single European Sky initiative which aims to overcome the fragmentation of its airspace, with all air navigation service providers managed at national level.

It has made some progress on innovation. However, there should be greater effort to harmonise and incentivise minimum standards for technology in air traffic management across the bloc. Safety should always be the priority. But that should not rule out change for the better.

Israel’s business ties to UAE tested by Gaza war fury

Entrepreneurs operating in Gulf state hope that their delicate commercial links can withstand the conflict

In the days after Hamas’s October 7 attack and the war that followed, Israeli entrepreneur Ron Daniel left Dubai, his home since 2021, fearing that he was “sitting on a volcano”.

The chief executive of asset manager and financial technology company Liquidity Group flew back to the United Arab Emirates a month later after deciding these concerns were “mainly in my head”.

Daniel is among a small band of Israelis who have been living and working in the UAE since it normalised relations with Israel four years ago. His decision to return reflects hopes among Israeli businesspeople that the US-brokered normalisation with the UAE and three other Arab states — which allows them to openly seek deals in the Middle East — can withstand the fury and anguish created by Israel’s war in Gaza.

“The peace survived, the interest survived, the friendships survived,” said Daniel, adding that while it was “awkward” with Emirati friends at the start, “very quickly it was like, ‘it’s got nothing to do with us’.”

The UAE, like all other Arab states, has condemned the devastation wrought by Israel’s bombardment of Gaza, which has enraged Emiratis and a large part of the majority expatriate population.

But anger and hurt have largely been contained to private conversations in the autocratic state, where protests are prohibited. This has led to an absence of the kind of large scale demonstrations in support of the Palestinians seen across the region and other parts of the world. The authorities have also warned against overt displays of Palestinian solidarity.

The UAE’s leaders have stated their commitment to the deal with Israel known as the Abraham Accords, despite their concerns about Israel’s Gaza offensive.

“The UAE has taken a strategic decision, and strategic decisions are long-term,” presidential foreign affairs adviser Anwar Gargash told a conference in Dubai last month.

The UAE has long been unhappy with Prime Minister Benjamin Netanyahu’s far-right government. But it considers its decision to become the third Arab state to normalise ties with Israel as vital to its interests, both in terms of security and its economic ambitions.

The UAE needed to keep “communication, intelligence and diplomacy” channels open and see if it “can put them to use”, said Abdulkhaleq Abdulla, an Emirati analyst. “We knew there would be ups and downs.”

Unlike the “cold peace” that Egypt and Jordan agreed with Israel, the UAE — which never fought a war with the Jewish state — embraced the relationship and pushed for greater economic ties, with a particular desire to tap Israeli technology. And with the UAE and Israel sharing a foe in Iran, the accord also enabled Abu Dhabi to overtly develop intelligence sharing and security co-operation.  

Most of the new business that followed the accord was conducted with Emirati state-affiliated entities, particularly those in Abu Dhabi, the oil-rich capital that drove the normalisation deal.

Even before the war, tapping private UAE family offices was harder than expected for Israeli entrepreneurs, who wanted to use the Abraham Accords to gain a regional foothold and access to deep-pocketed Gulf investors.

There was an idea that “Israeli entrepreneurs would come over, raise a lot of capital and come back”, said Elie Wurtman, co-founder of Jerusalem-based PICO Venture Partners. But “that is not the way business gets done there”. 

The Israel-Hamas war has now chilled nascent prospects of Emirati private businesses doing deals with Israeli companies because of the simmering fury among merchant families — many of whom were already wary of dealing with Israelis — over the destruction in Gaza.

“Whether it’s business or socially, everyone who is here will think twice,” said an Emirati executive. “If I had business with an Israel company, I would stop that right now,” he added. “Emotions are very high.” 

The most significant deals have involved Abu Dhabi’s state-affiliated companies. G42, Abu Dhabi’s artificial intelligence company chaired by Sheikh Tahnoon bin Zayed al-Nahyan, the UAE’s powerful national security adviser, was the first Emirati business to open an office in Israel. Abu Dhabi state fund Mubadala has invested $1bn in an Israeli gasfield and $100mn in Israeli venture capital and start-ups.

And even if some business may have slowed, there are signs that in other areas it is moving ahead.

Israel-based senior researcher Yoelle Maarek said last month that she was moving ahead with opening a Haifa branch of Abu Dhabi’s Technology Innovation Institute, renowned for its open-source large language model Falcon. TII said it had established itself in Israel early last year, and that Maarek “was in a recruitment process with us since late summer of 2023” — prior to the war’s outset — and has now been “onboarded”.

The Gulf state’s airlines have continued services to Tel Aviv even as other carriers cancelled flights, underscoring the interest in maintaining the relationship with Israel.

For many Israelis doing business in the Emirates, the Israel-Hamas war has sharpened the need for friends in a hostile region. 

“Since October 7, perhaps the Abrahamic Accords is no longer in its honeymoon phase — but it’s still our future,” said Noa Gastfreund, co-founder of the Israeli-Emirati business forum UAE-IL Tech zone. The group is being rebranded as simply Tech Zone “in light of the sensitivities and need for wider regional collaborations”.

Arik Shtilman, chief executive officer of the Israeli-founded financial technology company Rapyd, which has about 100 employees in the UAE, said the war’s impact on his business was “literally nonexistent”.

“Everything is business as usual” in the UAE, he said, adding that there has been a greater change in Europe where it has become more challenging to sign on new clients. 

The bilateral flow of goods between Israel and the UAE, excluding software, topped $2bn from January to August 2023, according to Israel’s ambassador in Abu Dhabi. A UAE-Israel partnership deal came into force last year, lowering tariffs and aiming to boost bilateral trade to $10bn within five years.

Wurtman of PICO Venture Partners said a crucial aspect was that Israelis still felt welcomed in the Gulf state. “It’s one of the safest places in the world today to be Israeli,” he said.

Clients pull nearly $150bn in assets from a strategy once known for its star stockpickers

One of the oldest and best-known hedge fund strategies has suffered nearly $150bn in client withdrawals over the past five years, as investors tire of their inability to capitalise on bull markets or protect them during downturns.

So-called equity long-short funds, which try to buy stocks likely to do well and bet against names set to perform poorly, have underperformed the US stock market in nine out of the past 10 years, according to Nasdaq eVestment, after failing to adapt to markets largely dominated by central banks.

The poor performance and outflows mark a fall from grace for a strategy known for its star stockpickers such as Tiger Management’s Julian Robertson, GLG’s Pierre Lagrange and Egerton’s John Armitage.

“Ten years ago people used to talk about the great equity stockpickers,” said Donald Pepper, the co-chief executive of hedge fund firm Trium, which manages around $1.7bn.

“You still have some rock stars like [TCI’s] Chris Hohn, but there just aren’t many of him around anymore.”

Pioneered in 1949 by investor Alfred Winslow Jones — seen as the world’s first hedge fund manager — equity long-short funds were designed to “hedge” against overall market fluctuations through their bets on both winning and losing stocks.

The strategy made double-digit returns in almost every year of the 1990s bull market, according to data group HFR, with many funds then profiting by shorting wildly overvalued dotcom groups in the ensuing bust. During the global financial crisis, funds such as Lansdowne Partners made millions betting against doomed UK lender Northern Rock.

But since then many funds have struggled, coming unstuck in markets dominated by central bank bond-buying and low interest rates. In the meantime, they have badly lagged cheap index tracker funds that have reaped huge gains from the bull market.

An investor who put $100 into an equity long-short hedge fund 10 years ago would now on average have $163, according a Financial Times analysis of figures provided by Nasdaq eVestment. Had they invested in Vanguard’s S&P 500 tracker with dividends reinvested they would have $310.

“You don’t need your hedge funds to beat the S&P every year, but you do want them to beat it over time, for instance over the past decade,” said a pension fund adviser who allocates billions of dollars to hedge funds.

Big-name funds have suffered. Some of the so-called Tiger cubs — managers who trace their roots back to Robertson’s firm — were among those hard hit in 2022’s market sell-off, including Chase Coleman’s once- high-flying Tiger Global and Lee Ainslie’s Maverick Capital.

In October the FT highlighted billions of dollars of outflows from London-based hedge fund Pelham Capital, run by former Lansdowne portfolio manager Ross Turner, and it 2022 the FT revealed Roderick Jack and Marcel Jongen’s Adelphi Capital would return capital and become a family office.

When Lansdowne shut its flagship Developed Markets equity fund in 2020, after admitting it had become hard to find stocks to short, many saw it as a sign of a deep malaise in the sector.

Long-short managers complained for years that ultra-low interest rates allowed weaker companies — which would previously have been excellent targets to short — to stumble on for longer and, in some cases, for their share prices to soar. That, they said, made it harder for them to profit.

But a sharp rise in interest rates over the past two years has failed to revive the strategy’s fortunes. After large losses in 2022’s downturn, funds were meant to have their breakout year last year as higher rates sifted stronger companies from weaker firms. But funds gained 6.1 per cent on average, compared with the S&P 500’s 26.3 per cent gain.

Adam Singleton, chief investment officer of external alpha at Man Solutions, which invests in other hedge funds, said low volatility and last year’s bull market made it hard for long-short managers to prove themselves.

“Higher interest rates should lead to more good companies succeeding and bad companies failing, but I think markets were very focused on what policymakers like the [US Federal Reserve] would do.”

After more than a decade of excuses, investors are losing patience. Richard Byworth, managing partner at Syz Capital, said his portfolios have not invested in equity long-short funds for close to two years.

“With high fees, long-short managers are just not delivering performance anywhere near a level that would justify a position in our portfolio,” he said. “It is that simple.”

After 23 consecutive months of investor withdrawals, assets in equity long-short funds are down to $723bn, below levels five years ago, according to Nasdaq eVestment. Some of this has flowed to multi-manager hedge funds, which spread clients’ money over a range of strategies including long-short equity. Such funds invest heavily in risk management and are far less affected by the performance of a star stockpicker.

Not everyone is downbeat. There are early signs that shorting is finally becoming “more fruitful” as higher rates hit poor-quality companies, said one executive, while some allocators such as Kier Boley, co-head of alternative investment solutions at Swiss allocator UBP, think funds will profit as the market’s attention switches back to company fundamentals.

“I am bullish on the prospects for long-short strategies,” said Mario Unali, a portfolio manager at investment firm Kairos. “We will see long-short funds likely roar back to pre-2008 levels.”

But an executive at one top long-short fund was less optimistic, saying a widely anticipated fall in global interest rates would hurt the sector.

“Which hedge fund has ever said that the next decade won’t be great [for their particular strategy]?” he said. “[But] long-short hedge funds will continue to dwindle if rates go back down to zero.”

Europe’s largest asset manager becomes latest group to push into fast-growing alternatives sector

Amundi, Europe’s largest asset manager, is buying a private markets specialist as it becomes the latest mainstream investment group to look to expand its footprint in the fast-growing alternatives sector. 

Paris-based Amundi said on Wednesday that it had signed a binding agreement for the acquisition of Alpha Associates, a 20-year-old company based in Zurich that manages €8.5bn of assets. 

Adding Alpha Associates would bring Amundi’s assets in its private markets multi-manager business to €20bn. The acquisition price is €350mn, split between €160mn up front and €190mn based on hitting revenue milestones, according to a person familiar with the situation.

The French giant follows the likes of US peers BlackRock, Franklin Templeton and T Rowe Price in buying alternatives specialists to seek new avenues of growth — although the Alpha Associates deal is on a much smaller scale. 

Amundi chief executive Valérie Baudson said the acquisition would allow the company “to significantly broaden its client base, capabilities and product offering, in a promising market”. The move is in line with the asset manager’s “strategic objective to increase our footprint in alternative and real assets in Europe”, she added. 

Alpha Associates offers funds of funds that give institutional investors access to private debt, infrastructure and private equity strategies. 

The deal will diversify the geographical footprint of Amundi’s private markets multi-manager business beyond its roots in France, Italy and Spain, into Switzerland, Germany and Austria. The multi-manager activities of both groups will be combined into a new business line. 

The overall private capital industry rose to more than $10tn in 2021 and data provider Preqin has predicted this will grow to almost $18tn by 2026. One important driver of this growth will be the opportunity to target retail investors, who have historically had lower allocations to private markets than their institutional counterparts. 

Amundi said the acquisition would help accelerate the development of private markets products for a segment in which retail clients were underinvested. Such investors might start by allocating to private markets through a fund of funds, rather than directly, because of the increased diversification it brought. 

Amundi anticipates that the return on investment will be above 13 per cent after three years. The transaction is expected to be completed by the third quarter of this year, subject to regulatory approvals.

The announcement came as Amundi reported net inflows of €26bn in 2023, boosted by a strong fourth quarter and helping overall assets increase by 7 per cent last year, to €2.04tn. Adjusted net income grew 3.9 per cent during the year, to €1.2bn.

Amundi was created in 2010 by the merger of the asset management companies of Crédit Agricole and Société Générale. Its 2021 acquisition of Lyxor from Société Générale allowed Amundi to leapfrog German rival DWS and become the second-biggest player in European exchange traded funds behind BlackRock.