TheChek News Flow

Swiss asset manager elevates chief risk officer after board was replaced last week

GAM’s new board has appointed Elmar Zumbuehl as chief executive of the Swiss asset manager, after the previous board stepped down following the blocking by activist investors of a takeover bid by UK rival Liontrust.

Zumbuehl, who has been the firm’s chief risk officer since 2017, replaced previous CEO candidate Randy Freeman, who withdrew from the process due to “unforeseen family circumstances”.

Rock Investment SAS, part of the “NewGAMe” group of activist investors, which includes French telecoms billionaire Xavier Niel, has also increased its funding for the company from SFr20mn ($21.8mn) to SFr100mn.

GAM’s share price has collapsed 86 per cent since March 2021 after it was fined by regulators and lost one of its star fund managers over its involvement in the Greensill scandal. The struggling asset manager reported a SFr22.5mn loss in the first six months of the year, with net outflows hitting SFr2.2bn in the same period, despite a strong investment performance.

GAM’s board agreed to step down last month after the failure of a takeover offer by UK rival Liontrust, which was disrupted by the activist investors, who branded the deal “lopsided”.

The activists launched a tender offer for 17.5 per cent of the company last month, which closes today. The group currently owns 9.6 per cent of GAM.

The new board, which was voted in by shareholders last week, includes Antoine Spillmann, chief executive at Bruellan, part of the activist investor group, as chair. Other appointments include Fabien Pictet, founder of Fabien Pictet & Partners and Carlos Esteve, founder of Banque Heritage. Anthony Maarek, a former partner at Deloitte, and Jeremy Smouha, a founding member of GAM, have also been appointed to the board.

Spillmann said he was “delighted” that Zumbuehl has been appointed chief executive. “[Zumbuehl] has the right blend of experience and operational expertise, as well as an in-depth knowledge of GAM to lead the firm,” he said.

“Under his leadership we look to build on GAM’s heritage and strong investment performance to return GAM to a path of success and growth that will create long-term value for our clients, employees and other stakeholders.”

Zumbuehl said: “[GAM] has a strong international brand, talented teams across the business and exceptional investment performance. I look forward to building on these strengths to put GAM on to a sustained recovery path.” 

German citizen allegedly received confidential information from Perella Weinberg banker

Frankfurt prosecutors have charged a 48-year-old German citizen with insider trading in one of the country’s largest such cases, public prosecutors told the Financial Times, as German authorities seek to crack down on the practice.

The defendant, who allegedly received confidential information about forthcoming M&A deals from a partner at boutique investment bank Perella Weinberg, is accused by prosecutors of having used inside information in 20 different trades between 2017 and 2021.

The defendant, who has been in pre-trial custody since January, is alleged to have made at least €24mn in profits. Some earlier deals, where prosecutors allege he also relied on insider information, fall outside the statute of limitations.

The Perella Weinberg banker, who worked on mergers and acquisitions in its London office, was found dead days after police raided the bank’s premises in the UK and Europe. He had been put on leave by the bank after the raids.

People familiar with the case said the men had been longtime friends and were in regular contact.

The probe, which involved Germany’s financial watchdog BaFin, Frankfurt state prosecutors and federal police, highlights the increased awareness among German authorities of insider trading and market manipulation.

This is the third big insider trading scandal involving a large financial institution in Germany since 2021.

Last year a former Lazard investment banker received a suspended jail sentence after sharing confidential information with a trader.

In 2021, a former senior fund manager at Union Investment was sentenced to three-and-a-half years in jail and ordered to repay almost six times the €8mn in profits he made from insider trading. That case is currently being retried in Frankfurt after Germany’s highest court found procedural flaws.

Insider trading can be punished with up to five years in jail under German law.

Perella Weinberg has become one of the leading M&A advisers in Germany. It has acted on deals including the €29bn acquisition of Deutsche Wohnen by Vonovia in 2021, the €4.5bn takeover of Osram in 2019 and the €59bn asset swap between RWE and Eon in 2018.

After the raids in January, the bank told the Financial Times that it was “assisting in an investigation by German law enforcement authorities”, stressing it was not the subject of the investigation itself and that there was “no suggestion of wrongdoing on the part of the firm.”

Charges were filed in July but have not previously been made public. No date has yet been set for a trial, but people familiar with the case said it was likely to start early next year.

A lawyer for the 48-year old defendant declined to comment.

Retailers placing goods on open display is an everyday miracle that could turn into a perk of the privileged

When young, the writer Susan Sontag used to frequent the Pickwick bookstore in Los Angeles and shoplift works of literature. “Each of my occasional thefts cost me weeks of self-revilement and dread of future humiliation, but what could I do, given my puny allowance?” she later wrote.

That made her a snitch, in the definition laid out in a classic study of retail theft in a Chicago department store in the 1960s. Snitches were amateurs, mostly women who would pilfer purses and accessories from the beautiful displays. Then there were boosters, a much smaller number of professional thieves who were systematic and ruthless.

This is the age of boosters, judging by the complaints of supermarkets, department stores and electronics retailers about an onslaught of theft. The US chain Target said this week that it will close nine stores in cities including New York and San Francisco because “theft and organised retail crime” are becoming a threat to the safety of its staff and customers.

Target is among many retailers warning of a rise in organised theft, including “flash robs” of young thieves threatening staff, and others brazenly exiting with big bags filled with booty. Dame Sharon White, chair of John Lewis, this month called shoplifting an “epidemic” and the Co-op supermarket chain says repeated robberies could lead to some districts being blighted.

Robbery is not an existential threat to all stores. The US National Retail Federation this week estimated that “shrinkage”, including theft by staff and customers, together with stuff getting lost, rose to $112bn last year. But the 1.6 per cent of sales that this represents is only back to pre-pandemic levels, and external theft accounted for only about a third of the total.

The modern-day snitch is still responsible for a lot of shoplifting. Detectives used to complain of women slipping into stores to pick up status-enhancing goods, but necessities are now out of reach for some families. High inflation and poverty lead to temptation: even the NRF says that social challenges “deserve an empathetic solution.”      

Nor are all store closures due to theft. Target, which will still have more than 1,900 US stores left after closing nine, has been hit together with other chains by shoppers cutting back spending as prices have risen. It is convenient to place the blame on shrinkage if you need to shrink anyway.

But it would be idle to pretend there is no problem. Everyone I spoke to about it this week recounted some experience, or knock-on effect, of retail crime. Supermarkets limit the number of trolleys to prevent them being used for theft; clothing stores lock their doors and make customers buzz to be admitted; ever more items are locked in cabinets.

The people who suffer most are retail workers. Even if crime is in line with historic standards, many face greater abuse from angry shoppers in these anxiety-ridden times. Those in the worst affected outlets must endure repeated criminality and sometimes violence; they are not paid enough to compensate for such stress.

The technology is readily available on the internet. One criminal entrepreneur offers “booster bags”, lined with metallic fabric to seal off antitheft tags when goods are inside, shipped from Poland. There are also keys to unlock tags and jammers to block scanners: everything a modern booster could need.

At this level of preparation, shoplifting shades into what stores define as organised retail crime, perpetrated not for consumption but to flog the loot for cash. It also involves the division of labour: the kids rifling stores pass goods along to fences to be sold in bulk online. They get only a small slice of the proceeds in return for joining a Fagin-like criminal enterprise.

This is not exactly Ocean’s Eleven: semi-organised might be a better description. As one NRF study noted, such groups often employ the homeless or addicts as boosters. Indeed, members of drugs gangs moonlight by stealing stuff from stores in their spare time. The greater the urban dysfunction, the bigger the pool of potential recruits.

It is not obvious how to stop it. Stores complain of a lack of police action against crimes that do not individually amount to much. There is some logic to repeatedly raiding the same place if each theft falls below the threshold of a felony. Or perhaps too many people casually believe that shoplifting from chains is a victimless crime.

I don’t know, but one difference between Sontag snitching in the 1940s and gangs boosting through Los Angeles now is that physical retailing is on much shakier ground. There are enough vacant shops in many towns and cities already without retailers constantly being taught that leaving goods on open display is a fool’s game.

True, supermarkets save money by allowing shoppers to fill their own baskets and check themselves out, but being able to browse freely is an everyday miracle, as well as very convenient. Society would lose a lot if that freedom became a perk of the privileged, or those who live in places where stores do not fear being ransacked.

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Economists and investors urge Beijing to take forceful steps as founder of developer Evergrande faces assets-transfer probe

Pressure is building on Beijing to intervene more forcefully to restore confidence in its reeling property market.

In the latest sign of stress for the market, people with knowledge of Beijing’s decision-making said authorities are investigating whether Hui Ka Yan, the billionaire founder of heavily indebted property developer China Evergrande Group, attempted to transfer assets offshore while the company was struggling to complete unfinished projects.

The company had disclosed an investigation into its founder last week, but offered little explanation. It didn’t respond to questions over the weekend.

Evergrande, whose plans to restructure billions of dollars of debts have collapsed, is one of many property developers struggling to regain their footing three years after the popping of China’s housing bubble. As bad news in the sector piles up, economists and investors are increasingly calling for more coordinated measures to restore confidence and help developers clear up their debts.

Ultimately, many say, it could require significant government intervention, much as the U.S. was forced to step in during the property-induced financial crisis in 2008.

“The government should take more decisive steps to clean up the troubled property sector, allowing losses to be allocated among developers, banks and other stakeholders,” said George Magnus, former chief economist of UBS and an associate at Oxford University’s China center.

The deepening gloom over the property market, which in recent years made up as much as a quarter of China’s economy, is threatening to offset recent improvements in manufacturing and other sectors, jeopardizing a hoped-for economic recovery.

Longer term, many economists warn, a prolonged property downturn could contribute to an extended period of stagnation in China’s economy. That could spill over into the global economy in the form of weaker demand for commodities and depressed Chinese spending on items such as fashion from the U.S. and Europe.

Property investment in the year through August fell 8.8% versus the same period last year. Home sales by value by China’s top 100 developers declined 29% in September compared with a year earlier. Other developers in trouble include Country Garden, which once was considered among China’s healthiest.

“Property is a mess,” said Leland Miller, chief executive of the China Beige Book, an economic-research firm. “That’s why we’re seeing the dullest cyclical recovery in China ever.”

The State Council Information Office, which handles media inquiries for China’s leadership, didn’t immediately respond to questions. In the past, Chinese officials have said that Western politicians and media have exaggerated the country’s economic challenges, and that they are working to bring stability to the property industry.

To date, Chinese officials have mainly tried to muddle through the downturn. President Xi Jinping’s government has focused on modest steps to keep the market from falling apart, while holding off on addressing many of the worst problems.

Ad hoc efforts to make developers clean up their debts and finish stalled projects have met with only limited success. Other measures, such as price floors imposed in many cities to help keep home values stable, have masked the depths of the distress.

China’s real-estate troubles escalated to their current level in part because of decisions made earlier, when the leadership repeatedly leaned on housing to goose growth.

Decades ago, most Chinese people lived in homes provided by their Communist Party work units. Authorities started liberalizing the market in the 1990s, setting off one of the biggest investment booms in history.

By the time Xi came to power in late 2012, a property bubble had already formed in many Chinese cities. Xi and his advisers at times tried to curb speculative activities.

But whenever growth appeared threatened, his leadership took steps to keep the property market humming. In Beijing policy-making circles, property became known as a countercyclical tool for economic management.

In 2015, with a housing glut dragging down prices, Beijing rolled out new policies to stimulate speculative buying and launched a slum-redevelopment program that expanded demand for private housing.

When the Covid-19 pandemic struck in 2020, authorities initially stood aside as the market took off again, inflating the bubble even more.

By mid-2020, Xi was worried the boom was drawing credit away from economic sectors he considers crucial to China’s future, especially high-end technology. With the economy rebounding from initial Covid lockdowns, the leadership decided it was finally time to rein in the market.

“The plan was to grab the window with lower growth pressure to push ahead with changes,” recalled a policy adviser in Beijing.

Guided by the top leader’s instructions, China’s financial regulators put in place a policy dubbed “three red lines” that imposed strict debt and cash-flow targets on property developers, all but choking off liquidity for many of them.

While some analysts applauded the idea of deflating the bubble, many feared the measures were too blunt, adding to financial and economic risks by making defaults more likely.

The market stalled and developers started to collapse. That led to a sharp slowdown in construction activity, which triggered protests by homeowners furious that units they had already started paying for weren’t being finished. Sales of new properties plunged.

A common playbook in such situations calls for authorities to recapitalize stronger competitors, while hiving off the worst assets to be handled or disposed of by asset-management firms.

China did something similar in the 1990s, when then-Premier Zhu Rongji shook up a near-insolvent banking sector by moving bad loans to asset-management firms and recapitalizing state banks through government bonds.

Beijing’s response this time, however, has been more ad hoc. Rather than organize a large-scale restructuring program, it focused largely on trying to ensure developers completed construction of unfinished buildings to defuse public anger.

Last year, large Chinese banks said they would offer at least $178 billion in total yuan-denominated financial support to selected property companies. Regulators also allowed developers to extend repayment of some loans.

In the case of Evergrande, local authorities were told by Beijing to help manage completion of stalled projects and negotiate with other developers to potentially help out.

Bailing out developers such as Evergrande was off the table because of fears it would create a moral hazard and lead to more overbuilding.

But some efforts lacked follow-through, or weren’t embraced because confidence in the market was so low. Some policies conflicted, slowing the process.

One reason why Evergrande hasn’t been able to restructure its debts is the refusal by China’s securities regulator to allow the firm to issue new financial instruments. The company has said it isn’t eligible to issue new debt under China’s securities rules because its principal mainland subsidiary is under investigation.

The company had the equivalent of more than $327 billion in liabilities at the end of June. Hundreds of thousands of housing units Evergrande started or promised to build remain unfinished.

Some analysts have questioned whether authorities’ latest move to investigate the company’s founder was intended at least in part to distract from Beijing’s failures to fully restructure the company.

Without restructuring debts, analysts say, developers such as Evergrande would either need to be put on life support by the government or face liquidation.

Beijing has also been slow to stimulate demand, fearful it could spur a repeat of previous waves of speculative buying.

Some cities prohibited “malicious” price cuts by developers who needed to unload properties so they could pay down their debts. Such moves helped keep home prices from falling much, which could destabilize society. But they also prevented the market from resettling at levels where more people would want to buy.

In the past couple of months, as more bad economic data piled up, Beijing loosened rules that had been restricting home purchases. Recent steps by China’s central bank and local governments have included cutting mortgage rates and lowering minimum down-payment ratios.

“Those are all Band-Aid solutions to stabilize the market, not to repair the market,” said Magnus of Oxford University’s China center.

Many restrictions on home purchases remain, such as limits on the number of properties families can buy in China’s largest cities.

While most economists believe China’s banking system can withstand further pain in the housing market, the need to resolve so many debts could require recapitalization of certain segments of China’s banking sector, Goldman Sachs economists wrote in a research note in late August.

“Further policy changes are needed,” they added. A faster market recovery would require bolder steps, such as the creation of a nationwide asset-management company. Other options could include direct acquisition of distressed inventory and either demolishing properties or converting them to rental units.

“There are no indications from policy makers they will shift toward a more ‘big bang’ approach and, therefore, we maintain our view that restructuring the China property sector will likely be a gradual, multiyear approach,” they wrote.