TheChek News Flow

Deal at that valuation would make OpenAI one of the most valuable U.S. startups

OpenAI, the research lab behind the viral ChatGPT chatbot, is in talks to sell existing shares in a tender offer that would value the company at around $29 billion, according to people familiar with the matter, making it one of the most valuable U.S. startups on paper despite generating little revenue.

Venture-capital firms Thrive Capital and Founders Fund are in talks to invest in the deal, which would total at least $300 million in share sales, the people said. The deal is structured as a tender offer, with the investors buying shares from existing shareholders such as employees, the people said.

The new deal would roughly double OpenAI’s valuation from a prior tender offer completed in 2021, when OpenAI was valued at about $14 billion, The Wall Street Journal reported. OpenAI has generated tens of millions of dollars in revenue, in part from selling its AI software to developers, but some investors have expressed skepticism that the company can generate meaningful revenue from the technology.

No final deal has been reached and terms could change, the people said. OpenAI didn’t immediately respond to a request for comment.

OpenAI released a series of artificial intelligence-based products last year that captured the public’s attention, including the image-generation program Dall-E 2 and chatbot ChatGPT. If the tender goes through at that valuation, OpenAI would be one of the few startups able to raise money at higher valuations in the private market, where investors have pulled back from new deals given last year’s technology rout.

Microsoft Corp. has also been in advanced talks to increase its investment in OpenAI, the Journal reported. In 2019, Microsoft invested $1 billion in OpenAI and became its preferred partner for commercializing new technologies for services like search engine Bing and design app Microsoft Design.

Hedge-fund business is said to have taken in $28 billion in revenue for 2022

Citadel’s winning streak continued in 2022, with Kenneth Griffin’s hedge-fund and electronic-trading businesses both posting record revenues even as markets swooned, people familiar with the matter said.

Citadel, the hedge-fund operation with $54.5 billion under management as of Jan. 1, had about $28 billion in revenue, the people said. That far outstripped its prior record of $16.2 billion the year before. The separate Citadel Securities, one of the world’s biggest electronic-trading firms, had $7.5 billion in revenue, up from the prior record of $7 billion in 2021.

After a near-death experience in 2008, Citadel went on in recent years to outpace many rivals, and each of its hedge funds posted double-digit gains after fees in 2022. Operating under tight risk controls that leave Citadel with little directional exposure to markets, the firm’s 1,000-plus traders make bets across asset classes in markets around the world. The firm doesn’t provide detailed information to clients about significant trades, though earlier in the year it told them it had benefited from successful commodities bets.

Citadel Securities is a global market-making operation that handles more than 20% of the shares that change hands in U.S. stock markets each day. The business, which also trades futures, options, Treasurys and currencies, benefits from increased volumes and volatility, allowing it to prosper even when markets fall. In 2022, it added new institutional clients and improved its technology and analytics, one of the people said.

The pandemic-era boom in activity by individual investors has benefited Citadel Securities’ so-called retail-wholesaler unit, which executes orders for brokerages such as Charles Schwab Corp. and Robinhood Markets Inc. Last year’s uptick in revenue for Citadel Securities took place even though overall retail stock-trading volumes declined in 2022 relative to 2021, underscoring the strength of Citadel Securities’ other businesses.

The revenue bonanza will add to the already considerable fortune of Mr. Griffin, 54 years old, who in addition to regularly breaking records in the real estate and art markets, has emerged as a major GOP donor. Forbes estimates Mr. Griffin’s wealth at around $31 billion.

Many hedge funds had rougher years. Goldman Sachs Group Inc. told its prime-brokerage clients in a recent note that hedge funds betting on and against stocks lost an average 12.9% for the year, on an asset-weighted basis, while the S&P 500 lost about 18% including dividends. Citadel’s flagship multistrategy fund, Wellington, returned 38.1% by contrast. The Wall Street Journal previously reported that commodities made up more than 60% of the second-quarter gross investment gains for Wellington.

Citadel returned about $8.5 billion in profits to its investors Dec. 31, up from the $7 billion it earlier expected. (Funds that have notched huge gains regularly return some money in efforts to limit their size and stay nimble.)

Rivals Millennium Management and Point72 Asset Management gained 12.4% and 11.8% for the year, respectively. D.E. Shaw Group’s flagship multistrategy fund, Composite, returned about 24.7%.

All of Citadel’s five strategies—fixed income and macro, commodities, equities, quant and credit—were profitable for the year, people familiar with the matter said. That was evident in the returns of its three other hedge funds, which notched gains of more than 20%. One of the funds, Citadel Equities, was up 21.4% for the year.

Firm suffered steep losses from loans it supplied to Alameda, Three Arrows

Massive crypto lender Genesis Global Trading Inc. laid off 30% of its staff and is considering filing for bankruptcy, according to people familiar with the matter, the latest sign of financial turmoil at the crypto lender.

The layoffs weren’t confined to one department and were across the company, some of the people said. Genesis has 145 employees left after Thursday’s layoffs.

Genesis is working with investment bank Moelis & Co. to evaluate its options for the future, including a potential chapter 11 filing, said some of the people.

A Genesis spokeswoman said that the firm is working with its advisers “to preserve client assets and move the business forward.”

The crypto lender has become the latest digital asset firm to struggle for survival. Last year was marked by a series of crypto bankruptcies as the Federal Reserve boosted interest rates, deflating the most speculative investments. Blowups in the little-regulated sector trickled down to other companies, demonstrating the interconnectedness of the nascent industry. The Fed has signaled it will continue raising rates. Investors are bracing for more pain in crypto.

Genesis suffered steep losses from loans it supplied to the now-defunct trading firm Alameda Research and crypto hedge fund Three Arrows Capital. Both Alameda and Three Arrows filed for bankruptcy last year.

“As we continue to navigate unprecedented industry challenges, Genesis has made the difficult decision to reduce our head count globally. These measures are part of our ongoing efforts to move our business forward,” a spokeswoman for Genesis said.

Last summer, Genesis cut 20% of its 260-person workforce—and its chief executive Michael Moro stepped down—after Three Arrows was forced to liquidate. Genesis had given the hedge fund a $2.4 billion loan with 50% collateral. Genesis has disagreed with this characterization, and Mr. Moro has said the collateral was closer to 80%.

The lender also struggled to keep leaders in its risk management team. Most recently, Michael Patchen, who served for only a few months as its chief risk manager, abruptly resigned in October, according to his LinkedIn profile.

Its woes deepened with the collapse of FTX. Genesis lent at least hundreds of millions of dollars to FTX’s sister trading firm Alameda Research before its implosion in November, according to people familiar with the matter.

Genesis paused loan originations and redemptions on Nov. 16. As a result of Genesis’s move, crypto exchange Gemini has $900 million of its customers’ funds trapped in Genesis. Genesis used Gemini as a partner for its yield program.

Genesis has sought lifelines in the form of an emergency loan of $1 billion from investors.

The company also tried to raise capital from crypto exchange Binance and private equity giant Apollo Global Management.

Moelis was brought on last year by Genesis to help the company shore up its finances and figure out a road map for its future, according to a company statement.

Gemini and other creditors to Genesis have attempted to recoup owed funds in recent weeks. Tensions between heads of both companies erupted into an open dispute on Twitter earlier this week.

Derar Islim, interim chief executive of crypto brokerage Genesis Global Trading, said Wednesday that the company needs more time to resolve the financial crisis brewing in its lending business and has made progress in reducing costs in its business lines.

Genesis is owned by the crypto conglomerate Digital Currency Group, which also operates crypto asset manager Grayscale Investments, crypto news outlet CoinDesk, mining and staking firm Foundry, crypto exchange Luno, data platform TradeBlock, wealth management firm HQ and DCG Real Estate.

Beijing is expanding its presence in Central Asia after the U.S.’s exit from Afghanistan, with an eye on mineral riches

KABUL—A Chinese company signed a $540 million deal with Afghanistan to develop an oil-and-gas field, as Beijing moves to secure access to the country’s vast mineral wealth after the exit of American troops.

In the biggest deal struck since the Taliban’s takeover in 2021, Xinjiang Central Asia Petroleum and Gas Co. Ltd. said that over the next three years it would develop the field in the Amu Darya basin in northern Afghanistan, according to the Afghan regime.

Afghanistan’s aid-dependent economy collapsed after the August 2021 withdrawal of American forces and the Taliban’s toppling of the U.S.-backed government. The regime, which hasn’t been recognized by any country, is trying to stabilize the economy by attracting investments that create jobs for poverty-stricken Afghans. Developing mines and hydrocarbon resources is seen as one of the few economic options.

Raffaello Pantucci, co-author of a book about China’s growing influence over its Muslim-majority neighbors, said that the estimated oil reserves at the Amu Darya site were modest, but the hope was that a giant gas field just across the border with Turkmenistan extended into Afghanistan—and that such a find could make it a linchpin for the economy, as it is for Turkmenistan.

“I don’t know if this is the start of a flood of Chinese deals, but we will continue to see a lot of Chinese companies nosing around in Afghanistan,” said Mr. Pantucci.

Mullah Abdul Ghani Baradar, the Taliban’s deputy prime minister for economic affairs, said at a contract-signing ceremony for the new field in Kabul on Thursday that his administration sought to build a sustainable economy for Afghanistan.

International aid to Afghanistan continues for now, with two-thirds of the population in need of assistance, but is in jeopardy since the Taliban announced a ban on women working in nongovernmental organizations. Girls and women are also being excluded from education. Many countries, including the U.S., along with the United Nations, have called on the Taliban to reverse its decisions.

American experts a decade ago estimated the value of Afghanistan’s mineral resources at $1 trillion, which include rare-earth minerals now used in electric cars. While war raged, this potential wealth was never exploited.

The Taliban have since imposed their rule on the entire country, providing some security, despite patchy opposition from remnants of the ousted government and Islamic State transnational jihadist group, which carries out attacks. The threat extends to the Chinese presence. After the bombing of a Chinese-owned hotel in Kabul in December, which was claimed by Islamic State, China advised its citizens to leave the country.

It is still the safest it has been in decades to develop Afghan mining and oil projects. However, the country’s rulers are under international sanctions, hindering Western companies from getting involved. That opens the way for China. Iran, another U.S. adversary, is also looking to win mining deals in Afghanistan.

“The progress of this project is a model for China-Afghanistan cooperation in major projects in energy and other fields,” said China’s ambassador in Kabul, Wang Yu.

He said that China wouldn’t interfere with Afghan internal affairs, and that the two sides would continue to discuss bringing Afghanistan into Beijing’s flagship Belt and Road Initiative, which builds infrastructure in developing countries.

The Taliban’s minister for minerals and petroleum, Shahabuddin Dilawar, said that the Amu Darya project would create 3,000 jobs for Afghans. He said the Afghan side has an initial 20% share in the project.

“I will make sure that our economy will grow in two to three years, and we will have people from abroad coming to Afghanistan to work,” he said.

Mr. Dilawar said that processing the oil from the field would take place in Afghanistan, although it is unclear whether China is willing to build a refinery there. He called on China to complete plans for developing the huge Mes Aynak copper mine, considered one of the world’s biggest unexploited resources of the metal.

Both the Amu Darya project and the Mes Aynak mine, which is located south of Kabul, were awarded to Chinese companies a decade ago, when the U.S.-backed government was in power. However, neither project was developed then, due largely to the war.

Xinjiang Central Asia Petroleum and Gas, which didn’t respond to a request for comment, took over the Amu Darya project from China National Petroleum Corp., which originally won the contract.

Citizens are still willing to pour their life savings into property, as long as prices keep rising

A significant change is on the cards for China’s real estate sector in 2023, according to reports from the country’s recent Central Economic Work Conference — the landmark event which sets the economic course for the coming year. The delegates insisted on one hand that “housing is for living not speculation”, but on the other, emphasised the critical importance of real estate to China’s economic growth. This statement sent real estate developers’ shares multiplying, to the delight of global investors.

But even if the worst time for China’s real estate sector is behind us, the country’s housing bubble remains a serious structural problem. Just this week, a local government finance vehicle in Guizhou province was allowed exceptional approval to delay its loan repayment to banks by 20 years.

Until the “three red lines” introduced two years ago to reduce borrowing, Chinese housing developers enjoyed a degree of leverage higher than that of their Japanese counterparts in the 1980s or US peers in 2008, especially if one accounts for presale and informal financing. To make things worse, Chinese homebuyers were offered versions of intergenerational and zero-deposit mortgages in much larger volumes than official statistics suggest.

Chinese first-tier cities such as Beijing and Shanghai, have become some of the most expensive in the world, with widening house-price-to-income ratios which are frustrating youngsters trying to get into the market. The media has even coined a new term, “six wallet”, to describe the way young couples have to tap their own two wallets, and those of all four of their parents, to buy a property.

Nonetheless, Chinese households are still willing to pour their life savings into property, as long as house prices keep rising. Camouflaged under the term “improvement housing”, which is supported by the CEWC, many Chinese homebuyers are expressly chasing potential returns from the investment they have known over the past two decades. This is strikingly similar to the behaviour of investors during the Japanese and US housing booms.

Managing speculators’ expectations during a run of rising prices is an art. If the message is too blunt and hawkish, it runs the risk of scaring the market and piercing the bubble. However, if it is not stern or explicit enough, the market may shrug off warnings and continue its buying spree. This is the Chinese government’s dilemma.

To cool housing speculation, policymakers have in the past 15 years implemented a series of curbs, all of which were eventually dropped. After all, China’s housing sector has become too big to fail. Following a few such curb-relax cycles, even the early sceptics are convinced that housing prices will never fall, and that government support will remain steadfast.

Their rationale is that since the housing sector brings critical fiscal revenues to local government and gross domestic product growth to Beijing, then as long as policymakers are pursuing high-speed growth, they cannot afford to withdraw their support for the housing market.

But that has changed. While the speed of growth remains an important policy goal, it is no longer the only one. Over the past few years, China has started a transition into a more financially sustainable, environmentally friendly, and socially inclusive growth.

The economic slowdown in 2022 presents some real tests for policymakers, not just concerning the real estate sector, but China’s future growth model. Recent policies are targeted at stabilising the housing market. However tempting it might be, returning to the mindset in which property is an engine of investment and growth would just be dangerous.

Crypto lender’s former CEO ‘acted as a modern-day Robin Hood’ but misled investors, lawsuit alleges

Celsius Network founder Alex Mashinsky has been hit with a civil lawsuit from the New York attorney-general, which accuses the former head of the bankrupt crypto lender of defrauding hundreds of thousands of investors and flouting the state’s securities laws.

The 57-year-old, who established Celsius in 2017 and was running the business when it dramatically collapsed in July, had promoted the company “as a safe alternative to banks while concealing that [it] was actually engaged in risky investment strategies”, the lawsuit said.

Celsius’s bankruptcy was a watershed moment in the unprecedented market crash that hit the digital assets sector last summer. Other once-prominent firms including Three Arrows Capital also collapsed after a sharp downturn in the value of popular tokens such as bitcoin.

In a complaint filed on Thursday, the attorney-general’s office claimed Mashinsky acted as a “modern-day Robin Hood”, promising customers returns of up to 17 per cent via its Earn programme — which paid interest on cryptocurrency deposits — and urged users to stay invested even as the hole in the platform’s balance sheet grew larger.

They said Mashinsky had also failed to register as a salesperson for Celsius and as a securities and commodities dealer under New York law.

“Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” New York attorney-general Letitia James said in a statement. “The law is clear that making false and unsubstantiated promises and misleading investors is illegal.”

Celsius froze customer withdrawals in June, and filed for bankruptcy the following month, revealing a more than $1bn deficit. In October, the FT reported that Mashinsky himself withdrew $10mn from Celsius just weeks before customer accounts were frozen, amid growing turmoil.

The AG’s office said a disabled veteran was among the New Yorkers to have lost money with Celsius, having invested a decade’s worth of savings totalling $36,000, while another disabled citizen making just $8 per hour lost his entire investment on the platform.

Should the AG’s suit succeed, Mashinsky could be barred from doing business in New York state and be forced to repay investors.

ex Mashinsky took control of Celsius trading strategy months before bankruptcy

A lawyer for Mashinsky did not immediately respond to a request for comment on the lawsuit. Mashinsky, who resigned as Celsius’ chief executive in September, previously said he was “very sorry about the difficult financial circumstances members of our community are facing”.

The AG’s suit comes after a ruling issued in an New York bankruptcy court on Wednesday found Celsius’s “unambiguous” terms of service made it clear that crypto assets deposited in the company’s Earn Accounts were Celsius’s property, ruling against some account holders who argued that they owned their deposits.

In July of last year, Celsius had approximately 600,000 accounts in its Earn programme. These accounts held crypto with a market value worth more than $4bn as of July 10. Celsius reported liabilities exceeding $5bn in a bankruptcy filing.