TheChek News Flow

The Italian mega-brand’s uneven pandemic rebound has some investors worried after years of dizzying growth.

KEY INSIGHTS

When Paris-based luxury conglomerate Kering reported first-quarter sales last Thursday, the overall picture was rosy: explosive growth at its second-biggest brand, Saint Laurent, helped the group’s revenues climb 21 percent on a comparable basis, 6 percent ahead of estimates.

But slowing growth at flagship label Gucci sparked a sell-off, sending shares down 5.3 percent in Paris trading. The Italian label, which has long accounted for the majority of Kering’s sales and profits, grew 13.4 percent to €2.59 billion ($2.76 billion) compared with analysts’ average estimate of 19 percent.

As recently as February, analysts were lauding Gucci for completing a hefty turnaround since the pandemic. To be sure, the brand had taken longer than rivals like LVMH or Hermès to get sales back above 2019′s pre-Covid levels, but it had also seized opportunities to revamp its product offering and tighten control of distribution during the crisis. “Mission accomplished,” analyst Luca Solca wrote then in a note to clients.

Now, the deceleration at Kering’s key asset has investors worrying again, speculating that the gap between Gucci and fellow “megabrands” like LVMH-flagship Louis Vuitton could continue to widen. (LVMH’s fashion and leather division grew 35 percent in the first quarter).

“Is something broken in the Gucci recipe?” one analyst asked after the latest results, a question Kering CFO Jean-Marc Duplaix called “brutal and unfair.” “We have been accustomed to very, very strong growth rates at Gucci, so we need to cope with the new one,” the analyst explained.

“The market is very sensitive to any news about Gucci,” UBS analyst Zuzanna Pusz said. “To say it’s underperforming is a bit harsh. It’s performing in line with the broader sector, whereas the market has an expectation for the bigger brands, the mega-brands, to outperform.”

Rather than anything “broken” in its formula, Kering notably attributed the recent deceleration at Gucci to high exposure to mainland China, where coronavirus lockdowns have returned in major population centres like Shanghai and Shenzhen.

Only 10 percent of Gucci’s stores in mainland China closed during March, but roughly 40 percent of the store network in China was impacted by some form of coronavirus restrictions that impacted store traffic, Duplaix said.

A fast-paced suite of activations to promote Gucci’s Love Parade collection has also been paused due to the lockdowns, he added.

“Gucci is well-penetrated in mainland China, that’s for sure … Even online has been pretty disrupted by the restriction. All the warehouses in Shanghai are closed,” echoed Claire Roblet, Kering’s director of financial communications and market intelligence.

Overall, sales to Chinese clients (domestic and travelling) account for 37 or 38 percent of Gucci sales, compared with a low-30s percentage for most brands according to Citi estimates. Shanghai accounts for one-quarter of Gucci’s Chinese stores — an unusually high exposure for the sector, according to UBS.

The brand’s results were stronger elsewhere: in the US, which has been driving growth across the luxury industry in recent quarters, sales grew by 31 percent, while Gucci’s Europe sales jumped a whopping 71 percent — bouncing back sharply from last year’s coronavirus restrictions, as well as offering a sign that local sales are finally on the mend after years of catering to foreign tourists.

Still, analysts and retail sources are unsure that Gucci’s slowing growth can be explained solely by the situation in China, which is hurting players across the industry.

“There are valid questions to ask about the brand momentum. If demand was stronger they might not have been hit to the same extent,” said UBS’ Pusz.

Some of the company’s current challenges might amount to a sort of hangover after a multi-year sales rager: from late 2015 to early 2019, Gucci recorded dizzying growth under designer Alessandro Michele and CEO Marco Bizzarri.

Michele’s decadent take on design drove the fashion agenda — interrogating notions of good taste by dialling up the whimsy, romance and even gaudiness inherent to the Gucci brand.

Meanwhile, Gucci’s business pushed like there was no tomorrow. Suppliers across Tuscany were ignited as the brand raced to meet explosive demand for Marmont crossbodies and dragon- or peacock-painted canvas totes. At stores in European shopping hubs like Paris, clienteling was often reduced to crowd control, as visitors would line up to stuff their suitcases with duty-free purchases (much of which might be ultimately resold back home).

The heady time saw Gucci more than double sales and roughly quadruple its operating profits in four years, but also risked saturating the market.

“That explosive growth, they didn’t control or contain it,” Citi analyst Thomas Chauvet said. “Has it been growing too big, too quickly for a brand whose products are so visible?”

While the market remains on tenterhooks regarding Gucci’s quarterly performance, the brand has been steadily advancing its strategy, which includes tightening control of distribution while refocusing its core offer to include more higher-priced, iconic products.

“The pullback from wholesale has been radical three years in a row,” Chauvet said. The channel now makes up less than 10 percent, including e-tailers, versus 20 percent of sales prior to Bizzarri and Michele’s tenure.

Kering plans to take that even further this year, exiting online wholesale completely in a bid to eliminate the impact of instantaneous price comparison on its brands.

The pause in China’s daigou trade has also given Gucci an opportunity to clamp down on grey market sales and invest in more direct relationships with clients.

Products are evolving, too. While shows like Gucci’s Love Parade outing in Los Angeles still hammer home Michele’s core message of over-the-top, campy glamour, accessories include a higher share of timeless options, like the relaunched Jackie bag and 1955 Horsebit range.

The brand’s menswear trade has gone in a more classic direction, too, with the brand relying less on logo t-shirts and hoodies in favour of more elevated fare that is still infused with a street-smart vibe. Golf jackets and knitwear stitched with the Gucci monogram are more elevated than merch but still tap into the brand’s logo-fuelled hype. A June presentation in Milan is slated to be Gucci’s first dedicated menswear outing since January 2020.

Amid Gucci’s China-driven slowdown, Kering is leaning into growth in the US market. In a February press conference, chairman François-Henri Pinault said the group was weighing opening more stores in secondary markets including Nashville, Denver and Austin.

Many of those new locations will likely go to the group’s fastest-growing brands like Saint Laurent and Balenciaga rather than Gucci, which already has a robust footprint of 100 stores in the US. But Gucci, too, is set to double down on US retail, with new stores and renovations in its pipeline for cities including Atlanta, Sacramento and Las Vegas.

“Gucci’s US business is still very strong,” retail consultant Robert Burke said. “Kering is seeing good success with their emerging brands, but by no means is Gucci being forgotten.”

Still, results may take time. “Q2 is looking like a challenge: Asia Pacific is set to be weaker than Q1,” Jefferies’ analyst Flavio Cereda wrote. “The Gucci gap [with Louis Vuitton] is a concern.”

If there’s a deal to made for acquiring Kohl’s Corp., the Simon Property Group would probably be the frontrunner.

The nation’s largest developer and operator of shopping centers has the wherewithal to outbid others; confidence in managing retail chains, having invested in J.C. Penney Co. Inc., Forever 21 and Aéropostale in recent seasons, and, according to sources, lots of ideas of how to turn around the fortunes of J.C. Penney through consolidations with Kohl’s.

“One hundred percent, Simon put in a bid for Kohl’s,” said a source close to the Kohl’s auction process, which has continued for the past three months. “No one will outbid David Simon (chairman, president and chief executive officer of SPG) if he really wants it. He wants to bolster J.C. Penney by merging it with Kohl’s. I think he is going to keep both nameplates, have one team do it all. There could be a tremendous amount of cutting, even closing down Kohl’s Wisconsin headquarters.”

Neither Simon nor Kohl’s has confirmed media reports this week, first appearing in the New York Post, that Simon, in partnership with Brookfield Asset Management, put in a $68-a-share offer valued at more than $8.6 billion for Kohl’s.

If David Simon does manage to seal the deal and buy Kohl’s, it would mark a significant step in his evolution from landlord to multifaceted retail force.

Simon has had to repeatedly walk Wall Street through his company’s growing investments in retail — from the SPARC joint venture with Authentic Brands Group, which owns Reebok, Forever 21, Eddie Bauer, Brooks Brothers, Aéropostale and more, to J.C. Penney, which Simon owns with Brookfield Asset Management. Brookfield Asset Management is the parent of Brookfield Properties, the second-largest U.S. shopping mall owner, next to Simon.

While many of the investments came at low prices, rescued companies out of bankruptcy and helped avoid a wave of store closures in Simon properties, Kohl’s is clearly a different case, since it’s stronger and has a large base of off-mall stores.

But where some analysts appeared skeptical of the company’s adventures in retail at first, Simon has been crowing over the investments lately.

And he, in effect, was already doubling down, touting this as a transitional and investment year, setting up bigger gains in retail for the future.

Simon told analysts in February that the company’s “platform investments,” including Penney’s, SPARC, ABG and Rue Gilt Groupe produced “terrific results in 2021.”

“J.C. Penney’s results were impressive,” he said. “Their liquidity position is growing, now $1.6 billion. [The] company de-levered their balance sheet [and] has no borrowings on their line of credit. CEO Marc Rosen strengthened his management team with a new [chief information officer] and chief digital officer. RGG [Rue Gilt Groupe], including our Shop Premium Outlet marketplace growth, continues, and we expect continued investment in 2022 to drive customer acquisition and sales growth. SPARC Group will be the operating partner for Reebok in the U.S. There’s a tremendous opportunity for SPARC to develop sportswear and footwear expertise. The Reebok integration will require additional investment by SPARC as it expands its capability and reach.”

J.C. Penney, in particular, seems to be a source of pride.

“Penney’s success is an excellent example of how to better understand our company,” Simon told analysts in November. “We appointed Stanley Shashoua as the interim CEO nearly a year ago and look at the results. Much like the variety of our investments, no other company or industry has the capability to put an executive in an interim role and produce these results. This is a testament not only to Stanley but to the Simon culture.”

Simon seems to have caught the retail bug.

And while he is still very much in the real estate game, he has encouraged investors to look at his company more broadly as well.

“We have growth levers beyond our real estate assets that are unique attributes of our company,” Simon said. “We have proven to be astute investors. We have unique business models and diversity of income streams.”

That being said, Simon Property still gets something like 80 percent of its cash flow from its U.S. property business as dynamic as the retail business, generally speaking, has been.

“It’s more it’s a tail wagging the dog,” Simon told analysts. “But you know, it’s an important tail and it’s a beautiful tail and it wags nice and is very friendly.”

Bringing Kohl’s on board would give that tail even more heft.

Among the others said to have bid for Kohl’s are the Hudson’s Bay Co., which operates the Saks Fifth Avenue, Saks Off 5th and The Bay brands; Sycamore Partners, a private equity firm that has Belk, Loft, Express, Hot Topic, Ann Taylor and other retailers in its portfolio; Leonard Green & Partners, a private equity firm that has been active in the retail sector, and Starboard Value’s Acacia Research Corp.

Representatives for Simon, Brookfield and Goldman Sachs, which is running the Kohl’s sale process, did not reply to WWD queries. Kohl’s said in March that Goldman had talked with more than 20 potential buyers.

The bidders each believe that Kohl’s, which operates more than 1,100 stores and generated $19.4 billion in volume last year, has the potential for greater profitability, shareholder value and sales, and that they each know how to help the retailer improve its financial performance.

However, the Kohl’s board and management also believe they have a strategy in place that will generate improved results over time, making it conceivable that Kohl’s decides against being acquired.

The Simon-Brookfield bid for Kohl’s came as a surprise despite the developers’ recent track record of buying up retail.

“This doesn’t make sense to me,” said one retail source. “Other acquisitions and joint ventures Simon has done with other retailers and brands and with Jamie Salter [CEO of ABG] made sense, but Kohl’s is not a mall-driven retailer. Kohl’s is an off-the-mall retailer. The question is what economies of scale would Simon and Penney’s bring to Kohl’s?

“There could be back-office efficiencies, but this reminds me of what Eddie Lampert tried to do with Sears and Kmart. He did fine for himself, but the concept of Kmart and Sears, bringing two struggling retailers together, didn’t work,” added the source. Both chains are on the verge of extinction.

Kohl’s, the source suggested, could be best off staying independent.

“Kohl’s is a great operation. Michelle Gass [the CEO] has done a wonderful job of moving the business forward and trying to attract different customers as an off-mall retailer and navigating the business the last couple of years through COVID[-19].”

Under the leadership of Gass, Kohl’s has implemented several growth strategies that haven’t fully kicked in yet and could bear fruit in the future, namely the rollout of Sephora shops inside its stores; the addition of several high-profile brands such as Calvin Klein and Tommy Hilfiger; the plans to open 100 new stores over the next four years, on top of the 1,100 or so already operating, and digital growth. Kohl’s has about 200 Sephora shops installed in its stores, and plans to have Sephora in 850 units by 2023. Before Kohl’s partnered with Sephora, Penney’s had a 10-year run with the beauty retailer.

“I’m wondering if David Simon is thinking of bringing Kohl’s to the mall. But everybody is talking about how off-mall and open-air centers are more attractive in the COVID[-19] environment, and Kohl’s whole concept is being closer to the consumer and situating in neighborhood and strip malls. Do you come up with some sort of hybrid for Kohl’s?” the source wondered. “Everyone is testing smaller formats, so would you bring Kohl’s down to 30,000 square feet,” from its average of about 80,000 square feet.

Kohl’s competes directly with Penney’s. The retailers have similar customer demographics. It’s believed that Kohl’s, which expanded aggressively in the ’80s and ’90s, took market share from Penney’s.

But Kohl’s has been under pressure from Macellum Capital Management, which is seeking to take control of the company’s board and has been highly critical of the company’s management and strategies.

On Tuesday, Morgan Stanley & Co. in a report indicated that Kohl’s has been underperforming its peers, and reduced its share price target to $42 from $50. On the Simon-Brookfield bid for Kohl’s, Morgan Stanley wrote that “media reports on the $68[-a-share] bid would imply a value within 6 percent of our $72 bull case….Kohl’s appears to be significantly lagging department store peers, with first-quarter-to-date traffic down 1 percent, while Nordstrom, [at] plus 32 percent; Macy’s, plus 25 percent and Nordstrom Rack, plus 14 percent, are all experiencing a meaningful year-over-year recovery.

“Further, our store checks throughout the quarter show a recent increase in clearance activity, a potential early indicator of margin pressure to come. We are slightly trimming our [first-quarter 2022] revenue estimate from plus 1.5 percent to plus 0.5 percent and lowering our [first-quarter 2022] EPS down 10 percent to 70 cents, slightly below consensus’ expectation of 72 cents.

“In a bull case, Kohl’s stock could rise to $72 if its financial targets prove achievable. Should management deliver its long-term targets over the next three years, we see upside potential to a $72 price target. However, given that Kohl’s has struggled to deliver on its long-term targets for the past 13 years, we see a low probability of the bull case playing out.

“Is the board serious about a sale? Or are they just buying time? There is always scope for shareholder value to be maximized in the event of a sale to the highest bidder. That said, there has been no announcement by Kohl’s regarding a potentially binding agreement,” Morgan Stanley indicated.

Students discuss wealth inequality and its impact on national culture.

The Pinnacle of the American Dream

The proper question to ask is not whether America’s overall disparity of wealth is increasing, but whether the standard of living is improving across the board. And the answer to that is yes. Widespread advances in technology have helped improve the overall quality of life across the nation. Phones, computers and e-commerce are such examples. Behind each influential technology stand billionaires who played instrumental roles in its development. We should consider their wealth as a small percentage of the overall value that they helped create, with most of the gains being captured by consumers.

A cursory glance at the group of ultra-wealthy Americans reveals that much of their money was earned meritoriously, through a combination of skill, hard work and drive. In 2021 reports showed that over 70% of the 400 richest men in the U.S. and 88% of millionaires are self-made. We should see those vast fortunes as the pinnacle of the American Dream, not as phenomena to ridicule.

—Jeffrey Wolberg, Columbia University, computer science

Innovation Creates Value

Successful business moguls like Elon Musk are a fruit of U.S. culture, not symptoms of its rot. The ability to build and succeed is an inseparable part of the American Dream, which has drawn people to this nation for generations and created one of the most competitive and inventive societies on earth. The billionaire technocrat and the mom-and-pop shop down the street are both created by this ideal.

While the degree to which Americans realize this dream varies widely, society needs to be careful not to confuse wealth equality with baseline living standards. The economy is not zero-sum, and the commerce made by innovation creates value across socioeconomic ranks.

Mr. Musk may be richer than Smaug, but the hundreds of thousands of jobs created by his enterprises, his revolutionary automotive and green technologies, and the prospect of commercialized space travel as a competitive industry contribute more to the rest of us than he could ever personally profit. One may have likewise found Henry Ford’s opulent wealth irksome when he first put automobiles on the assembly line in 1913, but it’s worth not having to commute by horse or bicycle.

Are the outcomes fair or proportionate? No. And these tech moguls can have grating personalities. But just as one must separate the art from the artist, Americans should laud our economy’s rapid growth even if we do not find ourselves personally invested in the people behind it.

—Nathan Biller, Colgate University, history and political science

This Is Nothing New

Disdain for extremely successful entrepreneurs isn’t surprising given the rise of redistributionist ideology in some political corners. It’s an increasingly common political ploy to frame the wealth of Elon Musk as uniquely bad for the rest of us.

Thus, for example, though the acquisitions of media companies by billionaires is nothing new, Mr. Musk’s purchase of Twitter has been met by some with hysteria. Jeff Bezos owns the Washington Post and Laurene Powell Jobs owns the Atlantic, but blue-check-marked journalists claim Mr. Musk’s acquisition is novel and dangerous.

This country faced periods of immense economic inequality in the 1920s and the 1870s. Tycoons from that era such as J.P. Morgan, Washington Duke and Leland Stanford left a lasting mark on our society—their names are scattered all across prestigious universities, companies and museums. Wealth is nothing new. What’s particular to our time is the urging by progressives to get billionaires to succumb to their cultural control.

—Andrew Swanson, Hamilton College, economics

Musk’s Wealth Is Speculative

People have every right to scoff at the extreme wealth disparities that exist in America today. It doesn’t make sense for money to be hoarded by a few people while everyone else has to spend their lives making do.

The general populace, however, doesn’t understand the limits of Elon Musk’s wealth. He may well be worth hundreds of billions, but that wealth doesn’t exist in a bank account. Much is speculative, based on the companies he operates. As of 2021, Tesla was valued higher than such automakers as Toyota or General Motors, despite its lack of legacy and meager market share. It’s easy to imagine that this valuation could decrease, which would drastically decrease Mr. Musk’s wealth.

The average person would be outraged to see his wealth diminish from factors outside his control. Mr. Musk is playing a game of speculation. He sometimes makes promises his companies don’t keep, and the market eventually corrects rogue speculation. Mr. Musk happens to thrive with speculative wealth, while others prefer a bank account’s stability.

Weaker demand and exposure to Ukraine mean the eurozone’s central bank will tighten policy at a slower pace

Christine Lagarde has spent several days persuading investors the European Central Bank will take a more “gradual” approach than the Federal Reserve to stamping out soaring inflation.

However, her insistence that the eurozone economy is not yet as strong as the US has not stopped markets pricing in the possibility of the ECB raising rates for the first time in a decade as soon as July.

Such a shift, which analysts at Goldman Sachs and JPMorgan Chase are now forecasting, would mark a turnaround for the ECB and its president, who was insisting as recently as December that it was “very unlikely” to raise rates at all in 2022.

Markets now bet the ECB will take its deposit rate from minus 0.5 per cent into positive territory by the end of this year and to above 1 per cent next year.

Even so, the ECB will still lag far behind the Fed, which last month raised rates by a quarter of a percentage point from close to zero and is expected to announce a half-point rate rise at its policy meeting next week.

Jay Powell, Fed chair, has hinted at a string of half-point rises to swiftly bring rates to a “neutral” level that no longer actively stimulates demand. Analysts put the neutral rate at between 2.25 and 2.5 per cent.

The Fed will also begin shrinking its $9tn balance sheet as early as June — something the ECB is not planning to do before the end of 2024 at the earliest.

At first glance, the ECB seems to have almost as big an inflation problem as the Fed. Eurozone consumer prices rose by a record 7.4 per cent in the year to March — nearly as far above the 2 per cent level targeted by most central banks as the 8.5 per cent rise reported by the US.

But Lagarde told CBS on Sunday there were several reasons why the ECB was “facing a very different beast” to the Fed, especially the war in Ukraine. Moscow’s invasion has left Europe more exposed to soaring energy costs because of the region’s greater reliance on Russian oil and gas imports.

Higher energy prices account for half of eurozone inflation, much more than in the US, Lagarde said, adding: “If I raise interest rates today, it is not going to bring the price of energy down.” 

Core inflation, stripping out more volatile energy and food prices, was 2.9 per cent, less than half the US level of 6.5 per cent. Lagarde also pointed out that labour markets on the other side of the Atlantic were “incredibly tense” compared to those in Europe.

US private sector average hourly earnings were 5.6 per cent higher in March than the previous year. By contrast, annualised labour cost growth in the eurozone has remained sluggish and even slowed to 1.9 per cent in the fourth quarter, down from 2.3 per cent in the previous quarter.

Lagarde said these factors, along with fears the war in Ukraine will hit Europe’s economy harder than most regions, meant the ECB aimed to shift policy in “a sufficiently well sequenced, well calibrated, and — for us in Europe — a gradual way, so that we don’t induce recession”.

The ECB said earlier this month it expected to stop adding to its bond portfolio in the third quarter. Lagarde went further on Sunday by saying there was a “high probability we do so early in the third quarter and then we will look at interest rates and how and by how much we hike them”. That leaves open the possibility of raising rates at the governing council’s meeting on July 21.

Frederik Ducrozet, a strategist at Pictet Wealth Management, said: “The hawks are pushing for a July rate rise, which is not crazy at this time. I can see it happening even if it is not the base case.”

Lagarde said the timing of tightening would be “data-dependent”. Analysts said recent business surveys, such as the S&P Global purchasing managers’ index and the Ifo Institute’s index of German business confidence, showed the eurozone had weathered the fallout of the war better than expected — boosting the likelihood of a July rise.

“There has been a deterioration of growth, particularly in manufacturing,” said Silvia Ardagna, chief European economist at Barclays. “But we’ve had a much stronger services sector thanks to the reopening of the economy after Covid.”

First-quarter gross domestic product figures for the eurozone are likely to back this up when released on Friday. They are expected to show resilient growth of 0.3 per cent from the previous quarter. Eurozone inflation, due on the same day, is set to fall slightly due to lower energy prices — but analysts expect a continued rise in core inflation to keep up the pressure on the ECB to tighten policy.

A concern for the ECB will be that the last few times it raised rates — in 2008 and 2011 — were shortly before eurozone recessions.

Some worry it could repeat the mistake again. “All in all, the slowdown is inevitable,” said Jens Eisenschmidt, chief European economist at Morgan Stanley who used to work for the ECB. “We assume an EU oil embargo on Russia in some form this year and then we are not that far away from a technical recession in the second half of the year.”

Low level of sanctioned funds belies assumptions that it is a treasure house of Putin kleptocracy

There’s a well-worn Swiss bankers joke about the venality of a particular country. The actual country changes with the times but since this is April 2022, it starts like this: “Where is the capital of Russia?”

You can guess the punchline.

Two months into Vladimir Putin’s brutal war of aggression in Ukraine, however, what is remarkable is just how little Russian capital actually seems to be in the Alps. Neutral, inscrutable Switzerland was, perhaps more than any other country, presumed to be the treasure house of the Putin kleptocracy.

But despite Bern having mirrored all of the US and EU sanctions against Russian oligarchs — measures that apply to around 900 people globally — just $8bn of Russian assets in the country have so far been frozen.

Consider, by comparison, that the channel island of Jersey alone has frozen $7bn of assets linked to a single Russian tycoon, Roman Abramovich.

For the Swiss government, this reflects the fact that applying such a sweeping set of sanctions is a work in progress.

“It’s very difficult to determine the effective control of the assets,” Erwin Bollinger, a senior official at the Swiss State Secretariat of Economic Affairs, said at a briefing last month. The total is likely to tick up, he added, as banks work hard to try and trace their clients’ wealth. “The amount reported is a snapshot.”

To put the low official figure of sanctioned funds into context, the Swiss Bankers Association has estimated that in total around Sfr150-200bn of Russian money is held by Swiss banks.

So surely there will be more asset-freezes to come? Not many Swiss bankers themselves seem to think so.

For the biggest, and most international banking houses, there has been a rush to fall into line and apply the most stringent interpretations of the rules as quickly as possible. The risk of a bruising encounter with US authorities at some point in the future, for the sake of turning a blind eye to Russian clients’ money now, is not one worth taking, they reason.

At UBS, the bank’s executive team was holding twice daily conference calls in February and March on the progress of applying sanctions to their client book. The more secretive, privately owned private banks have less fear of Washington. But they too say they’ve frozen what they can.

The issue, said one Geneva-based banker over a recent drink, is twofold: first, assets are not often held directly in clients’ names. The legal complexities around that are not just fiendish, but often quite innocent, as when money is held by family members. Second, he said, money is very rarely kept in structures in Switzerland.

In Zurich, another banker explained: “We’ve been advising clients not to use Swiss trusts for years — not for political reasons at all but just because they are easier [to use]. All the money is offshore.”

So much for the half-innocent explanations. And the bad? Well, how much notice did you need that the west might be coming after your cash? Russia’s at-risk oligarchy has had the better part of eight years to prepare since the invasion of Crimea.

The well-paid Swiss lawyers and bankers of the Russian rich who, historically, used Geneva and Zurich as their financial clearing houses have, as a result, hardly sat still in helping them shift wealth into the hands of relatives, layers of obscure trusts, or out of the country altogether.

When Putin began to mass his troops on the borders of Ukraine, that process only speeded up. Back in early February, a world still somewhat sceptical about US intelligence claims that Putin would invade his neighbour could perhaps have done worse than look at the billed hours of Genevois notaries for supporting evidence.

“It’s all gone to Dubai!” joked the banker from Geneva by the time we’d opened a second bottle of wine. Swiss banks, of course, have vital information and intelligence on this great squirrelling of wealth.

But they continue to make unhelpful partners for law enforcement because of the extremely strict banking secrecy laws that still — with great national pride — exist in Switzerland. Without evidence of clear suspected criminality, Swiss bankers must protect clients’ secrecy at all costs.

The wealth that has, in such circumstances, remained under the purview of Swiss institutions, linked directly by name to those sanctioned is oligarchs’ loose change, or, if you will, the holiday kitty — for the inevitable season in Gstaad, shopping spell at Piaget or detox at Clinique La Prairie.

Amid slim pickings, it is not, therefore, surprising that the highest-profile asset seized in Switzerland of the $8bn haul, is a three-bedroom apartment on a golf course, belonging to Pyotr Aven. Hardly Xanadu.

Scrutiny on performance is growing as markets see-saw

Melvin Capital’s sharp U-turn this week on proposed changes to its performance-fee structure has reignited a debate among hedge funds about how portfolio managers are paid.

For the last three decades, the standard way to tie pay to financial performance was for hedge funds and private equity firms to receive management fees based on the amount of money invested plus a chunky share, usually 20 per cent, of the gains they produce.

Most investors also insist on “high water marks” that bar performance fees until a fund that has lost money returns to net profit.

That system enriched the $4tn industry during years of low volatility and rising markets. Although performance fee levels have slowly drifted lower, relatively few funds have found themselves constrained by such high water marks.

But gyrating prices during the pandemic, the recovery and Russia’s invasion of Ukraine have pushed some funds so deeply into the red that some managers are trying a different approach with their models likely to come under further pressure.

Melvin, for example, which shed 39 per cent last year after betting against meme-stock favourite GameStop and lost a further 20.6 per cent in the first quarter, rapidly backtracked on plans to charge performance fees this week, after investors expressed their anger, with founder Gabe Plotkin admitting he had been “tone deaf”.

Melvin’s mooted, and subsequently withdrawn, proposals to charge the fees to investors who had suffered big losses underscores the need to revamp the way fund managers are paid, said Peter Kraus, former chief executive of AllianceBernstein.

“Investors overvalue not having to pay performance fees,” Kraus said in an interview.

“A high water mark forces the portfolio manager and the team to change their risk appetite in order to earn their way out. [But] when the team is unstable and you are taking on more risk, that is a bad combination,” he warned. “Why would you take the risk when the [fund] is telling you they are going to lose people.”

Kraus’ new firm Aperture Investors is experimenting with ditching high water marks for a clawback structure for its $4.2bn in assets under management. Its portfolio managers ultimately receive 30 per cent of the returns they generate that are above their benchmark index, rather than the absolute returns.

But half of the performance bonus is held in escrow for several years and pays out only if the gains are maintained. That gives the portfolio managers time to recover from deep losses while returning money to investors if the gains prove illusory, Kraus said. The structure also helps with staff retention because the performance fee clock is reset annually.

Such marks also push some fund managers to shut down and start over, crystallising losses for current investors and handing any new gains to a different set of investors. “When you calculate your losses on the firms that go out of business and you never get your money back, that eradicates the value of the high water mark across all the rest” of the other funds, Kraus said.

Some managers have kept such investor protections and gone on to be successful.

When oil trader Pierre Andurand started Andurand Capital in 2013 following the closure of previous fund BlueGold, he allowed investors who stuck with him to keep their high water marks, while he personally funded the firm until it broke even, said a person familiar with the company.

Nevertheless, others in the industry also back a new model for calculating incentive fees, even if few groups have implemented them yet.

Andrew Beer, managing member at New York-based Dynamic Beta Investments, which oversees $850mn in assets and advocates a low-fee approach to hedge fund investing, said performance fees should only be charged over a set level or ‘hurdle’ and should only be charged over the same time period as investors are locked up in the fund for.

“Imagine if a venture capital firm paid itself a billion in incentive fees when WeWork momentarily hit $47bn, and didn’t give a penny back later? Welcome to hedge fund land,” he said.

However, working out the precise details of a performance fee structure — that is considered by investors and the manager to be fair — can be extremely difficult.

“We have had managers come up with new structures which were so complicated that even after spending hours on them we still didn’t fully understand what was going to be paid and when,” said Patrick Ghali, managing partner at Sussex Partners, which advises clients on hedge fund investments.

He added that clawbacks can make sense but investors should make clear they will not support a manager trying to reset high water marks.

Kraus’s critique drew support from financial reform advocacy group Better Markets.

“If large institutions such as pension funds (who supposedly are smart and powerful) want to protect their investors, then they should require hedge fund managers to use (some of) their winnings in good years to cover their losses in bad years,” Dennis Kelleher, chief executive, said in an email.

“If [a fund manager like Melvin’s Gabriel] Plotkin believes what he says about his ability, strategy, and future, then he should be willing to use his money to cover the costs of paying traders until he . . . makes performance fees based on, well, his performance!”

Billionaire financier brokered introduction to lawyer to help ex-mistress obtain legal status in UK

Billionaire financier Leon Black gave his ex-mistress £2mn for a UK golden visa and introduced her to a lawyer to discuss her application, hoping to facilitate a transatlantic move that would enable the former fashion model to start a new life far from his home in New York.

Black, the former Apollo chief executive, agreed to transfer millions of pounds to Guzel Ganieva in 2015 in the face of what he has characterised in court as extortion demands. She was to use the money “toward obtaining legal status in the United Kingdom”, according to legal filings and people familiar with the situation.

The money was intended to help her qualify for a Tier 1 “investor visa”, some of the people said, allowing her to take advantage of a route to citizenship for wealthy foreigners who wished to settle in Britain.

Ganieva’s affair with Black spilled into public view last March, when she wrote on Twitter that she had been “bullied, manipulated, threatened, and coerced . . .[and] forced to sign an NDA”. She later sued the billionaire in New York state court, accusing him of abusing her during their relationship and later damaging her reputation by accusing her of extortion.

It is unclear whether Ganieva, who currently lives in Manhattan, was granted a UK visa. Jeanne Christensen, a partner at the Wigdor firm who is representing Ganieva, did not respond to an emailed request for comment. The UK Home Office said it “[does] not routinely comment on the immigration status of individuals”.

Susan Estrich, an attorney who represents Black, said: “What is not clear is what Ms Ganieva did with the money to obtain her visa in the UK and her immigration status.”

The British government abolished Tier 1 visas in February after concluding that in some instances the scheme “gives opportunities for corrupt elites to access the UK”. Until then, residency was available to foreigners who had at least £2mn in cash and were willing to park the money in government bonds or other British assets.

Ganieva, a Russian national, moved to New York hoping to earn a living as a fashion model. Soon afterwards, in 2008, she began what Black’s lawyers have described as a “casual, episodic, and completely consensual” relationship with the married billionaire. During that time, he says he paid for her to live in an upscale Manhattan apartment and lent her nearly $1mn.

Black claims that in 2015 Ganieva began to extort him, threatening to “go public, and ruin his family, his business, and his life” unless he complied with her demands, court papers show. He responded by offering an $18mn financial settlement, his lawyers have told a court in New York.

To help her apply for a UK visa, the billionaire brokered an introduction to a partner at a top New York law firm. David Lakhdhir, a London-based mergers and acquisitions specialist at Paul, Weiss, Rifkind, Wharton & Garrison, met Ganieva to discuss her visa, according to several people with knowledge of the encounter. The law firm declined to comment.

The billionaire also made a large sterling-denominated payment to help Ganieva qualify for a UK visa. The former model “apparently has not been gainfully employed for at least a decade”, his lawyers told a court this year.

Black has countered Ganieva’s claims with a federal lawsuit alleging that she conspired with several lawyers and wealthy New York businessmen to publicise false allegations of rape in an attempt to oust him from Apollo Global Management, the private equity firm he founded three decades ago.

Ganieva and her lawyers deny the allegations.

Paul Weiss is one of New York’s top law firms, handling mergers and corporate litigation on behalf of Fortune 500 companies and asset managers including Apollo, a long-term client.

Black quit as Apollo chief last year following the disclosure that he had paid $158mn to the late paedophile Jeffrey Epstein for tax advice and other professional services. Epstein was convicted in 2008 of soliciting sex from a minor. A former federal prosecutor hired by Apollo to look into the matter found no evidence that Black knew of any other criminal activity by Epstein.

As the scandal surrounding Black’s personal life has grown, Paul Weiss has intensified its efforts to alleviate the personal difficulties of its billionaire client.

The month after Ganieva’s Twitter post appeared, Paul Weiss chair Brad Karp called Manhattan district attorney Cyrus Vance to ask him to open an investigation into Ganieva’s alleged extortion scheme.

Vance instructed his prosecutors to look into the matter, the Financial Times has previously reported. No criminal charges have been filed against either Black or Ganieva.

Private-equity firms circling the Barbie maker include Apollo, L Catterton

Mattel Inc. MAT -4.70% has held talks with private-equity firms about a potential sale, people familiar with the matter said, just a few months after the famed toy company declared its corporate turnaround complete.

Mattel has held informal talks with firms including Apollo Global Management Inc. APO -5.96% and L Catterton, the people said. The talks are at an early stage and may not result in a deal.

If there is one, it would be sizable. Mattel had a market capitalization of about $8 billion as of the close of the market Tuesday. It would add to a recent string of big leveraged buyouts, as private-equity firms look to spend a mountain of cash they have accumulated.

Chief Executive Ynon Kreiz said in February that Mattel had completed its turnaround and was “now in growth mode.” Mattel reported a sales jump of 19% in 2021 and said profits rose. Yet its shares have barely budged over the past year and have done little in the past two decades.

On Mr. Kreiz’s watch, sales at the maker of Barbie, Hot Wheels and Fisher-Price toys have stabilized after years of declines and the loss of a key license. The CEO cut a third of its jobs and closed several factories. A former television executive, he also helped to repair Mattel’s relationships with retailers and Hollywood studios.

In January, the company said it had won the license to produce toys based on Walt Disney Co. DIS -3.48% ’s princess lineup and its blockbuster “Frozen” franchise, wresting the properties back from rival Hasbro Inc. HAS -1.43%

Hasbro has had its own troubles. The maker of Nerf and Monopoly is in the middle of a proxy fight with activist investor Alta Fox Capital Management LLC, which is pushing the company to spin off the unit housing Dungeons & Dragons, called Wizards of the Coast and Digital Gaming, and seeking to replace board members.

In 2017, Hasbro made an unsuccessful takeover offer for its rival.

Mattel is scheduled to report first-quarter earnings Wednesday.

The stakes are high for Elon Musk’s personal finances, his backers and Twitter’s status as the 21st century’s public square

Elon Musk may like to kid around on Twitter, TWTR -3.91% but his impending ownership of the platform is no joke, to him or anyone else.

Mr. Musk maintains his interest in Twitter isn’t about money, but empirically it very much is. Not only will the company now account for around a sixth of his net worth, the world’s largest, it will also put him in hock to creditors. His discourse on the platform—both strategic and slipshod—has for years earned him free publicity for his other wildly ambitious business ventures. Just how much the avian-themed microblogging service had to do with his wider success is debatable, but based on his intense interest in how it is managed, it seems safe to say he believes it was significant.

Now, Mr. Musk’s ability to repay the tens of billions of dollars he secured to buy Twitter will hinge on his turning what has historically been a mediocre business into a good one.

Change won’t be easy. Consider the state Twitter had to have been in for its board to ultimately accept Mr. Musk’s offer, so quickly after he rebuffed their invitation to play on the same team by joining the board. Activist-driven attempts to change the trajectory of the company last year, including plans to double its revenue and the pace of its product innovation by 2023, had no lasting impact on its share price. Twitter’s share price fell 50% from mid-February of last year to mid-February of this year, even despite the company’s appointment of a fresh face as chief executive.

Of course, it is unclear if thinking any bigger would have helped. Meta Platforms has proved an especially cautionary tale for what major transformation at a social-media platform can do to a company’s near-term value in the public markets. While its “metaverse” ambitions may eventually pan out, Meta has seen more than $400 billion in market value evaporate so far this year.

By buying Twitter outright, Mr. Musk avoids having to think about fickle shareholders. But he has his own wealth to consider. The fact that he will need to answer to creditors means he has to be careful about trampling over a cash-generating advertising business, no matter how he feels about it. Yet the capitulation of Twitter’s board to Mr. Musk shows advertising alone probably isn’t the answer.

The key question around Twitter has always been the apparent disconnect between its valuation in public markets and its perceived influence on the public consciousness. In the markets, Twitter currently has an enterprise value of 6.4 times forward revenue to Meta’s 3.4 times. That might sound generous, but consider that next year, Wall Street is only expecting Twitter to generate $6.7 billion in advertising revenue to Meta’s nearly $149 billion.

Yet whether in building hype for Mr. Musk’s visions of electric cars and private space flight, or propelling the presidential campaign of a certain New York property developer, or driving the national social and political movements of recent years, Twitter’s role is undeniable.

The question now is whether Mr. Musk can succeed better in bridging that gap than the men who came before him. Whatever his plans, we have to assume they are a lot bigger than a paid-for edit button. Boosting monetization through subscriptions won’t be enough if it comes at the price of undermining Twitter’s central role in the discourse, thus harming its ultimate value proposition as the public square of the 21st century.

After two attempts to lead the company, co-founder Jack Dorsey resigned late last year, noting being founder-led is a “single point of failure” and “severely limiting” for a company. Lest anyone think Mr. Dorsey blames only himself, however, he also tweeted earlier this month that the board has “consistently been the dysfunction of the company.”

Now Mr. Musk needs to cure that dysfunction under perhaps the most intense public spotlight yet, while also running two other huge and innovative companies. All this for a man whose limitless ambition hasn’t always translated into follow-through.

It won’t be enough just to promise a new concept anymore. If Mr. Musk hopes to drive his latest cybertruck off into the sunset, its windows and much else better be bulletproof.