Inditex’s fast fashion makeover offers a pandemic lifeline
Spanish clothing group has blurred the boundaries between physical and online stores
Rolls-Royce sets course to net zero after Covid turbulence
British aero-engine group looks to battery power and greener fuels following collapse in long haul air travel
US hedge fund makes $400m from natural gas price volatility
Statar Capital posted gains of almost 24% last month as it benefited from choppy commodity market
Volatility in natural gas prices helped one US hedge fund bag profits of more than $400m in October alone.
Miami-based Statar Capital, which manages about $2bn in assets and is headed by Ron Ozer, a former trader at Citadel and DE Shaw, made around 23.5 per cent last month, said multiple people familiar with the performance.
The gains mark a bounceback after Statar suffered a loss of about $130m in the first two-and-a-half weeks of September.
Natural gas prices have rocketed this year as demand has rebounded and supply has proven strained, but the market has been choppier in recent weeks. UK gas prices, which were up more than 500 per cent for the year early last month, have fallen along with continental European prices during October, slipping about a quarter on signs Russia would increase exports again after restricting supplies to western Europe for months.
US prices on commodity futures exchange Nymex, meanwhile, seesawed during October, surging to almost $6.40 per million British thermal units at one point before briefly falling below $5, only to rebound sharply again.
Statar was able to profit from market volatility, repeatedly using declines in short-term contracts as a chance to increase positions before taking profits during rebounds in price, said one person familiar with its positioning.
The gains, which equate to more than $400m of trading profit for October, make Statar one of the big hedge fund winners from a volatile month for some markets, during which bonds also experienced a large upheaval.
Statar is now up around 29 per cent this year, said a person who had seen the numbers. The firm declined to comment.
Statar was one of last year’s top-performing hedge funds, gaining 59 per cent, as a number of commodity funds, including Pierre Andurand’s Andurand Capital, profited from a collapse in oil and other commodity prices during the early stages of the coronavirus pandemic, and then from a subsequent rebound.
Commodity markets have been hard going for hedge funds over the past decade, as lengthy periods of declining prices have made it harder to make money, and a number of firms, including Armajaro Asset Management and Astenbeck Capital Management, have shut funds. However, Statar has previously said that this exodus of capital had helped create “the best opportunity set for natural gas trading in many years”.
Ozer previously focused on trading natural gas futures and options at DE Shaw before becoming head portfolio manager for US natural gas at Citadel, where he was promoted after his first year to report directly to billionaire founder Ken Griffin.
Galderma in talks over potential $22bn IPO
Chief executive points to strong prospects as skincare market expands
Galderma, the Swiss skincare specialist, has begun talks with international investors for a possible $22bn initial public offering in the first half of next year.
Chief executive Flemming Ornskov, the former boss of rare diseases specialist Shire, told the Financial Times that Galderma and its owners had accelerated strategic planning after two years of bumper growth thanks in part to the Covid-19 pandemic.
Galderma was spun out of Nestlé in 2019 and bought by a consortium for $10bn led by private equity house EQT and including Singapore’s GIC and the Abu Dhabi Investment Authority.
Ornskov said that since then, growth in the markets in which Galderma operated had “significantly accelerated”. “We have experienced double-digit top and bottom-line growth. Last year we hit $3bn in top-line sales. We’re expecting that it will be $3.5bn plus this year.”
The pandemic, coupled with the growing power of social media, has turbocharged the market for non-invasive aesthetic and specialist skincare, Ornskov said.
“Digitalisation and social media have underscored something that was always part of this [business] — the emotional part. The skin is the largest organ in the body and we look at it every day. We react to it. We look at people and their skin and we judge whether they are healthy or in a good mood . . . Many hours spent on screens have reinforced that.”
Ornskov said he could not comment on the timing or outcome of the company’s strategic discussions, but confirmed that banks had been appointed and said a decision on Galderma’s future was imminent.
He added that “the growth profile, the size of the company” meant an IPO was “of course one of many [options] but it is certainly a realistic one”.
According to senior advisers to the company, Lazard has been appointed as lead IPO adviser, with Goldman Sachs, Morgan Stanley and Credit Suisse as joint global co-ordinators. Bank of America, BNP Paribas, Citi, Jefferies and UBS are joint bookrunners. Banks have told the group that a valuation of $22bn is possible.
“I would assume that our owners are getting second opinions from very competent people including investors about the attraction of markets and how we stack up,” Ornskov said. “I think we will do well on that scorecard because if I look at our growth and how the market is performing, we have everything lined up for one day being the world’s leading dermatology company.”
Galderma nevertheless is still largely dependent on a portfolio of historic products — the patents for many of which have begun to expire. Stagnant profits and a slim pipeline of new products were key reasons behind Nestlé’s decision to sell the business.
Ornskov’s appointment was an early signal its new owners expected radical change.
The 63-year-old Dane has already pledged to pump significant capital into research and development, and has moved to reposition Galderma’s existing range — in which he says there is still huge value — by honing the company’s marketing focus.
The “vast majority” of advertising revenue, for brands which include Cetaphil and Proactiv, is now spent online and on social media, Ornskov said. “That is not a skill set that was there in 2019.”
Despite criticism from investors for his “excessive” pay package, Ornskov built a reputation for maximising shareholder value at Shire — using a tight grip on product portfolio and marketing to guide the FTSE 100 company to an eventual $63bn takeover by Japan’s Takeda.
Galderma’s owners — and Ornskov himself — believe he can repeat the trick.
Citing his “track record” at Shire, he said: “I would like to build the world’s leading dermatology company, I want to be the one who is known for the broadest portfolio, the best products, the ones that are most innovative — so that a consumer, or a patient or a dermatologist will always use us as the reference.”
Investors are sick of paying for private equity’s private jets
Already frustrated by the industry’s “two and 20” fee structure, investors take aim at opaque costs
A $2.7bn private equity manager, named after the Monomoy lighthouse in the Nantucket Sound, was forced to return almost $2m to its investors after US regulators decided last year that it had failed to provide “full and fair disclosure” about costs that were ultimately paid by clients.
Monomoy Capital pledges to help its clients navigate “rough waters” but numerous similar examples of private equity managers exploiting opaque fees and expenses to boost their own profits are making investors feel queasy.
Investors say they routinely find themselves billed for extra costs, such as the hiring of private jets, in addition to the standard “two and 20” — a 2 per cent annual management fee and 20 per cent performance fee — charged by the managers of private equity groups, known as general partners or GPs.
“Expenses are the biggest cause of misalignment between GPs and their clients,” said an investor running a multibillion-dollar private equity portfolio.
Public criticisms of private equity managers by institutional investors remain extremely rare. Most large investors are reluctant to speak out in case they damage their own reputations as fiduciaries — guardians of their clients money — and because they worry that they will be quietly excluded from joining new funds raised by private equity managers.
But now, rule changes might be coming down the track.
The Institutional Limited Partners Association, a trade body, is urging US regulators to force private equity managers to report all of the fees and expenses which they charge in a clear and consistent format to investors.
“I have made allocations to more than 50 PE funds and there are a dozen where it is unclear what is being charged as an expense, even with the help of an external auditor which we hire to try to verify the information provided by our GPs,” said the private equity investor.
Michael Frerichs, the state treasurer of Illinois who oversees a $430m private equity portfolio, appealed in October to the US Congress to pass “new rules and sensible reforms” so that a “dangerously unregulated” part of the capitalist system would not cause further damage to institutional investors, businesses and workers.
Clear and standardised fee and expense disclosures by private equity managers, which either own or invest in 8,000 US companies, would “drive better decision making” among investors, said Frerichs, a former Democratic member of the Illinois senate.
Assets overseen by private equity managers have grown rapidly over the past decade to $4.5tn and the contracts signed by investors allow GPs to take additional fees for sourcing deals, salaries for advisers and expenses for regulatory and compliance filings.
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A quarter of investors are paying for administrative expenses for private equity managers, such as in-house legal services, accounting and computer software, according to ILPA.
The legal costs to set up new private equity funds have more than doubled since 2011, a bill that is also paid by investors who are also having to stump up for new expenses such as cyber security services for GPs.
KKR, the world’s second largest private markets manager by assets, has reported that it earned $480m in capital market fees and a further $152m in “additional fees” including monitoring and transaction fees in 2020.
“These fees include services provided by KKR which its portfolio companies are encouraged to use. They accounted for 30 per cent of KKR’s fee related revenue last year,” said Eamon Devlin, a private equity lawyer.
Ludovic Phalippou, a professor of finance at Oxford Saïd Business School, said that the expenses heaped on to investors at the discretion of GPs shows that the alignment of interests between private equity managers and their clients is “completely crooked”.
“It is amazing that it is down to GPs to decide how much they get paid after the contract with the investor is signed. This is effectively what happens when a GP can choose what to invoice as an expense,” he said.
Demands by investors for improvements in transparency standards led ILPA to create a new cost reporting template in 2016 for fees and expenses which the association says is “gaining traction”.
“All investors should have the transparency necessary to validate their fees and expenses with managers. Regulation can help achieve this,” said Chris Hayes, general counsel at ILPA.
But a significant minority of GPs remain reluctant to provide more information to their clients.
Only 60 per cent of the US private equity funds raised since 2017 have used the ILPA cost template or a similar reporting framework, according to Colmore, a specialist data provider.
“Fee templates based on the ILPA guidelines are now standard features of the services of fund administrators and software providers. We are moving to the point where ILPA type reporting standards will apply to all new PE funds,” said Ben Cook, the chief executive of Colmore.
Gary Gensler, chair of the Securities and Exchange Commission, said in October that he supported reforms to enhance fee disclosures by private funds.
“Every pension fund investing in private funds would benefit if there were greater transparency and competition,” said Gensler.
His comments follow blistering criticisms by the SEC last year which rebuked private equity managers for overcharging investors and secretly favouring their own interests and those of high-paying clients over other customers in clear contravention of existing regulations.
Private equity managers are obliged to observe a fiduciary duty to act in the best interests for their clients. But most funds are domiciled in Delaware and the Cayman Islands where local laws permit GPs to dilute or eliminate key parts of their fiduciary duties. Investors pay for these contractual changes which weaken their own legal protections and strengthen the hand of GPs.
Nearly 48 per cent of institutional investors reported modifications or reductions in the fiduciary duties specified in PE funds where they made new allocations over the past 12 months, particularly in the North America and Asia-Pacific regions, according to ILPA.
“This goes to the very heart of the issue of the alignment between the GP and investors in a private equity fund,” said Chris Hayes, general counsel at ILPA.
The association is lobbying the SEC to tighten the rules so that the fiduciary standards that apply to GPs are not weaker than those covering other types of investment advisers, such as mutual fund managers.
Not everyone thinks that PE needs to change how it operates.
“Transparency and accountability are important but it’s worth remembering that investors understand that PE is an expensive asset class . . . investors have demonstrated that they’re willing to pay those costs in exchange for the returns they are able to obtain,” said Igor Rozenblit, founder of the Iron Road Partners consultancy to private market managers, and a former SEC regulator.
But Phalippou cautions that regulators will have to step up their supervision of GPs to ensure that they “play by the rules” as opaque, complex private equity strategies move deeper into the investing mainstream.
“At the moment, investing in PE is like walking into a jungle. All you can hope is that the lions will be friendly,” he says.
Facebook’s ‘meta-existential’ pivot for survival
Facebook is in the fight for its life, but it won’t be the regulatory pressure that will kill it. Zuckerberg is leaning heavily on “metaverse” as a lifeboat to save a declining user base. He has long known that the future of Facebook is rooted in owning a major hardware platform.
Facebook’s brand pivot to “Meta” last week week is the third inning of a multibillion dollar game of balance sheet roulette. Let’s see if consumers adopt and make it a reality — all of Meta/Facebook is at stake.
As an investor in VR and AR since 2016, I find it cautiously encouraging to hear all the talk of “metaverse” on trending business channels today. Could this really be the time for VR?
The most valuable companies in the world own the metal on which their software applications run: Apple and Microsoft have had their fingers in the hardware pie for years, and even Google was able to build a robust OS business with Android. Facebook’s billion-dollar acquisition of Oculus in 2014 more than showed Zuck’s hand, though it would be another seven years until the pivot actually happened.
In the years directly after the Oculus acquisition, there was a flurry of investment in VR across the industry. Hardware platforms from Google, Microsoft, Sony, HTC, Steam and others were announced with great fanfare, though these investments were largely scrapped or defunded a few years later, leaving a dearth of VR hardware platform options.
This is when Facebook struck. It upped its investment in the Oculus/Reality Labs platform, innovating to create high-quality mobile VR hardware devices, started seeding game developers with capital and voraciously acquired the most engaging games on their platform. Taking a developer ecosystem approach through acquisition is a long-play investment to solve the cold-start content problem that all of these VR platforms faced.
Zuckerberg started with gaming, because it’s the earliest category of high-engagement consumer excitement and growth, thus turning up the temperature on consumer comfortability in a headset. Next, Zuck is moving VR/AR into the enterprise to drive hands-on, 3D collaboration by remote teams to a distributed workforce readied through the pandemic.
Lucky or good, he is known as a prescient strategist. He has displayed excellent strategy in response to market movements and timing, not all of which he controlled.
The “metaverse” already exists in Fortnite and Roblox. Zuck is betting we want fully immersive experiences through head-worn computers and can drive an older user base.
If Facebook’s acquisition history is a guide, Zuckerberg’s strategy will find success, though Facebook’s most successful acquisitions, including WhatsApp and Instagram, were already proven social successes at the time they were acquired. Going all in on the “metaverse” is creating a new platform and paradigm that has been woefully slow to find adoption despite multiple hype cycles over 30 years of excitement.
Given the balance sheet, this will likely work — but today, it’s still a master stroke of strategy and opportunity existing in a vacuum.
H2O.ai raises $100M at a $1.6B pre-money valuation for tools to make AI usable by any kind of enterprise
Image Credits: Mario Simoes (opens in a new window)/ Flickr (opens in a new window)under a CC BY 2.0 (opens in a new window)license.
H2O.ai — a startup that has developed an open-source framework as well as proprietary apps that make it easier for any kind of enterprise to build and operate artificial intelligence-based services — has seen a surge of interest as AI applications have become more ubiquitous, and enterprises beyond tech companies want to get in on the action. Now, it has raised $100 million to fuel its growth, a round of funding that values H2O.ai at $1.7 billion post-money ($1.6 billion pre-money).
This is a Series E round, and it’s being led by a strategic backer, the Commonwealth Bank of Australia (CBA), which has been a customer of the startup and will be using the backing to kick off a deeper partnership between the two to build new services. Others in the round include Goldman Sachs, Pivot Investment Partners, Crane Venture Partners and Celesta Capital. Further plans for the funding include building more products for H2O.ai as a whole, and hiring more talent to continue expanding the company’s H2O AI Hybrid Cloud platform.
This is not the first time that a customer has led a round as a strategic backer: in 2019, Goldman Sachs led the company’s Series D of $72.5 million. As a sign of how the company has been growing, and the general appetite for what it does, H2O’s valuation has leapfrogged since that last round, when it was valued at $400 million, per PitchBook data. Mountain View-based H2O.ai has raised $246.5 million to date.
The fact that both of the last rounds have been led by big banks that are also customers of H2O.ai’s speaks a lot to where the opportunity has been for the startup. Sri Ambati, the founder and CEO (who previously was also a co-founder of Platfora, which was acquired by Workday), told me over email that about 40% of the company’s revenues currently come from the very wide and all-encompassing world of financial services.
“Retail banking, credit cards, payments — almost every payment system from PayPal to MasterCard are customers of H2O,” he said. On the equities side, companies power fixed income, asset management, and mortgage backed security services using H2O’s technology, with MarketAxess, Franklin Templeton, and BNY Mellon also “strong” customers, he said.
That is also seeing a growing complement of business from other verticals, he added: Unilever, Reckitt P&G are among those in consumer goods; UPS is one of its users in logistics and delivery; Chipotle is among those in food services; and he said that AT&T “is one of our largest customers.”
Covid-19 has had a role to play here, too.
“Manufacturing became a fast-growing vertical due to supply chain disruption and demand sensing,” he said of the pandemic. “We launched H2O AI Health to help our hospitals and providers, payers like Aetna and pharma customers.”
Notably, H2O.ai is also now breaking ground into working more with other tech companies that want to build more AI into their own workflows to in turn provide services to their own customers. “Our latest wins are in vertical clouds and SaaS ISVs,” Ambati said.
The company has offered an open source component to its services, which it calls simply H2O, from its earliest days, and that is now used by over 20,000 enterprises. Part of the reason for that is its flexibility: H2O.ai says that its open source framework works both on top of existing big data infrastructure, on bare metal or on top of existing Hadoop, Spark or Kubernetes clusters and is able to ingest data directly from HDFS, Spark, S3, Azure Data Lake or any other data source into it’s in-memory distributed key-value store.
“Our open source platform gives freedom and ability for customers to build their own AI centers of competence and excellence,” Ambati said of the open source tools. “We are like the Tenzing Sherpas of the AI mountains helping our customers to traverse and conquer AI peaks.”
That framework can be used by engineers to build customized applications, while H2O.ai’s proprietary tools provide more completed applications in areas like fraud detection, churn prediction, anomaly detection, price optimization and credit scoring — areas that can benefit from the ingestion of massive amounts of data in order to gain better insights into what might happen next: these sit either as a complement to what human analysts and data scientists might be able to unearth, or potentially, in some cases, as a replacement for the more basic work they might do. In all, there are currently some 45 applications in all.
The plan, Ambati said, is to over time build out more of these, which will reside in “app stores” in specific verticals offering a range of its proprietary, pre-built tools particular to the demands of each of them.
The trend fueling H2O.ai’s growth has been gaining momentum for several years now.
Artificial intelligence holds a lot of promise for the world of enterprise IT: used well, tools like machine learning, natural language processing and computer vision can speed up productivity, or even open up completely new areas of opportunity for an organization. Over time, it can save companies billions of dollars in operational and other costs.
One big issue, however, is that in many cases, organizations might lack the internal teams to build or carry through projects that use AI, and that’s before considering the fact that as needs and parameters evolve all of that infrastructure will need updating, too. Technology touches everything in an enterprise these days, but not every enterprise is a tech company.
H2O.ai is not the first or only startup that has aimed to fill this gap in the market, although it seems to have managed its task a little more successfully than others.
Notably, Element.AI out of Canada was built out on the back of a large amount of funding and buy-in from big tech companies like Microsoft and Nvidia also to address the idea of democratizing AI for the wider world of enterprises that might lack the resources to build and run AI tools themselves, but could very much benefit from them before their businesses simply get cannibalized by the many AI-fuelled tech companies moving into their spaces. It had a strong focus on integration (it was a little like an Accenture for AI services) but never managed to make a big enough jump from concept to business and was eventually acquired, in 2020, by ServiceNow to complement its own efforts to build tools for businesses.
Ambati said that only about 10% of H2O.ai’s business is in the area of services, with the remainder, 90%, coming from its products, as an explanation for why one startup’s approach worked while another did not.
“It is easy to get lured by services in data science and AI,” he said. “Being true to our product maker culture and yet building deep customer empathy and listening is critical to success. Customers experience our maker culture and become makers themselves. We are continuously making our software easier (democratizing) low-code, reusable recipes and automation through AI Cloud and building data pipelines, AI AppStores and delivering AI as a service that our customers can use to improve their customer experiences, brands and communities.
“The big difference — we are raising a forest, not just a tree. H2O AI Cloud, H2O Wave our low-code Application Development, H2O AI AppStores, Marketplace and H2O-3 Open Source ML are at the core of AI Applications and software already and we are partnering with customers and their ecosystem of partners and developers.”
That’s a play, and business, resonating well with investors, too,
“Commonwealth Bank has a significant asset in the millions of data points collected every day. AI already has helped us to improve our customer experience, however, we know there is untapped potential to do more,” said Matt Comyn, CEO of CBA, in a statement. “The investment in and strategic partnership with H2O.ai extends our leadership in artificial intelligence and ultimately boosts the bank’s ability to offer leading digital propositions and reimagined products and services to customers.” Dr. Andrew McMullan, chief data and analytics officer at CBA, will join the H2O.ai board.
French prosecutors investigate Sanjeev Gupta’s business empire
UK metals magnate’s operations probed over allegations of ‘misuse of corporate assets’ and ‘money laundering’
French authorities have opened an investigation into Sanjeev Gupta’s business empire, deepening the challenge facing the UK metals magnate once hailed as the “saviour of steel”.
The Paris Prosecutor’s Office told the Financial Times it was probing Gupta’s French operations over allegations of “misuse of corporate assets” and “money laundering”.
France is home to several important assets in the GFG Alliance, the collection of plants and smelters Gupta amassed during a multibillion-dollar acquisition spree financed by Greensill Capital. Greensill’s collapse in March plunged GFG into crisis and triggered investigations in Germany and by the UK’s Serious Fraud Office.
Paris prosecutors said they launched their probe in July after suspicious activities were reported by public officials. They declined to provide details of the investigation.
GFG said it was “not aware of any such investigation and refutes any suggestion of wrongdoing in its French operations”.
The investigation by French prosecutors comes after a report from an influential group of British MPs last week called into question Gupta’s stewardship of Liberty Steel, the UK’s third-largest steelmaker, after identifying “a series of audit and corporate governance red flags” at GFG.
The probe marks a sharp contrast to the warm welcome previously extended to Gupta by the French government. Bruno Le Maire, France’s economy minister, has praised GFG’s deals in the country as “exemplary” for reshoring and decarbonising industry.
Some of the allegations involve Gupta’s attempts earlier this year to retain control of an aluminium smelter in Dunkirk, the largest in Europe and one of GFG’s most prized assets, according to people briefed on the matter.
Public officials flagged a deal Gupta struck with commodities trader Glencore as he sought to fend off a takeover attempt by US private equity firm American Industrial Partners, the people said.
As well as assuming 40 per cent of the smelter’s senior debt, Glencore would reap a financial benefit from every tonne of aluminium it sold, which could amount to a $10m windfall for the commodities trader over the course of a year, the people added.
Officials who reported the agreement were concerned about whether it was designed to benefit Gupta at the expense of the plant and thwart AIP’s takeover bid, said one of the people briefed on the matter. AIP last month said it had seized control of the smelter. GFG has responded with legal action.
According to French law, misuse of corporate assets is when one or more directors make use of the goods or credit of a company in “bad faith”, either for personal gain or in the interests of another business they own.
GFG said: “There was a commercial agreement with Glencore at market rates to secure stable financing for the business.” Glencore said that it “entered into arm’s length commercial arrangements with Dunkirk which were actively negotiated and were the subject of due diligence and review”.
Officials also reported GFG’s use of €25m from the Dunkirk smelter to pay off litigation costs that stemmed from a dispute with Rio Tinto over the original purchase, according to people briefed on the matter.
The use of funds from the French business to settle the litigation costs was seen as a “misuse of corporate assets” that purely “benefited the shareholder”, the people added.
A further case reported by officials relates to whether all of an €18m French government-backed loan given to Liberty Aluminium Poitou, part of the GFG empire, from Greensill’s now-insolvent German banking subsidiary, was deployed at the plant, the people said.
French media reported earlier this year that the Poitou loan was being investigated by local prosecutors, but that case has now been wrapped into the wider probe by Paris prosecutors.
GFG said in a statement that it had “abided by all the rules and invested €45m of shareholder funds into French downstream assets, including Poitou, while under our ownership”.