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Hedge fund is set on business expansion after navigating market volatility through pandemic

Millennium Management, one of the biggest hedge fund winners from last year’s coronavirus-driven market turmoil, has further beefed up its risk management by hiring three former Goldman Sachs partners.

New York-based Millennium, which is headed by Izzy Englander and manages more than $48bn in assets, has created new roles to lead the risk management of the firm’s equity, macro and rates, and credit divisions, said people familiar with the firm’s plans.

Large multi-strategy hedge funds such as Millennium and Citadel rely on tough risk management in order to navigate choppy markets such as in spring last year and late January this year. Such firms, which employ tens or even hundreds of teams of portfolio managers trading a wide range of asset classes and strategies, try to run their winning trades to maximise returns, but quickly cut back losing trades before losses spiral.

The firm has hired Paul Russo, who had previously worked as global chief operating officer of Goldman Sachs’s equities franchise until 2018, as head of risk management for equities, the people said. Scott Rofey, who left his role as Goldman Sachs’s co-head of global interest rates product trading in 2019, will become head of rates and macro risk management.

Jeffrey Verschleiser will become head of credit and mortgage-back security risk management. Verschleiser was previously head of global mortgages, credit and municipals trading at Goldman Sachs until 2019 and has more recently been partner and chief investment officer for credit at private equity firm Reverence Capital Partners.

Millennium declined to comment.

Despite suffering some losses and shutting some trading pods during last spring’s turmoil, Millennium finished last year up around 26 per cent. This year it has gained a further 3 per cent, according to numbers sent to investors.

Other multi-manager firms have also chalked up gains, including Citadel, which gained 24.4 per cent last year and a further 6 per cent this year, and Verition.

Millennium returned some capital to investors last year but its assets under management have still grown from about $37bn at the end of 2019 to more than $48bn, while the number of portfolio manager teams has risen from more than 230 to 265 over that period.

The firm has monitored risk centrally up until now and will continue to do so, although the new hires are part of a move to build standalone risk management in different asset classes as well.

The new hires will report to Millennium’s chief operating officer Ajay Nagpal, co-chief investment officer Bobby Jain and chief executive and co-chief investment officer Englander.

“Risk management is the foundation of our firm,” said Millennium in a note to staff, adding that the appointments had been made “as our business has continued to expand and diversify across strategies, asset classes and geographies”.

Few industries have raised as much money during the pandemic as the cruise-line companies.

Facing a virtual shutdown and suffering heavy losses, the three dominant cruise-line operators— Carnival (ticker: CCL), Norwegian Cruise Line Holdings (NCLH), and Royal Caribbean Group (RCL)—have raised a total of about $40 billion through debt and equity sales.

Unlike the U.S. airline industry, cruise-line companies were pretty much on their own and received no financial help from the federal stimulus bills. Why? While the companies operate out of Florida, they are domiciled offshore in tax havens and pay no material U.S. income taxes.

The debt and equity sales have left the three companies with ample cash to ride out the downturn, but they have come at a price. They will cut into investor returns because of higher interest expenses and a sharp increase in shares outstanding.

Carnival’s net debt, for instance, is expected to rise to about $23 billion by the end of its current fiscal year in November, up from $11 billion at the end of 2019. The company’s projected interest expense this year of $1.7 billion is up from $200 million in 2019, and its shares outstanding are up to 1.1 billion from about 700 million.

Dividends and share repurchases are probably off the table for several years as the companies focus on debt reduction. For industry leader Carnival, which has raised $23.6 billion since March 2020, that calls for caution on its stock.

The bull case is that the cruise lines will benefit from a huge pent-up demand as more people are vaccinated and the economy opens up. Investors have been willing to shrug off the losses—this past week, Carnival reported a $2 billion loss for the first quarter—and are looking ahead to a full return to voyages.

The shares of Carnival, Norwegian, and Royal Caribbean have rallied lately, along with other travel-related stocks.

“There’s definitely a reopening and momentum trade going on here,” says Patrick Scholes, an analyst at Truist Securities. “The market is baking in a full return to sailing by sometime early next year, which is questionable, and that 2023 not only will be a normal year but one that is better than 2019, which is also questionable.”

He has a Sell rating on Carnival’s shares and Hold ratings on Norwegian’s and Royal Caribbean’s.

Carnival, at about $29, trades for 17 times projected 2023 earnings per share of $1.67; Norwegian, at $31, fetches 13 times estimated 2023 earnings of $2.30 a share; and Royal Caribbean, at $90, trades for 15 times projected 2023 profits of $5.99 a share.

These are optimistic earnings estimates that assume higher operating profits in 2023 than in 2019. Morgan Stanley analyst Jamie Rollo, who has below-consensus industry earnings projections for 2023, wrote on Friday that “we doubt the industry will be larger or more profitable than it was pre-Covid.”

There may not be meaningful free cash flow until 2023 or 2024 because of interest expenses and still-lofty capital expenditure, as the industry seeks to refresh a fleet that has an average age of more than 10 years.

There are signs, to be sure, that vacationers are eager to resume travel and return to the seas.

Carnival highlighted that trend in a first-quarter update this past week. Booking volumes accelerated in the first quarter and were about 90% higher than in the fourth quarter, reflecting “significant pent-up demand,” Carnival said. It added that advance bookings for 2022 are running ahead of a “very strong” 2019.

In a conference call, Carnival CEO Arnold Donald said the company had enough liquidity to last well into next year without any revenue. Its financial priorities, once voyages begin, include regaining an investment-grade bond rating and cutting interest expense.

Royal Caribbean’s chief financial officer, Jason Liberty, said earlier this year that the company expected that the resumption of voyages would lead to “compelling returns and a strong balance sheet.”

Norwegian Cruise Line CFO Mark Kempa said in the company’s fourth-quarter earnings release that it remained “focused on our long-term strategic priorities and creating a clear path to financial recovery.”

Investors have gravitated to cruise lines, in part, says Truist’s Scholes, because they are among the few groups of stocks in the travel industry that are still appreciably below prepandemic levels.

Carnival, for instance, is 40% below a price of $50 at year-end 2019.

Yet the three cruise-line operators have projected year-end enterprise values (equity value plus net debt) that are above where they stood at the end of 2019 as a result of higher debt and more shares outstanding.

Much to the frustration of the industry, the U.S. Centers for Disease Control and Prevention hasn’t set a firm date for the resumption of voyages from U.S. ports, although the agency did say last week in an email to Barron’s that it desired a “resumption of passenger operations in the U.S., expressed by many major cruise ship operators and travelers, hopefully by midsummer.”

Norwegian Cruise Line recently offered to sail ships with fully vaccinated passengers and crew to break the logjam and restart U.S. voyages in July.

Norwegian’s CEO, Frank Del Rio, told CNBC that “it’s time to get back to cruising” and that fully vaccinated ships will be among the safest venues anywhere.

Scholes says that fully vaccinated ships may not be a long-term solution for the industry, given that a sizable percentage of Americans are vowing not to be vaccinated.

Asked about fully vaccinated ships, Carnival’s Donald said this past week that the company would “have to see how that evolves.”

“The key thing is mitigating risk,” he said. “We can’t be—prefer not to be and hopefully won’t be—asked to stand up to a zero risk standard because, frankly, nowhere else in society is that being considered. We just like to be treated similar to the rest of travel and entertainment and tourism sector. And so if we do that, we’ll be fine.”

While bookings are strong, it is unclear whether travelers—and particularly older ones, an important demographic—will be as eager to go on cruises as they were before the pandemic.

Investors don’t appear to be reflecting those risks or the earnings dilution from the financing flood in their enthusiasm for the cruise-line stocks.

Stuck-at-home players mean gaming companies have generally had a good pandemic. Less so Ubisoft. Shares in the “Prince of Persia” publisher have languished over the past year, whereas rivals Electronic Arts and Activision Blizzard have risen 34% and 60% respectively. Longer-term performance is even worse: since Vivendi dropped a mooted takeover in 2018, Ubisoft’s market value has fallen by 5%, leaving shares valued at just over 8 times forward EBITDA including debt, well below those peers’ double-digit multiples.

Investors’ chief bugbears are disappointing releases, such as “Tom Clancy’s Ghost Recon Breakpoint”, and lacklustre profitability. Despite a crop of famous titles, Ubisoft is expected to report an operating margin of just 20% in its latest financial year, according to Refinitiv forecasts, below peers EA, Take-Two Interactive Software and Activision.

Guillemot, whose family founded Ubisoft and still owns a 16% stake, has a turnround plan. The upcoming release of pirate-themed adventure “Skull & Bones” could help, as may a mobile-game collaboration with 5% shareholder Tencent. He also wants to sell more in-game content – extra items a player can download for a fee – which is more profitable than releasing new titles.

If Guillemot continues to stumble, however, there will likely be plenty of assassins ready to pounce, such as Activision Chief Executive Bobby Kotick, or even Tencent. True, the Guillemot family’s roughly 20% voting stake would make a takeover harder. But an acquirer could win over other shareholders by paying a fat premium and still make an acceptable return.

Assume a bidder offers a 50% premium, valuing Ubisoft at 12.6 billion euros including debt. Next, assume it can raise Ubisoft’s operating margin to 33% by 2024, roughly in line with the current average of peers EA, Activision and Take-Two. By 2024, EBIT could reach 1.1 billion euros, based on Refinitiv forecast sales of 3.4 billion euros. After tax, that would equate to a 7.6% return on the purchase price, broadly in line with the sector’s estimated cost of capital.

Guillemot has successfully fought off would-be corporate marauders before. As long as humdrum profitability persists, he will remain vulnerable to fresh attacks.

• President Biden outlined a vast expansion of federal spending on Friday, calling for $1.52T in spending on discretionary programs—in addition to his $2T infrastructure plan—that would significantly bolster education, health research, and fighting climate change.

• India, which managed to contain the pandemic to some degree at the beginning, is now seeing a massive rise in Covid-19 cases, with vaccinations, a mammoth task in such a large nation, dangerously behind schedule and hospital beds running short.

• Supplies of JNJ’s one-dose coronavirus vaccine will be extremely limited until federal regulators approve production at a Baltimore manufacturing plant with a pattern of quality-control lapses.

• Prince Philip, the Duke of Edinburgh, husband of Queen Elizabeth II, father of Prince Charles, and patriarch of a royal family that he sought to ensure would not be Britain’s last, died on Friday at Windsor Castle in England at the age of 99. • +/- AZN: New research has identified unusual antibodies that appear to have caused, in rare cases, serious and sometimes fatal blood clots in people who received the Covid vaccine made by AstraZeneca.

• Russia has amassed more troops on the Ukrainian border than at any time since 2014, and talks of intervention are causing jitters in Ukraine and prompting Western governments to try to determine Moscow’s motives.

• President Biden ordered a 180-day study of adding seats to the Supreme Court, per his campaign-year promise to establish a bipartisan commission to examine the potentially explosive subjects of expanding the court or setting term limits for justices.

• In China, local brands are prospering from a consumer backlash against NKE, H&M, and other foreign brands over their refusal to use Chinese cotton made by forced labor, putting the NBA in a tough spot, since some of its players promote Chinese brands.

• Young migrants on the Mexican border are posing a problem for the Biden administration, which faces growing pressure to expand its capacity to care for as many as 35,000 unaccompanied minors who continue to cross the border.

• The coronavirus pandemic has become more dire in Michigan than in any other state—outbreaks are spreading rapidly, and officials are reporting more than 7,000 new infections each day, a sevenfold increase from late February.

• Florida governor Ron DeSantis’s inclination to keep his own counsel and drive hard at reopening the state has made him perhaps the most recognizable Republican governor in the country and a favorite of the party faithful, though he has many critics.

• Europe, the epicenter of the coronavirus pandemic last spring, is again at the center of a global surge of Covid-19 cases, but this time the threat comes from a virus variant first seen in Britain and known as B.1.1.7, more contagious and deadly.

• World Bank president David Malpass described climate change as an “immense” issue for the globe and said nations must transition away from coal—comments he would not likely have made when Trump, who appointed him, was president.

• The sharp rise in bond yields is forcing traders to consider that they may be holding two irreconcilable ideas—that the Fed has no real control over bond market interest rates, and that the Fed can keep the stock market aloft as long as it tries to control interest rates.

• The decision by workers at an AMZN warehouse facility in Alabama to vote against forming a union hands the tech giant a victory in its biggest battle yet against labor organizing, after a campaign that fueled a national debate over working conditions.

• A fine imposed by the Chinese state administration for market regulation against BABA says the e-commerce company punished certain merchants who sold goods both on Alibaba and on rival platforms, and will force it to revamp operations.

• Florida governor Ron DeSantis’s handling of Covid-19 and sparring with the media may boost him in the GOP presidential field—but first he must get re-elected to his current office.

• Data show that voters continue to maintain a higher-than-usual level of interest in politics during the Biden presidency, a sign the record levels of turnout, donations, and activism during 2020 may continue.

• Michigan governor Gretchen Whitmer urged high-school classes to go remote for two weeks and called for a halt to both youth sports and indoor dining, to combat a steep surge in Covid-19 cases in the state.

• Some of the largest US school districts are planning to fully reopen schools in the fall as more staff become inoculated against Covid-19 and a record level of federal funding is expected to bolster safety measures.

• The deployment of Russian troops along Ukraine’s border and Moscow’s hint hat it could intervene in the event of a full-scale war in eastern Ukraine are dimming hopes for a peaceful resolution to a seven-year conflict.

• Hubs located far from the coasts have emerged as beacons to job seekers and businesses during the pandemic—Salt Lake City has the hottest job market in the US, and cities such as Austin, Denver, Indianapolis, and Kansas City aren’t far behind.

• In the battle over privacy in advertising, “if AAPL is King Kong and FB is Godzilla, mom-and-pop online merchants are worried they’re the screaming, scattering citizens who are about to get stomped as these two giants battle it out.”

• In China, car sales have reached pre-pandemic levels—retail sales of passenger cars in China hit 5.09M vehicles in the first quarter, up 69 percent from a year earlier, when Covid-19 sent sales plummeting.

• H.O.T.S.: Shipping backlogs and port congestion issues are bad news for Americans eager to upgrade their wardrobes, though retailers may end up benefiting; PTON investors “have been backpedaling hard on the fitness-products maker’s stock even as its delivery times have improved”; For the world’s largest companies, President Biden’s proposed global tax policy proves the adage that “you should be careful what you wish for.”

• Front page story reports “Loans to Sanjeev Gupta’s company from Greensill Capital that were later sold to CS investors were made on the basis of suspect invoices that have raised suspicions of fraud.”

• A severe winter frost in France has badly damaged buds and flowers in vineyards and fruit orchards and will cut grape harvests in some areas by as much as 90 percent, putting the wine harvest in peril.

• Raul Castro, who has led Cuba since the death of his brother Fidel, is set to step down and cede power to a younger generation at next week’s Communist Party congress, where leaders will discuss a dire economic crisis and growing political dissent.

• German chancellor Angela Merkel is set to increase the central government’s powers to battle the coronavirus in a bid to counter a third surge of infections, and will impose a more uniform set of rules on the country’s 16 states.

• Big Read piece says “Only a few months ago, the IMF forecast lasting damage to living standards around the world because of the pandemic—but now it says the advanced economies will emerge largely unscathed,” an opinion that may be overly optimistic.

• A crucial source of funding for special purpose acquisition companies is drying up, a sign one of Wall Street’s hottest products may face a slowdown after a record-breaking quarter.

• Lex Column: With the US economy rebounding and Democrats in control of Washington, AMZN will have to increase pay, though probably by less than what a union would call for; Doubling down on impairment charges at Fraser’s at this stage “is sound and fury”; It has taken social distancing requirements during the coronavirus to make golf cool again—in Asia, golf club memberships are soaring.”

• Comment: President Biden’s global corporate tax proposals are brave and bold, says DeAnne Julius—“Few can defend the current system as economically efficient or productivity enhancing.”

• If CBS executive Kim Godwin takes the reins at ABC News, she’ll face a number of challenges, including rivalries between anchors and an allegedly toxic culture within the division that includes bullying claims.

• Donald Trump called Senate minority leader Mitch McConnell a “dumb son of a bitch” during a GOP donor event at Mar-a-Lago on Saturday, and said the coronavirus vaccine should be named the “Trumpcine” in his honor.

• Secretary of State Antony Blinken criticized Beijing for its lack of transparency about the pandemic and for its campaign of genocide against Uighur Muslims, but would not commit to boycott the 2022 Winter Olympics in China.

• “Godzilla vs. King Kong” is on track to become the highest-grossing North American film since the onset of the pandemic—the Warner Bros. film netted $48.1M in its first five days since opening in theaters on March 31.

Kwarteng makes concession on new UK takeover regime

Business minister raises threshold at which foreign buyers must notify authorities

Business secretary Kwasi Kwarteng has further revised tough new UK legislation on foreign takeovers to try to make the system more “proportionate” and ensure the new rules do not deter overseas investors.

Kwarteng, appointed to his post in January, has sought to refine the scope of the government’s National Security and Investment Bill, which aims to impose stringent safeguards on foreign ownership of British companies.

A government amendment to the bill, introduced on Friday, has changed the proposed overseas stake threshold at which Kwarteng’s department must be notified about a bid from 15 per cent to 25 per cent.

It follows a move last month when Kwarteng narrowed the list of which type of foreign investments will fall foul of the new takeover regime, after business lobby groups expressed fears about the scope of the legislation.

The bill, currently being scrutinised by the House of Lords, is part of a drive by Boris Johnson’s government to stop China or other countries deemed to be hostile from acquiring stakes in sensitive UK companies, particularly technology businesses.

Kwarteng has re-examined the bill following complaints from business groups that its scope could create delays and massive bureaucracy around uncontroversial deals involving overseas bidders.

The new 25 per cent notification threshold for a foreign company hoping to take a stake in a UK company mirrors similar restrictions in the US.

“This change will ensure the new regime is proportionate and as transparent as possible without reducing the government’s intervention powers,” said a government spokesman. 

“The National Security and Investment Bill will strengthen the UK’s ability to investigate and intervene in mergers, acquisitions and other types of deals that could threaten our national security. The overwhelming majority of transactions will be unaffected by these new powers.”

Under the government amendment, the secretary of state will retain the power to scrutinise acquisitions where a foreign bidder is proposing to buy less than a 25 per cent stake in a UK company if the minister reasonably suspects that this amounts to the purchase of “material influence”. That power would be available up to five years after an acquisition takes place.

The government is retaining the right to reintroduce a 15 per cent notification threshold if deemed appropriate in the future, although the business department said it did not expect this to be necessary.

Last month the government tightened some of the definitions of the 17 industries covered by the bill in order to “streamline” the system.

Officials said that should mean a drop in the number of transactions that are notified under the planned takeover regime from a previous estimate of up to 1,800 each year. Only a small percentage of these are likely to be blocked by the government or face “remedies”.

South African telecoms group plans to spin out business within the next year

South Africa’s MTN, the continent’s biggest mobile phone company by subscribers, is looking to value its mobile money arm at more than $5bn as it prepares to sell or list a minority stake to draw global investors enticed by fast-growing fintech assets.

Chief executive Ralph Mupita told the Financial Times that the unit, which added almost 12m new users to a total of more than 46m last year, should be worth at least $5bn to $6bn and that the group would spin it out within the next year.

Johannesburg-listed MTN, which has 280m global subscribers, unveiled the separation plan last month as part of a strategy shift to refocus its business and cut R43bn ($3bn) of net debt.

“We think the best way to run these businesses is to structurally separate them,” Mupita said, adding that the move would unlock value hidden in MTN’s $11bn market capitalisation.

The group wants to tap into growing investor interest in the mobile money businesses built by African telecoms in the past decade that allow phone subscribers to send or receive money outside banks and increasingly sell ancillary services such as microinsurance.

MTN’s rival Airtel Africa recently sold minority stakes in its mobile money business, valuing it at more than $2.6bn excluding cash and debt. The Rise Fund, the impact investing arm of buyout firm TPG, and Mastercard bought stakes for $200m and $100m respectively.

“There is surely value to be unlocked from the telcos by carving out their mobile money operations,” analysts at Renaissance Capital wrote in a recent note.

MTN’s mobile money business has more than double the number of the Airtel Africa unit’s 21m. “We think that the fintech business will be worth more than $5bn, reading across from the Airtel Africa transaction,” Mupita said.

The group’s financial services interests also include an insurance joint venture with over 10m customers. Separating these businesses has become more pressing as their scale has become “quite material”, Mupita added.

The move also anticipates growing regulatory scrutiny in Africa of increasingly complex financial services being wholly owned by mobile phone companies. “In the discussions we’ve had with regulators, they welcome this,” Mupita said.

MTN is also aiming to raise cash with a sale and leaseback of most of the group’s mobile-phone towers in South Africa by the end of the year, and it is exiting its troubled Middle East operations.

For many investors MTN is still seen as a proxy for its single biggest market, Nigeria, although it was it was left reeling from a $5bn fine imposed by regulators in the country in 2015 for failing to disconnect millions of unregistered Sim cards.

This was later negotiated down to $1.5bn, but shortages of foreign currency have also made it difficult to repatriate cash to finance dividends.

Despite these problems “there is a lot we can control” in Nigeria, a market that accounts for nearly 40 per cent of group earnings and 12m of the 29m new subscribers added last year, Mupita said. “We think Nigeria is a huge data story,” he said. “There are still low levels of internet penetration which we believe we are well positioned to drive higher.”

This week, everyone will be talking about LVMH’s post-pandemic outlook at its annual meeting, the start of Ramadan and BoF’s Professional Summit on closing fashion’s sustainability gap.

There’s less clarity than usual about how luxury’s biggest brands have fared so far in 2021. The industry is likely to see strong economic data out of the US and China translate into booming sales from its two biggest markets. But lockdowns across much of Europe can’t be good for business. LVMH will release first-quarter results on Tuesday, and with a global presence in ready-to-wear, leather goods, beauty and hotels, its outlook will set the tone for competitors. The latest report will be followed soon after by LVMH’s annual shareholder meeting on Thursday, an opportunity for executives to give a detailed outlook for the coming months and, occasionally, to make some news. Last year, CEO Bernard Arnault predicted a gradual recovery from the pandemic, setting expectations low for what turned out to be a surprisingly robust rebound for the conglomerate’s brands. The normally bullish Arnault is unlikely to be quite so circumspect this time.

The Bottom Line: One area to watch is LVMH’s travel retail business. Air passenger volumes are rising rapidly in the US and some other countries, but it’s not yet clear whether the international shopping trips that are so important to global luxury brands are making a comeback.

Last year Ramadan, which rotates around the calendar based on the lunar calendar, happened to fall in late April when global lockdowns were at their strictest. Sales from what was normally the Muslim world’s biggest shopping event of the year were effectively wiped out. In 2021, fashion brands and retailers are hoping to make up for lost time. They just might: Dubai’s malls have been open since last summer, and the emirate, along with nearby Bahrain and Qatar, has been among the world’s fastest at vaccinating its population. Retailers who depend on the “Ramadan Rush” of Muslim tourists arriving to the UK and other destinations are out of luck, however. And some of the largest Muslim-majority countries by population, including Indonesia, have been slower to roll out vaccinations.