TheChek News Flow

Managers consider switching lenders as they fret about reputational damage

Hedge funds are evaluating their banking relationships after a fire sale of assets by family office Archegos Capital Management forced billions of dollars of losses on Credit Suisse and Nomura.

Executives are weighing up whether to switch lenders they use as their prime brokers — banks that offer a range of services including stock lending, leverage and trade execution.

The head of one London-based hedge fund said the firm had “initiated an internal process” to evaluate its prime broking relationships in the wake of the Archegos debacle.

The top concern was reputation, particularly whether their clients believed they were “associated with the bad people” in the sector, the person said.

Another London-based fund said that, in the wake of the scandal, it had been receiving questions from investors about which banks it was exposed to.

“I’d not be very comfortable if we had balances” at one of the banks caught up in the scandal, said the head of a large Europe-based hedge fund firm.

The situation evokes memories of the financial crisis in 2008, when the risk that a banking counterparty could run into financial difficulty led managers to pull their balances from some banks, in some cases exacerbating the problem.

“Anyone who lived through 2008 is going to be checking their prime brokerage exposure,” said Cutler Cook, managing partner at investment firm Clay Point Investors.

Unlike the financial crisis, there are no suggestions that the Archegos fallout will cause a bank to go under. But hedge funds are nevertheless jittery about the potential danger and reputational damage of having such a close-knit relationship with a bank perceived as less competent, particularly in its risk management. Many of them are baffled as to how the blow-up of a little-known family office could have led to billions of dollars of losses for lenders.

Some managers also fear that the losses could lead some banks to give funds less leeway in future in the time they allow to settle margin calls, or even lead them to scale back their prime brokerage businesses.

For the banks, the Archegos debacle raises awkward questions about how much leverage they can extend to individual funds and how they monitor that risk.

It also highlights the limited visibility that individual banks have of a fund’s overall market exposures. Archegos had built up similar positions with different banks, adding to pressure when lenders tried to offload assets at the same time to meet margin calls.

Archegos also used swaps to build positions, which gave it exemptions from disclosure requirements and further complicated banks’ visibility on its holdings.

“Prime brokerage looks a lot riskier today than two weeks ago,” said Andrew Beer, managing member at fund firm Dynamic Beta Investments, who added he expected banks to cull riskier clients.

“Every bank risk manager will be in the hot seat to prove that outstanding lines and swaps to hedge funds and family offices are prudent and sufficiently collateralised.”

While the full impact of the scandal is yet to be fully quantified, Credit Suisse faces an estimated loss of between $3bn and $4bn, while Nomura has said its estimated claim against Archegos is about $2bn, which could wipe out its second-half profits. Rating agencies have also raised questions about risk management and controls.

One senior prime broking executive described the debacle as “the wrong type of fund in the wrong product”, adding that Archegos’s purchases should have been funded by a margin loan between several banks, not through prime brokerage.

Another prime broker said total exposure was less of an issue for a bank than having the correct risk models in place. “The heads of [Credit Suisse and Nomura’s] PB divisions will be asking did we not have the right risk systems, whether they mischaracterised the securities, liquidity, volatility, etc, when they allowed these trades,” the person said.

Credit Suisse has a margin team that sends daily reports to prime brokerage clients, highlighting the bank’s exposure to the fund and how the bank values the fund’s different types of collateral, said a person familiar with the process.

Industry insiders say that the practice of keeping a fund’s collateral at a third party custody bank, which many funds do, makes it very difficult for a fund to pledge the same assets to multiple banks. That means there is less chance of a fight between banks over who has control of the assets in the event of a fund blow-up.

However, different levels of risk controls at some private banks or wealth managers, some of whom can allow a wealthy client or family office simply to show a statement of their assets, could lead to a risk of collateral being pledged multiple times.

The current pandemic has shown the value of planning ahead of crises

Price is not always a reliable guide to value. The financial rewards that come from developing new antibiotics are pitiful, but their importance can hardly be overstated. The rise of antimicrobial resistance could claim up to 10m lives a year by 2050, resulting in a cumulative loss of up to $100tn of economic output, one study concludes. New business models to prevent this — including Netflix-style subscriptions — are being explored to overcome market failure.

Developers of new antibiotics have to contend with both low prices and low volumes. Innovative treatments are deployed slowly to reduce the risk of resistance developing. That makes it hard to recoup development costs. Those are typically around $1.5bn, about 33 times average annual sales.

Small companies have done a lot of the running, initially sustained by research grants. But they have struggled to make a return. The handful of quoted innovators, such as the US’s Summit Therapeutics and India’s Wockhardt, have together lost more than half their value since 2015. Several have been forced into bankruptcy. 

A number of big pharma companies have sounded the retreat. AstraZeneca pulled out of this line of research in 2016, followed by Sanofi and Novartis in 2018. That has left just a handful of big players in the market, led by GSK — although 20 pharma companies have contributed to a $1bn fund that aims to develop several new antibiotics by 2030.

New incentives are required. The UK and Sweden are both piloting an approach that pays pharmaceutical companies upfront for access to antibiotics, rather than for usage. The UK recently selected two antimicrobials — made by Japan’s Shionogi and the US’s Pfizer — to be purchased via this Netflix-style subscription payment model. US legislators have considered a similar scheme.

There are political obstacles. The pharmaceutical sector is not a popular recipient of government help. But the current pandemic has shown the value of planning ahead of crises. New antibiotics are akin to fire extinguishers or vehicle breakdown memberships. They are worth paying for, in preparation for future emergencies.

The first large-scale crypto-art exhibition reveals the contradictions in China’s eager digital art market

It is a remarkable twist that the first major gallery in the world to host a crypto-art exhibition is in a country where the artists are forbidden from supporting themselves through the proceeds.

Virtual Niche: Have You Ever Seen Memes in the Mirror? opened in late March at Beijing’s UCCA Lab. An exhibition of NFT art, it is curated by BlockCreateArt (BCA), China’s first platform for exchanging art through NFTs, or non-fungible tokens. These are works in digital form that are entered into a digital ledger with additional details such as ownership. The medium gives digital artists, whose work can be infinitely copied, another way to monetise their art.

BCA and most other NFT art exchanges accept cryptocurrencies such as ether or bitcoin in exchange for digital pieces sold by artists. Many of these artists will eventually exchange their cryptocurrencies for government-issued currencies, such as dollars. But in China, a combination of capital controls and internet blocks means that nobody is allowed to exchange cryptocurrencies for renminbi.

However, underneath the blocks, China has a surprisingly active community of blockchain enthusiasts, as well as the world’s biggest blockchain mining hardware company, Bitmain, which sponsored the Virtual Niche exhibition. More broadly, digital art, not only crypto-art, is enjoying an upsurge in Beijing, where at least seven digital art exhibitions were held concurrently last October — partly thanks to the government’s control of Covid.

As the first major gallery to host an exhibition of NFT art, Beijing’s UCCA has gone some way to legitimise the crypto community in the art establishment. The other notable inroad was Christie’s $69.3m sale of an NFT by Beeple, the third most valuable work sold by a living artist. Justin Sun, the Hong Kong-based founder of Tron Foundation who also bid for the piece, says he hopes the global nature of NFT platforms will bring Chinese art to the interest of foreign investors.

For Qinwen Wang, the exhibition’s producer, the recent surge of capital into NFT art represents the new influence of the “tech capitalist class”: bitcoin millionaires, tech entrepreneurs, and their taste for styles such as crypto-punk, which will stimulate more artists to create work in that vein. Sun Bohan, founder of BCA, puts it more bluntly, asking: “Is it old money or new money who gets to decide the value [of art]?”

If Beeple’s work is anything to go by, the new tech capitalist class has a strong liking for phallic cartoons. A much more beautiful example of that new taste, exhibited in Virtual Niche, is a block from Robert Alice’s Portraits of a Mind: a part-painting, part-sculpture of a thick metallic disc. Alice created 40 such discs, inscribing bitcoin’s source code across all of them — a series of blocks that creates a whole, mirroring the architecture of blockchain.

Close-up, patches of electric blue and gold glimmer, bringing to mind the precious metals found in actual mining — as opposed to blockchain mining. Block 8 was chosen for the exhibition because of the association between that number and the Chinese phrase for “making a fortune”.

Despite the crypto-world’s fascination with the ability to monetise everything, many of the artists in the exhibition see the relationship between creativity and finance as fraught. Innovation in fundraising is a way freeing them from thinking about fundraising.

For Ellwood, a young artist recently returned to China from New York, NFTs present an opportunity to gain independence from the demands of art galleries. “Creativity is creativity, and fundraising is fundraising,” he says. He is exhibiting his 3D-printed encrypted self-portrait. Originally a photo of his reflection in his own iris, now randomised through encryption, the resultant sculpture resembles a relief of unknown terrain.

China is steeped in political and social fascination with online technologies, and entrepreneurs and artists are used to pushing at the outer bounds of what the government explicitly approves of. Some of the artworks in Virtual Niche were not fully displayed at times, because they required special software (VPNs) to bypass censorship controls to access the global platforms that the art works reside on.

In trying to reach beyond what is easy, Virtual Niche is ambitious and idealistic — as is every interesting art collective. At the centre of the exhibition space is a wall of Chinese and English words that describe not only the mechanisms of blockchain but also the values of its advocates: anti-censorship, privacy, decentralisation.

Under the agreement, top earners in New York City would pay the highest combined local tax rate in the country

ALBANY, N.Y.— New York Gov. Andrew Cuomo and state lawmakers are nearing a budget agreement that would increase corporate and income taxes by $4.3 billion a year and would make top earners in New York City pay the highest combined local tax rate in the country.

Democratic leaders of the state Assembly and Senate briefed legislators on Saturday on the tax plan, which was one of the last pieces of a roughly $200 billion state budget, people familiar with the deal said. The additional tax revenue would be used to increase school aid and create new funds for undocumented immigrants, small businesses and tenants who are behind on their rent, the people said.

Legislators were briefed on a plan under which income-tax rates would rise to 9.65% from 8.82% for single filers reporting more than $1 million of income and joint filers reporting more than $2 million, the people said.

The plan would also add two new tax brackets. Income over $5 million would be taxed at 10.3% and income over $25 million would be taxed at 10.9%, the people said of the plan, and the new rates would expire in 2027.

New York City’s top income tax is 3.88%, which means the city’s millionaires would face a combined state and city income tax of between 13.5% and 14.8% under the new plan. California currently has the highest top income-tax rate, 13.3% on income over $1 million.

The budget would also increase New York’s corporate franchise tax to 7.25% from 6.5% through 2023, the people said. Previous legislative proposals to increase the estate tax and enact a 1% surcharge on capital gains aren’t part of the emerging budget deal, the people said.

Final drafts of budget bills are expected to be completed and voted on early this week, officials said. The state’s fiscal year began on April 1. Comptroller Tom DiNapoli, a Democrat, said last week that if a state budget isn’t adopted on Monday, about 39,000 state workers may have a delay in receiving their paychecks due this week.

Spokespeople for Senate Majority Andrea Stewart-Cousins, a Democrat from Yonkers, and Assembly Speaker Carl Heastie, a Democrat from the Bronx, didn’t return emails seeking comment on Sunday. A spokesman for Robert Mujica, Mr. Cuomo’s budget director, declined to comment.

A legislative official said lawmakers are also close to an agreement on legalizing mobile sports betting in New York, which aides to Mr. Cuomo estimated could eventually raise as much as $500 million a year. That move, as well as other programs, would bring the total amount of new revenue in the budget to roughly $5 billion, the official said

The agreement would mark the first time that income taxes have increased during the tenure of Mr. Cuomo, a Democrat who took office in 2011. He has previously bragged that he decreased income and estate tax rates and restructured corporate taxes in prior budgets. This year’s budget talks unfolded as Mr. Cuomo faces pressure over accusations that he acted inappropriately in the workplace and investigations into his administration’s handling of Covid-19 in nursing homes.

Mr. Cuomo has denied inappropriately touching anybody and has apologized if his workplace behavior made anybody uncomfortable. He has said the state is cooperating with a probe by federal prosecutors into nursing home policies as well as a state Assembly impeachment investigation looking at both matters.

Business executives warned lawmakers that if excessive tax increases were adopted, residents who have been working remotely in other states would be reluctant to return to New York. The highest-earning 5% of tax filers account for 60% of what the state raises from income taxes.

Supporters of raising taxes have said higher rates won’t prompt migration. The number of millionaires in New York went up after state lawmakers increased income taxes in 2009, they have said.

Republicans said last week that there was no need to raise taxes given an influx of federal aid. The federal government also approved a Covid-19 relief bill in March, which appropriated $12.6 billion of unrestricted aid to New York state in addition to billions more for education and healthcare programs.

In January, Mr. Cuomo proposed a $1.5 billion income-tax increase as part of a plan to bridge a $15 billion deficit across the current and prior fiscal year. The state’s budgetary picture improved since then, with tax collections exceeding estimates.

Mr. Cuomo’s initial proposal assumed the state would receive $6 billion spread across two fiscal years, and the governor said additional funds would obviate the need for tax hikes.

But Democrats who control the Assembly and Senate pushed for additional tax increases to generate recurring revenue that they said was needed for critical social-service programs. Their position is supported by unions and progressive organizing groups. Members of the party now have a two-thirds majority in each chamber, which is enough to override Mr. Cuomo’s veto.

State Sen. Jabari Brisport, a Democrat from Brooklyn, was one of several lawmakers who slept outside Mr. Cuomo’s Capitol office as part of a protest last week. Mr. Brisport said he believed Mr. Cuomo was an obstacle to increasing taxes on the wealthy.

“We have to bring this physically to the governor, because he is wildly out of touch,” Mr. Brisport said Friday.

Rich Azzopardi, a senior adviser to Mr. Cuomo, said that, “Lots of people sleep in this building this time of year” as they work on the budget.

In a chaotic period for mutual funds, Morgan Stanley’s Dennis Lynch was No. 1, steering his fund to a 273% gain for the 12 months

In late March of last year, as the world started to deal with the pandemic lockdowns, the U.S. stock market had already hit “reset.”

A year later, as investors closed the books for the first quarter of 2021, they are looking back on a market rebound that outdid even the post-financial-crisis recovery for both speed and magnitude.

How did the professional stock pickers at mutual funds do? Overall, no better than an index fund. But the best of them blew away the field—including a spectacular 273% gain for the No. 1 fund, the small-stock-focused Morgan Stanley Inception Portfolio (MSSGX).

The group of actively managed U.S. stock funds that The Wall Street Journal tracks (based on Morningstar data) for its quarterly Winners’ Circle survey posted an average gain of 47% for the 12 months ended March 31. While that trailed the S&P 500’s 56% total return for the same period—and fell short of recovering all the losses investors incurred during the selloff early in 2020—the best-performing funds did far, far better.

That’s a testimonial either to the pros’ ability to anticipate the kinds of disruptive change that would benefit the companies they chose to add to their portfolios, or to their ability to tweak their holdings in response to the rapidly changing market environment.

A case in point: Dennis Lynch, head of the Counterpoint Global team at Morgan Stanley Investment Management. Funds managed by Mr. Lynch and his team have routinely earned top honors in the Winners’ Circle. This time, it was their small-cap growth offering, Morgan Stanley Inception.

Mr. Lynch doesn’t credit his fund’s outperformance to any attempt to pick the bull market’s new crop of winners. Rather, his team has long emphasized identifying opportunities in the kinds of disruptive business models that emerged as the winners of the “pandemic market.”

Among them: Fastly Inc., FSLY 4.50% whose edge-computing technologies helps improve the performance of cloud-based apps, including the kind of online gaming that many Americans flocked to during lockdowns. Fastly’s stock price has soared in the bull market, from lows of $14 a share in mid-March 2020 to $70.31 currently. While that’s well below its high of $126 a share last October, the gain was enough—in combination with big moves by other Inception holdings—to boost the fund to the top of the heap.

“We prioritize long-term thinking over knee-jerk reactions, especially during a period of turmoil and crisis like last year,” Mr. Lynch says.

As always, the Journal isn’t recommending that investors view the quarterly ranking as a shopping list. Many of the funds may have high fees, or be closed to new investors or otherwise inaccessible. But their managers may still offer our readers insight into what’s happening in the market. The survey also includes only actively managed mutual-fund portfolios with a three-year record and more than $50 million in assets; it excludes sector funds, quantitative funds and funds that employ leverage.

Small stocks strutted

Funds concentrating on small-cap or microcap stocks dominated the list of winners. That doesn’t surprise Scott Opsal, director of research for Leuthold Group of Minneapolis. “Huge returns coming off a bear market’s bottom are pretty typical,” he says. “In a bear market, investors turn conservative; in the first leg of a bull market recovery, they’re willing to invest in less-stable businesses, to take a flier on less-established businesses and look to the future for their rewards.”

What is unusual about the past 12 months, Mr. Opsal notes, is the speed and magnitude of the recovery. “We got so much stimulus right away, so the bottom was sharp and quick,” he says.

“I would never in a million years have envisioned this kind of market recovery,” says Darren Chervitz, portfolio manager of Jacob Discovery Fund (JMIGX), the No. 2 Winners’ Circle finisher. “We’ve had more than 26 portfolio names post gains of more than 100% in the last 12 months.” That propelled Mr. Chervitz’s fund 220% higher for the 12-month period.

Mr. Chervitz’s willingness to adjust holdings as the bull market has evolved helped ensure he handily beat top-ranked Morgan Stanley Inception in a more-volatile first quarter. Mr. Chervitz’s fund has delivered a year-to-date gain of 37%, compared with 23% for Morgan Stanley Inception.

Jacob Discovery Fund’s assets under management ballooned in response to these returns, thanks both to capital gains and to an inflow of new cash, from only $10 million at the market’s nadir in March 2020 to about $100 million a year later. Partly as a response to this and in part due to changing nature of the market, Mr. Chervitz oversaw a gradual expansion in the number of holdings from 40 to 60 companies.

“When the pandemic first hit, I sought out companies that I thought would benefit from medical innovations as well as from people staying home: that was the first wave for me,” says Mr. Chervitz.

He also added to positions in companies like Arcturus Therapeutics Holdings Inc., ARCT -1.94% which is developing mRNA-based vaccines (including another Covid-19 vaccine candidate) but also using the same genetic research to devise therapies able to treat diseases like cystic fibrosis. The stock’s price has tripled over the past 12 months, but it’s the longer-term outlook that Mr. Chervitz finds intriguing.

“I see the potential for this kind of new medical technology to significantly expand lifespan over the coming decades,” he argues.

Scientific change

Looking past the immediate beneficiaries of the stay-at-home phenomenon, Mr. Chervitz sought out other business models that could benefit from a willingness to embrace scientific and business change. Alphatec Holdings Inc., ATEC -1.27% under the leadership of a new chief executive, Patrick Miles, fell into that camp, he says, as it has rolled out a series of innovations targeting spinal surgery, such as software that tells surgeons about the health of nerves during operations.

More recently, he has invested in a cryptocurrency broker, Voyager Digital Ltd. VYGR 5.11% (listed on Canada’s over-the-counter market), whose biggest problems may lie in managing runaway revenue growth, he argues. “Although it has gone from being a penny stock to trading at more than $30 Canadian dollars a share, its valuation is still lower than the one being discussed for Coinbase’s likely initial offering,” he adds.

Jeff James, the lead portfolio manager of Driehaus Micro Cap Growth (DMCRX), which ended our competition in fifth place with a 12-month return of 175% and advanced nearly 13% in the first quarter, also has been actively readjusting his portfolio in response to the shifts in the economy and the market, adding that active stock-picking has helped his performance. (The fund is closed to new investors, though the Driehaus small-cap fund, which Mr. James says has about a 50% overlap in holdings with the microcap fund, remains open.)

“For the first half of the last 12 months, the market has really been about pandemic beneficiaries,” Mr. James says, including some of the fund’s existing holdings. These included Freshpet Inc., FRPT 0.37% which provides pandemic puppies and kittens (as well as other animal companions) with refrigerated fresh foods, and Fulgent Genetics, FLGT 3.96% which developed some of the widely used Covid-19 tests and which now is pushing forward with research and development of many kinds of genetic tests.

“As it became clear we’d have effective vaccines emerge, I’ve started shifting my emphasis and looking for companies that will benefit most from a reopening,” Mr. James says. For instance, he took a stake in Bally’s Corp. BALY 0.48% , which owns casinos in a number of regional markets (including Colorado and Rhode Island), as well as racetracks and an array of online gaming products. “We bought this in the second half of last year, expecting that while online gaming would continue in the reopening, Bally’s would benefit from a surge in activity at its casinos,” adds Mr. James.

The Driehaus fund has benefited from this decision to try to track the evolution of the pandemic and its impact on an array of businesses. Early on, Mr. James says, the consumer discretionary sector was the worst performer for his fund, but a growing interest in home furnishings and outdoor-related activities had transformed it into the single largest contributor to returns by the first quarter of 2021. Holdings in stocks like Nautilus Inc. NLS 4.22% (a maker of fitness equipment, whose shares have exploded in value from about $2.50 a year ago to more than $16 by March 31) and Lovesac LOVE 2.97% (a specialist modular furniture maker, whose stock has soared from less than $5 to nearly $60 over the past 12 months) were among the leaders.

Baron’s test of time

Not all top-performing fund managers relied on the ability to identify the biggest beneficiaries of the new bull market as it unfolded to generate gains. Baron Partners Fund (BPTRX) earned third place in this quarter’s rankings with a 12-month return of 212%, thanks to its managers’ early decision to invest in stable but high-growth businesses.

“All of our core holdings had been in the fund prior to February 2020,” says Michael Baron, who manages the fund alongside his father, veteran investor Ron Baron. “We don’t try to outsmart the market, but we look for high-quality businesses able to weather the storms and continue to grow, in businesses that we feel will be much larger in five years’ time.”

Mr. Baron attributes the outsize gains in many growth companies, and especially among the ranks of smaller stocks, to the fact that the pandemic seems to have accelerated the pace of economic change. “A lot of growth projections we had established for our holdings for the next several years were pulled forward, and realized in a much shorter timespan,” he says.

The pandemic-related trends contributed to this new focus and sense of momentum, Mr. Baron argues. Legacy businesses weren’t able modify their business plans rapidly, so disruptive companies offering new models were able to capitalize on that.

For instance, Zillow Group Inc. already has captured more attention from eager home buyers (encouraged by ultralow interest rates) reluctant to tour homes in person in the company of a real-estate agent. Tesla Inc., the fund’s largest holding, came to be seen not only as the maker of more environmentally friendly cars, but as a consumer-friendly business in a pandemic.

“Fewer people touch the vehicles when they’re made, and there’s no need to go to a dealership and interact with other people to make the purchase or get the vehicle serviced,” says Mr. Baron.

The No. 4 finisher was Hodges Fund (HDPMX), with a 182% gain under Craig Hodges. It employs a “go anywhere” approach that enabled Mr. Hodges to add (and later subtract) pandemic-economy winners like Zoom Video Communications Inc. ZM 1.54% More recently, the fund has diversified, adding small positions in sports betting firms ( DraftKings Inc. DKNG 2.53% ) and food-delivery companies ( Waitr Holdings Inc. WTRH -3.07% ) Like Mr. James at Driehaus, Mr. Hodges benefited from a stake in Nautilus and ventured further into the outdoor-sports arena with a stake in Callaway Golf Co. ELY 1.50%

The investment, in the form of convertible debt, is set to be announced Monday

SoftBank Group Corp. plans to lead an investment of nearly $1.2 billion into genetic-testing provider Invitae Corp., as the Japanese technology giant ramps up an effort to put more money into public companies.

The investment, in the form of convertible debt, is designed to help Invitae gain broader use of its platform, the companies plan to announce Monday.

Invitae shares have tripled in the past 12 months, closing Thursday at $39.19 apiece and giving the company a market value of roughly $7.7 billion. The notes have an initial conversion price of $43.18 per share, a 20% premium to the company’s trailing 5-day average as of April 1.

SoftBank, best known lately for making big investments in private technology startups out of a $100 billion fund, has been pushing more lately into public companies.

It recently said it was investing in convertible debt of Pacific Biosciences of California Inc., which produces next-generation DNA-sequencing systems used to research diseases and develop treatments. PacBio, as it is known, had announced a joint venture with Invitae to develop a platform to make it easier and more affordable to provide whole-genome sequencing at scale, which Morgan Stanley research analysts called a “potentially game-changing collaboration.” The agreement helped spark a major rally in PacBio shares.

These investments are part of SoftBank’s plan to build up its portfolio of biotech and life-sciences companies. SoftBank has also recently invested in the initial public offerings of several U.S. life-sciences companies.

While SoftBank and its $100 billion Vision Fund have had some high-profile stumbles over the past several years, they have recently scored giant paper gains as portfolio companies including DoorDash Inc. and Coupang Inc. join the public markets at far higher valuations than those at which they invested.

Insurance executive focuses on proven companies and skips the speculative businesses and hype of many blank-check company creators

Fast-trading, social-media-obsessed investors have driven the special-purpose acquisition company craze. One of the biggest SPAC creators is a staid insurance executive who wants nothing to do with them.

Billionaire Bill Foley, owner of the Vegas Golden Knights team in the National Hockey League, has bypassed unproven electric-car makers and speculative space companies and instead focused on solid, sustainable businesses.

“Bill Foley is going to make money,” said Evan Ratner, a SPAC portfolio manager at Easterly Alternatives. “He’s buying a business where he’s going to own it for a long time.”

Despite the speculative frenzy all around him, Mr. Foley, 76 years old, is sticking to his old strategy of buying businesses that are undervalued based on their financials. His record building Fidelity National Financial Inc. FNF 1.52% into a title-insurance behemoth is allowing him to raise cash and do some of the biggest SPAC mergers ever.

“I’ve been a value investor my whole life,” said Mr. Foley, a graduate of the U.S. Military Academy at West Point whose companies share names with historic battles such as Trasimene, Trebia and Austerlitz. “I’m a big fan of boring companies.”

SPACs, also called blank-check companies, are shell companies that list on a stock exchange to merge with a private firm and take it public. The private company then gets the SPAC’s place in the stock market. SPACs have become a popular alternative to traditional initial public offerings for companies such as the sports-betting firm DraftKings Inc., and a trendy endeavor for wealthy individuals and celebrities who expect to earn several times their investments.

Few SPAC creators have raised as much money as Mr. Foley, who was chief executive officer of Fidelity National from 1984 to 2007 and is now nonexecutive chairman of its board. He and former Citigroup Inc. executive Michael Klein are the only SPAC executives to raise at least $1 billion three separate times, according to the data provider SPAC Research.

One of Mr. Foley’s SPACs recently took Paysafe Group Holdings Ltd. public in a $9 billion deal; another earlier this year reached a $7.3 billion merger with the employee-benefits provider Alight Solutions. Both deals are among the largest 15 ever. Three other Foley SPACs are in the market still seeking mergers. One area of interest: units of public companies that could be spun off and taken public separately through a SPAC merger. Some of those might have been neglected during the Covid-19 pandemic as businesses focused on their core areas.

Paysafe posted $1.1 billion in revenue in the first nine months of 2020, and Alight says it has contracts with about half of the Fortune 500 companies. Both deals are reminiscent of how SPAC deals were done before the current boom, when existing profits were more of a priority. Mr. Foley raised money for his first SPAC in 2016.

A Las Vegas resident, Mr. Foley owns other businesses including the Golden Knights, the Whitefish Mountain ski resort in Montana and Foley Family Wines, which operates several wineries in California’s Napa and Sonoma counties. He headlines a group of experienced executives who do fund-raising through SPACs, including the finance entrepreneur Betsy Cohen and the private-equity billionaire Alec Gores.

Mr. Foley’s recent flurry of SPAC activity started last spring, when the coronavirus temporarily shut down the National Hockey League and presented another obstacle to Mr. Foley’s goal of winning the Stanley Cup. The Golden Knights lost in the 2018 finals in their first season, and they were leading their division at the time of the shutdown last year. They have one of the NHL’s best records again this year.

At the time of the pause, the former Air Force captain recognized that SPACs could be a lucrative investment during volatile markets caused by the pandemic. Blank-check mergers offer more flexibility than normal IPOs by letting private companies make projections about their businesses and negotiate valuations behind closed doors. In a normal IPO, pricing can change until the night before a company makes its debut.

Mr. Foley sees himself as an effective executive and investor. When he was CEO of CKE Restaurants—parent company of Carl’s Jr. and Hardee’s—he described himself as a dictator, underscoring his relentlessness, which his backers prize.

“That’s the secret sauce,” said Chinh Chu, a SPAC creator and former co-head of private equity at Blackstone Group Inc. who worked with Mr. Foley on his first SPAC. “He’s a rare combination of the two.”

Businesses connected to Mr. Foley, including Fidelity National and the investment firm Cannae Holdings, often invest in his SPAC deals. That lets him acquire bigger companies but creates risks of conflicts of interest that can arise in SPAC mergers.

Typically, SPAC creators are allowed to purchase 20% of the company at a deep discount. Messrs. Foley and Chu initially paid about $16 million for shares and other investments tied to the 2016 SPAC, according to New York University School of Law professor Michael Ohlrogge. The company then teamed up with Mr. Chu’s former company, Blackstone, to take the insurer Fidelity & Guaranty Life public in a $1.84 billion deal in 2017.

As part of the deal, Blackstone gave Messrs. Foley and Chu millions of dollars in fees. In 2020, Mr. Foley’s Fidelity National Financial paid a premium to acquire Fidelity & Guaranty Life. At the time of that acquisition, the initial SPAC positions held by Messrs. Foley and Chu would have been worth about $315 million, generating Mr. Foley alone a paper profit of roughly $150 million, Mr. Ohlrogge estimates.

A Miami pension fund is suing Mr. Foley and other Fidelity National executives following the FGL deal, alleging that they neglected ordinary shareholders. Mr. Foley said the lawsuit has no merit. He, Mr. Chu and a Blackstone spokesman said that the deal was approved by regulators, that any conflicts were publicly disclosed and that they are proud of FGL’s financial and stock performance.

Mr. Ohlrogge estimates that Mr. Foley made a paper profit of about $400 million in the Paysafe deal. Mr. Foley said he doesn’t know the exact paper gains from his SPAC deals but said they are consistent with other blank-check merger payouts and depend on investors’ liking his deals.

Mr. Foley has stayed away from speculative investments since his experience trading stocks in college. He turned about $4,000 into $40,000—then lost it all.

“If you’re going to be an intelligent investor, you’d better be an intelligent investor all the time—not just once in a while,” he said.