TheChek News Flow

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Macro :

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- Cases Top 80,000; H.K. Extends School Closure: Virus Update

- UBS Global Wealth Prefers EM Stocks Over Euro-Zone Equities

- Japan warns of rapid coronavirus spread after global market sell-off

- The Yen Won’t Provide Safety From This Virus Storm: Macro View

- Italy Suspends Tax Payments in Virus-Affected Areas

- Hong Kong Schools to Resume April 20 at Earliest, Govt Says

Keep an eye on :

- ABBN SW : ABB Robotics Targets E-Commerce Giants Amid Automotive Slowdown

- AIR FP : ANA to Buy As Many As 20 Boeing 787s for More Than $5b

- AF FP : United Airlines Withdraws 2020 Forecast, Citing Coronavirus

- ANTO LN : Antofagasta’s Los Pelambres Mine Expansion Challenged in Court

- AAPL US : Apple Reopens More Than Half of its Retail Stores in China

- ARBN SW : Arbonia Full Year Ebitda Misses Lowest Estimate

- ATO FP : PANW Cuts FY Adj EPS View, Misses Lowest Est.; Shares Fall 12.8%

- AUSS NO : Austevoll Seafood Fourth Quarter Ebit Misses Lowest Estimate

- BAKKA NO : Bakkafrost Fourth Quarter Operating Ebit Misses Estimates

- BKG LN : Berkeley Toughens Bonus Targets After Shareholder Opposition

- CLLN LN : KPMG alerts regulators to concerns over Carillion auditor

- CLVS US : CLVS 4Q Loss/Shr Wider Than Est.; Shares Fall 7.3%

- COFA FP : Coface Raises Financial Targets as Part of 2023 Strategic Plan

- CCAP GY : Corestate Full Year Ebitda Meets Estimates

- CSGN SW : FINMA Sees Swiss Emergency Plans Credit Suisse, UBS as Effective

- DNB NO : DNB, KLP Reach Deal to Jointly Finance NOK12B in Renewables: DN

- EQNR NO : Equinor Drops Australia Oil Plan in Win for Green Activists (2)

- GILD US : China to Announce Remdesivir Clinic Test Result April 27

- GREEN BB : Greenyard Nine Month Organic Revenue +0.8%

- HMB SS : H&M Now Has Less Than one Third of its Stores in China Closed

- HUBN SW : Corning Seeks to Block Rival Fiber-Optic Equipment From U.S.

- IMPN SW : Implenia Full Year Sales Meet Estimates

- KORI FP : Korian Plans Acquisition of 5 Sante Group

- KWS GY : KWS Saat SE & Co KGaA 1H Net Sales EU329.6 Mln, +14% Y/y

- LR FP : Corning Seeks to Block Rival Fiber-Optic Equipment From U.S.

- LSG NO : Leroy Fourth Quarter Adjusted Ebit 2.3% Below Estimates

- ML FP : China Car/Light Truck OE Tire Market Falls 30% in Jan.: Michelin

- NWO GY : New Work FY Ebitda Meets Est.; Proposes 21% Dividend Raise (1)

- 7201 JP : Nissan Warns About Future of European Plants as Brexit Weighs

- NDX1 GY : *NORDEX GETS 33 TURBINES ORDER FOR A 156 MW WIND FARM IN CHILE

- NOVN SW : Regeneron Gains as Piper Notes Novartis Drug Side Effects

- OCI NA : OCI Full Year Adjusted Ebitda 4.6% Above Estimates

- PMO LN : Pemex Fight For Giant Mexico Oil Field Snags Premier Stake Sell

- PRU LN : Third Point Takes Stake in Prudential to Push For Split

- PSPN SW : PSP Swiss Full Year Rental Income Meets Estimates

- RNO FP : Renault: Brings Civil Action in Investigation Announced Feb. 19

- SAN FP : Sanofi May Have Coronavirus Vaccine in 12-18 Months: Luscan

- SBBB SS : SBB Offering Prices 6.64m Shares at SEK29.90/Share

- SIGN SW : SIG Combibloc Full Year Revenue Meets Estimates

- TSLA US : Tesla to Face Fresh Autopilot Scrutiny After Company Snubs NTSB

- UBI IM : UBI Banca Investor Group With 1.6% Rejects Intesa Offer: Ansa

- WDi GY : Mastercard Sees Lower Revenue Growth on Coronavirus Impact (MA US -1.9% in after Hours)

- WLN FP : Mastercard Sees Lower Revenue Growth on Coronavirus Impact (MA US -1.9% in after Hours)

With the world seemingly on the precipice of an acute supply shock, you probably want some financial data to bring you comfort as your precious stonks head south. Tough luck:

Yep, that’s the ratio of debt-to-ebitda across private equity deals in the past 17 years from the latest version of Bain & Company’s annual report on the sector.

The 96-page report covers quite a lot of what you might already think about the private equity business. Namely, multiples are elevated, leverage is egregious, there’s copious “dry powder” on the sidelines and it’s hard to see where its historically stonking returns will come from after a near-decade run in earnings growth and multiple expansion.

Well mainly multiple expansion, because as it turns out, private equity is not very good at hitting its profit targets:

Much has been made, in this paper and others, of the report’s finding that the S&P 500 has outperformed private equity in the past decade. It’s a sobering stat, particularly considering the leverage (and other tricks) used to juice private equity returns, and the institutional “all-in” on the sector.

But these two charts are perhaps the most telling. One of the frequent justifications for private equity is that the model encourages operational excellence. The general partners hire a top-dollar management team, carefully set the incentives, and then watch a business flourish outside of the highly-scrutinised world of public markets.

And that is true looking at the above: revenue grows, and margins expand. But what’s more true is that if you paid $1.00 for a company in say, 2010, and nothing changed about the business in the time while you were in charge, it would be worth $1.60 when it was sold. A glorious 60 per cent return for doing sweet nothing.

Despite the small sample size, the chart does reveal how beholden private equity is to the public markets. Without a listed equivalent to roughly set the correct profit multiple for a company, it would be much harder to justify a higher multiple exit. Particularly as private equity deals aren’t a beacon of transparency.

Thoughts and comments on the report welcome below, but we recommend glazing over between pages 43 and 54. It’s all about ESG.

Activist hedge fund takes $2bn stake in insurer and demands separation of US and Asian arms

US hedge fund Third Point has taken a near $2bn stake in Prudential, calling on the insurer’s board to separate its US and Asian business and end its 172-year presence in the UK.

The $14bn activist hedge fund, run by Daniel Loeb, unveiled a series of demands, including the elimination of the company’s UK head office, in a letter to Prudential’s directors on Monday.

In his letter, Mr Loeb argued that there was no strategic logic to the company’s current structure, consisting of distinct units in the US and Asia which are operated from a London head office.

The company no longer has any operations in the UK, but is the largest insurance company listed on the London market, with a value of £37bn.

“Prudential PLC’s two separately managed franchises . . . have distinct strengths but share no discernible benefit from being operated under the same corporate umbrella,” the Third Point letter said.

Mr Loeb said shares in Prudential could double within three years if the units — Jackson National Life and PruAsia — were separated and if it retained an interest in both.

Third Point has taken a stake of just under 5 per cent in the insurer, and is now its second-largest shareholder.

It added that Prudential’s shares had underperformed those of rival AIA, which also has a big life insurance business in Asia, by 80 per cent over the past five years.

“It is a very compelling and very straightforward story,” Mr Loeb told the Financial Times. “Prudential has been operating in a suboptimal way for some time.”

The break-up demands come after Prudential separated its UK business, which includes fund manager M&G, through a demerger last year.

Bankers have long seen a separation of the remaining businesses as the next logical step, but have questioned whether Prudential would be able to get a strong valuation for Jackson if it were to be sold or floated.

However, Mr Loeb said there was no reason to wait before splitting the businesses up: “Any time you wait around and do nothing you’re wasting the opportunity to go into a growing market and take advantage of the changes that are going on.”

The company last month said that Shriti Vadera, a former banker and government minister, would take over as chair from Paul Manduca at the start of next year.

Shares in Prudential fell 4.6 per cent on Monday during a broader market sell-off.

Mr Loeb contacted Prudential’s management earlier on Monday and is awaiting a call back from the company’s chief executive, Michael Wells, one person with knowledge of the matter told the FT.

Prudential confirmed on Monday night that it had received a letter from Third Point.

Prudential said that it “proactively engages with shareholders with regards to group strategy and structure, and looks forward to commencing a dialogue with Third Point with regard to the views outlined in its letter”.

It will provide an update on performance and strategy at its full-year results on March 11.

Third Point has called for Prudential to eliminate the “redundant” overhead in the UK, which could save £200m per annum, and move the primary headquarters for PruAsia to Hong Kong, and for Jackson to Michigan.

Mr Loeb also wants to see a shift from the company’s “short-sighted” dividend policy to reinvestment.

Mr Loeb said: “Both companies should retain more earnings. That would enable Prudential Asia to invest more in growth and Jackson to change its investment portfolio and improve its earnings.”

Third Point’s stake in Prudential, which accounts for 15 per cent of the fund, ranks among its biggest investments, on par with Nestlé and Baxter International. The fund has not ruled out building a bigger stake in the company.

UK group reaches valuation of $5.5bn, making it one of most valuable fintech companies in Europe

Revolut has raised $500m in a long-awaited funding round that makes the UK company one of the most valuable fintech groups in Europe.

Silicon Valley venture capital group TCV led the investment, which valued Revolut at $5.5bn — three times the valuation at its last fundraising round in 2018, and equalling the record for a private European fintech set by Sweden’s Klarna last year.

Nikolay Storonsky, Revolut chief executive, said the investment “demonstrates investor confidence in our business model”, as it attempts to shift from being a prepaid card used mainly for overseas travel, to an international bank that customers use on a daily basis.

Mr Storonsky said that “going forward, our focus is on rolling out banking operations in Europe, increasing the number of people who use Revolut as their daily account, and striving towards profitability”.

Revolut received a banking licence in Lithuania in December 2018, but only started moving a small number of customers to its banking entity at the start of this year.

The vast majority of the company’s 10m users are served through an e-money licence, which means customer deposits are held by a third party bank and not protected by deposit insurance schemes.

The company plans to shift the rest of its Lithuanian customers to full bank accounts in the next few months, before expanding its banking operations across central and eastern Europe later in the year.

It also plans to offer new lending products such as overdrafts and personal loans to encourage customers to use Revolut as their main bank account.

Revolut is the latest in a string of British banking start-ups expected to complete major fundraisings in the next few months.

Earlier this month, Starling received a £60m injection from existing investors, and said it would raise further cash later this year. Monzo and Monese, meanwhile, are both in talks to raise up to £100m.

The UK has become a uniquely competitive market for so-called neobanks. Total customer numbers jumped from 7.7m to 19.6m in 2019, according to a report by Accenture published on Monday.

However, they have struggled to convince customers to use them as their main accounts, with average deposit sizes falling in the second half of the year from £350 to £260 per customer.

Revolut’s fundraising was welcomed by the UK government as a vote of confidence in the City’s fintech sector amid concerns about the potential impact of Brexit.

John Glen, City minister, said: “It is clear that the UK fintech sector continues to thrive, and Revolut’s announcement, which comes on the back of record-breaking fintech venture capital investment in 2019, is a clear indicator of our strength as a place for fintech business as we leave the EU.”

The deal created a hedge fund giant but the transformation did not go as planned

In spring 2010, two of the most powerful figures in the European hedge fund industry unveiled one of the biggest deals in the sector’s history.

Peter Clarke, the chief executive of Man Group, and Manny Roman, co-CEO of GLG Partners, announced that Man Group would buy GLG for $1.6bn.

The contrast between the two groups was striking. Man Group was a quantitative investing specialist with a button-down culture. GLG had plenty of high-profile and high-earning traders whose uniform appeared to be jeans.

But the merger thesis was simple: Man Group wanted to add discretionary hedge fund strategies — where manager skill is relied upon — to its portfolio of predominantly quant funds, which depend on complex algorithms programmed by teams of PhD scientists.

Sales of Man Group’s lucrative structured products linked to its flagship quantitative strategy, AHL, were rapidly drying up. Its fund of hedge funds business had been left reeling after it was found to have invested with fraudster Bernard Madoff. And AHL itself was volatile: after a jackpot year in 2008, it suffered a large loss the following year. GLG, it bet, would bring a steadier — and different — source of profits.

A decade on and the deal has transformed Man Group — just not in the way that its architects had envisaged.

GLG’s value has been written down by more than $1bn, confirming the fears of some investors who always warned the price was too high. Performance has at times flagged, notably in 2014 and 2016.

Yet GLG provided the next generation of Man Group’s executive management team — which has, ironically, turned its back on star managers and driven deeper into quant investing.

Man Group’s current chief executive Luke Ellis, who arrived with GLG and was a close ally of Mr Roman, said recently the industry would no longer rely on “Masters of Mayfair”, referring to the upscale London district where star traders have traditionally worked.

Man Group is Europe’s largest hedge fund manager and under its ownership, GLG’s assets have grown from $23.7bn, at the time the deal was announced, to $33.5bn, although they have shrunk slightly in the past two years. Much of the asset growth has come in long-only funds, which tend to command lower fees than hedge funds, and have benefited from the bull market of the past decade.

“Back in 2010, the Man-GLG merger was seen as the embrace of two struggling giants that had a great future behind them,” said Amin Rajan, chief executive of consultancy CREATE-Research.

Since then GLG’s “star culture has withered on the vine”, he added. Nonetheless, Man Group’s products have expanded, it is using quant processes across its whole business and its client base has changed markedly.

Mr Rajan said: “Its transformation has confounded the sceptics. It has followed a trajectory that few expected at the time.”

In the past decade, Man Group has grown its quant business substantially, with funds that now rank among its top performers. It has raised billions of dollars from clients for its long-only funds, and four years ago further diversified its asset base by adding a private markets business that focuses on real estate and direct lending.

The profound changes at Man Group, which reports its full-year results on Friday, mirror how the wider $3.3tn hedge fund industry has also evolved.

An industry that once ran money for rich individuals and was dominated by highly-paid stars has become a lower-fee business that manages money for big institutions whose risk appetite is less tolerant of the big investment bets of the past. The famous GLG traders such as Greg Coffey, Philippe Jabre and Pierre Lagrange have long since left.

“Things are very different to 10 years ago,” said Mr Ellis. The use of quant has “increased remarkably” in the past decade, notably in trade execution. “Trading has gone from being people hollering down phones […] to computers doing things with other computers,” he added.

Man Group’s reboot was kicked off by Mr Roman, a former Goldman Sachs partner who succeeded beleaguered Mr Clarke as chief executive in 2013, after a testing period of client withdrawals and poor performance at AHL. Despite attempting to diversify through the GLG acquisition, Man Group was in trouble: its shares, trading above 300p in early 2011, had slumped below 70p by summer 2012.

Mr Roman embarked on sweeping cost cuts and appointed Mr Ellis as the company’s president. Sandy Rattray, another former Goldman employee and co-creator of the Vix volatility index, became head of AHL. That helped the division diversify into new strategies, beyond its staple of following market trends, and into new, untapped markets.

“There was quite a lot of rethinking of the business that needed to be done in the first year or two when we got here,” said Mr Ellis.

“The move to increasing the proportion of quant was conscious,” he added. “We definitely re-engineered what AHL was about, and we re-engineered what GLG was about. We’ve broadened out the content for both.”

Over the past decade, AHL’s assets have surged by 40 per cent to about $30bn, reflecting increased investor demand for computer-driven funds. After disappointing returns from some of the industry’s best-known discretionary traders, clients have turned to quant funds. Their various techniques include spotting market patterns or using artificial intelligence to scour satellite imagery and credit card data for trade ideas.

Like many of the big hedge fund firms that have survived over the past decade, Man Group has pivoted its business away from investors such as funds of funds and wealthy clients — many of whom became disillusioned with the sector after the financial crisis — in favour of pension funds, insurance companies and other big institutions.

But these inflows come at a cost. Institutions tend to bargain harder and pay lower fees. Since 2014, Man Group’s management fee margins have dropped by more than a third.

“The criticism of taking on institutional business is that it’s lower fee,” said Mr Rattray, now Man’s chief investment officer. “Well, it might be, but it feels very sticky. It’s slow to come, but often it’s going to be with us for a long period of time.”

Mr Rattray also does not agree with Leda Braga, founder of quant hedge fund rival Systematica Investments, who has described the sector as “very low margin”.

“This is a high-margin industry, it just is, by [comparison with] almost any other industry,” he said.

Regardless of the rebound in Man Group’s quantitative division, some investors believe that the GLG acquisition represents a missed opportunity. GLG’s performance has been patchy and its star has faded. This is in contrast to US multi-strategy firms such as Ken Griffin’s $30bn manager Citadel and Izzy Englander’s $40bn Millennium Management, which have gone from strength to strength since the financial crisis.

Man Group is publicly listed and rivals say it faces tough competition for talent from large unlisted hedge fund groups that operate outside the scrutiny of public markets and can offer higher pay packages.

“Man Group hasn’t been able to emulate the success of the large multi-strats that rely upon a very developed risk-controlled approach to generating returns,” said Jim Neumann, partner at Sussex Partners, which advises clients on hedge fund investments.

Mr Ellis said GLG has been successful in attracting talent and said the fact Man Group is listed makes “zero” difference to its ability to attract the best traders. He said fund managers at GLG have the opportunity to have a career and can run their own funds.

“If somebody wants maximum short-term compensation there are other people who will pay more than we will,” he said. But “you will be out the door very quickly at the moment you have a small drawdown [loss].”

While rival firms “pick the odd one from us”, said Mr Ellis, “we’re doing very well [in the battle for talent]. We get the people we want to.”