TheChek News Flow

Investors back well-known figures as they strike out on their own

he star system is dominating hedge-fund launches this year, with a handful of better known managers raising billions of dollars for new investment vehicles.

The four biggest hedge fund launches of 2018 have attracted more than $17bn, according to figures compiled by the FT. That compares with the $13.7bn investors have put in existing funds, according to data from eVestment.

Leading the way has been Michael Gelband, the former fixed-income trader at Millennium Management and an ex-Lehman Brothers executive, who has secured commitments of more than $8bn, making his hedge fund debut the largest launch ever in the industry.

Daniel Sundheim, former chief investment officer of Andreas Halvorsen’s Viking Capital, is reported to have raised $4bn for a launch. Steve Cohen raked in $3bn from investors when he opened his family office, Point72, to outside money. Greg Coffey, former co-CIO at Moore Capital, capped his fundraising at $2bn.

“Our feeling is that for some time it has been a have- and have-not situation for new firms coming to market,” said Garry Collins, head of capital services in the Americas at Credit Suisse. “There’s an almost insatiable demand for high-quality talent. Investors are really earmarking capital for the right situations: funds with a proven manager, proven record, very strong pedigree with strong references.”

The bulk of the new money invested in hedge funds this year has gone to those that oversee assets of more than $1bn, according to eVestment. Funds with assets below that had redemptions of nearly $2bn.

The allure of new funds has grown as well-known hedge fund managers have struggled in recent years, according to prime brokers, the bankers who service hedge funds, handling everything from loans and trading to research and introductions.

A survey of hedge fund investors conducted by Credit Suisse’s prime services unit found that 63 per cent put money into a start-up this year, up from 43 per cent last year.

Allocators are “more active in early stage managers than they’ve been in the past,” Barsam Lakani, head of prime services sales at Jefferies, said in a May report that noted “2018 is gearing up to be one of the busiest periods for hedge fund launches in years.”

“Five years ago, the majority of talent would launch,” said Stephane Marchand, the head of prime sales for Emea at JPMorgan. “Today, the appetite to take risk to launch has reduced because of barriers to entry.”

The lack of effective succession planning in the industry has also led to more mega-launches, said Mr Collins. Mr Gelband, Mr Sundheim and Mr Coffey were all once second-in-charge at top hedge funds, and struck out on their own rather than wait for their bosses to step aside.

While Mr Cohen has officially launched, the other three are still in the planning stages, with Mr Gelband’s the furthest along. His fund, ExodusPoint, is expected to start trading next month. Mr Coffey’s fund, Kirkoswald Capital, and Mr Sundheim’s, D1 Capital, are likely to launch later in the year.

“When you think about these new launches, they’re coming from well-known firms, where there is a transfer of pedigree and experience,” said Mr Collins. “Investors are looking for something that is proven, not something that is conceptual.”

At the same time, getting into the business has become more difficult than the days when managers could start a hedge fund out of a home office with money from family and friends. Now, they have to raise millions to pay for IT infrastructure, lawyers, regulatory compliance, staff and other back-office functions.

The pipeline for new hedge fund launches — a key measure of the health of the industry — has been thin in recent years. Hedge fund closures have outpaced start-ups for the past three years, according to data from HFR.

EU’s chief Brexit negotiator says UK must ‘look the reality of the EU in the face’

he EU’s chief Brexit negotiator on Saturday called on Britain to stop playing “hide and seek” and decide on a realistic exit policy, as the two sides traded barbs over the blame for stalled talks.

Michel Barnier’s blunt remarks came in a speech in Portugal on Saturday, hours after his British counterpart David Davis accused the EU of “public posturing” that was putting the security of citizens at risk.

The pointed exchanges reflect the bad feeling in London and Brussels after a difficult week of talks over Britain’s future relationship with the EU.

Mr Barnier said Britain must “look the reality of the EU in the face” and refrain from suggesting more models of co-operation that recreate the advantages of a shared regulatory system from the outside.

“I can see the temptation of a blame game to pin the negative consequences of Brexit on the EU. But we will not be cowed,” he said. “It is the UK that leaves the EU. Britain cannot, on leaving, ask us to change who we are and how we operate.”

“We ask for clarity because to negotiate effectively you must know what the other party wants,” he added. “A negotiation cannot be part of a hide and seek . . . the UK must accept the consequences of its own decision [to leave], explain them and assume them.”

It followed Mr Davis, Brexit secretary, on Friday hitting out at the EU trying to “score points” rather than engage with “serious papers” from the UK that sought to address shared interests.

“Our proposals on security, for example, are not about bending rules or ‘membership-light’ — they are about protecting people — nothing more, nothing less,” he said. “We face the same threats and have shared values — criminals and terrorists do not respect borders.”

Mr Barnier’s comments came in a speech focused on dispute settlement arrangements for the exit treaty — a highly sensitive issue for Brexiters since it relates to the future influence of the European Court of Justice in Britain.

Warning that the need to make progress on a governance arrangement was “urgent”, Mr Barnier rejected British proposals for a political joint committee to resolve disputes, saying a judicial component was essential.

“We have come a long way on the substance of the exit agreement, but without effective governance, these gains will be of limited value,” he said. “We cannot leave such a central subject in abeyance because without an agreement on governance there will be no withdrawal agreement, and therefore no transition period.”

The argument is particularly difficult for Westminster since Mr Barnier envisages an extended role for European judges in interpreting any elements of EU law that are included in Britain’s exit treaty.

Mr Barnier suggested a compromise agreed on the enforcement of citizen rights — which gave the ECJ indirect influence over UK cases for eight years after Brexit — could be used as a model for other parts of the withdrawal agreement.

“The mechanism allows us to ensure, over time, the uniformity of the interpretation of the agreement on both sides of the Channel,” Mr Barnier said. “This objective, which has been achieved for citizen rights, has yet to be achieved for the rest of the withdrawal treaty. This would reduce the risk of litigation between the EU and the UK.”

Kingdom’s ambitious plans for diversification face challenge of economic reality

With its pristine beaches, manicured lawns and rows of newly built villas, the King Abdullah Economic City bears all the hallmarks of the modern Saudi Arabia envisaged by Crown Prince Mohammed bin Salman. Women walk freely without abayas, a golf course nestles up against the Red Sea coastline and international companies including Pfizer and Mars have opened factories in the city.

Yet the development instead serves as a cautionary tale of the challenges the young heir apparent faces as he pursues a highly ambitious programme to overhaul the conservative kingdom, including his own plans for a new $500bn megacity, Neom.

The King Abdullah city, also known as KAEC, was launched a decade ago as part of a $30bn project to build six cities to diversify the oil-dependent economy, attract foreign investment, create 1.3m jobs and add $150bn to gross domestic product. But only one of the six made it off the drawing board, King Abdullah city, which today has a population of just 7,000 people set against a target of 2m by 2035.

Despite offering more social freedoms than other Saudi cities, King Abdullah city, 145km north of Jeddah, feels eerily quiet and empty. It was intended to be a hub for logistics and manufacturing. But its struggle to attract investors and residents has underlined a perennial battle the kingdom faces bringing in foreign capital beyond the energy sector.

“If KAEC was viable the city would have taken off a long time ago. Their marketing was amazing but the whole concept behind it was flawed,” said a former government adviser. “The economic base was never there.”

The private sector feels more comfortable if there are basic guarantees by government, and private investors in emerging regions … tend to be more short-term focused

Steffen Hertog, LSE

It highlights the task ahead for Prince Mohammed as he pursues his “Vision 2030” plan that is aimed at reducing the dominant role of the state, creating 450,000 private sector jobs by 2020 and reducing unemployment from about 12 per cent to 9 per cent over the same timeframe.

“The business case is hard to make for manufacturing and light industry in Saudi Arabia,” says Karen Young, a senior resident scholar at the Arab Gulf States Institute in Washington.

The Neom development is the flagship project of Prince Mohammed’s plan. He unveiled the scheme at a glitzy investor conference in October where he wooed some of the world’s top bankers and executives. Neom is far more ambitious than the six economic cities launched in the 2000s: it will cover 26,000 sq m and targets attracting investment in new technologies, including renewable energy and robotics. Its goal is to contribute $100bn to GDP by 2030.

Prince Mohammed will personally oversee the project, and it is be financed by a combination of government spending, funding from the Public Investment Fund, the $230bn sovereign wealth fund, and private sector investment.

Similar diversification plans have been tried many times before and stumbled. But Saudi officials insist they have heeded the lessons of the past.

“We will learn. If we execute something and we think it’s not as we planned we will adjust our plans,” said Mohammed al-Jadaan, finance minister. “Am I confident? Yes … I’m seeing results and momentum.”

People watch a presentation about Neom, a new mega city planned by Crown Prince Mohammed bin Salman © Reuters

But Saudi companies are risk-averse as they struggle with a stagnating economy and government austerity measures. Foreign groups have also shown hesitancy to invest outside the energy sector. When Prince Mohammed embarked on a weeks-long tour of the UK and US this year, Riyadh announced only one sizeable deal, a solar power joint venture with Japan’s SoftBank.

Steffen Hertog, an expert on the Gulf political economy at the London School of Economics, says it is unrealistic to expect the private sector to build and maintain basic infrastructure.

“The private sector feels more comfortable if there are basic guarantees by government, and private investors in emerging regions … tend to be more short-term focused,” he said.

Still, officials at King Abdullah city say they are optimistic that Prince Mohammed’s reform plans will breathe new life into their development.

Officials say about 30 local and foreign companies operate in the city’s industrial area, with a similar number in the process of moving there. King Abdullah Port, described as the anchor development in the city, reported handling 1.7m 20ft equivalent units in 2017, an increase of about 20 per cent compared with the previous year.

“Vision 2030 is calling for a post-oil era for the economy and at KAEC we like to think of ourselves as a model of the post-oil economy,” says Fahad al-Rasheed, chief executive officer of Emaar EC, the city’s lead developer. “We are not government owned. We are not government-dependent. We have no revenues from oil.”

Residents say they enjoy the relaxed, peaceful atmosphere in the city.

“I’m happy that my wife can go out here without the abaya,” says one. “I can open the door and my children and dogs would run to the park without me worrying that they might get hit by a car.”

But while resident’s embrace the city’s sleepy feel, Ellen Wald, author of Saudi, Inc, a book on the kingdom, says there are clear lessons for Neom: “Sign tenants before you build and be prepared to pivot.”

“Global economic downturns and changing business strategies can always hamper grand plans,” she said.

CYBG expected to sweeten Virgin offer after share slide

Stock tumble of almost 8% devalues initial proposal for rival bank

CYBG is likely to have to make an improved offer to take over rival bank Virgin Money after a slump in its stock devalued its all-share proposal, according to analysts and people close to the prospective deal.

The company behind Clydesdale and Yorkshire banks confirmed earlier this month that it had approached Virgin about a deal that initially valued it at £1.62bn. However, shares in CYBG have fallen almost 8 per cent since the offer was announced, knocking roughly £125m from the value of its stock.

Shares in Virgin, meanwhile, have made further gains after jumping on news of the approach, meaning it is trading at a premium to the preliminary proposal.

Several bankers familiar with the situation said they expected CYBG to improve its offer and potentially add a cash component to the deal.

They said that while CYBG’s position was strengthened by the lack of viable alternative bidders for Virgin, a sweetener would be required to push a deal over the line.

Gary Greenwood, analyst at Shore Capital, said CYBG’s initial proposal looked like a “lowball” offer, but suggested changes to the way the FTSE 250 group calculates credit risk could make it easier to fund a cash component.

CYBG said it was in the “final stages” of the regulatory process to move to a new model that was expected to strengthen its balance sheet and leave it with several hundred million pounds of excess capital.

The recent slide in CYBG’s share price was prompted in part by a disappointing half-year update, with the bank falling to a loss and warning of ongoing weakness in the mortgage market.

However, one banker suggested the weak results strengthened the case for a merger, highlighting the need for scale to take on the big four lenders — Lloyds, HSBC, Barclays and RBS.

Economic slowdown combined with rising competition and higher funding costs have encouraged a renewed focus on M&A activity across the UK’s so-called “challenger bank” sector in recent weeks. News of CYBG’s approach boosted shares in other potential targets or consolidators, such as One Savings Bank.

Under the UK Takeover Code, CYBG has until June 4 to announce a firm intention to make an offer for Virgin, or it will not be allowed to make a bid for another six months.

CYBG and Virgin declined to comment.

Howard Marks sees risk in groups being pushed into accepting poor terms on deals

Private equity groups are lowering their standards over investment choices, raising money too easily and paying record prices in a shift that will lead to lower returns than the historical average for investors, according to Howard Marks, founder of Oaktree.

Mr Marks, a billionaire investor, said private equity groups were being pushed into accepting poor terms on deals. He told the Financial Times that money managers have a “big impetus to get invested” even if it means backing bad ideas.

“When there’s too much money around, it creates really bad things,” he said. “You’ve got to think of the markets like an auction. There is an opportunity to lend money. Who gets to make the loan? The person who will accept the least.”

As of May 25, there was $1.08tn of raised capital yet to be deployed, according to Preqin, the data provider.

“The person who pays the most can also be described as the person who will accept the least for his money.”

He said the capital markets showed features similar to those in 2005 and 2006. “There is more money than there are good ideas. There’s very strong interest in getting ideas invested.”

He added that with so much money available to them, buyout funds had “FOMO [fear of missing out] and people are abandoning the standards of the past”.

Asked if private equity was in a bubble, he said: “There is every chance that it is”, but he warned that “bubble is such a coloured word. I think we are in a highly elevated phase of the market.”

“It’s too easy for them to raise money. If they can place the money they have, they can raise more money and get more fees,” he said. “They are paying record-breaking multiples. You’ve got to worry when we are in the tenth year of an economic recovery.”

His remarks emerged at a time when buyout funds are not only raising record amounts of cash but are turning away billions of dollars as they struggle to cope with demand.

This is not the first time Mr Marks has warned about risk in private equity. He said last year that the wall of money being raised would lead to industry players trying to be more aggressive in order to hit their returns.

Protesters removing their headscarves in unprecedented acts of civil disobedience are fostering a crisis of self-confidence for the regime

With the U.S. pullout from the nuclear deal, Iran will soon face renewed economic sanctions, compounding a crisis that has seen its currency go into freefall. On top of that, the Trump administration has signaled its readiness for political and perhaps even military confrontation with the Islamic Republic. These are very real pressures, but I would argue that they don’t threaten the ruling mullahs nearly as much as a growing domestic development: the prospect of unveiled Iranian women.

The Islamic Republic’s key vulnerability has always been its oppression of women. Since coming to power in 1979, the theocracy has imposed compulsory hijab laws, requiring women to securely wrap their heads in scarves in public. Over the past four years, however, with little help or notice from Western powers pressing the regime on other fronts, Iranian women have countered the most visible symbol of clerical rule. They have begun to remove their headscarves in unprecedented acts of civil disobedience, fostering a crisis of self-confidence for the regime.

I was a two-year-old in the northern Iranian village of Ghomikola when the Islamic Republic was formed after the overthrow of the Shah in 1979. Like every girl, I had to start wearing a headscarf at age seven. Iranian women cannot be judges or members of the council that vets laws, cannot travel abroad or seek divorce without their husband’s permission, and cannot attend sports events. In my own divorce, I lost custody of my son because the law favors men. Only Saudi Arabia is as restrictive, and it is loosening some of its rules.

In 2002, I became a journalist writing for reformist publications, but I was always aware that my hair was held hostage by the Islamic Republic. One day, wearing my hijab while in conversation with two members of Iran’s parliament, I was approached by a conservative lawmaker who immediately warned, “First, cover your hair or I’m going to punch you.” A few wisps had flown loose.

In 2009, I had to flee my homeland to avoid being arrested amid political tensions. Five years later, I began the online campaign “My Stealthy Freedom” from London and then New York, urging Iranian women to post images on my Facebook page of themselves removing their hijabs. Hardline newspapers predicted the movement’s speedy demise, but thousands of women sent me images of their quiet rebellion. Last year, we launched White Wednesdays as a weekly street demonstration in which women either publicly take off white headscarves or wear the color in solidarity.

The activism is clearly upsetting the regime. In 2014, when our movement began, Iranian police announced that “bad hijab” had led to 3.6 million cases of police intervention, more than any other type of crime; they then stopped releasing figures. The next year, according to an analysis by a University of Tehran professor, the government spent the equivalent of hundreds of millions of dollars to promote compulsory hijab, using state-owned media, billboards and leaflets. In 2016, the regime said it was deploying 7,000 undercover morality police in Tehran to enforce hijab laws.

But the propaganda and crackdowns have failed to stem the opposition. In 2016, we got men to join in by sending photos of themselves standing by women who had shed their headscarves. This February, Iranian police arrested 29 activists in one day for their involvement in White Wednesday, but the demonstrations continue. In April, a female university student in Tehran was slapped by a morality police officer for letting her hair show through a loosely wrapped hijab; the ensuing struggle was captured on a mobile phone and went viral. Three government officials, including the minister of the interior, apologized for the attack, but the officers involved were then promoted.

As police increasingly harass women wearing white, we have asked women to shoot video of these interactions; think of it as an Iranian version of the #MeToo movement. It has already led to one change: Security officers have threatened to arrest any protesters wielding mobile phones.

On International Women’s day on March 8, Iran’s Supreme Leader launched a tirade against women who challenge the hijab laws, and he blamed the West: Iran’s enemies, he said, had worked to promote the protest so that “a few girls would be deceived and take their scarves off.”

Women used to merely fear the Islamic Republic; now the Islamic Republic fears its own women. We want women to have the same rights as men in Iran. Perhaps we can manage to elect a woman president before the United States does. That is the regime change we want.

Amazon CEO and owner of rocket startup Blue Origin pledges to expand his space ventures and spells out long-term concepts for exploration

LOS ANGELES— Amazon.com Inc. AMZN 0.44% founder and Chief Executive Jeff Bezos vowed to use his rocket startup to develop robotic rovers and perhaps human habitats on the moon’s surface, even if such projects fail to win financial support from the U.S. government.

In a personal, wide-ranging talk at a space conference here Friday, Mr. Bezos laid out his vision for lunar exploration and eventual settlement. Depicting such efforts as a matter of long-term human survival, he said: “This is not something that we may choose to do; this is something we must do.”

Without divulging details about the new generations of powerful rockets, spacecraft and landing vehicles he envisions will be necessary to establish such permanent outposts, Mr. Bezos made an impassioned argument for accelerating private space travel. He said future generations won’t be able to survive on earth without expanding into other parts of the solar system.

“The alternative is stasis,” he said, adding that without space settlements, societies around the globe “will have to stop growing” due to environmental and other constraints. “That’s not the future that I want for my grandchildren, or my grandchildren’s grandchildren.”

Mr. Bezos called the efforts of his rocket company, Blue Origin LLC, “the most important work I am doing.” The question-and-answer session occurred at the annual meeting of the National Space Society, a nonprofit group championing space colonies.

A self-described space geek and lifelong reader of science-fiction novels, Mr. Bezos in the past has talked about his determination to play a big part in creating building blocks to usher in supercheap, reliable and frequent transportation beyond the atmosphere.

Like fellow billionaire Elon Musk, the founder and head of Space Exploration Technologies Corp., Mr. Bezos has talked about developing the infrastructure to eventually move millions of people into space and transform launches of reusable rockets into trips as routine as airline travel.

But Mr. Bezos’s latest comments were unusually stark in saying that to maintain economic vitality, “we will have to leave this planet” and “we don’t have a lot of time” to map out a step-by-step approach, starting with reduced launch costs.

“It won’t be done by one company” or by just the National Aeronautics and Space Administration, Mr. Bezos said, but instead will require “thousands of companies working in concert over many decades.”

On a practical and political level, arguments advanced by Mr. Bezos support President Donald Trump’s focus of relying on public-private partnerships for space exploration, including building landing craft able to take experiments—and within a few years astronauts—to the lunar surface.

“We must go back to the moon, and this time to stay,” Mr. Bezos said, echoing one of the White House’s principles for establishing sustainable outposts.

Even before the Trump administration came into office, Blue Origin proposed that NASA help fund it to pursue a fledgling program designed to send robotic spacecraft to the moon. Other companies also are developing similar projects, and NASA is soliciting ideas for various sizes of landers.

The agency hasn’t commented publicly on the specifics of Blue Origin’s proposal, and on Friday Mr. Bezos didn’t mention Mr. Trump’s previous pointed criticism of Amazon over policies related to payment of certain local taxes.

On his own, Mr. Bezos has sold roughly $1 billion of Amazon stock annually to invest in Blue Origin, which hopes to start offering suborbital space tourism flights by 2019. The fast-growing, closely held company also is developing two larger rockets aimed at carrying satellites and spacecraft into earth orbit and beyond.

Noting that for the foreseeable future, “very few people are going to want to abandon earth altogether,” he said liquid-fueled rockets able to be flown 100 times or more with minimal maintenance are vital for a new and affordable transportation model.

Responding to questions about his commitment to pursue human space travel regardless of federal support, Amazon’s CEO joked that either “other people will take over the vision, or I will run out of money.”

But he ended the talk on a more serious note by reiterating his view that moon exploration is an essential step toward transporting humans to Mars and allowing them to create habitats on the Red Planet. Such gradual efforts are the only way to avoid a repeat of earlier policy mistakes, he said, which saw the Apollo astronauts land on the moon but then morphed into five decades without any more human missions there.

“I don’t like to skip steps,” he said, explaining that trying to take people directly to Mars would be futile. “There would be a ticker-tape parade and then 50 years of nothing.”

The soaring ranks of groups with multi-class capital structures

Tenth of stocks by weight in MSCI World Index now boast unequal voting rights

The idea of “one vote, one share” has been a core principle of corporate governance for decades.

Just 30 years ago, less than 2 per cent of stocks that made up the MSCI World Index by weight had unequal voting rights.

But that changed in 2004, after Google came to the market with a dual share class structure that gave some investors more say than others.

At the time, about 4 per cent of the MSCI World index had unequal rights. But this increased fivefold to about 10 per cent by 2017 as many rival tech companies followed Google’s lead.

Now many of the world’s most famous companies, including Alphabet, Google’s parent company, Facebook and Warren Buffett’s Berkshire Hathaway, have unequal voting rights.

Often favoured by family-controlled companies or those set up by entrepreneurs, dual share classes typically allow founders more control over the business — something they say is vital for driving growth. But many investors complain that all shareholders should be treated the same, arguing unequal voting rights is bad for governance.

The rapid rise in dual share classes has caused concern among investors. Snap, the tech company behind the vanishing messaging app, caused huge upset last year after shareholders buying shares in its initial public offering were denied voting rights.

Investors are now putting pressure on index providers and regulators to address the issue.

But at the same time, stock exchanges in countries such as Hong Kong are introducing new rules to allow for the introduction of unequal voting rights, as they vie to win public offerings from big tech companies.

The structures are already common in countries such as the US, Canada, Sweden, Germany and South Korea, but largely absent from places such as the UK.