FT : Tech group public-private funding gulf widens

Tech group public-private funding gulf widens http://on.ft.com/1SqE1hq

A chasm has opened between the private and public financing of fast-growing tech groups as more Silicon Valley companies shun initial public offerings, contributing to a sharp fall in global listings of all kinds.
Tech companies raised less than $10bn through IPOs in the US in 2015, according to Dealogic, compared with $41bn the year before, when the figure was boosted by the $25bn raised by Chinese ecommerce company Alibaba.
The dearth of IPOs has provoked consternation among venture capital investors in Silicon Valley, who have seen a hoped-for payday repeatedly deferred in recent years as companies such as Uber, Airbnb and Palantir have opted to stay private rather than follow earlier generations of successful start-ups to Wall Street.
“There’s some impatience around the fact that we need liquidity,” said Bill Maris, head of the venture capital arm at Alphabet, the holding company for Google. “Companies generally need to go public so there’s liquidity in the marketplace. I think we’ll move in that direction, because I don’t know how much further the pendulum can swing in the direction it’s already gone.”
With tech start-ups shunning Wall Street, the amount raised instead from venture capitalists in 2015 is expected to show its second-biggest year ever when official numbers are reported, topped only by the dotcom bubble year of 2000.
If the fourth quarter matches the year before, the amount of private investment would have exceeded $60bn, or more than six times as much as tech companies raised on Wall Street during the year — twice the differential that existed at the height of the dotcom boom.
The flood of money into so-called “unicorns”, or private start-ups valued at $1bn or more, made it unnecessary to seek a listing, said Lise Buyer, an IPO adviser in Silicon Valley. “In 2015, it was raining money on them, so why bother?”
Anthony Kontoleon, head of global syndicate in equity capital markets solutions at Credit Suisse, added: “Tech has been largely absent from the IPO market given the availability of private market alternatives.” He predicted that there would be “a make-up over the next 24 months as these companies continue to refine their business models and prepare for the public markets”.

Mr Maris said more IPOs were needed so funds such as his could report returns for their investors. He also echoed a view expressed by a growing number of VC investors in recent weeks that holding back from IPOs was shielding successful tech companies from the disciplines imposed by public markets on more mature companies and reducing the opportunities for their employees, many of whom held stock, to cash in.
The collapse in tech IPOs lay behind a broader decline in US IPOs, with companies tapping Wall Street for only $36bn during 2015, less than half the $96bn of the year before. Total global proceeds from new listings fell nearly 30 per cent from $264bn in 2014 to $194bn.

Signs in recent weeks that private investors have grown more wary could force more tech companies to consider IPOs next year, several VC experts said. VC investment “has definitely fallen pretty materially”, said Anand Sanwal, chief executive of CB Insights. Operational difficulties at some highly valued start-ups, including Dropbox, Evernote and Jawbone, have contributed to the change in mood, he added.
Stock market volatility, a factor behind the postponement of share sales by the grocer Albertsons and retailer Neiman Marcus in 2015, could also contribute to a shift in the balance between supply and demand in the IPO market. Analysts predict that companies will have to offer discounts to their publicly traded peers to get deals done, a trend that was already apparent in the final months of 2015.
“IPO buyers are back in the driver seat,” said Matthew Kennedy, an analyst at Renaissance Capital, which specialises in IPO research and investment.

FT : Brevan Howard’s $20bn flagship fund falls for second year

Brevan Howard’s $20bn flagship fund falls for second year http://on.ft.com/1moEc0V

Brevan Howard’s $20bn flagship fund is down for a second year in a row in a further blemish to the trading record of one of the largest hedge funds in Europe.
While Brevan Howard’s 0.8 per cent loss for 2015 is small compared with some of its rivals, it inflicts a symbolic wound to a hedge fund that until 2014 had proudly defended its history of having never lost money in a calendar year for its clients.

The loss comes as some of the world’s highest profile hedge fund managers have suffered brutal losses over the past 12 months and several large funds have chosen to close down altogether.
The net asset value of the BH Macro listed fund, a feeder to Brevan Howard’s flagship Master Fund, fell from $21.06 at the end of November to $20.45 up to the week of December 18, taking the fund’s loss to about 0.8 per cent for 2015.
Alan Howard, who co-founded the hedge fund with a group of Credit Suisse proprietary traders in 2003, had already issued an apology to his investors for a “disappointing” investment performance in 2013, and pledged to deliver “a more satisfactory outcome for 2014”.
However, the Brevan Howard Master Fund went on to lose 0.8 per cent that year.
Although the Master Fund, which is run by Mr Howard and a team of traders, returned 12 per cent in 2011, it generated just under 4 per cent in 2012 and 2.7 per cent in 2013 after fees, before falling to a loss in 2014.
The ongoing struggles of Brevan Howard to make money trading in financial markets comes as its biggest European rival BlueCrest decided to return all outside money to its investors to focus solely on trading the fortunes of its founders.
Brevan Howard and BlueCrest’s strong performance during the biggest bouts of market volatility in the global financial crisis won both hedge funds many new investors, with its total assets under management at each swelling to more than $50bn.
Many of these new investors were public pension funds looking for a way to hedge the rest of their portfolios against large sell-offs, as well as making returns that were not correlated to the wider bond and equity markets.
Following several years of mediocre performance, a number of high-profile clients have pulled out of both Brevan Howard and BlueCrest.
In 2014, the influential London Pension Fund Authority redeemed its entire investment from Brevan Howard while BlueCrest saw several consultants to public pension funds in the US and UK recommend their clients to redeem their investments.

FT : Cash lures investors from high-grade debt

Cash lures investors from high-grade debt http://on.ft.com/1ZF86Mg

Investors made withdrawals for the sixth consecutive week from mutual funds and exchange traded funds buying high-grade US corporate debt, shifting instead to cash after a challenging year for credit.
Funds investing in investment grade corporate bonds counted $1.7bn of outflows in the week to December 30, lifting withdrawals in the fourth quarter to more than $11bn, according to Lipper.

Investors instead piled into money market accounts — effectively sitting in cash — as they counted down the final days of 2015. Money market funds recorded $17bn of fresh capital in the latest week, following two weeks of outflows.
Treasury funds drew in $246m of inflows while junk bond mutual funds and ETFs staunched three weeks of multibillion-dollar outflows, counting $114m of new money. Overall, taxable bond funds were hit by $1.8bn in outflows.
The figures underscore investor resistance to adding risk at year-end after turbulence in both the investment grade and high-yield asset classes.
US corporate credit ratings have deteriorated this year as companies have levered up to fund a record wave of mergers and acquisitions, and finance share buybacks and dividends.
Investors have suffered losses of nearly 1 per cent on US credit as well as a 2.6 per cent decline on high-yield debt — bonds rated triple B minus or lower by one of the major rating agencies — according to Barclays Indices.
A number of fund closures earlier this month also rattled investor nerves, with portfolio managers warning that a dearth of liquidity had made it challenging to trade in and out of bonds.
Investors have attributed much of the recent weakness to volatility in commodities. Crude oil has tumbled by more than a third this year, extending a 48 per cent decline in 2014, while copper has fallen by a quarter.

Analysts with all three leading US rating agencies — Standard & Poor’s, Moody’s and Fitch — expect defaults to increase in 2016, as credit conditions tighten and energy and materials groups struggle with the drop in commodity prices.
“That is one of the other features nipping at the heels of smaller companies,” said Jack Ablin, chief investment officer of BMO Private Bank. “Here we are in the sixth or seventh year of this bull market and all of a sudden it is getting harder to finance yourself.”
Investors have recently pushed back on new deals, requiring companies tapping the junk bond market to tighten investor protections or offer steep discounts.
Investment grade bond yields, which move inversely to price, have climbed 56 basis points over the past 12 months, according to Barclays.
For speculative groups, yields have climbed even faster. Yields on junk bonds have jumped more than 200 basis points since the end of 2014, rising to 8.74 per cent, according to Barclays.

FT : Airbus set to widen lead over Boeing

Airbus set to widen lead over Boeing http://on.ft.com/1SqCkAC

Airbus has won the first new customer in two years for its A380 superjumbo, giving the aircraft programme a new lease of life.
ANA Holdings of Japan has agreed to buy three of the world’s largest passenger jets, which retail at a list price of $428m each, although this is rarely the price paid. Just a year ago, Harald Wilhelm, Airbus finance director, suggested that the A380 programme — which cost more than $10bn and took a decade to develop — could be scrapped without new orders.

The deal rewards the European aerospace group after it backed ANA’s plan to turn round the bankrupt domestic rival, Skymark Airlines, last August.
Airbus would not comment. ANA insisted that no decision had yet been made. However, two people familiar with the situation confirmed that agreement had been reached to buy three superjumbos and the details were being finalised before a formal signature later this month. The story was first reported by Nikkei.
Airbus is also understood to be in discussions for the sale of up to 30 A380s with other potential customers. It is under pressure from the superjumbo’s biggest user, Emirates Airline, to relaunch the aircraft with a more fuel-efficient engine. However, the group is keen to secure more orders for the existing programme before deciding to invest more in an aircraft that is unlikely ever to recoup its development costs in full.
The news comes as Airbus is set to widen its lead in net orders over US rival Boeing for the third consecutive year. By the end of December Airbus had 1022 firm orders against 743 for its US rival.
Official figures, net of cancellations, will not be published for several days, but the trend is clear. Though Boeing is expected to lead on aircraft deliveries, the re-engined Airbus A320neo short-haul aircraft is strongly outselling the rival 737 Max single aisle. Europe’s aerospace champion now claims about 60 per cent of the booming market for short-haul jets, which accounts for about three-quarters of all aircraft sales by volume.
The widening gap in orders is putting pressure on Boeing to fight back, possibly by accelerating plans for a new midsize passenger jet, to fill the gap between its 737 short-haul workhorse — including its more fuel efficient Max version — and its long-range 787 Dreamliner.
“Boeing does not have a lot of choice,” said Nick Cunningham of broker Agency Partners. “Narrow bodies are 50 per cent of the total market in dollar terms and the A320neo has been outselling Boeing’s 737 Max by two to one over the past two years. That cannot be acceptable to Boeing.”
Boeing insists no decision is imminent. “There is no change to our development profile for the balance of the decade,” a Boeing spokesman told the Financial Times. But the language it uses when discussing the possible launch of such an aircraft has noticeably changed over the course of 2015.

After ruling out any new “moonshots” in 2014, Boeing top management is now talking about the potential for a “middle of the market” aircraft to enter service in 2022. To meet that target, Mr Cunningham said, Boeing would have to make a launch decision during 2016.
The launch of a new aircraft is a huge financial commitment for Boeing — and potentially for Airbus which might feel driven to respond. It also could have a depressing effect on orders for existing jets, which is likely to intensify the nervousness that investors are feeling as growth begins to slow after a six-year boom.
Boeing and Airbus are expected to report combined net orders of about 1765 for 2015, a sharp drop on 2014’s 2,888. But those figures still leave the companies with 10 years of production in their backlogs. Given forecasts for continued strong growth in passenger traffic and the need to replace ageing jets as well as expand capacity, many industry observers are reluctant to call the turn of the cycle just yet.
Robert Stallard, aerospace analyst at RBC Capital, said there was a question mark over the quality of the backlog. Airlines could begin to defer their commitments — one of the first signs that the good times could be coming to an end. “Emerging market carriers have been a particular focus, given the double whammy of economic issues and foreign exchange impacts,” he said. “So far there’s been nothing meaningful — but we are ‘on watch’ for this. Many investors share our view that aero cycles don’t last for ever.”

>>> Weekly Update

Weekly Market Update: Tough Year for Investors Goes Out on a Cheerless Note

The week started off on a sour note as Chinese stocks tumbled on Monday after the latest industrial profits data declined for the sixth straight month. US data was mostly disappointing as well, with key regional readings in Chicago and Dallas dropping sharply. The 2-, 5-, and 7-year treasury auctions all showed poor results and dragged yields higher for the week. Crude oil prices dripped lower again and continued to exert influence on broader markets. US stocks alternated red and green in the post-holiday week as the S&P flipped back and forth from positive to negative on the year. For the week, the DJIA was down 0.7%, and the Nasdaq and S&P500 each lost 0.8%. For the year, the DJIA fell 2.2%, the Nasdaq gained 5.7%, and the S&P500 slipped 0.7%, its first losing year since 2011.

Early in the week, China reported November Industrial Profits at -1.4% y/y, its sixth straight decline. At the same time Japan announced its first decline in m/m retail sales in four months and first m/m drop in industrial production in three months. The poor economic data continued in the US as the Dallas Fed Manufacturing reading hit its lowest mark in seven months and the Chicago Purchasing Managers Index tumbled to its lowest in over five years. The Chicago PMI number was particularly disappointing because it showed big declines new orders, order backlogs and the employment index. The 42.9 reading for December was the seventh reading of the Chicago PMI this year that was below 50, indicating contraction. Weekly initial jobless claims were also disappointing, registering the highest number since July, though this may be attributable to holiday week volatility. On a brighter note, the December US Consumer Confidence reading beat expectations and showed a rise in the perception that job opportunities are "plentiful."

Interest rate futures fell hard on Tuesday following a very disappointing 5-year treasury auction. The 2-year yield reached its highest level since early 2010 to above 1.10%, the 5-year yield hit its high of the year above 1.79%, and the 30-year fell 2 points, putting the yield above 3.04%. The 2- and 7-year auctions that bookended the 5-year sale were also weak, perhaps attributable to the slow holiday week. Treasuries pared losses on Thursday after the higher than expected jobless claims. For the year, the 2/10-year yield spread narrowed to its smallest since 2008 as the treasury curve flattened: the 2-year yield jumped 38 basis points, while the 10-year yield was up only 8 basis points during 2015.

With relatively few corporate or macro developments during the week, broader markets were pushed around again by activity in the energy market. Saudi Arabia's 2016 budget plan showed that weak oil prices are hurting its fiscal situation, but despite that the energy ministry affirmed it would hold steady on its production policy. WTI and Brent crude are now trading in lockstep and each lost nearly 3% during the week, ending 2015 down by over 30% on top of last year's steep losses. That kept downward pressure on energy equities despite some bargain hunters picking through the wreckage. Cold weather finally swept across most of the US, helping natural gas achieve a sharp rebound this week, gaining more than 12%.

In the FX market, the dollar strengthened against the euro, emblematic of the year's move. For the week, EUR/USD peaked at just under 1.10 and ended around 1.086. For 2015, the euro fell 10.3% against the dollar, while the greenback gained a more modest 0.5% against the yen, though that was the fourth straight year the USD/JPY has risen.

On the M&A front, Carl Icahn won the bidding war for Pep Boys, cinching a deal at $18.50/share, valuing the auto service company at about $1 billion. Bridgestone said it would not go around again with another counteroffer. Media General shares lifted on Thursday on a report that Nexstar had raised the funds it needs to pursue a planned takeover offer. Another report said that Liberty Global and Vodafone may soon resume merger discussions, which could ultimately lead to a £140 billion deal.

>>> US Close Dow-1.02% S&P-0.94% Nasdaq-1.15% Russell-1.20%


Closing Market Summary: 2015 Ends on Defensive Note

The stock market ended its last session of the year under broad-based selling pressure, which pushed the S&P 500 (-0.9%) into negative territory for the year (-0.7%). This represented the first year-to-date loss for the benchmark index since 2008. The benchmark index outperformed the Nasdaq (-1.2%) today as the technology sector paced today's retreat. On the year though, the Nasdaq outperformed with a year-to-date return of 5.7%. Unsurprisingly, it was a quiet end to the year with fewer than 740 million shares changing hands at the NYSE floor.

The major averages slipped at the beginning of their day as pressure in oil helped to dampen futures trading. Oil prices fell through pre-market trading, but they eventually rebounded to their overnight levels. Oil rallied during the afternoon before settling near the $37.13/bbl price level with a 1.5% gain.

In sectors, energy (+0.3%), industrials (-0.7%), materials (-0.8%), and financials (-0.9%)  lead, while technology (-1.4%), utilities (-1.1%), and consumer staples (-1.1%) rounded out the leaderboard. It is interesting to note, that only two cyclical sectors posted gains in 2015. The top-weighted technology sector gained 4.3% while the consumer discretionary space (-1.0%) rallied 8.4%. On the other side, energy ended the year down 23.6% while materials surrendered 10.0%. Both sectors responded to year-long weakness in commodities, which was highlighted by a 32.2% plunge in crude oil.

Looking at the energy space, Dow component Chevron (CVX 89.96, -0.13) struggled to keep pace with the broader sector while pipeline companies outperformed. Kinder Morgan (KMI 14.92, +0.38) advanced 2.6% following the developments in oil. To be fair though, pipeline companies also benefited from the strong performance of natural gas, which spiked 6.0% to $2.34/MMbtu following a bullish inventory reading.

In the heavily-weighted technology sector, large-cap constituents Apple (AAPL 105.26, -2.06), Alphabet (GOOGL 778.01, -12.29), and Facebook (FB 104.66, -1.56) saw increased pressure as the three underperformed the broader sector with performances 1.9%, 1.6%, and 1.5% respectively. For the year Apple lost 4.6% while Alphabet soared 46.6% and Facebook surged 33.8%.

Treasuries ended their abbreviated session on their highs with the 10-yr yield slipping three basis points to 2.27%.

The stock market will be closed tomorrow in observation of New Years Day.

It was a relatively quiet day on the economic front with data being limited to Chicago PMI and Initial and Continuing Claims:

  • The Chicago Purchasing Managers Index fell to 42.9 (consensus 50.1) from November's 48.7. 
  • Initial claims increased by 20,000 in the week ending December 26 to 287,000 (consensus 270,000).
    • No special factors influenced this jump which pushed the four week average up 4,500 to 272,500.
  • Continuing claims for the week ending December 19th increased by 3,000 to 2.198 million (consensus 2.213 million)
    • This moved the four week average higher by 9,250 to 2.220 million.

Monday's data will be limited to the 10:00 ET release of November Construction spending report (consensus 0.8%) and the December ISM Index (consensus 49.0). 

  • Nasdaq  +5.7% YTD
  • S&P 500 -0.7% YTD
  • Dow Jones -2.2% YTD
  • Russell 2000 -5.9% YTD