Investments in private companies are saving the year for stock-picking hedge funds.
Prominent managers that invest in both public and private companies in the same funds have seen their portfolio of public investments flail, weighed down by losses from January’s meme-stock rally and a retreat by fast-growing technology stocks. But soaring valuations of private companies and a hot U.S. IPO market have boosted their private wagers. That has helped mask their poor performance in public markets and driven up their overall returns.
Dan Sundheim’s $25 billion D1 Capital Partners, for example, is down 4% in its public bets for the year through September—but up 71% before fees in its private investments, said people familiar with the firm. The S&P 500 had a total return of 15.9% for the period.
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D1 clients opt into share classes that offer varying levels of exposure to private investments. Clients in the share class that can invest up to 15% in private companies have seen gains of about 4.5%, after fees, for the period. The gains stand at 14% and 21% for clients in share classes that can invest up to 35% and 50% in private companies.
Meanwhile, Boston-based Whale Rock Capital Management was down 11.2% for its public investments in a hedge fund that can invest up to a quarter of its clients’ money in private companies, said people familiar with the fund. The performance of the fund’s private wagers shrank the fund’s losses to 3.3% for the year through September.
Hedge funds without private companies in their portfolios have had a rougher time. Palo Alto, Calif.-based Light Street Capital Management, which manages late-stage growth and other funds along with a hedge fund that only invests in public companies, is down 18.6% for the year through September in its hedge fund, said people familiar with the firm. That has brought the fund’s size down to about $1.7 billion. Its growth funds have fared much better, the people said, with Light Street’s first such fund, whose investments include the restaurant-software provider
expected to have an internal rate of return of more than 100%.
The rush into private investing by public-market investors has helped fuel surging valuations for private companies. And as hedge funds, along with mutual funds and sovereign-wealth funds, deploy billions of dollars, they often crowd out venture and growth funds.
Hedge funds made up 27% of the money raised in private rounds this year through June, despite participating in just 4% of the deals, according to a recent report by Goldman Sachs Group Inc.
“These tech companies are growing exponentially, and managers want to capture that huge exponential growth for their clients,” said Susan Webb, founder and investment chief at the New York-based outsourced-investment firm Appomattox Advisory.
The higher-return potential is stark. Private-equity and venture strategies gained an average 14.2% a year in the decade ended in 2020, Goldman said, while hedge funds overall averaged half those annual returns over the period—and were subject to the stresses of regular redemption cycles.
Hybrid funds can offer distinct benefits, said Udi Grofman, global co-head of the private-funds group at Paul, Weiss, Rifkind, Wharton & Garrison LLP. “The beauty of the structure is that it allows the capital of the investors, in between being invested in private investments, to be exposed to public markets,” Mr. Grofman said. Clients typically sit on cash to fund capital calls by venture and private-equity funds.
to extraordinary heights, dealt losses to myriad hedge funds. Whale Rock gained 71% last year, while the D1 share class investing up to 15% of clients’ money in private companies climbed 60%; in January they lost about 11% and 30%, respectively, in just their public investments.
While D1 has almost recouped those losses, Whale Rock and other growth-oriented stock pickers have struggled. Fund managers say sector rotations that have alternately favored growth or value have made it difficult to navigate markets. Long out-of-favor sectors such as energy and financials have been on a tear.
Meanwhile, private markets have continued to be supportive. The U.S. IPO market is flourishing, and companies are continuing to raise more money in private markets than in the past. Hedge funds are contributing to the brisk pace of fundraising. D1 and Tiger Global Management, which manages a series of private-equity funds in addition to a hybrid hedge fund, have participated in private funding rounds this year through September at a pace of more than a deal a week for D1 and more than two deals every three days for Tiger, according to PitchBook Data Inc.
The 44-year-old Mr. Sundheim, who started D1 after several years as chief investment officer at Viking Global Investors, said at a recent capital-introduction conference that he hadn’t expected to get as big in private companies as he has. D1 is invested in 90 private companies, he said.
He said judgment was the only competitive advantage in public markets as private markets offered the additional benefit of firms’ reputations playing a role in gaining access to deals. He said D1 in its earliest investments acted as a resource to management teams so they would be strong references for D1. Mr. Sundheim also said he was confident in his portfolio of public investments over the next three to five years.
posted better-than-expected second-quarter earnings from strong client activity in the world’s buoyant markets.
On Tuesday, Switzerland’s biggest bank said net profit jumped to $2 billion from $1.23 billion a year earlier, outpacing analyst expectations of $1.34 billion. It said wealth clients traded more, pushing transaction revenues 16% higher from a year earlier, and added that recurring fees were 30% higher on their existing trades and products.
At UBS’s investment bank, deal advice for mergers and acquisitions and other corporate transactions pushed global banking revenue 68% higher, helping to offset a 14% decline in market-trading income.
UBS said markets revenue would have been flat but it took an additional $87 million hit the quarter from the late March default by family office Archegos Capital Management. UBS was one of about a half-dozen banks that lent to Archegos to take large, concentrated positions in stocks. The Swiss bank said in April that it had lost $861 million when exiting the trades, most of it booked in the first quarter.
UBS helps the world’s rich manage their wealth and competes with Wall Street banks in investment banking.
On Tuesday, Chief Executive
said wealth clients are investing more with the bank in private markets and in separately managed accounts, adding that they are also freeing up liquidity as a buffer against unforeseen events by refinancing assets and borrowing from the bank.
He said momentum is on UBS’s side and that its strategic choices are paying off. The bank refocused around wealth management a decade ago and pared back its investment bank. It has been less in the limelight than its smaller domestic rival,
and listed on the Amsterdam stock exchange in September. The SPAC’s investors were offered early exposure to an attractive business at a low valuation.
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The deal’s complexity has been part of its undoing. After spending 72% of the SPAC’s cash on the Universal stake, $1.6 billion would be left over for another acquisition. Investors also would get warrants to buy into an additional blank-check deal. The Securities and Exchange Commission, which is scrutinizing SPAC deals more closely these days, said that as more than 40% of its assets would be in a minority stake, Pershing Square Tontine risked becoming an unregistered investment company.
The SPAC’s workaround caused a headache for investors. The Universal shares were to be locked up in a trust for four months, which would trigger a fall in Pershing Square Tontine’s share price—bad news for a sizable chunk of the SPAC’s shareholders who bought the stock on margin. The final nail in the coffin was the SEC’s opinion that the Universal stock purchase wouldn’t meet the New York Stock Exchange’s SPAC rules.
Mr. Ackman still gets his hands on the record label because the
hedge fund will buy the stake instead. This way, though, he will tie up a lot more capital in Universal than initially planned. Under the original deal, his fund would have owned a 3% stake but that number could now be closer to 10%.
More pressing is the need to pacify institutional investors and family offices that liked the idea of a stake in Universal and missed out. The deal also was supposed to showcase what the hedge-fund billionaire could accomplish with future blank-check vehicles. It hasn’t been a good start.
Pershing Square Tontine Holdings’ shares are down almost one-fifth since the Universal deal was announced and now trade just in line with their net asset value. Its founder has learned the lesson to keep things simple; the SPAC will do a conventional deal next, according to an investor letter Monday. Investors will be harder to impress the second time around.
SE—Universal’s majority owner—said it approved Pershing Square Tontine’s request to assign its rights and obligations under a June 20 agreement to investment funds with significant economic interests or management positions held by Mr. Ackman.
The French media company said the equity interest eventually acquired in Universal Music will now be between 5% and 10%. If it falls below 10%, Vivendi said it would still sell the additional interest to other investors before the planned spinoff of Universal Music into an Amsterdam-listed company in September.
On June 20, Pershing Square Tontine agreed to buy 10% of the ordinary shares of Universal Music in a deal valuing the world’s largest music company—home to stars including Taylor Swift, Billie Eilish, Queen and the Beatles—at about $40 billion.
Pershing Square Tontine said its decision to withdraw from the deal was prompted by issues raised by the U.S. Securities and Exchange Commission. The company said its board didn’t believe the deal could have been completed given the SEC’s position.
The blank-check company said its board concluded that assigning its Universal Music stock-purchase deal to Pershing Square was in the best interest of shareholders. Pershing Square Tontine said Pershing Square intends to be a long-term Universal Music shareholder.
Pershing Square Tontine said it would seek a new transaction, which will be structured as a conventional special purpose acquisition company merger. The company said it has 18 months remaining to close a deal.
B de CV raised money from bond funds and the U.S. government in recent years, using its status as a lender to Mexico’s poor to tap into the booming trend of socially conscious investing. Hedge funds including Millennium Management LLC and Bybrook Capital LLP have questioned the company’s accounting and wagered that prices of its roughly $2 billion of bonds will tumble, according to people familiar with the matter. Millennium and Bybrook declined to comment
The company has made great progress in reassuring investors, a spokeswoman for Credito Real said. Management is employing a strategy with “a much clearer focus on payroll loans now and a renewed emphasis on transparency,” she said.
Environmental, social and governance investing took off in recent years, allowing companies that claim ESG attributes to raise capital with ease. The controversy over Credito Real’s finances shows that such credentials don’t insulate investors from market losses.
Credito Real was “a very popular name but that doesn’t mean people were spending the time to assess them,” said a Swiss bank trader who bought Credito Real bonds for years before selling out this spring. “There was a chase for yield and they got on the investment-bank recommendation lists and people just kept on buying.”
Credito Real was founded by Mexico’s wealthy Berrondo family, which controls a 25% stake, according to the company’s 2020 annual report. It makes personal loans to low-income government employees, pensioners and small businesses that traditional banks don’t serve. Credit ratings firms gave the company relatively high scores because government employers withdraw payroll loan repayments directly from paychecks, which is meant to ensure steady cash flows to the lender.
Portfolio managers bought Credito Real’s bonds based on those ratings, interest rates as high as 9.5% and the company’s ESG credentials, analysts said.
U.S. fund company DoubleLine Capital and European banks Credit Agricole SA and
were among Credito Real’s biggest bondholders early this year, according to data from Bloomberg LP. A spokeswoman for UBS declined to comment. DoubleLine and Crédit Agricole didn’t respond to requests for comment.
The U.S. International Development Finance Corporation, or DFC, also bought in, lending the firm $100 million in January citing the investment’s “positive developmental impact in Mexico,” especially for women-owned businesses.
But in April, Credito Real disclosed a delinquent small-business loan of $33 million that Mexican press reported the company had made to the family of a wealthy financier, Carlos Cabal Peniche. The loan was about 200 times as large as the average small-business loans the company makes.
The lender also disclosed that about46% of the assets it reported as loans consisted of accrued interest, an unusually high ratio. Despite reporting a 12% increase in average loansheld during 2020, Credito Real took in less interest income than it had the year before.
took the changes as evidence that state agencies were holding back payments owed on Credito Real payroll loans, squeezing the company’s finances. Some of the company’s bonds dropped as low as 68 cents on the dollar. Bearish investors believe they will fall further if it struggles to borrow new funds to repay a bond due in February.
“Bad business decisions [were] made on a recurrent basis,” Credito Real Chief Executive
Carlos Ochoa Valdes
said on an April conference call the company held with analysts. “So what we are now aiming [for] is to strengthen all the origination procedures.” The company is focused on refinancing the February bond, he said.
The new disclosure “implies there were almost zero collections,”
an investment manager for Millennium, said on the April call. A hedge-fund analyst who made similar comments on a conference call organized for Credito Real by
in June was ejected, people familiar with the matter said.
Delays in payroll loan payments are so common in Mexico that a slang word has emerged to describe them: “jinetear,” which literally means to ride a horse, said an executive at a Mexican nonbank lender. But the holdups grew well past the normal 60 or 90 days during the pandemic, hurting lenders that needed steady cash flow to pay interest on bonds they issued in international markets, he said
Some Wall Street analysts remain steady on Credito Real debt. “The credit faces challenges, but it is not on the verge of default, in our view, and could possibly turn around,” JPMorgan Chase & Co. analyst
said in a May report.
The U.S.’s DFC takes a similar view. “Credito Real has been a transparent, responsive and highly regarded partner,” a DFC spokeswoman said.
Credit rating firms have taken a more conservative tack. FitchRatings cut the company’s score in June to double-B with a negative outlook, citing deteriorating loan quality, refinancing risk and corporate governance.
“The company’s public information disclosure is weaker than international best practices and lacks sufficient detail around some accounts; in particular, the issuer’s approach to reporting accrued interest,” Fitch said in its announcement of the downgrade.
Plc, according to people familiar with the matter, in a deal that would expand the U.S. company’s focus on consumer software.
A deal could be finalized this month, assuming talks don’t fall apart, the people said. Avast has a market value of around £5.2 billion ($7.2 billion). Assuming a typical deal premium, the deal could value the cybersecurity firm at more than $8 billion.
Major news in the world of deals and deal-makers.
Avast is based in Prague but trades in London. It primarily makes free and premium security software, offering desktop and mobile-device protection. Avast traces its roots back roughly 30 years to when founders
established the company, then known as Alwil. It says on its website that it rebuffed an acquisition offer from rival McAfee in 1997, instead licensing its antivirus product to the company. It became Avast in 2010 and went public in London in 2018. In 2014, private-equity firm CVC Capital Partners took a significant minority stake.
Avast’s founders control roughly 35% of the shares and sit on its board.
The deal would be a big one for NortonLifeLock, which is based in Tempe, Ariz. With a market value of about $16 billion, the company was known as Symantec Corp. before it closed a $10.7 billion deal to sell its enterprise-security business to
Now the market for SPACs—or special-purpose acquisition companies—has come off the boil, and new underwriting fees are threatening to dry up. Credit Suisse’s SPAC deals are being closely watched by investors and analysts, because revenue from them came to represent a large chunk of overall investment-banking revenue last year. That raised concerns that the fees and deal volume might not be sustainable.
Credit Suisse went from making an estimated $466 million in gross SPAC underwriting fees in the first quarter, to $16.1 million between April 1 and June 15, according to data provider Refinitiv.
Across banks, SPAC underwriting fees fell to $541 million in the second quarter to June 15, from a record $4.85 billion in the first quarter, according to Refinitiv data. Other banks, including
also saw sharp dives in their SPAC initial public offering fees in the second quarter, according to Refinitiv data.
SPACs are shell companies that raise money to target a private company and take it public. They became a popular cash cow for big-name investors and celebrities in soaring stock markets, but demand cooled in the second quarter as shares of some companies that merged with SPACs tumbled and the Securities and Exchange Commission toughened its stance on the format.
The drop-off in activity doesn’t mean banks will stop reporting strong SPAC revenue. Refinitiv calculates full IPO underwriting fees upfront, while in practice, banks receive around 2% of money raised when the SPAC goes public and another 3.5% or so if and when the SPAC buys or merges with another company. Mergers continued in the second quarter, producing those deferred underwriting fees, and frequently additional fees too for deal advice or raising more cash.
Nearly 300 SPACs have said they intend to raise money, meaning new blank-check IPOs and underwriting could pick up again.
The SPAC business is emblematic of the bank’s post-Archegos dilemma: It wants to ratchet down risk and focus on managing the wealth of the global rich—but investment banking brought in 40% of revenue last year. Credit Suisse Chairman
who started May 1, said there could be strategic changes and that tough decisions lie ahead.
Credit Suisse’s share price has been among the worst performers of global banks this year, down 14%. Over the same period, an index of European banking stocks is up by more than one quarter.
The SPAC fee surge last year helped Credit Suisse offset $1.3 billion in unexpected charges from a legal case, and revaluing a hedge-fund stake. The revenue took on more importance when Archegos Capital, the family office of hedge-fund manager
couldn’t meet margin calls at several banks in March, causing more than $10 billion in losses at lenders exiting the Archegos positions.
Credit Suisse said it was able to largely contain losses from Archegos because of the strong quarter it had elsewhere in the investment bank, including in underwriting SPACs and other IPOs. It reported a $275 million first-quarter net loss and tapped shareholders for $2 billion capital in April.
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The bank said losses could also be material from the collapse of another client, financial firm Greensill Capital, with which Credit Suisse ran $10 billion in investment funds.
Credit Suisse doesn’t break out SPAC revenue in published earnings. However, its chief financial officer,
told analysts in April that around $300 million of $1.5 billion capital markets and advisory fees in the first quarter came from SPACs. Revenue across Credit Suisse was around $8.4 billion.
Credit Suisse was the biggest underwriter of SPACs last year, benefiting from relationships with serial SPAC founders such as venture capitalist Chamath Palihapitiya and deal maker and Vegas Golden Knights owner
The Swiss bank invested in the sector in the years before SPACs went mainstream, hiring veteran SPAC banker Niron Stabinsky in 2015.
A Silicon Valley stock exchange that encourages long-term thinking over short-term gains has landed two marquee tech companies to be among its first listings, reflecting the growing popularity of sustainable investing.
are the first two companies to agree to dual list their shares on the Long-Term Stock Exchange. The CEOs of both companies, which also are listed on the New York Stock Exchange, were early investors in LTSE with financial stakes of less than 1.5%.
To list on LTSE in August, Twilio and Asana are agreeing to a slate of commitments such as aligning executive and board compensation with long-term performance; taking customers and employees into account; and explaining how the company’s board oversees its long-term strategy. These commitments must be concrete policies that can be monitored by LTSE.
The companies and the exchange hope the listings will be a signal that their stocks should appeal to long-term investors, potentially reeling in some of the hundreds of billions of dollars stashed in funds dedicated to environmental, social and governance investing. It also would lend credence to LTSE, which has long been embraced by venture capitalists and tech founders but has yet to list a single company.
Stock exchanges often serve as gate keepers for corporate governance and provide a platform for a company’s shares to be traded. There are more than a dozen exchanges in the U.S., and most only operate as trading platforms.
The two largest in the U.S., New York Stock Exchange and Nasdaq, are dominant players in both aspects. Those exchanges also have recently been bolstering their advisory services around ESG to their listed companies.
Long-Term Stock Exchange started trading stocks in September, and only a fraction of shares are traded on its platform. Its primary focus is on ensuring stakeholder-focused corporate governance, according to its founder and Chief Executive
told The Wall Street Journal that investors are demanding companies pay more attention to their progress toward social and environmental goals.
“We’re starting to enter a realm where there is a higher expectation of companies,” he said. “LTSE takes what various pledges have been and codifies it. It’s companies putting their money where their mouth is.”
Twilio and Asana are still working out what their exact commitments will be, but Messrs. Lawson and Moskovitz said they would likely be in line with what the companies already are doing.
For example, Twilio already is focused on its social impact. Mr. Lawson highlighted Twilio.org, which supports nonprofits and social enterprises and is funded by 1% of Twilio’s equity. The company pledged $10 million to Covax, a global initiative to vaccinate lower-income countries against Covid-19. Mr. Lawson said he hopes listing on LTSE can attract more long-term investors.
Asana’s Mr. Moskovitz pointed to the company’s commitment to building an inclusive and diverse employee base. (Asana’s website shows 30% of its U.S. employees identify as Asian, while 46% identify as Caucasian; 49% identify as male and 43% as female.)
In 2011, Mr. Ries proposed the idea for a long-term exchange in his book “The Lean Startup.” He won support from Silicon Valley entrepreneurs, including venture capitalist
and LinkedIn co-founder
The decision to let companies write their own long-term themed commitments wasn’t the original plan for the exchange. On its journey to Securities and Exchange Commission approval, LTSE ended up scrapping more ambitious requirement plans for listing companies, including barring quarterly guidance and banning executive bonuses tied to short-term financial targets.
Finding its first listings also proved challenging. To sweeten the deal, LTSE cut its listing fee by 50% in 2021. To assuage executives concerned about low trading volumes on the new exchange, LTSE pitched companies the idea of dual listing, meaning their stock is primarily listed on either the Nasdaq or NYSE.
Other exchanges have tried to pick away at NYSE’s and Nasdaq’s dominance in corporate listings. None have made much progress. IEX Group Inc. spent years wooing companies to list on its upstart exchange, but closed its listing business in 2019 after winning only one.
Mr. Moskovitz, a longtime LTSE supporter, said he considered dual listing with LTSE last fall when Asana went public but the timing didn’t feel right. Asana already was doing something different by going public in a direct listing on the NYSE. Adding another twist to its stock-market debut felt like too much for investors, he said, though he said he made LTSE-inspired commitments in his founder letter and in Asana’s regulatory filing at the time of its initial public offering.
“We wanted to establish ourselves as a public company,” Mr. Moskovitz said. “We now feel we’re on stronger footing to take this new step.”
‘The material benefit of being seen as an ESG leader has become bigger as so much money has flowed in.’ ”
— Long-Term Stock Exchange CEO Eric Ries
In addition to Twilio and Asana, expense-reporting software company Expensify Inc. also is looking at dual listing with LTSE as it goes public, people familiar with the matter said. Last year,
not only called itself mission-driven in a filing ahead of its IPO, but it also dedicated an entire section to ESG.
Mr. Lawson said LTSE can help give a stamp of approval to companies who make ESG pledges. “If LTSE helps connect companies with investors who also value those things like ESG and long-term focus, that’s a good thing,” he said.
tried to mine the sea floor, the company he backed lost a half-billion dollars of investor money, got crosswise with a South Pacific government, destroyed sensitive seabed habitat and ultimately went broke. Now he’s trying again, but with a twist: Mr. Barron is positioning his new seabed mining venture, The Metals Company, as green, to capitalize on a surge of environmentally minded investment.
TMC is set to receive nearly $600 million in investor cash in a deal slated to take the company public in July. If successful, that would value TMC at $2.9 billion—more than any mining company ever to go public in the U.S. with no revenue.
“We were positioning this incorrectly as a big mining, deep-sea mining project, which it was,” says Mr. Barron, who says the metallic nodules he hopes to bring up are crucial to building electric-vehicle batteries. “But it wasn’t the way that we were going to garner support from investors to make this industry a reality.”
Green investing has grown so fast that there is a flood of money chasing a limited number of viable companies that produce renewable energy, electric cars and the like.
Some money managers are stretching the definition of green in how they deploy investors’ funds. Now billions of dollars earmarked for sustainable investment are going to companies with questionable environmental credentials and, in some cases, huge business risks. They include a Chinese incinerator company, an animal-waste processor that recently settled a state lawsuit over its emissions and a self-driving-truck technology company.
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One way to stretch the definition is to fund companies that supply products for the green economy, even if they harm the environment to do so. Last year an investment company professing a “strong commitment to sustainability” merged with the operator of an open-pit rare-earth mine in California at a $1.5 billion valuation. Although the mine has a history of environmental problems and has to bury low-level radioactive uranium waste, the company says it qualifies as green because rare earths are important for electric cars and because it doesn’t do as much harm as overseas rivals operating under looser regulations.
The stretching has been true for special-purpose acquisition companies, one of the hottest investments on Wall Street. More than 45 SPACs that have declared themselves green have raised nearly $15 billion, according to data provider SPAC Track.
SPACs raise money on the stock market from investors who give them broad latitude to look for an existing private company to acquire. SPACs typically promise shareholders they will invest their cash within two years. With so much money looking for deals, they can’t be too picky. Sometimes multiple suitors converge on the same operating company, in a frenzy known as a “SPAC-off.”
A SPAC that is set to merge with TMC, the Sustainable Opportunities Acquisition Corp., or SOAC, went public on the New York Stock Exchange in 2020 and met more than 90 companies before deciding on the deep-sea miner. “It’s like speed dating,” says
the SPAC’s general counsel.
Even more money is coming from mutual funds and other big investment vehicles. Since the beginning of 2019, stock mutual funds and exchange-traded funds with ESG as part of their mandate—meaning they prefer to invest in companies with certain environmental, social and governance characteristics—have received a net $473 billion from investors; just $103 billion net has gone into all other stock funds, according to a Goldman Sachs Group compilation of data from fund tracker
When it comes to green companies, “there just isn’t enough” to absorb investor demand, says
a managing director at MSCI, a research company that compiles indexes of companies, including ESG indexes, that many fund managers follow to decide how to allocate green investment.
Cumulative value of sustainability-focused SPAC initial public offerings
SPACs have filed for
another $6 billion of IPOs
SPACs have filed for
another $6 billion of IPOs
SPACs have filed for
another $6 billion of IPOs
In response, MSCI has looked at other ways to rank companies for environmentally minded investors, for example ranking “the greenest within a dirty industry,” Ms. Nishikawa says. “If you were to be too purist about where you set these thresholds you would end up with a not-really-investable universe,” she says.
The second-biggest firm on MSCI’s Global Pollution Prevention Index is
an $11 billion animal-waste-rendering company. New Jersey’s attorney general sued the company in 2019 alleging rotting-animal odors from a Newark plant were so pervasive that neighbors suffered migraines. As of March, green-investment funds held more than $300 million in Darling stock, according to FactSet Research data.
The company settled the New Jersey suit last year without admitting to the allegations. “We continue to make investments. We continue to upgrade the air emissions of our plants,” a Darling spokesman says.
Ms. Nishikawa says MSCI decided to include Darling in the index despite its environmental issues because its business is “clearly tied to the circular economy theme,” since it takes waste products from other companies and turns them into usable goods. “There’s no such thing as a perfectly green company,” she says.
Of all the industries seeking green money, deep-sea mining may be facing the harshest environmental headwinds.
Biologists, oceanographers and the famous environmentalist
have been calling for a yearslong halt of all deep-sea mining projects. A World Bank report warned of the risk of “irreversible damage to the environment and harm to the public” from seabed mining and urged caution.
More than 200 deep-sea scientists are preparing to release a letter calling for a ban on all seabed mining until at least 2030. In late March, Google Inc., battery maker
and heavy truck maker Volvo Group announced that they wouldn’t buy metals from deep-sea mining.
TMC’s Mr. Barron says they’re misguided. Existing battery mineral miners dig up rainforests and sometimes use child labor, he argues, making deep-sea mining a better option.
Much of the world’s known deep-sea metal lies under international waters, where mining is regulated by the U.N.-created International Seabed Authority. The 168-member-country bureaucracy has never issued a mining permit—and in its nearly three decades of existence hasn’t yet even decided on mining rules.
TMC’s Mr. Barron has been trying to overcome such obstacles for two decades. A serial entrepreneur from rural Australia who once imported batteries from China, published a magazine and built a software company, Mr. Barron says he was introduced to deep-sea metals by his tennis partner,
around 2001. Mr. Barron decided to invest in Mr. Heydon’s Canadian startup,
Working through Pacific island nations including Tonga, Vanuatu and Nauru, Nautilus tried to get access to the seabed in international waters, but the process moved slowly.
The territorial waters of Papua New Guinea, where geothermal vents created vast mineral structures over thousands of years, seemed to offer a way forward outside the reach of international regulators. The local government there invested $120 million in Nautilus, which began grinding up the sea floor to test the viability of mining there.
Mr. Barron boosted his Nautilus stake in 2005. Months later the company went public via a reverse merger, similar to a SPAC listing. Mr. Barron cashed out in 2007 and 2008, making about $30 million in profit, he says. Mr. Heydon left around the same time.
Alarm bells were already sounding in Papua New Guinea. Villagers said Nautilus’s exploration was driving away sharks they lured in, killed and ate in traditional ceremonies. Government officials and environmental groups called for a halt in operations. “It became obvious that the destruction outweighed the very, very minimal benefits,” says
an activist from a nearby village.
Nautilus disputed that, but the company exhausted its funds before it could begin production. It lost its boat to creditors and Nautilus went broke, according to liquidation filings. The Papua New Guinea government lost its investment, and two other investors, one from Qatar and one from Russia, acquired Nautilus assets.
Messrs. Barron and Heydon had already started DeepGreen, later renamed The Metals Company, planning to reacquire old Nautilus holdings in international waters where metal nodules could be picked up “like golf balls,” Mr. Barron said, in an area he called “a desert.” Exploration work by TMC and prior research by others found a large number of the nodules, enough to produce high volumes of metals used in electric-car batteries, in areas more than 2 miles deep.
Oceanographers countered that, rather than a desert, the area roughly midway between Mexico and Hawaii, is actually a little-explored ecosystem where new species are still being discovered. Recent finds include a bright-yellow sea cucumber with a tail like a squirrel’s and a “walking squid” that traverses the bottom with spindly tentacles.
The metal nodules TMC wants to mine are located in some of the area’s only animal habitat, the scientists say. A recent study in the journal Scientific Reports showed that 26 years after a trial project sent a robot to a similar habitat, the seabed and its animals hadn’t recovered.
Hoping to assuage some of the environmental concerns—and to prepare studies necessary for mining permits—TMC granted $2.9 million to researchers to study the biology of the mining area. Many scientists signed on because it is a rare opportunity to explore one of the world’s most remote environments and to catalog what might be lost.
Among them was
a University of Hawaii biology professor and a leading authority on the area. After Mr. Drazen publicly criticized seabed mining, a TMC employee warned he might lose access to funding if he continued, say two people familiar with the matter. Mr. Drazen declined to comment on the conversation. A TMC spokesman says the scientists are free to speak their minds.
TMC decided to frame itself as green in 2017 around the time it tried and failed to go public on the Toronto Stock Exchange.
Mr. Barron took over as CEO and hired Erika Ilves, an executive at a space-mining company, to help steer strategy. Mr. Barron and Ms. Ilves are raising their twin daughters together.
The once clean-cut Mr. Barron now sports shaggy hair, a scruffy beard and leather bracelets coiled almost halfway to his elbow. He travels with a metal lump from the seafloor in his bomber-jacket pocket. When it sets off airport metal detectors, Ms. Ilves says, Mr. Barron offers security guards an opportunity to invest.
“I’m doing it for the planet and the planet’s children,” Mr. Barron said on a company-funded podcast. It hired a marketing firm that began promoting him as the Australian
While Mr. Barron is TMC’s public face, the business of securing mining rights—this time in international waters—was handled privately by co-founder Mr. Heydon and his son
now a TMC executive. Seabed Authority rules let any member nation sponsor projects in any international waters, and gives favored treatment to developing countries. The Heydons decided to seek an exploration license via a company based in Nauru, partly, they say, to help the struggling eight-square-mile Pacific island nation of 10,000 people.
“I’ve always been very dedicated to the fight for justice,” says Robert Heydon.
The Nauru company first was owned by Nautilus, then by an investor group that included the Heydons and later by two Nauru-government-controlled foundations formed to provide financial benefits to Nauruans. In 2012, the foundations’ directors gave the company to TMC for free.
Robert Heydon wouldn’t provide details of the ownership changes, calling them “a private sort of transaction.” He says the only money TMC has paid to Nauru is for public benefits including college scholarships for two students. One recipient is the niece of the Nauru official in charge of deep-sea mining when the government transferred ownership to TMC, former Trade Minister
Mr. Aroi, who is still a government official, says he didn’t believe his niece received the scholarship due to his position, but rather because she was one of a very few applicants—around 10—who qualified for a university education. He said he wasn’t involved in the Nauru foundations’ decision to transfer ownership to TMC, and that no one in government raised issues with TMC paying for his niece’s education. A government spokeswoman didn’t respond to requests for comment.
“It’s obviously misleading, false and patronizing” to imply Nauru officials could be bribed, Robert Heydon says. TMC didn’t pay the Nauru foundations for the company, Mr. Barron says, and in fact Nauru invested about $100,000 in TMC after the transfer. A TMC spokesman said the Journal’s reporting is “riddled with inaccuracies and misrepresentations.”
With the Heydons handling government relations, Mr. Barron set out to attract money to the venture.
As investor interest in green companies heated up, Mr. Barron says, would-be backers approached TMC with offers to invest or outright buy it. In the months leading up to the SPAC deal, Mr. Barron says he held negotiations with a large mining company and a large oil company that were looking to get into the electric-vehicle supply chain in addition to green-focused investors.
He said TMC negotiated term sheets with “several” SPACs before being approached by SOAC. Mr. Barron says he liked SOAC’s sustainability-focused mission—its founder
calls it “the first ESG SPAC,” though other ESG-focused SPACs preceded it—and signed a deal to stop negotiating with any other potential investors while SOAC and TMC worked out acquisition terms.
SOAC’s Ms. Stryker said she was initially skeptical that TMC would be a good fit. But after examining its business plan and weighing the environmental impact of deep-sea versus land-based mining, the firm was won over. The companies soon began seeking other investors with a presentation labeling seabed nodules an “EV battery in a rock.”
The deal gives TMC $570 million in cash and values it at $2.9 billion, much more than any other mining company that has gone public in the U.S. with no revenue, according to University of Florida business professor
TMC’s projections call for the company to raise more than $3 billion in additional funding before it turns profitable.
In a regulatory filing Wednesday, TMC added a new risk factor that warned the environmental impact of its mining techniques on seafloor life “could potentially be more significant than currently expected” and require further study.
Mr. Barron’s stake is now worth about $175 million.
expects to take $3 billion in losses as part of an agreement to sell its unprofitable French retail bank, in a sign of the souring fortunes of European banking.
London-based HSBC, one of the world’s largest lenders, said Friday that it had agreed to sell the bank to a company owned by Cerberus Capital Management LP, a New York-based private-equity firm.
HSBC said it would receive 1 euro for the bank, equivalent to around $1.19, and that it might be required to put additional cash into the deal, which isn’t expected to close until the first half of 2023. It expects to take a pretax loss of $2.3 billion on the sale, plus a further $700 million goodwill write-down.
Two decades ago, HSBC paid $10.6 billion to acquire Credit Commercial de France, as part of a broad growth strategy to expand its footprint to economies large and small around the world.
Its sale reflects the dire straits of European banks, with slow growth, negative interest rates and regulatory and political obstacles to consolidation.
“It is not expected that the potential transaction will result in any net proceeds of sale for the HSBC Group,” HSBC said.
In 2000, when it bought Credit Commercial de France, the total value of takeovers of European banks was over $90 billion, according to Dealogic. Last year, the value of European banking takeovers slumped to under $50 billion.