As Hedge Funds Endure Rocky Year, | Stock Market News Today


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.

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

Toast Inc.

and the software-development company

GitLab Inc.,

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.

Toast, a restaurant-software provider that went public last month, is an investment of a Light Street Capital Management growth fund.



Photo:

Richard Drew/Associated Press

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.

Stock-picking hedge funds had a banner year in 2020, buoyed by markets that set new highs after bottoming that March.

Their fortunes in public markets have changed this year. The meme-stock rally in January, which sent the price of companies including GameStop Corp. and

AMC Entertainment Holdings Inc.

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.

Write to Juliet Chung at [email protected]

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Robinhood Stock Sale Soured By Investor Confusion, Valuation | Sidnaz Blog


Robinhood Markets Inc.’s


HOOD 3.45%

bid to revolutionize IPOs has created losses for investors instead, after one of the year’s most highly anticipated listings fell flat.

In a regulatory filing in early July, the trading platform’s co-founders said they would open their initial public offering to customers on equal terms with institutional investors. They said they recognized it may be the first IPO many would participate in, and pledged to “never sacrifice the safety of our customers’ money.”

It now appears Robinhood’s commitment to “democratizing” the IPO process played a role in the offering’s big initial stumble Thursday. An innovative auction system sowed some confusion among investors, many already suspicious of the valuation of a business that has drawn scrutiny from regulators and criticism from customers, people involved in the process said.

The stock, initially priced at $38, the bottom of the target range, sits below that. It is a disappointing result at a time when IPOs are booming and investor appetite for new issues is robust.

Robinhood proudly tore up the traditional IPO playbook. It insisted a large chunk of its stock—in the end up to 25%—go to its individual-investor customers compared with the normal retail allocation of well under 10%. It said employees could sell a portion of their stock right away instead of being locked up for six months. And when it came to determining the price of its IPO, Robinhood decided to use a hybrid-auction process, which attempts to assign shares to investors based on what they are willing to pay, regardless of who they are.

Robinhood co-founder Baiju Bhatt, in gray suit, and CEO and co-founder Vladimir Tenev in the Wall Street area of New York City on Thursday.

The hybrid auction has worked in other IPOs in the past year. In typical listings, underwriters give their investor clients updates throughout the roadshow—the seven- to 10-day period in which a company pitches its stock. These updates typically include guidance on how much demand bankers are seeing for the shares and the rough price they ultimately expect to set.

In this case the company and lead underwriters

Goldman Sachs Group Inc.

and

JPMorgan Chase

& Co. gave few such updates, people familiar with the matter said. When some large investors called the other underwriters on the deal, some of those bankers pleaded ignorance.

The opaqueness of the process sowed suspicion among some investors who assumed the deal was going poorly and adjusted their orders accordingly, investors and bankers said.

Many had already expressed concern about how much of Robinhood’s revenue comes from a controversial practice called payment-for-order-flow, which the Securities and Exchange Commission is reviewing, people who attended the roadshow said. Others questioned what they saw as the high valuation the eight-year-old company was seeking—in excess of $30 billion.

Another concern: whether Robinhood’s controversial decision earlier this year to stop users from buying meme stocks like

GameStop Corp.

would prompt some to eschew the offering.

Wednesday night, as bankers met with Robinhood Chief Executive

Vlad Tenev

to set the price, some investors said they were only told it would be within the $38 to $42 target range. This surprised many large institutions, who are used to more guidance heading into a pricing meeting.

A Robinhood IPO event in Times Square.

An unusually large percentage of shares were set to be allocated to hedge funds, which are more likely to “flip” IPO stock on the first day of trading, according to people close to the deal. To bring in more of the biggest institutional funds who are viewed as “buy-and-hold” investors, Robinhood chose $38 a share instead of the higher price some funds were willing to pay.

The company and Goldman felt comfortable that the lower price was conservative enough that the shares would rise on their first day of trading, especially given the buzz around Robinhood in the lead-up to the listing, according to people close to the deal.

Instead, the stock opened at $38 a share, unusual at a time when big initial pops for hot IPOs are more the norm. It rose higher briefly, touching $40 before dropping through the IPO price. It closed down 8.4% Thursday.

The shares fell further still Friday morning before regaining some ground in the early afternoon.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ

Robinhood’s Stock Market Debut

Write to Corrie Driebusch at [email protected]

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Should You Be Buying What Robinhood Is Selling? | Sidnaz Blog


In rare cases, such pitches have paid off big time. More often, you’d have done yourself a favor by taking roughly half your money and lighting it on fire instead.

Just as Robinhood isn’t the first brokerage to offer commission-free trading, it isn’t the first to seek to “democratize” investing or to sell a piece of itself to its own customers.

On June 23, 1971, Merrill Lynch, Pierce, Fenner & Smith Inc. became the first New York Stock Exchange firm catering to individual investors to offer its shares to the public.

Thirsty for fresh capital in a struggling stock market, Merrill flogged its shares to its own customers, tapping the firm’s “awesome recognition among that vast segment of the population,” reported The Wall Street Journal the next day. “Primarily small investors, the type long championed by Merrill Lynch, quickly purchased the entire amount.”

Nearly 400 insiders at the firm unloaded a total of 2 million shares in the offering. From its initial $28 per share, the stock shot to about $42—a 50% pop—then closed around $39. That valued Merrill at 30.5 times its prior-year earnings, much higher than the overall stock market’s price/earnings ratio of 18.7.

Less than three weeks later, Merrill announced that its net earnings had fallen nearly 50% from the prior quarter.

For the rest of 1971, Merrill’s stock lost 9.4%; the S&P 500 gained 4%, counting dividends.

In 1972, when the S&P 500 rose nearly 19%, Merrill sank 7.7%. And in 1973-74, when the S&P 500 lost 37%, Merrill’s stock slumped by 61%. In its first three full years, Merrill’s stock lost three-quarters of its value; the S&P 500 fell only 5%.

Here in 2021, Robinhood’s offering is one of several trading and investing IPOs:

Coinbase Global Inc.,

the cryptocurrency exchange, went public in April, and

Acorns Grow Inc.,

which helps users invest in tiny increments, said in May that it expects to go public later in the year. Since its Apr. 14 debut, Coinbase is down about 27%. Robinhood fell 8% on its first day of trading Thursday.

One of Wall Street’s oldest and frankest sayings is “When the ducks quack, feed ‘em”—meaning that whenever investors are eager to buy something, brokers will sell it like mad.

Back in 1971, that was the brokers’ own shares. Roughly half a dozen major firms sold stock to the public soon after Merrill, including Bache & Co. and Dean Witter & Co. By 1974, according to data from the Center for Research in Security Prices LLC, several of them had dealt losses at least as devastating as Merrill’s.

In 1987, Jane and Joe Investor got invited to join in on the fun of Charles Schwab Corp.’s IPO, when roughly three million of the offering’s eight million shares were reserved for employees and customers of the firm.

Unlike Merrill, which was rescued from the brink of failure in 2008 when

Bank of America Corp.

bought the firm, Schwab went on to generate spectacular long-term performance. Over the full sweep of time since its 1987 IPO, Schwab is up more than 26,500%, or 17.9% annualized. The S&P 500 gained less than 3,500%, or an average of 11.3% annually.

However, Schwab went public in late September 1987. Only 18 trading days later, on Oct. 19, the U.S. stock market took its biggest one-day fall in history, plunging more than 20%.

Schwab’s stock got brutalized. In their first year, Schwab’s shares fell 59.1%. After three years, the market as a whole had gained 0.6% annually; Schwab’s stock lost an annualized average of 6.9%, according to CRSP.

How many of the original buyers in 1987 stuck around long enough to reap the giant rewards that came much later? That’s impossible to know, but the likeliest answer has to be: very few.

Every once in a while, outside investors in a brokerage IPO do well.

Goldman Sachs Group Inc.

began trading on May 4, 1999. If you’d bought Goldman stock in the IPO and held it ever since, you’d have earned 9.1% a year, versus 7.6% in the S&P 500, according to FactSet.

Yet Goldman was a giant then, as it is now; it was late to the IPO party because it had held on to its partnership structure for so many years. Most brokerage IPOs, like Robinhood’s, occur when the firms are younger and smaller.

That makes them typical. Companies selling shares to the public for the first time tend to be small, with minimal profits; they also require additional invested capital to sustain their rapid growth.

That’s what Savina Rizova, global head of research at Dimensional Fund Advisors, an asset manager in Austin, Texas, calls “a toxic combination of characteristics that points to low expected returns.”

On average, IPOs have severely underperformed seasoned stocks in the long run. And, history suggests, brokerages doing IPOs are better at timing the market for themselves than for you.

Write to Jason Zweig at [email protected]

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The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ

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Robinhood IPO Is No Giveaway | Sidnaz Blog


Robinhood Markets likes to give away free shares to attract new customers. Its public offering to investors is a different matter.

The offering bears some similarity to recent IPOs such as

Coinbase Global

and

Rocket Cos.,

which made their debut in the midst of crypto and mortgage booms, respectively. Investors had the challenge of trying to chart out a normalized earnings and revenue path. So far, neither of those prior examples have worked out for initial public investors.

Robinhood derives the vast majority of its revenue from trading by its customers, including in cryptocurrencies like Dogecoin. In this topsy-turvy market, it will be quite difficult to forecast what that activity level looks like a year from now. Plus, its primary trading revenue source is payment for order flow, one of the most hotly debated topics in finance and in Washington.

Amid that uncertainty, there is one measure that cuts through a lot of the noise: how much an investor would be paying at the IPO valuation per funded account. That is a way to benchmark Robinhood to established peers in the retail brokerage business.

At the proposed IPO price range set on Monday, a funded Robinhood customer account is worth about $1,500 to $1,600. Contrast that to a long-term average of about $2,000 for E*Trade over the past 15 years, before it was acquired for about $1,800 by Morgan Stanley, according to figures compiled by Christian Bolu of Autonomous Research. Charles Schwab, a much broader wealth- and asset-management business, has traded around $3,600 historically, and is closer to $4,000 today.

Vlad Tenev, co-founder and chief executive officer of Robinhood Markets. It will be Robinhood’s broad appeal that is most vital to justifying the IPO price.



Photo:

Daniel Acker/Bloomberg News

So that multiple isn’t by itself wild and suggests that, even if Robinhood has to alter its revenue model, it could still be a viable business just by virtue of the number of customers it has. But it also is giving Robinhood credit for a lot of growth it has yet to achieve. Consider that Robinhood’s typical funded account had about $4,500 worth of assets in custody at the end of the second quarter. The established retail brokers’ typical accounts are well into the six figures.

Yes, Robinhood’s accounts on average trade more. But overall, Robinhood still generates much less revenue out of its customers, in part because they are smaller. In the first quarter, average revenue per user was $137 at Robinhood. By contrast, TD Ameritrade and E*Trade were generating more than $500 around the time they were acquired, according to Autonomous. Charles Schwab was above $600 in the first quarter.

So the per-account price implies that Robinhood will either far better monetize its customers in the future, grow them at a much faster rate, or some combination thereof. Faster growth is much more likely, based on recent history: Schwab added 1.7 million net new brokerage accounts in the second quarter, while Robinhood added 4.5 million funded accounts on net. “Expanding the universe of investors has been, and we expect will continue to be, a significant driver of our market-leading growth,” Robinhood writes in the IPO prospectus.

Meanwhile, per-user revenue trends are already slowing. Preliminary second-quarter results given by Robinhood imply a drop-off in average revenue per user to under $120, with Robinhood noting that, while cryptocurrency and options trading are growing, equities trading activity in the second quarter was lower than it was a year ago.

The company can build on other revenue streams, which include margin loans to customers and cash management. But low pricing is a vital part of the company’s mission to expand its customer base. The company is still building out its securities lending platform, which could generate incremental revenue. In the face of slowing trading activity, though—and that includes crypto in the third quarter, according to the company—it is hard to bank on significant per-user revenue growth in the near future.

So it will be Robinhood’s broad appeal that is most vital to justifying the price. That makes the IPO itself a pivotal moment. Robinhood will be distributing potentially over 20 million shares to its own customers via its own platform. If the deal doesn’t perform well out of the gate for any reason, that could frustrate some of its most engaged customers.

Investors might have to wait for the dust to settle on this offering before thinking about nabbing any Robinhood stock for themselves.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges as it looks forward to its IPO. Photo illustration: Jacob Reynolds/WSJ

Write to Telis Demos at [email protected]

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Paytm and Zomato IPOs Point to Coming Wave of Indian Tech | Sidnaz Blog


NEW DELHI—India is gearing up for tech IPOs, including two worth more than $1 billion, as startups look to tap a stock market that has proved resilient despite Covid-19.

The initial public offerings reflect the maturing of a generation of e-commerce and digital-economy companies, bankers say, many of which have grown rapidly during the pandemic as well-off city-dwellers turn to them when purchasing products from milk to medicines.

On July 16, the operator of the Paytm digital-finance app, One97 Communications Ltd., filed a prospectus for what would be India’s largest IPO in local-currency terms. The group offers services such as a mobile wallet, loans and stock-trading, and is backed by

Jack Ma’s

Chinese financial-technology giant Ant Group Co. One97 aims to issue new and existing shares worth a total of up to 166 billion rupees, the equivalent of $2.23 billion.

Other companies considering IPOs include digital-payments platform One MobiKwik Systems Ltd., which filed its prospectus earlier this month, and logistics and supply-chain-services provider Delhivery Pvt., according to a company spokeswoman. Online cosmetics seller Nykaa E-Retail Pvt., API Holdings Pvt., the parent company of online pharmacy PharmEasy, and PB Fintech Pvt., the parent of insurance aggregator Policybazaar.com, are also considering listings, according to people familiar with their plans.

“This is the first set of these companies coming to the public market” in India, said

Kaustubh Kulkarni,

the head of investment banking for India at the local unit of

JPMorgan Chase

& Co.

Demand for the shares is likely to be strong, given the companies’ brand recognition, said Mr. Kulkarni, who is also the bank’s co-head of investment banking for South and Southeast Asia. “Most of these companies are offering products, services or capabilities which millions, if not hundreds of millions, of customers are utilizing on a day-to-day basis,” he said.

Last week investors placed orders worth 38 times the shares being offered by Zomato Ltd., India’s answer to

DoorDash Inc.

The food-delivery group raised around 94 billion rupees, the equivalent of $1.26 billion, and its shares are due to start trading on July 27.

Some market-watchers say Indian tech has plenty of room to grow, as more consumption shifts online. Earlier-stage investors have poured about $16 billion into Indian startups this year, creating 16 new unicorns—young private companies valued at $1 billion or more—according to data firm Venture Intelligence.

India’s unicorn population will rise to 150 by 2025 from 60 now, predicted

Gaurav Singhal,

the head of India consumer technology at

Bank of America Corp.

’s investment-banking arm. Many will eventually look to float, he said, translating into a big increase in market capitalization.

“India will see $300 billion to $400 billion of market-cap creation in the internet ecosystem in the next five years,” said Mr. Singhal.

The deals already under way show how India’s financial sector has been swept up in an international boom, even as the country records more than 30,000 new Covid-19 cases a day, among the highest daily counts in the world.

Already this year, India has hosted a rush of IPOs—joining a global surge fueled in part by tech companies from elsewhere in Asia, such as China’s

Kuaishou Technology

and South Korea’s

Coupang Inc.

The operator of the Paytm digital-finance app filed a prospectus for what would be India’s largest IPO in local-currency terms.



Photo:

Dhiraj Singh/Bloomberg News

India’s 22 IPOs in the first six months of 2021 brought in $3.7 billion, a record half-year haul, according to Prime Database Group, a research firm in New Delhi. Shares in some recently listed companies are trading at twice their IPO price.

At the same time, Indian stock indexes have soared as investors bet on big listed companies. The S&P BSE Sensex has hit a series of record highs, most recently on July 15, and international investors have poured about $7.7 billion into Indian shares this year, official data shows.

Millions of individual Indian investors are trading stocks for the first time, again mirroring trends seen in the U.S. and some other markets.

Harpreet Singh,

a 23-year-old from the northern city of Pathankot, started dabbling in the market last year while waiting for the chance to study abroad.

Relying on advice from videos on YouTube and Telegram, Mr. Singh said, he has lost money at times—but still finds trading stocks more appealing than getting a job in his hometown, where he said private-sector work pays barely 10,000 rupees a month, equivalent to about $134.

“If you have knowledge of stocks,” he said, “then in three to four months you can earn hundreds of thousands of rupees, sitting at home.”

Write to Shefali Anand at [email protected]

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Robinhood IPO Expected to Value Trading App at About $33 Billion | Sidnaz Blog


Menlo Park, Calif.-based Robinhood Markets operates a stock-trading platform for individual investors.



Photo:

olivier douliery/Agence France-Presse/Getty Images

Trading app Robinhood Markets Inc. said it expects to raise about $2 billion in its initial public offering, which would give it a market value of about $33 billion, according to a securities filing Monday.

Robinhood would sell about 52.4 million shares in the offering, and other stockholders would sell about 2.6 million. At the $40-a-share midpoint of the offering range, Robinhood would raise about $2 billion.

The Menlo Park, Calif.-based company operates a stock-trading platform for individual investors.

In the first quarter of 2021, Robinhood recorded revenue of $522.2 million, the company said in a regulatory filing. It posted a loss of $6.26 a share. In the first quarter of 2020, the company’s net loss was 23 cents a share on revenue of $127.6 million.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges as it looks forward to its IPO. Photo illustration: Jacob Reynolds/WSJ

Write to Matt Grossman at [email protected]

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Intel Is in Talks to Buy GlobalFoundries for About $30 Billion | Sidnaz Blog


Intel plans to make more chips for other tech companies.



Photo:

David Paul Morris/Bloomberg News

Intel Corp.


INTC -1.26%

is exploring a deal to buy GlobalFoundries Inc., according to people familiar with the matter, in a move that would turbocharge the semiconductor giant’s plans to make more chips for other tech companies and rate as its largest acquisition ever.

A deal could value GlobalFoundries at around $30 billion, the people said. It isn’t guaranteed one will come together, and GlobalFoundries could proceed with a planned initial public offering. GlobalFoundries is owned by Mubadala Investment Co., an investment arm of the Abu Dhabi government, but headquartered in the U.S.

Any talks don’t appear to include GlobalFoundries itself as a spokeswoman for the company said it isn’t in discussions with Intel.

Write to Cara Lombardo at cara.lom[email protected] and Dana Cimilluca at [email protected]

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IFIT to Buy Fitness Platform Sweat for $300 Million Ahead of IPO | Sidnaz Blog


IFIT, which owns NordicTrack, was recently valued in excess of $7 billion in its most recent round of funding in late 2020.



Photo:

iFit

IFIT Health & Fitness Inc. will acquire Sweat, an online fitness training platform, ahead of an initial public offering that is expected in the fall, according to people familiar with the matter.

IFIT is buying Sweat, which was co-founded by trainer

Kayla Itsines

and CEO

Tobi Pearce

in 2015, for around $300 million, some of the people said. IFIT plans to keep Sweat, which is based in Australia, as a stand-alone brand and Ms. Itsines and Mr. Pearce as executives.

The Sweat app



Photo:

Sweat

IFIT is beefing up its content offerings ahead of its anticipated IPO. The company, which owns NordicTrack, was recently valued in excess of $7 billion in its most recent round of funding in late 2020 and is expected to attain a valuation in excess of that in its IPO.

Should the company debut as planned later this year, it is expected to tap a market hungry for fast-growing companies in the busiest year for public offerings on record. IFIT’s closest competitor,

Peloton Interactive Inc.,

made its debut in late 2019, and while its stock price has tumbled this year after a recall of its treadmills, investors had raced into the stock. Even with the pullback, Peloton shares have more than quadrupled from their IPO price.

IFIT, formerly known as Icon Health & Fitness Inc., has been moving swiftly with its IPO plans and confidentially filed papers recently with the Securities and Exchange Commission, according to people familiar with the offering.

Write to Maureen Farrell at [email protected]

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Credit Suisse’s SPAC Bonanza Dries Up | Sidnaz Blog


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

Citigroup Inc.

and

Goldman Sachs Group Inc.,

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

António Horta-Osório,

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.

Credit Suisse’s new chairman, António Horta-Osório, has said tough decisions lie ahead for the bank.



Photo:

Simon Dawson/Bloomberg News

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

Bill Hwang,

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,

David Mathers,

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

Bill Foley.

The Swiss bank invested in the sector in the years before SPACs went mainstream, hiring veteran SPAC banker Niron Stabinsky in 2015.

WSJ explains why some critics say investing in SPACs isn’t worth the risk. (Originally published Sep. 29, 2020)

Write to Margot Patrick at [email protected]

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