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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UBS Profit Jumps on Wealth Management Boom | Sidnaz Blog


A pedestrian passes a UBS branch in Zurich earlier this month.



Photo:

Stefan Wermuth/Bloomberg News

UBS Group AG


UBS -2.22%

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

Ralph Hamers

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,

Credit Suisse

Group AG, which lost more than $5 billion from the Archegos affair this year.

Write to Margot Patrick at [email protected]

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William Ackman Needs a Soothing Pitch After Universal Music Drama | Sidnaz Blog


Pershing Square Tontine Holdings had planned a $4 billion purchase of a 10% stake in Universal Music Group.



Photo:

Bing Guan/Bloomberg News

William Ackman’s

blank-check company picked a good target but a poor deal structure. To keep investors happy, both need to be right on a second attempt.

On Monday,

Pershing Square Tontine Holdings


PSTH -1.45%

$4 billion purchase of a 10% stake in Universal Music Group was called off. The world’s biggest record label will be spun off from its French owner

Vivendi

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.

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

Pershing Square Holdings


PSH -4.85%

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.

Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ

Write to Carol Ryan at [email protected]

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Ackman SPAC Decides Against Buying 10% Stake in Universal Music | Sidnaz Blog


Universal Music’s headquarters in Santa Monica, Calif., earlier this year.



Photo:

Bing Guan/Bloomberg News

Pershing Square Tontine Holdings Ltd.


PSTH -1.81%

, a blank-check company led by hedge-fund manager

William Ackman,

said it won’t proceed with its proposed acquisition of a 10% stake in Universal Music Group and will assign its share-purchase deal to

Pershing Square Holdings Ltd.

Vivendi

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.

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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 [email protected] and Dana Cimilluca at [email protected]

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NortonLifeLock in Talks to Buy Avast | Sidnaz Blog


Prague-based Avast primarily makes free and premium security software, offering desktop and mobile-device protection.



Photo:

david w cerny/Reuters

NortonLifeLock Inc.


NLOK -0.92%

is in talks to buy European cybersecurity firm

Avast

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.

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

Pavel Baudiš

and

Eduard Kučera

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

Broadcom Inc.

in 2019. What is left mainly sells Norton antivirus software and LifeLock identity-theft-protection products to consumers.

The company had attracted takeover interest of its own a few years ago, but nothing has come of it.

Activist investor Starboard Value LP owns a roughly 3% stake in NortonLifeLock, according to FactSet, and holds a board seat. It first took the position in 2018.

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

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The Case for and Against Investing in Emerging Markets Now | Sidnaz Blog


Emerging-markets stocks have outpaced developed-market shares over the past 12 months, making them a tempting investment option. So is now a good time to take the plunge, or should investors stay away?

On the plus side, economic growth in emerging markets is expected to surpass growth in developed markets in the next few years. And emerging-markets stocks can be useful to U.S. investors for diversifying a portfolio, since they don’t move in lockstep with U.S. shares.

But emerging-markets shares come with higher volatility than developed-market stocks and an array of risks, including political risk, currency risk, liquidity risk—and economic risk, despite the rosy projections. And investors can get exposure to emerging markets more safely with a portfolio of U.S. stocks that includes companies doing business in those markets.

“Investing in emerging markets is a high-risk, high-reward proposition,” says

Eswar Prasad,

a trade-policy professor at Cornell University. “Many emerging markets have done well growth-wise, and their financial markets have had periods of success, but it tends not to last too long.”

With that in mind, here’s a closer look at the cases for and against investing in emerging markets now.

The positive case

The biggest advantage of emerging markets today is their potential for stronger economic growth than advanced economies, investment pros say.

“About 90% of the world’s population under 30 lives in emerging markets,” says Michael Sheldon, chief investment officer at RDM Financial Group, Hightower, a wealth-management firm in Westport, Conn. “This may lead to stronger labor-market growth, increased productivity and stronger GDP and corporate profits over time.”

In contrast, developed countries have rapidly expanding senior populations and low birthrates, which makes it more difficult to find workers to fill new jobs, says

Karim Ahamed,

investment strategist at Cerity Partners, a wealth-management firm in Chicago. That can limit economic growth.

The International Monetary Fund forecasts average annual GDP growth of 5.5% for emerging markets in 2021-23, compared with 3.5% for advanced economies.

Emerging markets also represent diversification opportunities for U.S. investors. That’s partly because economic growth and financial-market performance in emerging markets are less correlated with the U.S. than advanced economies and financial markets are. In addition, emerging markets give U.S. investors currency diversification, which can be helpful when the dollar is weak.

While investors can gain exposure to emerging markets through stocks of U.S. companies that earn revenue from those markets, those stocks won’t give investors the full diversification benefit, Prof. Prasad says.

The strong economic and corporate performance that is boosting emerging-markets stocks also makes their bonds attractive, says

Robert Koenigsberger,

chief investment officer at Greenwich, Conn.-based Gramercy Funds Management, which specializes in emerging markets.  

Inflation is less of a problem in most major emerging markets today than it has been at times in the past. Also, emerging-markets countries’ external deficits generally have narrowed, or totally reversed in some cases. “This should give emerging-market central banks more flexibility to absorb external shocks and deal with post-pandemic inflationary pressures, allowing them to tighten monetary policy without slowing growth momentum too much,” Mr. Koenigsberger says.

The negative case

Brazil, in addition to debt, has had a harder time than many other countries with Covid-19. Shown: São Paulo in February.



Photo:

sebastiao moreira/Shutterstock

Emerging-markets stocks are more volatile than those in advanced economies. The MSCI Emerging Markets Index had a standard deviation of 18 over the past 10 years, compared with 14 for the MSCI World Index of developed markets, according to

Morningstar.

Standard deviation measures volatility, with a higher number representing more volatility.

The factors behind that higher volatility in emerging markets include political risk, economic risk, currency risk and liquidity risk.

And while emerging-markets economies generally have been on a sharp uptrend for years, some also have experienced serious downturns. Russia’s economy, for instance, shrank 2% in 2015, compared with 2.9% growth for the U.S. that year.

Emerging-markets currencies are a double-edged sword, providing diversification but also volatility. “When you try repatriating your investment, everything may be going wrong at the same time,” with the emerging market’s economy, financial markets and currency dropping together, Prof. Prasad says.

A declining emerging-market currency makes an investment less valuable when converted into dollars. And emerging-markets currencies aren’t only vulnerable to trouble in their own country—they also tend to decline against the dollar when the U.S. currency is gaining against other developed-market currencies like the euro or yen, regardless of what’s happening in emerging markets.

South Africa is also dealing with debt. Shown: Johannesburg in July 2018.



Photo:

Waldo Swiegers/Bloomberg News

Meanwhile, market liquidity isn’t as deep in emerging markets as in advanced ones. “There’s always a risk with emerging markets: It’s easy to bring money in, but not always to take it out,” Prof. Prasad says.

On the bond side, corporate debt outstanding has soared 400% in emerging markets since 2010, Mr. Koenigsberger says. So, plenty of securities are available. But liquidity isn’t just about supply. “Due to fewer banks and smaller market-making operations at those banks, there is insufficient liquidity when investors look to exit the market” in many cases, he says.

Another issue for bond investors: “There are a handful of emerging-market countries—South Africa, Turkey and Brazil, for example—that face high debt levels and large current-account imbalances,” Mr. Sheldon says. These countries are vulnerable to capital flight, which could trigger a plunge in bond prices.

One negative factor for emerging markets in the near term is that countries such as India and Brazil are having trouble dealing with Covid-19. That will likely weigh on emerging-markets stocks this year, Mr. Ahamed says.

How to invest

For those who want to jump into emerging markets, what’s the best way? Mutual funds and exchange-traded funds will suit most investors better than individual stocks and bonds, because researching and trading individual securities in these markets is often difficult.

When it comes to the question of actively managed funds versus passive index funds, “you can make an argument for active management to provide some downside protection,” Mr. Ahamed says. “But an ETF gives you very broad-based exposure in a way that’s generally cost effective, with lower fees.” Most ETFs passively track a market index.

For bond funds, actively managed is the way to go, Mr. Koenigsberger says. The growth of emerging-markets debt amid continuing economic challenges in many countries puts a premium on active management to sort out the winners, he says. Emerging-markets bond indexes tracked by passive funds are usually weighted by market capitalization, so the most heavily indebted issuers have higher weightings. “Emerging-market debt isn’t an asset class that is suitable for index funds,” Mr. Koenigsberger says.

Mr. Weil is a writer in West Palm Beach, Fla. He can be reached at [email protected].

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Clean Energy ETFs Take a Hit, but Money Keeps Flowing In | Sidnaz Blog


Investors have lost a bundle this year betting on solar-panel and wind-turbine makers. Their response: to double down.

A year ago, green stocks and the funds that track them rallied tremendously in the aftermath of the market’s recovery from a pandemic-induced swoon. Solar-panel and wind-turbine companies were among firms benefiting from a surge of investor- and consumer-driven demand for renewables, despite many being small unprofitable ventures.

This year, returns are trailing the broader stock market. That is thanks, in part, to stocks having run so far and uncertainty around the Federal Reserve’s interest-rate course and how its actions may ultimately affect growth stocks.

Exchange-traded funds that track renewable-energy indexes have posted double-digit declines so far this year.

BlackRock’s

iShares Global Clean Energy ETF

has fallen 18% since December;

Invesco Ltd.

’s popular

Solar ETF

has posted a 17% decline.

Even so, money continues to pour in. Professional money managers and individual traders alike have invested $6.2 billion into green-energy ETFs so far this year, according to data from Refinitiv Lipper. The inflows are on course to eclipse last year’s record $7.2 billion.

Index makers and asset-management firms say that, for now, large pullbacks in share prices don’t reflect investors’ desire to bet on green companies.

“It’s an area where we see continuous demand,” said

Ari Rajendra,

a senior director of strategy and volatility indexes at S&P Dow Jones Indices.

At BlackRock, the world’s largest asset manager, clean energy funds reported $2.7 billion in inflows so far this year and $1 billion into a European clean-energy fund, according to FactSet. Interest was so high that S&P had to broaden its clean-energy benchmark used by BlackRock funds to fix the problem of having too much money in mostly small, hard-to-trade companies.

Such changes don’t happen often, said S&P’s Mr. Rajendra, but intense demand from investors warranted the index’s revamp to 82 stocks from just 30. The firm also lowered the criteria for the inclusion of stocks, among other things.

Ross Gerber,

chief executive of Gerber Kawasaki Wealth and Investment Management, thinks renewable-energy stocks, from solar-panel makers to manufacturers of alternative batteries, will eventually transform transportation and other facets of everyday life.

A solar farm in Maine. With clean energy stocks pricey, they and funds that track them may be more vulnerable to market or political changes.



Photo:

Robert F. Bukaty/Associated Press

Mr. Gerber has put more client cash into Invesco’s clean-energy fund, contributing to the $446 million of total inflows into ETF so far this year. He shuns oil stocks, which are among the stock market’s best performers this year.

“The more speculative the stock, the higher the valuation. But in this market, people care more about fantasy than reality,” said Mr. Gerber. “So with solar, you have a little bit of the fantasy in there, too.”

Invesco’s solar ETF jumped 233% in 2020, while BlackRock’s global clean-energy fund soared 140%—easily the best years ever for both as valuations of green stocks climbed to dizzying heights.

Although both funds have declined in the year to date, valuations are elevated. Invesco’s solar ETF trades at a forward price/earnings ratio of 36, versus 21 for the S&P 500, according to FactSet.

In an interview with WSJ’s Timothy Puko, U.S. special climate envoy John Kerry explains the roles he’d like to see the private sector and countries play in fighting climate change. Photo: Rob Alcaraz/The Wall Street Journal

Meanwhile, clean-energy companies trade at a 70% premium to traditional energy companies based on a ratio of enterprise value to earnings before interest, taxes, depreciation and amortization, a standard valuation yardstick, strategists at

Bank of America

said. They noted this valuation was down from highs earlier this year but still well above the five-year average.

With stocks pricey, they and funds that track them may be more vulnerable to market or political changes. Their allure may dim, for example, if the Fed begins to raise interest rates earlier than expected, taking some of the shine off growth stocks.

Or volatility could increase if there are hiccups for a $1 trillion infrastructure plan agreed to by President

Biden

and some U.S. senators. Green stocks rallied last year after Mr. Biden won November’s presidential election, as investors bet the new administration would hasten the U.S.’s transition toward wind and solar energy and away from fossil fuels.

Investors already are experiencing some of that volatility. Clean energy stocks have rallied alongside growth stocks in recent weeks. Invesco’s solar fund is up nearly 11% over the past month, while BlackRock’s ETF has added 2.2%.

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The willingness of investors to continue pouring money into this part of the market shows they are positioning for a potential longer-term readjustment of the energy sector and economy.

Rene Reyna,

head of thematic and specialty product strategy at Invesco, said expectations are premised on a belief that technology will eventually bring the cost of batteries, solar panels and other green efforts down enough to garner wider adoption—and big profits. In that sense, clean energy is the “hope trade,” he said.

Construction at a wind farm in New Mexico last year. Clean energy companies trade at a 70% premium to traditional energy companies.



Photo:

Cate Dingley/Bloomberg News

Write to Michael Wursthorn 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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