How companies are taking advantage of runaway markets

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One huge thing to start: Leon Black is to retire as chief executive of Apollo Global Management, the private equity group he founded in 1990. The announcement came as Apollo revealed the conclusion of a review by the law firm Dechert into Black’s relationship with the late paedophile Jeffrey Epstein. More here.

Leon Black © Reuters

Welcome to the Due Diligence briefing from the Financial Times. Not a subscriber to DD? Sign up here. Drop us a line and join the conversation: Due.Diligence@ft.com 

Companies tap the frothiest market in decades 

At DD, we typically leave the bull and bear-watching to our colleagues on the markets desk. But what’s happening on Wall Street is central to the dynamics driving corporate finance activity. 

Stocks around the world have soared from the pandemic-induced lows hit in March in a rally fuelled by an onslaught of central bank and government stimulus. 

The rapid rise in equity prices combined with a frenzy of trading among newly-minted amateur investors (exhibit A: what’s happening with GameStop and BlackBerry) are contributing to mounting angst among some investors that a bubble is brewing. 

One measure of exuberance in the US market — the ludicrous index — is already charging towards dotcom era heights reached more than two decades ago.

Wall Street exuberance barometer charges back towards dotcom boom heights

In fact, one of the most frequent questions asked by clients of Goldman Sachs is whether US stocks are in the throes of a “bubble”, David Kostin, the Wall Street bank’s top US equity strategist, said at the end of last week. 

Companies have taken advantage of red-hot markets to launch a $400bn fundraising blitz in the first three weeks of 2021, about $170bn above the average for this time of year, according to an FT analysis of Refinitiv data.

Breaking that figure down further, companies raised $337bn in the bond market, with unprecedented stimulus measures by central banks pushing down borrowing costs even for the riskiest companies. 

Column chart of Global corporate bond fundraising ($bn) showing Companies race to raise debt to stay afloat

The rest of that $400bn in fundraising comes from a record $64bn through IPOs and secondary offerings, which, you guessed it, includes Wall Street billionaires’ favourite pastime: the special purpose acquisition company.

And speaking of Spacs . . . 

If you ask famed investor Jeremy Grantham, the US craze for Spacs is “reprehensible”. 

Not that he’s complaining. Grantham “by accident” made $200m from a personal investment in the battery maker QuantumScape after it merged with a Spac last year

The company, like plenty of other stocks that have listed via Spac deals, has caught the attention of retail investors who have taken to day trading like pros. Except they’re not, of course. 

In addition to the stocks’ aforementioned effervescent rise and frenzied retail investors, Grantham blames the blank-cheque boom captivating big-name investors and their wallets as of late for the “extreme overvaluation”.

Column chart of Volume raised ($bn) showing Spac mania boosts equity fundraisings in 2021

In the same camp stands Muddy Waters, the US short seller run by Carson Block, which called the instruments “the great 2020 money grab” in a scathing attack, and Goldman Sachs boss David Solomon, who called the craze unsustainable.

But despite these warnings, Spacs’ surging popularity has sauntered unabashedly into the new year. 

If this week’s merger Monday is any indication, DD is in for a very busy 2021. Spacs struck five mergers totalling more than $15bn, led by a $7.3bn deal between Alight, a cloud HR-benefits provider controlled by Blackstone, with a vehicle launched by the US billionaire Bill Foley

Bill Foley © USA Today Sports

Here’s a snapshot of the Spac scene so far this year:

  • There are plenty more Spacs to go around. 129 Spacs searching for private companies to target;

  • Spacs are launching at a rapid pace with 66 vehicles raising $18.3bn so far this year, outpacing the $13.2bn raised through traditional initial public offerings globally;

  • With almost a quarter of last year’s $79bn raised in the first three weeks of 2021 alone, we could be in for another record-breaking year. 

Read the FT’s full Runaway Markets series here for more on all the Spac and equity markets mania.

Debenhams: happily ever after administration

Cast your mind back to 2006, when Tony Blair was Britain’s prime minister and the financial crisis was still over a year away.

UK department store group Debenhams returned to the stock market with a £1.7bn market value, and Arcadia chief executive Philip Green was knighted for his services to retail.

Few noticed Asos, a small online fashion retailer trading at four times its £19m of annual sales, or Mahmud Kamani, the Manchester-based rag trade entrepreneur and his curiously named Wasabi Frog ecommerce start-up.

Mahmud Kamani, Boohoo co-founder and executive chairman © Getty Images for Boohoo

But a princess must have kissed it — because the Frog, now called Boohoo, is worth £4.4bn and just bought what’s left of Debenhams out of administration for £55m. (Not all of the online retailer’s rise has been a fairytale, it’s worth noting).

Asos, which Sir Philip liked to denigrate as a passing fad, has annual sales of £3bn and is poised to buy the best bits of Arcadia out of administration. Neither it nor Boohoo wants to run stores, so hundreds of them will close and thousands of jobs will go.

Conclusions? The obvious one is that ecommerce offers a storybook ending, while brick-and-mortar is a recipe for tragedy. But discount operations Primark, Aldi, B&M and others impinge on that generalisation. Properly run stores can still make money.

Look instead at investment. Asos and Boohoo have poured money into marketing, logistics and IT. Asos’s selling and general admin spend is routinely half of sales. Boohoo gives 10 per cent of turnover to its marketing department. Neither has ever paid a dividend.

Debenhams was owned by private equity, Arcadia by a tycoon. Neither invested a great deal. Both milked their companies like they were cows, with financial engineering facilitating huge dividends. Now the milk’s gone sour. 

Job moves

  • Colin Fan, a former senior executive at Deutsche Bank, is stepping down from his role as managing partner at SoftBank’s Vision Fund, marking the latest shake-up at the fund’s tumultuous US operations. Go deeper.

  • N26 GmbH, the German mobile bank backed by billionaires Peter Thiel and Li Ka-shing, named former Zalando finance chief Jan Kemper as its CFO. He succeeds the company’s co-founder, Maximilian Tayenthal, who will be co-chief executive alongside Valentin Stalf.

  • Law firm Paul Weiss has poached Sullivan & Cromwell lawyer Krishna Veeraraghavan who joins as an M&A partner in New York. In San Francisco, it also hired Orrick alums Melinda Haag, Walter Brown and Randy Luskey as partners in its litigation department, and Jeremy Veit as a partner in its corporate department from Kirkland & Ellis.

  • Linklaters has appointed Matt Keats as head of energy and infrastructure for the Middle East. He succeeds Sarosh Mewawalla, who has retired from the partnership. Keats formerly led the firm’s energy and infrastructure practice in Moscow.

  • Latham & Watkins added Gianluca Bacchiocchi and Guido Liniado as partners in its New York office, where they will advise on energy and infrastructure deals in Latin America. 

  • Private equity group Eurazeo brought on a three-person team from MargueriteLaurent Chatelin, Martin Sichelkow, and Melissa Cohen — to comprise its new infrastructure investments team.

  • Brunswick Group has hired Brian Potskowski as a partner focusing on climate issues in its London office. He was previously vice-president for the energy-focused investment group Riverstone Holdings.

  • Orrick has hired David Schulman as a life sciences partner in its Washington office. He joins from Dechert.

  • Reed Smith has hired Dimitris Assimakis as a partner in its global corporate group in Athens. He joins from Norton Rose Fulbright where he was a partner and head of the Greek energy practice.

Smart reads

Bankruptcy bureaucracy The best way to file for insolvency in the US? Don’t. Take Hertz and AMC for example: both companies were squashed by stay-at-home-orders, but only one was able to sell its stock to stay afloat. The difference is in the paperwork. (FT)

Renaissance man Sheikh Tahnoon bin Zayed al-Nahyan, the UAE’s national security adviser, is redefining links between the state and private sector. But you may have never heard of him until now. (FT)

Slice of Tokyo The FT’s Tokyo correspondent Kana Inagaki typically unearths the latest stories on SoftBank, Carlos Ghosn and Japanese tech. But this time, she’s digging into the best pizza the city has to offer. And it’s delicious. (FT)

News round-up

Deutsche probes alleged mis-selling of investment banking products (FT) 

Saudi wealth fund in talks to lure health and technology companies (FT) 

San Francisco 49ers lift stake in Leeds United (FT)

TikTok rival Kuaishou to raise up to $6.3bn in Hong Kong IPO (FT + Lex) 

Citadel, Point72 to invest $2.75 billion into Melvin Capital Management (Wall Street Journal)

AMC chief says bankruptcy ‘off the table’ after $917m fundraising (FT + Lex)

Europe’s bank bosses under pressure (FT)

VCs flood into banking-as-a-service (FT) 

Steve Cohen provides funds for hedge fund protégé Gabe Plotkin (FT)

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