One more event this week: the FT Global Boardroom kicks off on Wednesday. DD’s James Fontanella-Khan will host a panel on M&A as part of the proceedings on day two of the conference at 5pm GMT on Thursday.
To read the full agenda and register for free, go here.
Dealmakers Summit: the highlight reel
What happens when you (virtually) gather more than 50 of the leading M&A, private equity, hedge fund and corporate finance dealmakers to discuss the US election, global pandemic, Brexit and subsequent economic crisis?
A lot of great insight. A couple Peloton sightings. And, obviously, some Spac jokes.
The latest edition of DD will look at the highlights from our full-day inaugural Dealmakers Summit.
If you missed your chance to watch the sessions, you can still register to catch all of the action on-demand here.
On the economy after Covid:
“This is wartime finance on an extraordinary scale,” the FT’s chief economics commentator Martin Wolf observed on the long-term implications of Covid-19, as debt ratios in developed countries will reach levels the world hasn’t seen since the second world war.
Suspicion of big technology companies and the antitrust movement is rising, Wolf added. “And my god, you are seeing it in China where they’re stepping on Ant [Financial].” Watch his keynote presentation here.
Speaking of . . . on what was supposed to be the world’s largest IPO:
Chinese regulators’ suspension of Ant’s massive dual initial public offering signals that “everything that operates in China is still going to be regulated by the government, and everyone needs to play within their frameworks”, Gobi Partners’ Chibo Tang told the FT’s Henny Sender.
For fintech up-and-comers, Tang added, “it’s never too late” to build bridges with Beijing. Ant’s troubles may cause companies to re-examine the “pros and cons of dual listings in both Shanghai and Hong Kong”. Watch the panel here.
On the Spac boom:
“Not to brag but I think DraftKings led to an acceleration of Spacs,” former MGM chief executive turned Spac-promoter Harry Sloan told DD’s Sujeet Indap. Catch up on one of Wall Street’s biggest, and most divisive, trends here.
On post-pandemic M&A:
Mergers are the only way forward for oil and gas, Goldman Sachs banker Michael Carr told DD’s James Fontanella-Khan. “This is pretty clear to everyone who participates in that market,” he said.
Hellman & Friedman chief executive Patrick Healy told DD’s Arash Massoudi that the buying and selling of companies has been private equity’s “business model forever, and I think if you step back and say, ‘we can actually be thinking like an owner’ . . . that opens up a lot more opportunities.”
“I think they played it pretty well,” Healy added of competitors such as KKR, who aggressively snapped up opportunities during the height of the coronavirus economic crisis. Watch the full conversation here.
Apollo Global Management head of Europe Rob Seminara said: “We’re assuming flat multiples . . . I’d be nervous on some of these growthier deals about constant multiples on the way out five years from now.” Watch the full private equity panel held by DD’s Kaye Wiggins.
On Bill Ackman’s latest hedge:
“I’m long equities and still short investment-grade credit. And I feel very comfortable in that position,” the founder of Pershing Square Capital Management told DD’s Ortenca Aliaj. Read the full story here.
Ackman predicts that while the economy is set to make a “robust recovery” in the long-term, companies will struggle to pay off their debts stemming from the crisis in the short-term as a potential second lockdown looms.
News of a breakthrough in the search for a Covid-19 vaccine is “actually bearish” because it is likely to make people more complacent about wearing masks and seeing the virus as a threat, he added. Watch the keynote interview here.
And finally, ending on an excellent note, a word from Silicon Valley:
“If there’s a dip, you should buy more,” said GGV Capital managing partner Hans Tung. You heard it here folks. Watch the full discussion with DD’s Miles Kruppa.
Xavier Niel: ‘We are not activists, but rather rebellious shareholders’
There are lots of losers in the battle at Europe’s largest mall operator, Unibail-Rodamco Westfield, and one big winner: telecoms billionaire Xavier Niel. (DD broke down the fight for you last month.)
Legions of short-sellers who faced a mega-squeeze on Tuesday when shareholders sided with an activist campaign by Niel to vote down a proposed €3.5bn capital increase. Among them was D1 Capital Partners, which had a significant 4.4 per cent stake, according to the data group Breakout Point.
Only a few weeks ago, almost a third of the shares in the heavily indebted owner of Westfield London and Forum Les Halles in Paris were out on loan, making it one of Europe’s most shorted stocks.
Then management, led by chief executive Christophe Cuvillier, saw its strategy undercut by the company’s own shareholders. Cuvillier refused to say if he would resign, but the activists clearly want his head, as Niel hinted in an interview with the FT’s Leila Abboud.
They mounted a slick activist campaign complete with slides and punchy media interviews, not only killing the share sale but securing themselves three board seats.
Niel maintains their success was down to doing the hard graft of calling every shareholder who would speak to them. He doesn’t, however, appreciate being lumped in with aggressive US hedge funds: “We are not activists, but rather rebellious shareholders.”
Initially they did not expect any of the proxy firms to support them, he said, but proxy adviser Institutional Shareholder Services was eventually won over, providing a key boost.
Conspicuously absent from Unibail’s press release or public comments on Tuesday was any mention that it welcomed the new administrators.
“I told Leon earlier, we have bought ourselves a lot of work,” cracked Niel. “The management still thinks they are right, and this type of battle, especially as public as this one has been, is sure to leave some scars.”
British tycoon Sanjeev Gupta’s GFG Alliance appointed a judge of the supreme court of India, SJ Mukhopadhaya, and former first minister of Wales, Carwyn Jones, to its newly created global advisory board. The move is controversial due to Mukhopadhaya’s overseeing of court cases involving GFG entities, and alleged conflicts of interests stemming from Jones’s former government position. More here.
Law firm Reed Smith has hired Christopher Jackson and Adam Longney as partners in its London aviation group. Both join from REN Legal.
Craig Stewart, former chief counsel to the US attorney for the Southern District of New York, has rejoined Arnold & Porter’s white collar defence and investigations practice.
Pan-African private equity group DPI hired three new senior partners: west Africa deal lead Babacar Ka, east Africa deal lead Takudzwa Mutasa, and portfolio manager Marc Stoneham.
Latham & Watkins has hired Kaede Toh as a partner in its litigation and trial department as well as its white collar defence and investigations practice. She joins the Tokyo office from Ropes & Gray.
New York Advisory group PJ Solomon promoted Kenneth Baronoff to the newly created role of president. He first joined the company in 1999 and has worked as chief operating officer since 2010.
Arms length Wall Street overwhelmingly backed Joe Biden on his march to the White House. But executives in the Democratic camp may not enjoy the same proximity to the Oval Office as certain financiers do in the current administration as the party’s progressive wing pushes for separation of finance and state. (Wall Street Journal)
Missing in action Unanswered questions continue to swirl around Wirecard’s gobsmacking $2bn fraud. The man that can answer them — Jan Marsalek, who went from chief operating officer of the fallen German payments group to Interpol’s most wanted list — remains nowhere to be found. (Bloomberg)
Full throttle 2020 has been a wild ride so far, especially for Elon Musk. The Twitter-prone chief executive became the third-richest man alive, launched two astronauts into orbit, and led Tesla to become the world’s most valuable carmaker. What’s next? (Vanity Fair)
Bridgepoint golden hellos a challenge to private equity and investors alike
Corporate governance updates
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Just what an industry under fire needed. Private equity has been taking flak amid a wave of take-private deals for UK companies.
The charge sheet is long (and not always fair): reckless use of debt, aggressive cost cutting, outsize rewards for those on the inside and a general sense that the rules of engagement, particularly around governance, don’t always apply.
A high-profile listing of one of their own should have been a cause for celebration. Bridgepoint’s shares surged on their first day of trading this month, reflecting strong interest in alternative investments and the rarity of a private equity group joining the premium ranks of the London market.
Yet it was overshadowed by a governance bust-up that played into the worst stereotypes: sorry but the rules don’t apply to us.
First, Bridgepoint’s executive chair William Jackson is staying in that role, something common among US-listed alternative investment groups but in contravention of City best practice. Second, the big name recruited as senior independent director, chair of Marks and Spencer Archie Norman, received a highly unusual signing-on bonus, or “golden hello”, of £1.75m, on top of his annual fee of £200,000.
Amid angst that onerous corporate governance rules are pushing listed companies into private hands, it is sporting of Bridgepoint to attempt to narrow the gap. In reality, it underlines the need to extend some of the more stringent regulations and disclosure requirements for listed companies to their private peers — a key plank of the government’s audit reform proposals.
Sure, the company wanted a high calibre board; three other independent directors received payments of £500,000 too. The sums were, after tax, invested in the company’s stock (which would have provided considerably better alignment with other shareholders if it had involved directors’ own money).
But the payments set a bad precedent and risk the board’s credibility, especially around overseeing pay. The UK Corporate Governance Code, which applies to premium-listed companies, is clear: independence is threatened where a director “has received or receives additional remuneration from the company apart from a director’s fee”. The fact Bridgepoint labelled the payments “initial fees” is perhaps no coincidence but is an explanation surely too cute to run with.
And therein lies the problem. Under the “comply or explain” system, designed to give companies flexibility, shareholders can look forward to a discussion of this in the annual report, long after the point where it was a done deal.
Everyone knows those explanations tend to be pointless boilerplate, something regulator the Financial Reporting Council addressed earlier this year. Giving the FRC more powers to call out code breaches and insipid explanations is another welcome suggestion in the government’s reforms.
There has been much gnashing of teeth from institutional investors this year over the risk to London’s reputation from a mooted overhaul of listing rules, which propose watering down free float requirements and allowing dual-class listing structures in the top tier of the market. There was vocal opposition to Deliveroo’s listing, which eschewed premium status in favour of lower governance expectations.
But the job of enforcing the corporate governance code specifically falls to institutional shareholders, as part of the diligence and oversight exercised in investing clients’ money. Which makes you wonder whether the stewardship teams at asset managers had seen Bridgepoint’s pre-IPO pathfinder prospectus disclosing the payments before their colleagues in effect gave them the nod by buying shares in the listing.
Perhaps they didn’t make it to the relevant bit, page 261 of the 300-page document. There were, I’m told, no questions on the issue in investor meetings as part of the listing process.
The FRC is preparing to announce which of about 200 applicants will be the first signatories to the new Stewardship Code for investors, an effort to set higher expectations around these issues and, presumably, a desirable badge for any money manager professing to be ESG-minded (all of them).
When it comes to explanation, large investors should now be asked not only how they’re addressing issues after the fact but why, on balance, they decided to invest in the first place.
Robinhood IPO: why believers failed to deliver the ‘moonshot’
Robinhood built its business on helping millions of American investors lift stocks “to the moon”, a phrase adopted by those seeking to drive up share prices of favoured “meme-stocks”. But as the US brokerage sold its own shares to the public for the first time on Thursday, the favour was not returned as many ignored the call to buy and some even relished the slide in its shares.
In its few short years Robinhood has revitalised a type of day trading last seen in the dotcom boom, and subsequent bust, more than two decades ago. Investors on its app have sent stocks like Tesla and cryptocurrencies such as dogecoin to all-time highs, and brought conversations about financial markets back to dinner tables across the US.
Its pitch to investors has become marketing folklore: everyone should have access to the US stock market, not simply moneyed institutions on Wall Street. For a moment this year the populist narrative almost held, as newly minted online traders helped send shares of GameStop rallying to the detriment of a prominent hedge fund. Its user base swelled to 31m and it now counts 22.5m funded accounts.
But its rise has been pockmarked by crisis and scandal. It has suffered outages. Customers have been locked out of accounts, with little access to support. It has been fined heavily and regulators have ramped up investigations into how it makes money and whether its game-like features have crossed the line. Vlad Tenev, the Robinhood chief executive, was forced to appear before US Congress earlier this year.
Robinhood’s stock market debut was meant to start a new chapter for the broker. Instead, with shares falling 8.4 per cent from the $32bn market capitalisation set by the company just hours earlier, it represented one of the worst ever starts for an IPO of its size. And it underscored how much work it will have to do to convince the investing world its business can withstand growing pressure from regulators, and that the American public will keep trading once the pandemic is over.
“The whole business model could be impacted by a regulatory crackdown,” says Reena Aggarwal, a professor at Georgetown University in Washington. “The IPO performance doesn’t help. People are feeling like ‘I’m not the only one who has doubts.’ The whole market has doubts about the future of the company.”
For many, the Robinhood brand has come to represent an entire generation of younger, active investors who have surged into the market since the start of the pandemic. The company’s rise began in 2013 with a free app that let users share stock predictions. Two years later, it developed an app that allowed commission-free trading, attracting a waiting list of 800,000 people before launch.
Co-founders Tenev and Baiju Bhatt and their early investors wagered that stock trading would be the wedge into the wallets of millions of new consumers.
Chad Byers, whose firm Susa Ventures first invested in Robinhood in 2013, says the company benefited from “unfair customer acquisition costs” compared with other financial technology start-ups due to the hype around low-cost trading. “It was the most inherently viral part of fintech,” Byers says.
“The brand Robinhood stands for the next generation of consumers,” Tenev said in an interview with CNBC on the morning of the float. “Over time we’d like to be the most trusted, and most culturally relevant investment app worldwide.”
Cultural relevance came easily to the broker. Its easy-to-use app, with dopamine-inducing features, attracted customers and inspired them to check in with the app seven times a day on average.
Its more recent dramatic rise has piggybacked on a once-in-a-lifetime moment that sent US markets into a tailspin and locked most people in their homes. Government stimulus to deal with the pandemic helped plump up savings accounts, and with betting and sporting events cancelled millions of Americans turned to Robinhood to try their hand at something new. And they did so just as the market caught fire, hitting dizzying new heights.
For the latest news and views on fintech from the FT’s network of correspondents around the world, sign up to our weekly newsletter #fintechFT
Zero account minimums and the ability to trade fractional shares helped supercharge its growth and attract people who wanted to enter the market with small sums. This growth put pressure on established brokers and nearly every major player dropped trading commissions by the end of 2019.
Trust has been a bigger challenge. Technical difficulties with its platform on high-volume trading days have cost customers tens of thousands of dollars in losses, according to the regulators of which it has repeatedly run foul.
Several large institutional investors — which are normally crucial to the success of any company in its IPO — sat out Thursday’s flotation, according to people briefed on the matter. Some could not be convinced that Robinhood did not face an “existential threat” to its business from possible regulatory reform, according to one adviser to the company.
Others looked askance at an IPO that planned to put as many as 35 per cent of the 55m shares on sale in the hands of everyday retail investors, a major departure from a traditional listing where the figure often hovers at about 10 per cent.
Robinhood developed plans to offer a portion of the IPO to customers well before it selected banks to lead the process, says one person familiar with the decision. In the end, it sold between 20 and 25 per cent of its shares to customers on its own app, one adviser says. The broker had billed the move as another step along the road to democratising the way high finance operates.
But bankers involved in the process worried about the potential for a lukewarm reception to the offering. As they worked to gauge demand over the past week, it became clear that they faced difficulties drumming up support from many big money managers.
Robinhood’s private backers were equally nervous as it became apparent via feedback from top fund managers that the company’s IPO would receive a lacklustre reception from the public markets. The company ultimately priced its shares at the bottom of a range marketed to investors, and in the first minutes of trading it sank rapidly even from that level, cutting its valuation by nearly $3bn to $29bn.
Death of a day trader
Robinhood’s business model is heavily dependent on revenue from selling buy and sell orders from clients to high-speed market makers, a controversial practice known as payment for order flow. So-called Pfof has come under scrutiny for failing to provide the best prices to investors, and regulation of the practice was one of the many things listed in a more than 70-page “risk factor” section of the Robinhood prospectus.
Brad Sherman, a California Democrat, sponsored a bill in Congress in July that would direct the Securities and Exchange Commission to study Pfof and make recommendations including potentially banning the practice. Gary Gensler, the commission’s chair, is an outspoken critic of Pfof.
Robinhood makes it possible to easily trade stocks in seconds. But it has also lowered barriers to access for higher-risk trading products such as derivatives, leverage and cryptocurrencies, which are difficult to understand and can intensify investor losses, say critics.
Options trading represents the largest chunk of Robinhood’s revenues, contributing 38 per cent of business in the first quarter of 2021. Another 17 per cent came from cryptocurrency trading, with more than one-third of that attributed to speculation in dogecoin, which was initially set up as a joke.
In the run-up to the IPO, Tenev emphasised that Robinhood was a “safety first” company, an attempt to combat criticism that the brokerage incentivised novice traders — half of its customers are first-time traders — to play in these riskier products while providing inadequate customer support. But experts say the numbers don’t stack up.
“The conventional wisdom in customer services is 1,000 or 2,000 customers to one [customer service representative],” says Thomas Peterffy, chief executive of trading platform Interactive Brokers. “Robinhood has 22m customers . . . but only 2,000 total employees. How do they do any customer service?”
This lack of customer support came to a head in June 2020, when Robinhood customer Alex Kearns died by suicide after mistakenly believing he had incurred $730,165 in losses on a margin trade. In fact, his account had a balance of $16,000. Kearns emailed the brokerage’s customer service email — there was no phone number at that time — but only received automated responses before his death.
People close to the company say Robinhood recognised its problems too late to avoid tragedy. Former employees say the death of Kearns was a turning point for the broker’s disrupter approach to financial markets, and it rushed to reinforce its legal and compliance teams, as well as its lobbying presence in Washington.
“Robinhood said they are first and foremost a tech company, but if you are managing people’s wealth, you better see yourself as more than a tech company,” says Democratic congressman Sean Casten, a member of the powerful House Committee on Financial Services.
Lawmakers say providing access is not enough when an app is designed to incentivise trading behaviour and leaves vulnerable customers exposed to the sharp end of the markets.
“If we just say market participation per se is a good thing then we will have negative consequences like what happened to the Kearns family,” Casten says. “Why are we encouraging people to day trade?”
In May, the US regulator Finra levied its highest-ever fine against the brokerage, $70m, for causing “widespread and significant harm” to investors. Robinhood’s business model and practices have also drawn ire from the SEC and Massachusetts, New York and California state regulators.
It is unclear how the brokerage will continue its breakneck growth as it attempts to transition from disrupter to part of the firmament of the financial industry. Robinhood’s revenues are dependent on trading volumes, which hit record levels during the pandemic but are expected to drop as pandemic restrictions are eased.
Experts say Robinhood’s wild success has also been dependent on something it cannot control: a bull market.
“It’s easy to make positive speeches about democratising finance when everything is going up,” says Patrick Krizan, senior economist at Allianz. “It will be more interesting to see how people behave when we democratise the downturn.”
Robinhood push to democratise finance falters with own shares
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Robinhood has had a pretty clear pitch as it has taken on Wall Street’s traditional brokerages with its trading app — democratise finance for all.
That slogan hearkens back to the origins of the company in 2013 in the wake of the Occupy Wall Street protest movement, which railed against wealth inequality and the power of big banks.
Robinhood’s co-founders said they saw a need to disrupt the established, elitist financial system and make equity markets more accessible to everyday investors.
That pitch — reinforced with branding that played on the original Robin Hood ideal of stealing from the rich to give back to the poor — helped make the company the brokerage of choice for many new, young investors piling into equity markets since the start of the pandemic.
But in making its $32bn initial public offering this week, corporate governance activists believe the upstart company has not lived up to the democratic ideals of its mission statement.
Robinhood offered up to 35 per cent of its shares to its own customers, offering access for retail investors to a part of the market traditionally reserved for large investment institutions. It allocated the shares itself, bypassing traditional Wall Street banks by using the new IPO access feature on its app.
However, it has eschewed what corporate governance experts believe is the gold standard for shareholder structures of one share, one vote.
Not all Robinhood shares are created equal. Its co-founders will retain an extraordinary level of control over their company after it goes public. Robinhood’s dual class structure means the shares sold to retail investors and institutions carry one vote, while the shares held by its co-founders Vlad Tenev and Baiju Bhatt carry 10 votes per share.
The former high-frequency traders will own approximately 16 per cent of the company’s shares (7.9 per cent each), yet control 65 per cent of the votes, with Tenev holding 26.2 per cent and Bhatt holding 39 per cent, according to the company’s prospectus.
Dennis Kelleher, the chief executive of Better Markets, a financial reform advocacy group, said it was not clear that retail investors understand that “the owners of Robinhood are rigging share ownership in their favour”.
“Robinhood should tell retail traders that its shares available to them are in fact impaired shares that are always going to be less valuable than the shares of people running Robinhood for their own benefit,” he said.
Some 85 per cent of companies in America that went public in 2020 used one share one vote structures according to data from the Council of Institutional Investors, a corporate governance advocacy body. However, many higher profile companies — particularly in the tech sector — have more power over their investors to push through dual-class structures.
When ride-hailing service Lyft went public, for example, its co-founders owned just 5 per cent of the stock but held on to 49 per cent of the votes using a 20 to 1 dual share structure. In some companies, the extra voting rights even extend to the afterlife. Pinterest founder Ben Silbermann was also issued shares that gave him 20 times the number of votes of common stock shareholders, a privilege that gave him voting rights for up to 540 days after his death.
If the company actually succeeds, the shareholder power imbalance will widen. Tenev and Bhatt’s voting share rises if the share price hits certain price targets. If they receive their maximum agreed compensation including shares, the co-founders’ voting rights would represent more than 75 per cent of total shareholder votes in the company, according to the company’s prospectus.
IPO investors raised concerns about the dual class structure, and the unusual amount of power it gave both Tenev and his increasingly silent partner Bhatt. Both have been dealing with numerous regulatory interventions as a result of their “move fast and break things” approach to Robinhood’s early growth.
One large money manager who declined to invest in the IPO said: “You have no power over the management team if you want to get rid of them, and that is something to worry about.”
Premium valuations placed on hot companies with dual voting class structures in IPOs also tend to dissipate in subsequent years, according to research from the European Corporate Governance Institute on US companies from 1980-2017.
David Erickson, a lecturer at the University of Pennsylvania’s Wharton business school and former IPO banker, said it was not uncommon in recent years for tech companies over the last few years to have a dual-class voting structure. But he said it was odd to have one if a company was claiming to democratise investing.
“One share one vote is how you democratise investing,” he said.
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