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One thing to start: Boutique investment bank Perella Weinberg Partners, founded by Joe Perella (below) and Peter Weinberg, is in talks to take its advisory business public via a special purpose acquisition vehicle in a deal valuing the division at $1bn. More here.

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The twists and turns behind private equity’s latest payments deal

Sometimes, the seemingly dullest and most overlooked businesses can be the most lucrative. 

That’s one lesson from private equity’s entry into the payment-processing industry over the past decade. Where some European banks failed to capitalise on what looked like an unglamorous back-office function, buyout groups stepped in and reaped the rewards. 

Owning payments groups carved out from banks “has been one of private equity’s biggest investment successes”, said Charles Hayes, a partner at law firm Freshfields which has advised on several deals.

The latest reminder is Nexi, the Italian group set to be worth about €22bn after two big deals in little more than a month — buying state-backed domestic competitor Sia and, this week, Danish rival Nets

How Nexi and Nets came together

Over the years the now-listed group’s component parts have been through a dizzying array of buyouts, listings, take-privates and add-on acquisitions, in which the role of private equity groups Advent and Bain has often been central. 

DD’s Kaye Wiggins and the FT’s Silvia Sciorilli Borrelli set out the twists and turns in this deep-dive

As Lex points out here, there’s been a scramble for scale in the industry — with more dealmaking likely, since plenty of smaller players are still sitting within struggling banks. Private equity is not alone in having spotted the opportunity, as ecommerce has taken off and contactless payments surged. 

Charts shows deal value ($bn) showing payment consolidation deals

But a risk looms large over the business. What if a huge tech group launched a global rival that, like Alipay, offered merchants lower fees — or cut out the intermediary altogether?

The private equity groups behind the combined Nexi, which floated last year, will probably sell down their stakes in the years to come. The thing to watch will be where they go next. 

Markus Braun pleads the fifth 

Throughout the entire Wirecard saga, there is something team DD has been dying to know. Did the top execs at the disgraced payments company have an FT subscription?

Unfortunately, we didn’t get an answer to that on Thursday, but thanks to German politician Danyal Bayaz for asking.

Markus Braun, who turned up to (not) answer questions from German lawmakers in his usual get-up — a style favoured by bond villains and tech chief executives alike — remained silent throughout much of the questioning

Wirecard’s former chief executive Markus Braun leaves after testifying to a German parliamentary committee in Berlin on Thursday © REUTERS

It’s the first time we have seen Braun, who is one of at least seven former top managers of Wirecard suspected of running a criminal racket that defrauded creditors of €3.2bn.

The irony of Braun being hauled in front of regulators isn’t lost on us. For a while, it seemed that the FT’s Dan McCrum and Stefania Palma, who doggedly reported on Wirecard and flagged accounting irregularities at the company, would be the ones required to have to answer to German authorities. 

BaFin, the country’s financial watchdog, appeared to be more concerned about the FT’s writing on Germany’s fintech champion than the inner workings of what has turned out to be the worst corporate scandal in Europe’s largest economy since the second world war.

Braun’s refusal to answer questions seemed to exasperate German politicians. Cansel Kiziltepe, a lawmaker for the Social Democrats, suggested that he had “destroyed people’s faith” in German institutions. “Are you aware that your silence is dragging people into the abyss?” she asked.

The one thing Braun had to get off his chest was that regulators and Wirecard’s longtime auditor EY, which has faced criticism since the company’s collapse, weren’t to blame. 

“I can’t understand why external regulators should be held responsible for failures here,” he said. Braun added that EY, Wirecard’s longtime auditor, was “apparently comprehensively deceived” during the annual audits as it did not spot irregularities “despite extensive checks”.

Why a UK regulator’s gain could be Telefónica’s pain

As Brexit talks drag on, Europe’s dealmakers have been keeping one eye on a tussle between the UK’s Competition and Markets Authority and the European Commission

The two sides have been wrangling over a series of mergers, each seeking the final say on what happens to blockbuster tie-ups due to affect both UK and EU citizens. 

Britain’s regulator has claimed a big victory. On Thursday it took ownership of the proposed £31bn merger between Virgin Media and O2. Catch up with the FT’s story here

Great news for the CMA, whose chief executive Andrea Coscelli has been publicly relishing the chance to “take back control — genuinely — of the decisions”.

Not so great for Liberty Global and Telefónica, Virgin Media and O2’s respective parent companies. They will have to wait until the middle of next year for a decision, even after the watchdog agreed to fast-track the case. 

That will be particularly agonising for indebted Telefónica, which was hoping for a cash boost. 

José María Álvarez-Pallete, its chairman and chief executive, won’t be too pleased. He told the FT last month that the merger would probably be cleared before the end of the year if Brussels was in charge. 

Job moves

  • Jeremy Sinclair, David Kershaw and Bill Muirhead, three of M&C Saatchi’s founders who were known as the “three amigos” when they split from Saatchi & Saatchi in 1995, are handing over the reins of the advertising group. Moray MacLennan will become chief executive. More here.

  • Sanjay Swani, a partner at private equity group Tailwind Capital, has been named co-chair of the Partnership Fund for New York City, a civic fund set up in 1995 by KKR co-founder Henry Kravis

  • Kevin Bradshaw has been appointed chief executive of Viridor, the UK recycling company that private equity group KKR bought in June. He succeeds Phil Piddington, who will make a “transition into non-executive management” according to a statement from the company. 

Smart reads

Royal connections How Britain’s Prince Andrew — who is already in the spotlight for his links to the late paedophile Jeffrey Epstein — helped to open doors for a secretive Luxembourg bank. (BBG

Diversity push Companies usually choose big-name banks like JPMorgan, Bank of America and Citigroup for bigger roles on bond deals — but the insurance company Allstate has hired solely banks owned by women, minorities or veterans to underwrite its offering. (BBG)

News round-up

BuzzFeed buys HuffPost as digital media sector consolidates (FT)

Carnival to sell $1.6bn unsecured bonds as virus pressure eases (FT)

Two Pimco employees accuse asset manager of discrimination (FT)

Coca-Cola Improperly Shifted Profits Abroad, Tax Court Rules (WSJ)

Jamie Dimon blames ‘childish’ Congress for stimulus deadlock (FT)

China’s first negative-yielding sovereign bond spurs investor rush (FT)

Cineworld considers CVA in struggle to survive (FT) 

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US stocks rise as investors weigh strong earnings against spread of Delta variant




Equities updates

Stocks on Wall Street edged higher on Tuesday as strong company earnings and economic data offset worries about the spread of the Delta coronavirus variant and fears over another regulatory clampdown from Beijing.

The blue-chip S&P 500 was up 0.7 per cent by mid-afternoon in New York, its best performance in more than a week. The tech-focused Nasdaq Composite climbed 0.3 per cent.

Investor sentiment was lifted by June data for US factory orders, which typically feed into estimates of gross domestic product. New orders for goods rose 1.5 per cent on the month before, well above the consensus estimate of 1 per cent.

In Europe, another wave of strong earnings results helped propel the continent’s stocks to a fresh record. The region-wide Stoxx 600 index rose 0.2 per cent after Paris-based bank Société Générale and London-listed lender Standard Chartered reported profits that beat analysts’ expectations.

London’s energy-leaning FTSE 100 index rose 0.4 per cent, aided by oil major BP, which rallied after announcing a $1.4bn share buyback programme and an increase in its dividend.

Line chart of Stoxx Europe 600 index showing Strong earnings help propel European shares to record high

On both sides of the Atlantic, earnings have been strong. More than halfway through the US reporting season, 86 per cent of companies have topped expectations on profits, while in Europe 55 per cent have outperformed so far, according to data from FactSet and Morgan Stanley.

“The continued healthy earnings outlook is a key driver of our view that the equity bull market remains on solid footing,” analysts at UBS Wealth Management wrote in a note. Such a growth rate is, however, “flattered by depressed levels in the year-ago period,” they said. “But the results are still impressive compared with pre-pandemic earnings.”

Oil slipped in a choppy session as the global benchmark Brent crude fell 0.7 per cent to $72.37 a barrel on fears that the spread of the Delta variant could depress demand for fuel.

The seven-day rolling average for new coronavirus cases in the US, the world’s largest economy, have hit nearly 85,000 from about 13,000 a month ago, according to the Financial Times coronavirus tracker. Similar trends have taken hold in other countries as well as authorities race to vaccinate larger swaths of their populations.

A log-scale line chart of seven-day rolling average of newcases showing that US coronavirus case counts rise from just over 10,000 in mid-June to nearly 100,000 by early August

In Asia, investors were again focused on regulation after Chinese state media criticised the online video gaming industry, calling it “spiritual opium”. Shares in Tencent, the Chinese internet group, fell 6 per cent before announcing it would implement new restrictions for minors on its gaming platform. NetEase and XD, two rivals, dropped 7.8 per cent and 8.1 per cent, respectively.

The Hang Seng Tech index, which includes Tencent and its peers, dropped 1.5 per cent, lagging behind the wider Hong Kong bourse, which slipped 0.2 per cent. The CSI 300 index of large Shanghai- and Shenzhen-listed stocks was flat.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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Why it might be good for China if foreign investors are wary




Chinese economy updates

The writer is a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy

The chaos in Chinese stock markets last week was exacerbated by foreign investors selling Chinese shares, leaving Beijing’s regulators scrambling to regain their confidence while they tried to stabilise domestic markets. But if foreign funds become more cautious about investing in Chinese stocks, this may in fact be a good thing for China.

In the past two years, inflows into China have soared by more than $30bn a month. This is partly because of a $10bn-a-month increase in the country’s monthly trade surplus and a $20bn-a-month rise in financial inflows. The trend is expected to continue. Although Beijing has an excess of domestic savings, it has opened up its financial markets in recent years to unfettered foreign inflows. This is mainly to gain international prestige for those markets and to promote global use of the renminbi.

But there is a price for this prestige. As long as it refuses to reimpose capital controls — something that would undermine many years of gradual opening up — Beijing can only adjust to these inflows in three ways. Each brings its own cost that is magnified as foreign inflows increase.

One way is to allow rising foreign demand for the renminbi to push up its value. The problem, of course, is that this would undermine China’s export sector and would encourage further inflows, which would in turn push China’s huge trade surplus into deficit. If this happened, China would have to reduce the total amount of stuff it produces (and so reduce gross domestic product growth).

The second way is for China to intervene to stabilise the renminbi’s value. During the past four years China’s currency intervention has occurred not directly through the People’s Bank of China but indirectly through the state banks. They have accumulated more than $1tn of net foreign assets, mostly in the past two years.

Huge currency intervention, however, is incompatible with domestic monetary control because China must create the renminbi with which it purchases foreign currency. The consequence, as the PBoC has already warned several times this year, would be a too-rapid expansion of domestic credit and the worsening of domestic asset bubbles. 

Many readers will recognise that these are simply versions of the central bank trilemma: if China wants open capital markets, it must give up control either of the currency or of the domestic money supply. There is, however, a third way Beijing can react to these inflows, and that is by encouraging Chinese to invest more abroad, so that net inflows are reduced by higher outflows.

And this is exactly what the regulators have been trying to do. Since October of last year they have implemented a series of policies to encourage Chinese to invest more abroad, not just institutional investors and businesses but also households.

But even if these policies were successful (and so far they haven’t been), this would bring its own set of risks. In this case, foreign institutional investors bringing hot money into liquid Chinese securities are balanced by various Chinese entities investing abroad in a variety of assets for a range of purposes.

This would leave China with a classic developing-country problem: a mismatched international balance sheet. This raises the risk that foreign investors in China could suddenly exit at a time when Chinese investors are unwilling — or unable — to repatriate their foreign investments quickly enough. We’ve seen this many times before: a rickety financial system held together by the moral hazard of state support is forced to adjust to a surge in hot-money inflows, but cannot adjust quickly enough when these turn into outflows.

As long as Beijing wants to maintain open capital markets, it can only respond to inflows with some combination of the three: a disruptive appreciation in the currency, a too-rapid rise in domestic money and credit, or a risky international balance sheet. There are no other options.

That is why the current stock market turmoil may be a blessing in disguise. To the extent that it makes foreign investors more cautious about rushing into Chinese securities, it will reduce foreign hot-money inflows and so relieve pressure on the financial authorities to choose among these three bad options.

Until it substantially cleans up and transforms its financial system, in other words, China’s regulators should be more worried by too much foreign buying of its stocks and bonds than by too little.

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Square to acquire Afterpay for $29bn as ‘buy now, pay later’ booms




Square Inc updates

Payments company Square has reached a deal to acquire Australian “buy now, pay later” provider Afterpay in a $29bn all-stock transaction that would be the largest takeover in Australian history.

Square, whose chief executive Jack Dorsey is also Twitter’s CEO, is offering Afterpay shareholders 0.375 shares of Square stock for every share they own — a 30 per cent premium based on the most recent closing prices for both companies.

Melbourne-based Afterpay allows retailers to offer customers the option of paying for products in four instalments without interest if the payments are made on time.

The deal’s size would exceed the record set by Unibail-Rodamco’s takeover of shopping centre group Westfield at an enterprise value of $24.7bn in 2017.

The transaction, which was announced in a joint statement from the companies on Monday, is expected to be completed in the first quarter of 2022.

Afterpay said its 16m users regard the service as a more responsible way to borrow than using a credit card. Merchants pay Afterpay a fixed fee, plus a percentage of each order.

The deal underscored the huge appetite for buy now, pay later providers, which have boomed during the coronavirus pandemic.

“Square and Afterpay have a shared purpose,” said Dorsey. “We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”

Adoption of buy now, pay later services had tripled by early this year compared with pre-pandemic volumes, according to data from Adobe Analytics, and were particularly popular with younger consumers.

Rivalling Afterpay is Sweden’s Klarna, which doubled its valuation in three months to $45.6bn, after receiving investment from SoftBank’s Vision Fund 2 in June. PayPal offers its own service, Pay in 4, while it was reported last month that Apple was looking to partner with Goldman Sachs to offer buy now, pay later facilities to Apple Pay users.

Steven Ng, a portfolio manager at Afterpay investor Ophir Asset Management, said the deal validated the buy, now pay later business model and could be the catalyst for mergers activity in the sector. “Given the tie-up with Square, it could kick off a round of consolidation with other payment providers where buy now, pay later becomes another payment method offered to their customers,” he said.

Over the past two years Afterpay has expanded rapidly in the US and Europe, which now account for more than three-quarters of its 16.3m active customers and a third of merchants on its platform. Afterpay said its services are used by more than 100,000 merchants across the US, Australia, Canada and New Zealand as well as in the UK, France, Italy and Spain, where it is known as Clearpay.

Square intends to offer the facility to its merchants and users of its Cash App, a fast money transfer service popular with small businesses and a competitor to PayPal’s Venmo.

“It’s an expensive purchase, but the buy now, pay later market is growing very rapidly and it makes a lot of sense for Square to have a solid stake in it,” said retail analyst Neil Saunders.

“For some, especially younger generations, buy now, pay later is a favoured form of credit. Afterpay has already had some success with its US expansion, but Square will be able to accelerate that by integrating it into its platforms and payment infrastructure — that’s probably one of the justifications for the relatively toppy price tag of the deal.”

Square handled $42.8bn in payments in the second quarter, with Cash App transactions making up about 10 per cent, according to figures released on Sunday. The company posted a $204m profit on revenues of $4.7bn.

Once the acquisition is completed, Afterpay shareholders will own about 18.5 per cent of Square, the companies said. The deal has been approved by both companies’ boards of directors but will also need to be backed by Afterpay shareholders.

As part of the deal, Square will establish a secondary listing on the Australian Securities Exchange to provide Afterpay shareholders with an option to receive Square shares listed on the New York Stock Exchange or the ASX. Square may elect to pay 1 per cent of the purchase price in cash.

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