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Bruno Crastes: ‘French Soros’ fights for H2O’s future

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“There is a very simple rule in investment,” said Bruno Crastes with a wry smile. “If you are not able to get poor, you will never get richer. When you don’t want to lose, you will never make money.”

The tanned and silver-haired chief executive of H2O Asset Management articulated his philosophy of risk-taking at an awards ceremony in 2018, where he was collecting a trophy for market-beating returns.

The Frenchman used his acceptance speech to assert that his industry had become “corrupted by all this regulation and all this risk management”, which made investors “behave like software”.

Two years later, Mr Crastes’ approach to investing is under strain. The fate of his €20bn investment firm hangs in the balance. A year of drastic losses, renewed scrutiny around risk controls and regulatory difficulties pushed H2O’s majority shareholder Natixis to cut ties.

Natixis, the French bank that has backed H2O since its inception a decade ago, declared earlier this month that it was looking to sell out of the London-based asset management subsidiary.

It marked a sharp U-turn from a partner that had previously given H2O its unequivocal backing. That endured through a bruising 18 months, which began when the FT revealed that H2O had poured more than €1bn into hard-to-sell bonds linked to the controversial German financier Lars Windhorst.

Now, cut off from the powerful Natixis fund marketing machine that helped H2O grow to more than €30bn in assets at its peak, Mr Crastes faces the biggest test of his more than 30-year career. He will need all of his charisma and self-confidence to retain investors, many of whom once regarded him as the finest European fund manager of his generation.

“He’s super charming, very smart and very arrogant,” according to an investment consultant, who said that the 55-year-old inspires “cult-like” loyalty in some of his clients.

Even among his most ardent supporters, cracks have begun to appear. Several of France’s biggest life insurance firms — once the backbone of H2O’s domestic investor base — have halted new investments.

If Mr Crastes cannot cure the crisis of faith among some of his disciples, it would prove a stunning downfall for a star fund manager once lionised for his moneymaking bets on the direction of bond and currency markets. He declined to be interviewed for this article.

Column chart of Total return (%) showing Bruno Crastes's track record

The smartest guys in the room

In his heyday, the UK’s fallen star stockpicker Neil Woodford was known as the “man that made Middle England rich”. Mr Crastes’ Midas touch, in contrast, generated outsized returns for a truly international group of investors. His fan base stretched from retail investors in France and Italy to professional money managers in Switzerland and South Korea.

That broad appeal was no mystery. In the 25 years to the end of 2019, Mr Crastes recorded an astonishing return of close to 2,500 per cent, according to H2O marketing materials. In its first decade, the asset manager recorded annual returns of over 30 per cent on five separate occasions.

The firm’s 2019 accounts show that its discretionary profit shared between H2O’s management team and Natixis topped £400m, the largest ever annual pre-tax payout to its owners. By then Mr Crastes had swapped a home in London’s Kensington for the tax haven of Monaco.

“Bruno was seen as the French Soros,” said one former investor, referring to legendary hedge fund billionaire George Soros.

A trained actuary and mathematics graduate of the University of Lyon, Mr Crastes began his fund management career in 1989 after a brief stint as a proprietary bond trader. He made his name in the early 2000s at the asset management arm of Crédit Agricole, France’s largest retail bank, running a team in London that became known for skilfully navigating swings in bond and currency markets.

One investor recalled how the Frenchman’s desk was at the centre of a large room in Crédit Agricole’s offices near the Bank of England. Trading teams would sit around it, with those in favour often parked closest to him. “It was like a royal court with the king in the centre,” the investor said.

It was here that he earned a reputation for an uncanny ability to bounce back — even from periods of extreme losses.

In 2007, Mr Crastes dismissed the brewing US subprime mortgage crisis as “something that shouldn’t damage the state of the real economy”. This disastrous misjudgement meant that several of his team’s funds at Crédit Agricole were sitting on huge losses. But the following year, they staged a stunning comeback.

With a stellar period of performance behind him, Mr Crastes struck out on his own in 2010, setting up shop with his longtime business partner Vincent Chailley as chief investment officer. The pair convinced Natixis, Crédit Agricole’s rival co-operative lender, to snap up a 50.01 per cent share in the newly minted H2O Asset Management — named after the importance of managing liquidity risks that Mr Crastes learned during the financial crisis, he said at the time.

Natixis operates a multi-boutique asset management model, where subsidiaries are run at arm’s length but can tap into the parent group’s marketing might. Mr Crastes became a fixture at the French bank’s fundraising roadshows, drawing attention with his bold and often contrarian macroeconomic outlooks. When economists from other investment firms spoke, the H2O chief had no qualms about publicly disagreeing with or dismissing their predictions, according to attendees. 

“Stop listening to economists; listen to traders!” he implored during one such presentation.

H2O’s team “weren’t in any doubt about their own brilliance”, said another former investor. “They were firmly of the view that they were the smartest guys in the room.”

The talented Mr Windhorst

H2O’s present predicament arose after Mr Crastes strayed far from his usual area of expertise. He invested heavily in the debts of a ragbag assortment of businesses linked to one man: Lars Windhorst, a financier who had previously weathered the collapse of two companies, personal bankruptcy and served a suspended prison sentence.

H2O began dabbling in trading bonds linked to Mr Windhorst just over five years ago, after he met the firm’s co-founder Mr Chailley. In the past few years, Mr Windhorst developed a close relationship with the H2O duo. He and Mr Crastes would sometimes socialise together on the German businessman’s yacht or at private members’ clubs, according to people who also attended.

H2O’s investors and members of Mr Windhorst’s circle have questioned why a firm whose bread and butter was trading government bonds decided to pour billions of euros into thinly capitalised businesses such as La Perla, a lossmaking lingerie maker.

In June 2019 the Financial Times revealed the scale of H2O’s exposure to Mr Windhorst. Initially Mr Crastes appeared unruffled, coolly assuring clients in a video address that the financier was “extremely talented”.

But one week and €8bn of investor withdrawals later, Mr Crastes appeared rattled. In a second video, this time much more emotional, he pledged that — unlike Mr Woodford’s eponymous firm — H2O would “never gate” its investment vehicles.

The bold promise halted the stampede. Loyal investors were once again rewarded for sticking with Mr Crastes through another difficult period: his main fund finished 2019 up by more than a third.

By mid-March of this year, however, Mr Crastes’ flagship fund had halved in value as fears about the coronavirus pandemic roiled markets. His losses were amplified by the high leverage that had previously boosted returns.

Since then, the Frenchman struck a deal with Mr Windhorst where the German was to buy back his illiquid bonds, but so far progress has been “very partial”. In a recent video message to clients, Mr Crastes appeared solemn, and had swapped his suit for a grey jumper. His face was uncharacteristically covered in light stubble.

In a September address to investors, Mr Crastes admitted that investing with Mr Windhorst had “created more problems than it has created performance”, but pledged that he would do everything possible to reward clients’ trust.

“We will fight to our last breath to ensure that these transactions, despite everything, won’t cost the investment portfolio.”

H2O’s bruising 18 months

June 18, 2019

Financial Times investigation reveals H2O has bet over €1bn on hard-to-sell bonds linked to the controversial German financier Lars Windhorst

June 19, 2019

Morningstar suspends rating on H2O’s Allegro fund because of its holdings of illiquid bonds

June 21, 2019

Natixis’s fund management chief reassures investors that H2O’s bonds linked to Mr Windhorst are “quite diversified”

June 28, 2019

H2O co-founder Bruno Crastes tells investors “we will never gate” funds. H2O later blames “unfair media” for the €8bn of outflows it suffered

October 25, 2019:

H2O’s auditor first flags breaches of open-ended fund rules due to trades in illiquid bonds

March 9, 2020

H2O warns clients of “surprisingly large” losses after market turmoil. Mr Crastes’ fund is down 50 per cent by end of the week

late april, 2020

Mr Windhorst strikes a deal to buy back illiquid stocks and bonds from H2O

August 28, 2020

The French market regulator makes H2O temporarily suspend a series of its funds because of their “significant exposure” to illiquid debt 

October 13, 2020

H2O reopens the seven retail funds it suspended, but with substantial illiquid assets trapped in side-pockets

November 6 2020

Natixis announces it is seeking to sell its majority stake in H2O, as the French bank looks to sever all ties with its controversial subsidiary that exposed weaknesses in its risk management



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A carbon registry leaves polluters with nowhere left to hide

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The writer is the founder and executive chair of the Carbon Tracker Initiative, a think-tank

No one yet knows which countries will extract the last barrel of oil, therm of gas or seam of coal. But the jostling has started. Every nation has reasons to believe it has the “right” to continue fossil fuel extraction, leaving others to deal with the climate crisis.

In the Middle East, oil producers can argue that the cost of extraction is low. In Canada, they market their human rights record. Norwegians trumpet the low-carbon intensity of their operations. And in the US under Donald Trump, they touted the virtues of “freedom gas” and called exports of liquefied natural gas “molecules of freedom”.

The dilemma for governments is that if one country stops producing fossil fuels domestically, others will step in to take market share. And so the obligation to contain emissions set out in the Paris Agreement risks being undermined by special pleading.

In the UK, the furore over plans for a new coal mine in Cumbria the year that the country is hosting the UN’s climate summit is indicative of the contrary positions many countries hold. Facing one way the government says it is addressing climate change. But looking the other, it consents not just to continued extraction, but to support and subsidise the expansion of production.

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here 

To keep warming under the Paris Agreement limit of 1.5C, countries need to decrease production of oil, gas and coal by 6 per cent a year for the next decade. Worryingly, they are instead planning increases of 2 per cent annually, the UN says. On this course, by 2030 production will be too high to keep temperature rises below 1.5C. The climate maths just doesn’t work.

One of the problems in attempting to track fossil-fuel production is the lack of transparency by both governments and corporations over how much CO2 is embedded in reserves likely to be developed. This makes it difficult to determine how to use the last of the world’s “carbon budget” before temperature thresholds such as 1.5C are exceeded.

Governments need a tool that establishes the extent to which business as usual overshoots their “allowance” of carbon. There needs to be a corrective because the cost competitiveness of renewable energy, and the risk of stranded energy assets, has not stopped governments heavily subsidising fossil fuels. During the pandemic, stimulus dollars have been dumped into the fossil-fuel sector regardless of its steady financial decline, staggering mounds of debt and falling job count. 

This is why my initiative and Global Energy Monitor, a non-profit group, are developing a global registry of fossil fuels, a publicly available database of all reserves in the ground and in production. This will allow governments, investors, researchers and civil society organisations, including the public, to assess the amount of embedded CO2 in coal, oil and gas projects globally. It will be a standalone tool and can provide a model for a potential UN-hosted registry.

With it, producer nations will have nowhere left to hide. It will help counter the absence of mechanisms in the UN’s climate change convention to restrain national beggar-thy-neighbour expansion of fossil-fuel production.

No country, community or company can go it alone. But governments can draw from the lessons of nuclear non-proliferation. First, they must stop adding to the problem; exploration and expansion into new reserves must end. This must be accompanied by “global disarmament” — using up stockpiles and ceasing production. Finally, access to renewable energy and low-carbon solutions must be developed in comprehensive and equitable transition plans.

The choice is between phasing out fossil fuels and fast-tracking low-carbon solutions, or locking-in economic, health and climate catastrophe. A fossil-fuel registry will help governments and international organisations plan for the low-carbon world ahead.

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Hasty, imperfect ESG is not the path for business

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The writer is a global economist. Her book ‘How Boards Work’ will be published in May

Good environmental, social and governance practices take a company from financial shareholder maximisation to multiple stakeholder optimisation: society, community, employees. But if done poorly, not only does ESG miss its sustainability goals, it can make things worse and let down the very stakeholders it should help.

To be sure, the ESG agenda should be pursued with determination. But there are a number of reasons why it threatens to create bad outcomes. The agenda is putting companies on the defensive. From boardrooms, I have seen organisations worry about meeting the demands of environmental and social justice activists, leading to risk aversion in allocating capital. Yet innovation is the most important tool to address many of the challenges of climate change, inequality and social discord.

Pursued by $45tn of investments, using the broadest classification, ESG is weighed down by inconsistent, blurry metrics. Investors and lobbyists use different evaluation standards and goals, which focus on varied issues such as CO2 emissions and diversity. Metrics also depend on business models.

Without a clear, unified compass, companies that measure themselves against today’s standards risk seeming off base once a more consistent regulator-led direction emerges (for example, from worker audits, the COP26 summit and the Paris Club lender nations).

ESG is not without cost and the best hope for long-term success lies with business leaders’ ability to stay attuned to its impact and unintended consequences. For example, while the case for diversity is incontrovertible, efforts at inclusion should account for the possible casualties of positive discrimination.

Furthermore, despite ESG advocates setting a strong and singular direction for governance, organisations have to maintain their operations and value while managing assets and people in a world where cultural and ethical values are far from universal. While laudable, a heightened focus on ethics (such as human rights, environmental concerns, gender and racial parity, data privacy and worker advocacy) places additional stress on global companies.

It is often asked if advocates appreciate that ESG is largely viewed from the west’s narrow and wealthy economic perspective. To be truly sustainable, ESG demands global solutions to global problems. Proposals need to be scalable, exportable and palatable to emerging countries like India and China, or no effort will truly move the needle.

Much of the agenda is too rigid, requires aggressive timelines and lacks the spirit of innovation to achieve long-term societal progress. Stakeholders’ interests differ, so ESG solutions must be nuanced, balanced and trade off speed of implementation against the breadth and depth of change.

Business leaders are aware of the need for greater focus and prioritisation of ESG. We also understand that deadlines can provide important levers for senior managers to spur their organisations into action. After all, in the face of pressure for a solution to the global pandemic, vaccines were produced in months instead of the usual 10 years.

I live at the crossroads of these tensions every day. Raised in Africa, I have lived in energy poverty, and seen how it continues to impede living standards globally. As a board member of a global energy company, I have seen much investment in the energy transition. Yet from my role with a university endowment, I have also been under pressure to divest from energy corporations. 

Business leaders must solve ESG concerns in ways that do not set corporations on a path to failure in the long term. They must have the boldness to adopt a flexible, measured and experimental agenda for lasting change. In this sense, they must push back against the politically led narrative that wants imperfect ESG changes at any cost.



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UAE’s Taqa seeks to shine with solar energy push

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From a distance, the 3.4m panels making up the United Arab Emirates’ largest solar power plant look like a massive lake.

But Noor Abu Dhabi, nestled between camel farms and rolling sand dunes, is no mirage. The 1.2 gigawatt facility — the world’s largest single-site plant — produces enough electricity for around 90,000 homes. Owned by Taqa, an Abu Dhabi state-backed utility, with Japan’s Marubeni and China’s JinkoSolar, it will celebrate its second anniversary of operations this month.

Staff constantly scan for repairs so production can be maximised during daylight hours, while every evening more than 1,400 robotic cleaners wipe the dust from the banks of solar panels to boost efficiency.

Noor and another Taqa project — an even larger 2GW solar plant under construction in Al Dhafra, nearer the capital — are emblematic of the company’s ambitions to recast itself as a force in clean energy.

It has outlined a new sustainable strategy with a goal for renewables to form 30 per cent of its energy mix, compared with 5 per cent now, and plans to boost domestic power capacity from 18GW to 30GW by 2030. It will set itself a carbon emissions target later this year.

“We want to transform Taqa into a power and water low-carbon champion in and outside the United Arab Emirates,” said Jasim Husain Thabet, chief executive of the power provider, which is majority owned by government holding company ADQ and listed on the emirate’s bourse.

Renewable sources account for a small part of the UAE’s energy supply

Taqa’s push into renewables is a key element of the UAE’s ambition to have clean energy form half of its energy mix by 2050, with 44 per cent from sources such as wind and solar and 6 per cent from nuclear power.

Last year, the oil-rich emirate had 2.3GW of renewable energy capacity, or seven per cent of the power production mix, mainly from solar power, according to Rystad Energy, a research firm. It forecasts that the UAE is on track to reach its 44 per cent target by 2050.

Although many Gulf governments have targets to boost solar and wind power, the UAE has been out in front.

The Al Dhafra plant is expected to boast the world’s most competitive solar tariff when complete. The facility, a joint venture with UAE renewable pioneer Masdar, EDF and JinkoPower, plans to power 150,000 homes when it comes online next year, reducing the country’s carbon emissions by the equivalent of taking 720,000 cars off the road.

“This is about being a good citizen,” said Thabet. “But it is also attractive for global investors keen on environmental sustainability, it fits in with our main shareholder’s priorities and brings down financing costs.”

Yet Taqa’s sustainability pitch could fall flat with investors scrutinising environmental concerns.

Taqa has committed to capping production at its overseas oil and gas assets, which span fields in Canada, the North Sea and Iraqi Kurdistan. But although it has not ruled out selling the hydrocarbons assets that it bought during a spending spree in the 2000s, divestment is not imminent.

“If the right opportunity comes we will consider it, but right now our focus is on enhancing operations and reducing emissions,” Thabet said.

The UAE, a leading oil exporter and member of Opec, is also committed to increasing its crude oil capacity in the coming years. The country is working towards reducing greenhouse gas emissions, but still has one of the highest per capita carbon footprints in the world.

But Mohammed Atif, area manager for the Middle East and Africa at DNV, a renewables advisory firm, said the UAE, like other major oil and gas producers such as Norway and the UK, are working for a more sustainable future. 

“Yes, the roots and history of the UAE are grounded in hydrocarbons, but they are aware of the challenge of climate change,” he said. “It is a transition, not a revolution, and that takes time.”

US special presidential envoy for climate John Kerry: ‘There’s no reason why oil-producing countries cannot also be a key part of tackling the climate crisis’ © WAM/Handout via Reuters

John Kerry, the US special presidential envoy for climate, visited the Noor plant while attending a regional climate change dialogue in Abu Dhabi earlier this month, saying such “incredible energy projects” would “set us on the right path” to achieving the Paris Agreement goals that aim to limit global warming.

“There’s no reason why oil-producing countries cannot also be a key part of tackling the climate crisis,” he said in a tweet. 

At the same time, Taqa is eyeing opportunities to expand in renewables beyond the UAE. Last year it merged with Abu Dhabi Power Corporation, creating an integrated utility company with ADQ owning 98.6 per cent.

The government is expected to increase the free float via a share offering, Thabet said, declining to provide further details.

With exclusive rights to participate in power projects in Abu Dhabi over the next decade, the company is now mulling how to leverage that guaranteed cash flow abroad.

Thabet said the company would focus on projects and investments that burnish its sustainable credentials. It wants to build 15GW of power capacity outside the UAE. The group currently produces 5GW internationally, including 2GW in Morocco.

“We believe in solar and [photovoltaic] projects, so we will focus on that — but if there is an opportunity outside the UAE, such as onshore or offshore wind, then we will explore that,” he said. Taqa would also consider investing in international renewables platforms to reach its targets, he added.



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