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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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IPOs / FFOs

Oscar Health raises $1.4bn from stock market listing

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Oscar Health, the health insurance company co-founded by Joshua Kushner, raised more than $1bn in an initial public offering that topped the company’s marketed price range, in a sign of investor confidence despite political uncertainty over the future of US healthcare.

The New York-based company priced its shares at $39 each on Tuesday, according to a statement, raising about $1.4bn. Oscar would have a market capitalisation of $7.9bn at that price, based on the total number of shares outstanding.

Oscar previously said it expected its listing share price to range from $32-$34 before increasing the range to $36-$38 on Tuesday. Coatue Management, Dragoneer Investment Group and Tiger Global Management — existing investors in the company — had indicated interest in purchasing up to $375m of shares in the offering.

The move demonstrated that investors are relatively unfazed by potential headwinds for the company. President Joe Biden has vowed to reform the US healthcare system and the Supreme Court is considering a decision on the fate of the Affordable Care Act, known as Obamacare, both of which could pose significant challenges to Oscar’s operating model.

Oscar was co-founded in 2012 by Mario Schlosser and Joshua Kushner, the brother of Jared Kushner, Donald Trump’s son-in-law. Kushner’s venture firm, Thrive Capital, owned a stake that would be worth $1.3bn at the offering price and give it 75.9 per cent of the company’s voting power.

Oscar, which bills itself as the first health insurance company “built around a full stack technology platform”, has more than half a million paying members and offers its insurance plans in 18 US states.

But the company has struggled to become profitable. In 2020, it recorded widening losses of more than $400m on revenues of about $460m, a decline from almost $490m of revenues the previous year.

Oscar’s IPO came on the heels of several other public market debuts for “insurtech” groups in the past year, which fuelled an already strong run of stock market listings.

Clover Health, which uses data analytics to connect senior citizens to Medicare Advantage plans, merged with a special purpose acquisition company, or Spac, sponsored by former Facebook executive Chamath Palihapitiya in a $3.75bn deal in October. Lemonade, which sells rental, homeowners and pet health insurance, went public last summer in what turned out to be one of the year’s most successful stock market debuts.

Oscar is highly sensitive to any changes to Obamacare, which lawmakers have wrestled over since it was written into law in 2010. Almost all of the company’s revenue comes from plans subject to Affordable Care Act regulations, according to its prospectus.

President Joe Biden’s healthcare programme would leave Obamacare largely intact, but would make some adjustments and add a public option for all Americans. The Supreme Court, meanwhile, is expected to announce a decision on yet another review of the Affordable Care Act in the coming months.

Goldman Sachs, Morgan Stanley and Allen & Co led the offering.



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Spac led by tech founders targets Europe’s unicorns for US listings

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Tailwind International, the New York-listed special purpose acquisition company, is searching for European tech unicorns to list in the US as part of plans to bypass EU and UK markets and build a multibillion-dollar franchise of Europe-based businesses.

Tailwind, which says it is the first Spac where a group of European tech founders will focus on investing in the region’s tech companies, raised $345m on the New York Stock Exchange last month with the intention of taking a European tech group public in the US. 

Tommy Stadlen, co-founder of venture capital fund Giant and the Spac’s chair, said: “We will bring one of Europe’s iconic technology companies to the US public markets.”

Pierre Denis, former Jimmy Choo chief executive and Coty board member, is the chief executive. Nathalie Gaveau, co-founder of French ecommerce site PriceMinister, is president and other sponsors include the co-founders of luxury online retailer MatchesFashion and German meal kit delivery business HelloFresh.

Philip Krim, the co-founder of online mattress start-up Casper, is a co-founder.

The number of Spacs — which list on the stock exchange before they find a business to buy — has grown rapidly in the US in the past few months as investors have piled in with the hope of acquiring stakes in promising target businesses.

In February alone a total of 174 Spacs filed or priced for expected gross proceeds of $56bn, according to data from FactSet.

So far this year, there have been more than 180 Spac filings, against last year’s total of nearly 250, which was the highest in five years.

European tech groups, including the UK’s used car site Cazoo and health app Babylon, have already held talks with US Spacs

The Tailwind team is planning to launch a series of Spacs to build out the franchise. The minimum size of any target would be $1bn, Stadlen said, ranging up to $15bn, with the potential to raise additional equity.

He said the UK would be a focus owing to the larger numbers of promising tech companies, alongside France, Germany and the Nordic nations.

In a sign of booming demand among investors, Tailwind increased the size of the listing from $250m to the maximum of $300m, and also exercised the “greenshoe option” that allowed its underwriters to buy up further shares, taking the total to $345m. People close to the process said there was $3bn of demand for the initial public offering. 

Stadlen said Tailwind would have an advantage in being run by tech founders — pointing out that operator-led Spacs outperformed peers — and that a “multi-Spac” platform was more likely to succeed because of access to resources.

Tailwind has already had conversations with European venture capital firms and founders to discuss potential US listings of their businesses, he said.

He added that European exchanges had been unattractive to tech listings because they offered lower potential returns. Only two have listed in Europe so far this year, according to Refinitiv. A US Spac offers founders access to US markets where there were “more capital and better valuations”. 

Bankers in London are keen for the UK government to change the listing rules on Spacs to compete with New York and rival cities in Europe. At present, a Spac acquisition in the UK is considered a reverse takeover and the shares are suspended. Trading cannot resume until a deal prospectus is published, for which there is no specified deadline, so investors who want to sell their shares can find themselves locked in.

Bankers in London have talked up Amsterdam as Europe’s hub for Spacs, while German venture capitalist Klaus Hommels launched a European tech-focused Spac, Lakestar, in Frankfurt last week, the first on the Xetra market in a decade.

“We are open to Spacs as a product and have all the conditions in place for more of these to go public in Germany. They have been the go-to topic in most calls with issuers, banks, and lawyers over the past six months so we expect Spac listings to accelerate in Europe,” said Renata Bandov, head of capital markets at Deutsche Börse.

“In the post-Brexit environment, UK-listed companies cannot currently passport their prospectuses into the EU so we anticipate a higher influx of dual listings.”



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Rocket Lab/Spire Global: Spacs, the final frontier

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Life sometimes imitates emojis. Social media stock tipsters are fond of littering posts with rocket symbols. Rocket Lab, which is floating at a $4.1bn enterprise value, makes the real thing. It was one of two space-related businesses to join the market via special purpose acquisition companies (Spac) on Monday, as the surge in these listings continued.

Just two months into the new year and Wall Street has raised a staggering $58bn through 188 blank cheque vehicles, according to Refinitiv. With hot money appearing to outweigh the supply of merger candidates, sponsors are howling to the moon for deals.

Rocket Lab launches smaller satellites into space. Its celestial twin was Spire Global, a satellite data group that is combining with a Spac at a $1.6bn equity valuation.

Like many recent Spac companies, Rocket Lab and Spire are justifying their valuations with lofty sales and earnings growth projections. Rocket Lab, which generated $35m in revenues last year, said it expected to pull in more than $1.1bn in 2026 and become cash flow positive in 2024. Spire, with just $28m in sales in 2020, is forecasting $900m in revenue by 2025 and positive cash flow in three years’ time.

Tesla founder Elon Musk and his SpaceX rocket company have reignited investor interest in US space companies. Annual revenues from space-related business — at present worth $350bn — could almost triple in size by 2040, according to Morgan Stanley.

SpaceX was reportedly valued at $74bn by its latest private funding. Shares in Virgin Galactic, Richard Branson’s space tourism company, have almost doubled since last September to give it a $9bn valuation, even as the group reported a $273m loss in 2020.

Space companies are a moonshot borne aloft by the rocket fuel of cheap money. That momentum trade has more to recommend than some others, such as fledgling electric vehicle companies. Both Rocket Lab and Spire have proven technologies to accomplish highly demanding tasks. This really is rocket science. But like space exploration itself, these investments are only for the brave.

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