Asset Management: More private credit warnings

One scoop to start: The Competition and Markets Authority is considering asking a court to ban Supraj Rajagopalan as a director of Cinven after the private equity group was fined £52mn over price gouging by a drug company it owned.

In today’s newsletter:

• Meet Utah’s flashy Onset Financial

• Limited partners call the shots

• Revenues soar at London quant groups

Private credit worries linger on

More than a month has passed since Ohio-based automotive parts maker First Brands filed for bankruptcy, with investors still taking stock after one of America’s highest-profile bankruptcies in years.

HSBC is the latest to warn on the wider risks in private credit markets, highlighting that even financial institutions with limited direct exposure to recent blow-ups are on an alert, write Arjun Neil Alim and Ortenca Aliaj.

“What is very important in these situations is to consider the second and third-order risks,” said Pam Kaur, HSBC group chief financial officer, adding that the exposure of smaller lenders and hedge funds “that we may be dealing with . . . becomes a primary focus for us”.

Similarly Steven Meier, chief investment officer at the $302bn New York City Retirement Systems, told Sun Yu and Mary McDougall that the collapse of First Brands, which came on the heels of the collapse of subprime auto lender Tricolor, signalled a build-up of credit risks, suggesting some companies may have relaxed their lending standards.

“You wonder if there was a proper level of due diligence conducted on these companies . . . it is hard to protect against fraud other than doing your due diligence,” he said.

In a fascinating piece, Jill R Shah went to the exurbs of Utah’s Salt Lake City to get to the bottom of a nearly $2bn claim from a little known lender Onset Financial, a leasing firm which lent more than $1bn to First Brands over the past year.

Onset called itself a ‘dominant force’ in financing everything from chickens to helicopters. The firm prides itself on being “lightning fast” and boasts a corporate jet and a corporate penthouse for its chief executive, former college basketball player Justin Nielsen, that has a hot tub and sauna.

Onset is by no means the only creditor facing losses. Some of the most sophisticated investment firms in the world are poised to fight over their share of the collateral.

K&E softens as private equity downturn deepens

Powerhouse Kirkland & Ellis has come under fire for uncooperative behaviour in negotiations between its private equity clients and their investors, known as limited partners, writes Alexandra Heal.

The law firm has been training its lawyers on their communication style following complaints about their combative nature at an industry event last year, where limited partners were asked to name one thing they would like private equity groups to do if they could wave a “magic wand”.

Displayed prominently in a word cloud of responses was: “Fire K&E”, according to people who attended.

K&E’s response is a sign of how the pendulum swung, writes Sujeet Indap in the Lex column. Before interest rates rose, everyone wanted to put their money into private equity, and the general partners who run funds on investors’ behalf carried considerable market clout. Now it’s those who put money in who are able to call the shots.

The long lull in mergers and listings has made it hard for private equity funds to return capital, and to raise new funds. For the year to the end of June, just $600bn of private equity funds were raised, the lowest level in seven years, according to Preqin data.

As such, investors can extract better terms from private equity managers such as calling for lower fees and more disclosure on investment performance. Some are poaching their staff. Or, as in this case, demand better manners from arrogant corporate lawyers.

Chart of the week

London is establishing itself as a centre for quantitative finance, with a number of trading firms and investors based in the capital becoming multibillion-dollar forces in the market, write Costas Mourselas, Jamie John and Nikou Asgari.

Algorithmic trading firm XTX along with quantitative investors Qube and Quadrature have each made more than £1bn in revenues over the past year, according to public filings by their UK entities, cementing their positions at a time when London’s status as a global financial hub has been called into question.

So-called “quant” trading firms and hedge funds use mathematical models combined with vast amounts of data and computing power to spot correlations and asymmetries in asset prices and make bets.

They rely much less on human input and, partly because of less onerous regulation, have quietly become some of the most dominant and profitable firms in the trading world.

Some of the biggest quant firms are based in and around New York but there is “absolutely” a quant renaissance in London, according to Raffaele Savi, global head of BlackRock’s quantitative investing teams.

“It’s the combination of great [universities] in the UK and Europe, a good regulatory framework, and tradition,” he said.

Five unmissable stories this week

Phoenix Group is in talks to raise more than £1bn from private capital firms including Blackstone, Sixth Street and KKR as it seeks to expand its pension-risk transfer business and win a bigger share of an increasingly competitive and lucrative part of the insurance market.

Manulife’s CQS, Algebris Funds and Deltroit Asset Management have adopted a new tactic in the distressed debt wars, arguing in a New York lawsuit filed on Tuesday that heavy-handed deals violate US anti-monopoly and cartel laws.

Blackstone has poached Apollo’s lead European buyout dealmaker Michele Rabà in a rare switch at the senior level of the world’s two biggest private capital firms.

Janus Henderson has received a takeover bid from Nelson Peltz’s Trian Fund Management and General Catalyst. The groups offered $46 a share in cash for the asset manager, valuing it at $7bn, and sending its shares up about 12 per cent on the day.

UK investors have poured money into offshore bonds as a fiscal crackdown has prompted wealthy Brits to look for new ways to lower their tax bill. New investment in the 12 months to the end of June hit £10.5bn across all providers, according to data seen by the Financial Times, a sharp increase from £5.1bn the previous year. 

And finally

Peter Doig’s House of Music at the Serpentine adds a soundtrack to his paintings, for the first time. Each engages with music in a different way — some depict spaces where music is played or heard, others show musicians performing or people dancing.