For the last several months, investment bankers have been keeping their spirits up by telling themselves that the deals are going to come back, they have to come back, because the private equity funds and leveraged buyout sponsors still have large funds to put to work. But the latest news from the Citrix take-private deal isn’t encouraging.
Citrix was one of the last big leveraged buyout transactions to be struck before the Russian invasion of Ukraine and the end of the 2021 deals boom. It’s been working its way through the pipeline ever since. This week, the debt capital markets (DCM) part of the transaction has come to market and the news is not good – there are roughly $500m of underwriting losses on the $4bn of high yield bonds that were sold, to be shared out between a syndicate that includes Goldman, Credit Suisse and Bank of America.
The headline figure, if anything, understates how badly this deal went. The yield that had to be offered was significantly higher than the top of the range that had been estimated only a couple of weeks ago, and the order book was barely covered. Rather than being in the position of deciding which clients to allocate the limited supply of bonds to, the underwriters were apparently reduced to calling round smaller hedge funds that didn’t even usually invest in the high-yield space, just to get the sale to happen at all. And as much as $1bn of the bonds ended up with Elliott Investment Management, the original sponsors of the deal.
In other words, and to put in bluntly, it was a disaster. This isn’t exactly the first writedown on LBO business – they were a feature of the Q2 accounts season – but it’s another leg down, and the price established by the Citrix bonds is likely to affect the marks to market for the third quarter, of which there is exactly seven trading days left.
Beyond that, it’s very hard to see anything recovering between now and the end of the year. Given how much of this kind of debt is stuck on bank balance sheets, there’s a distinct risk of a “fire sale” dynamic developing; if one big player decides to take the pain before the end of 2022 and start the new year with capital freed up to do something different, all the rest of them might come under pressure to do the same, leading to an undignified scramble which benefits nobody and to writedowns the likes of which haven’t been seen for years.
The problem is that if investors don’t want to buy this debt, then nothing happens. In good times, bankers are happy to recite industry cliches like the one about being in “the moving business, not the storage business”. But if you’ve got nowhere to move stuff to, you’re in the storage business whether you like it or not. Before there can be any recovery in private equity deals, there has to be some sign of investor willingness to clear the backlog and to be receptive to new issues. That could mean that Citrix and similar transactions could still be weighing on bonuses and hiring for some time to come.
Elsewhere, one of the hottest areas in alternative investment is private credit and direct lending funds – basically, doing similar business to banks but without the overheads of a regulated business and with hedge fund investors rather than depositors. Private credit funds may yet end up having problems of their own, but with leveraged finance deals in trouble, one might have thought that the investment team at Tennenbaum Capital Partners, a private credit firm acquired by BlackRock in 2018, would be having a great year.
Apparently, not so. About a third of them have left since the acquisition, with a rash of departures in the last six months (which might reflect the fact that some of the senior staff were on four or five year retention plans). It seems that compensation is part of the issue – BlackRock just doesn’t pay as well.
But it seems that the more important factor has been that the Tennenbaum people just don’t feel respected. A particular cause of complaint is apparently that they thought they were going to be allowed to launch a special situations fund, but have been told to stick to direct lending and not encroach on the turf of David Trucano’s existing special sits fund. BlackRock don’t seem to be exactly regretting the deal – they’ve substantially grown assets under management – but they might be well advised to think a bit harder about this sort of overlap when they do deals in the future.
Credit Suisse is contemplating splitting is investment bank into three parts: the advisory business, a bad bank, and the rest. It still wants to sell-off the securitized products business. (Financial Times)
Big Tech are also trying to cut costs without giving the impression that they’re engaging in mass layoffs. Teams are being reorganized and staff invited to apply for a limited number of alternative roles at Google and Meta. They only have a short period to do so; employees are referring to being put on “the 30 day list”. Since the tech firms don’t have such a weighting to bonuses as banks do, they’ve got much less ability to flex personnel costs without firing people. (WSJ)
Apparently toward the end of Josh Harris’ time at Apollo Management, colleagues were getting increasingly frustrated at how difficult it was to get through to him because of all the time he spent on the sports teams he had bought. (Business Insider)
The downside of being in Citi’s Malaga team is that demonstrating a preference for work-life balance might put you on a less prestigious “mommy track” in your career. (The upside is, obviously, you’re in Malaga). (FT)
Andrew Hartley has resigned as Citigroup’s head of European investment banking. Not clear why or where he’s going, but Citi is definitely keen on the sector, having made six senior hires in April and set up a “healthcare, wellness and consumer supergroup” – sometimes this kind of reorganization is itself destabilising to the incumbents. (Financial News)
How does it feel to exit your startup? Although there are complicated emotions for fintech founders, there’s a general consensus of “pretty good, if only from a financial perspective”. (Sifted)
A “ransomware simulator” to test how good your instincts might be when negotiating with hackers (FT)
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