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In today’s editions, we have a scoop on failed merger talks between CVC and HPS, which show pressure͏‌  ͏‌  ͏‌  ͏‌  ͏‌  ͏‌ 
 
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March 12, 2024
semafor

Business

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Liz Hoffman
Liz Hoffman

Hi, and welcome back to Semafor Business.

Private equity retains its image as finance’s youthful rogue, but it is, generationally speaking, an old millennial. It’s been more than 40 years since a former U.S. Treasury secretary and a tax accountant teamed up to take private, and then quickly public, a maker of greeting cards, and their 200x returns birthed an entire industry.

It has grown into a $20 trillion pot of money defined mostly by what it isn’t; its preferred, but silly, name of “alternative investments” casts it as everything besides publicly traded stocks and bonds. But it’s starting to show its age. Competition for money and deals is getting fierce, and the industry is doing what all mature industries do: consolidating.

Today we have the details of secret talks, which died a few months ago, to build a true investing superstore. As a former M&A reporter, I don’t usually write about deals that aren’t happening, but this one shows just how fierce the pressure is, even on the industry’s top dogs, to bulk up and branch out.

Plus, a scoop on a firing at Josh Harris’s 26North, as the blast radius of 777’s troubles touches a Wall Street prince.

Buy/Sell
Wikimedia Commons/TechCrunch

➚ BUY: Money in the Telegram. Pavel Durov told the FT in a rare interview that he has turned down investment offers valuing his encrypted messaging service at $30 billion and prefers an IPO to “democratize access to Telegram’s value.” He said the app has 900 million users, is close to being profitable, and is toying around with AI chatbots and a dating service.

➘ SELL: Checks in the mail. U.K. mortgage delinquencies rose more than 50% to a seven-year high at the end of 2023, new Bank of England figures show. British homeowners’ mortgages reset every few years, exposing borrowers to soaring interest rates.

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The Tape

U.S. inflation rose in February in unwelcome surprise…Another Chinese property developer teeters… Meta accuses employee of stealing secret pay docs… Jamie Dimon says U.S. recession is “not off the table”… Nobody can explain gold rally… Choice throws in terry-cloth towel in hostile Wyndham chase… This is your brain on Cheetos… “Private equity identifies 75,000 bag holders to offer exit liquidity from failed investment.”

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Liz Hoffman

The race to build investing superstores

THE SCOOP

Investment firms CVC and HPS recently discussed a merger that would have created a $300 billion giant, a sign of the pressure on asset managers to bulk up and branch out as competition for money and deals intensifies.

The talks fell apart late last year and people close to both firms say they are moving ahead with their own plans to go public. But they show that even firms with size and success — CVC is a leader in European buyouts, HPS is a runaway hit in the fast-growing world of private credit — see the allure of the superstore model as fundraising gets tougher and investors concentrate their bets on a handful of managers.

Representatives for CVC and HPS declined to comment.

What once looked like an endless pool of cash chasing alternatives to publicly traded stocks and bonds is starting to run thin. As of January, about 14,500 separate funds were on the road seeking a combined $3.2 trillion, more than the value of every company listed on the London Stock Exchange, according to new data out this week from Bain, which concluded that there isn’t enough money in the world to go around.

As in all contracting industries, the biggest players are winning. Investors are concentrating their money with larger managers, which can offer more products and discounted fees. First-time fund managers are finding few takers. The number of $5 billion-plus funds rose by a third in 2023 from a year earlier, while the number of sub-$500 million funds shrank by a similar amount, according to Bain.

“It is really only the large players that can withstand the forces reshaping the private markets industry,” David Layton, CEO of Partners Group, told the Financial Times last year.

That’s driving firms to merge. TPG, one of the last big pure-play buyout shops, bought credit and real-estate shop Angelo Gordon last year. General Atlantic is buying infrastructure specialist Actis. Brookfield bought Deutsche Bank’s fund-stakes business. CVC has already dabbled, in September buying a Dutch infrastructure firm that owns data centers in Phoenix and a tram line in Belgium. BlackRock is buying infrastructure giant GIP and has signaled that it’s looking for a needle-moving takeover in credit. That list doesn’t mention the scramble among asset managers to buy up insurance companies.

A tie-up between CVC, which is trying to revive an IPO waylaid by a market rout in November, and HPS, whose own listing plans are among Wall Street’s worst-kept secrets, would have been more transformative than any of those deals.

CVC manages $200 billion and is best-known for well-executed, if fairly traditional, corporate buyouts in Europe. HPS was founded by a trio of Goldman Sachs alumni whose success in private credit has spawned copycats across Wall Street. A combined firm would have had $313 billion across equity, credit, infrastructure, and private-fund stakes — an investing superstore missing only the real-estate aisle, and it’s a generationally good time to be missing real estate.

LIZ’S VIEW

Among the biggest alternative asset managers, only Blackstone and KKR can credibly claim to be true one-stop shops. Carlyle needs more infrastructure. Apollo needs real estate. Warbug Pincus and Advent are strictly buyouts, though they both seem fine with it.

When you talk to industry executives these days, they don’t talk about funds, they talk about “platforms.” Layton, the Partners Group CEO, invoked the phrase when he predicted that the roughly 11,000 existing private investment firms could shrink to 100 “next-generation platforms” over the next decade.

He means top-shelf fundraising and capital-markets teams figuring out how to find and optimize every dollar, and operating teams figuring out how to fine-tune every asset. Then keep adding dollars and assets.

The image of private equity has been slow to change from its early wildcatter days, but the industry is mature, and it’s doing what mature industries do when growth slows — becoming a grinding ground game of execution and scale, where the big get bigger and the small don’t survive.

Room for Disagreement: The 'buy once, pay twice' problem.  →

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Live Journalism

Sen. Michael Bennet, (D) Colorado; Sen. Ron Wyden, (D) Oregon; John Waldron, President & COO, Goldman Sachs; Tom Lue, General Counsel, Google DeepMind; Nicolas Kazadi, Finance Minister, DR Congo and Jeetu Patel, EVP and General Manager, Security & Collaboration, Cisco have joined the world class line-up of global economic leaders for the 2024 World Economy Summit, taking place in Washington, D.C. on April 17-18. See all speakers, sessions & RSVP here.

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Quotable
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Former FDIC Chair Sheila Bair, proposing new agency framework for bank bailouts.

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Intel

Collateral damage: Josh Harris’s investment firm, 26North, fired a top executive because of concerns over his previous work at 777, the investment firm and would-be Everton buyer that is under criminal investigation by federal prosecutors, people familiar with the matter said. 26North hired Jorge Beruff in September from 777’s insurance arm, which invested policyholders’ money into risky and illiquid deals including European soccer teams, payday lenders, and failing airlines.

The U.S. Justice Department has been investigating whether 777 broke money-laundering laws, Semafor reported in November. Prosecutors have interviewed current and former 777 employees, and state insurance regulators in Utah and elsewhere are also investigating the company’s insurance operations, people familiar with the matter said. A 26North spokeswoman declined to comment. Beruff didn’t respond to a request for comment.

Everton

Harris, known outside of Wall Street as the new owner of the NFL’s Washington Commanders, founded 26North in 2022 after losing a power struggle at Apollo, where he was a co-founder and at one point the heir apparent. His new firm (actually a “next-generation alternatives platform” — see above) looks so far like a mini Apollo, with about $5 billion in investment funds, $4 billion in insurance money, and a pending application for a publicly traded loan fund.

The hottest corner of Wall Street right now is, improbably, insurance. Life insurance and annuities companies bring in billions of dollars from policyholders who don’t need to be paid back until they retire or die, an attractive pot of dealmaking money for private-equity firms. Apollo figured this out more than a decade ago, and its insurance arm, Athene, is now writing policies almost faster than Apollo can invest the cash (about $60 billion last year).

Over the past few months I’ve been hearing from executives at Apollo, KKR, and other firms active in this space who are worried about the scrutiny that 777 is putting on the entire business model, which rests on being seen as responsible stewards. The 26North moves shows the blast radius starting to widen.

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What We’re Tracking
Reuters/Peter Cziborra

Codesharing: Boeing’s problems are becoming its customers’ problems, and its customers’ problems are quickly becoming Boeing’ problems. Southwest this morning blamed a likely first-quarter loss on slow deliveries of planes; United is pausing pilot hiring and looking to Airbus to fill its orders; and Alaska said it’s gotten some of the $150 million it’s seeking from Boeing after a door blew out on a January flight — a failure that WSJ reports is now the subject of a criminal investigation.

Playing for time: Private equity firms are sitting on 28,000 companies valued at $3.2 trillion that they can’t sell, new data from Bain shows. But investors want their money back, which has stoked a red-hot market for continuation funds, which one industry trade called “the story of the year.” Elliott Management this week invested $500 million to let Quantum Capital pay out existing backers while holding onto natural-gas company HG Energy. “Is automatically selling a great business the best answer?” Eric Resnick, the CEO of investment firm KSL Capital Partners, told Semafor earlier this year, when he raised $3 billion to cash out existing investors in a ski-resort operator. To critics, the idea of paying out old investors with new investors’ cash looks an awful lot like a Ponzi scheme, and some query whether firms are just avoiding acknowledging that these companies aren’t worth what they think they are.

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