The big short meets private credit

One scoop to start: Private capital group EQT and Canadian pension fund Omers have offered to increase their investment in broadband provider Deutsche Glasfaser to nearly €5bn, as they attempt to avoid lenders seizing control of the heavily indebted business. 

And a scoop from the weekend: Wealth advisers at banks and independent brokerages generated billions of dollars in fees by steering individual investors into private market funds, which many retail investors are now trying to flee.

And a last thing: Tim Cook will step down as Apple’s chief executive at the beginning of September and will be replaced by hardware chief John Ternus, marking the end of a 15-year run leading the iPhone maker.

In today’s newsletter:

• The dreaded trade reaches private credit

• Berkshire’s partners in Japan

• Patrick Drahi levers Sotheby’s

The credit default swap arrives in private capital

Back when private capital stocks were roaring, industry executives had a problem: How could they hedge the fast-rising shares they held in their own firms as Wall Street’s enthusiasm for private markets hit an apex? 

DD has spoken to people who attempted to concoct hedges but ultimately abandoned the efforts after finding their options were overly complex. 

Now there’s a new private capital hedge circulating Wall Street, but it’s symptomatic of a leaner and more grinding era in the $22tn private markets. 

Wall Street banks including JPMorgan Chase and Barclays have unveiled a fresh crop of hedges against high-flying private credit funds.

The FT scooped last week that there’s a new market for credit default swaps against the flagship private credit funds run by Blackstone, Apollo Global and Ares Management.

The new contracts began trading last week after S&P Global launched an index called CDX Financials, which includes vehicles run by Apollo, Blackstone and Ares. 

Traders can wager on whether the individual vehicles, including the industry’s largest — the Blackstone Private Credit Fund, with $83bn of investments — will default. Recent pricing for Bcred contracts was a $790,000 premium and $100,000 annual coupons to protect against $10mn of debt for five years, according to Bloomberg data.

Some traders are simply betting on the decline of private credit, which has had a rough year as AI advances have caused concerns over the sector’s significant lending to software companies. Large private credit groups faced surging requests from wealthy investors to redeem their money in the first quarter.

Others will wager on the difference in pricing between the fund’s bonds and CDS spreads.

There may be an upside for some credit funds, as the increased market liquidity created by the CDS contracts could lower their borrowing costs. But DD doesn’t expect cheers inside the boardrooms of these firms. 

In past financial tumults, including European banking crises over the past 15 years, CDS prices have sometimes acted as a tail that wags the dog. The thin marketplace can have outsized influence on the perception of a firm’s financial health. 

Just ask any Deutsche Bank or former Credit Suisse C-suite executive their opinions on the marketplace. 

Berkshire’s deal fixers in Japan

In a few weeks Greg Abel will preside over the famed Berkshire Hathaway annual meeting for his first time as master of ceremonies. The conglomerate’s recently appointed chief executive will be feeling the pressure as he follows the acts of Warren Buffett and Charlie Munger, who turned the Omaha event into a “Woodstock for Capitalists”.

Abel is a veteran of Berkshire and so was a known entity to shareholders even before he took the top job in January. But in many ways, how he will run the firm remains to be seen.

An early move under his watch was to take a $1.8bn equity investment in Japan’s largest listed insurer. The FT has taken a closer look at the deal, which could provide Abel with further opportunities to deploy the Nebraska conglomerate’s record cash pile of nearly $400bn.

In addition to Berkshire buying a 2.5 per cent stake in Tokio Marine, the groups have also struck a strategic partnership. The arrangement will involve Berkshire using its cash-rich balance sheet to provide reinsurance for the Japanese insurer and help it strike bold acquisitions.

The model resembles Berkshire’s 2015 investment in Insurance Australia Group, where Berkshire agreed to take a 20 per cent cut of the company’s business over 10 years.

Abel said in his first letter to shareholders earlier this year that Berkshire’s insurance businesses faced tough competition as capital pours into the industry from private investment groups. Against that backdrop the Tokio Marine deal could be a critical opportunity for Abel to continue growing Berkshire’s underwriting.

Tokio Marine is Berkshire’s latest foray into Japan after Buffett made a $6bn contrarian bet on the country’s five biggest trading houses in 2020. The relationships may expand as they help Berkshire find opportunities to put its cash to work.

“We treasure our original five Japanese equity investments, and together we continue to look for opportunities of mutual benefit,” Abel told the FT.

DD’s Eric Platt covers Berkshire and will be in Omaha next month to report on Abel’s first run as emcee. He’d love to hear your ideas on Berkshire’s new era: [email protected]

KKR: patron of the arts?

Patrick Drahi famously loves leverage.

Seven years after the Franco-Israeli billionaire with a penchant for junk bonds bought Sotheby’s, the auction house has added yet another layer of debt.

This time KKR has stepped in, agreeing a securitisation deal with Sotheby’s backed by fees clients owe on their auction purchases.

Under the deal the auction house will pay an interest rate of more than 8 per cent on money it borrows, in order to, in effect, factor receivables from artwork sales. The facility, which is due for repayment in 2029, will allow Sotheby’s to borrow a maximum of $100mn from KKR.

Sotheby’s has also been offering sellers an interest rate of 7 per cent to delay paying out sale proceeds as part of its efforts to conserve cash.

Last week, Sotheby’s launched an $825mn bond offering, selling the debt at a yield of about 8.5 per cent.

Sotheby’s has racked up several years of large losses as it struggled with a heavy debt burden and a lacklustre art market since Drahi acquired it in a leveraged buyout. 

But there’s been better news recently: the FT revealed last week that Sotheby’s had jumped to a $53mn pre-tax profit last year.

Job moves

• FTI Consulting has abandoned a leadership succession plan it described to shareholders less than a year ago, after handing greater power to its longtime chief executive Steve Gunby.

• Cleary Gottlieb has hired Igor Kleyman as a financial institutions partner focused on digital assets. He rejoins the firm from Amazon where he was head of responsible AI governance.

• Paul Weiss has hired Adam Hoeflich as a litigation partner in New York. He joins from Bartlit Beck.

• Simpson Thacher has hired Chelsea Pullen and Tam Ho as partners on the firm’s data centre team. Pullen joins from Greenberg Traurig and Ho joins from Kirkland & Ellis.

• Citi has appointed Lee Smallwood chief operating officer of markets.

Smart reads

Fed head Kevin Warsh faces the US Senate this week for his confirmation hearings to be chair of the Federal Reserve. The FT has an in-depth profile on Donald Trump’s pick to lead the central bank — and how he’s expected to handle a likely confrontation with the president.

Taking up arms Germany’s struggling manufacturing sector is remaking itself for war, The Wall Street Journal writes. As car factories shed jobs, rising European defence spending and conflicts in Ukraine and the Middle East have presented a new opportunity.

Acquisition spree Brad Jacobs is bringing the private equity playbook to public markets, Lex writes. His QXO is rolling up companies in the fragmented building industry, fuelled by the stock market’s permanent capital — and at breakneck speed.

News round-up

Anthropic and Amazon agree $100bn AI infrastructure deal (FT)

Amazon’s ambition to rival Starlink set back after Blue Origin rocket grounded (FT)

Washington-backed rare earth group to buy Brazilian miner for $2.8bn (FT)

Shares in data centre hopeful Fermi plunge as top executives quit (FT)

Merz and Commerzbank attack Orcel’s ‘hostile tactics’ as takeover battle escalates (FT)

William Hill owner in takeover talks with gaming operator Bally’s Intralot (FT)

US oil refiners reap windfall from Iran war (FT)

Lilly to buy cancer biotech Kelonia for up to $7bn (Bloomberg)