Vulture funds circle private equity

One scoop to start: Amazon is in talks to acquire the satellite telecommunications group Globalstar, a deal that would bolster the ecommerce giant’s effort to build its own low Earth orbit satellite business.

Another thing: A record number of megadeals were agreed in the first quarter of the year as companies shrugged off war in the Middle East and a shakeout in the software sector to propel mergers and acquisitions to $1.2tn globally.

In today’s newsletter:

The sun shines on the vultures of credit markets

Andrew Milgram was accustomed to the loneliness that came from being a sceptic during private credit’s heyday. 

Let’s rewind to 2023: the distressed-debt investor was onstage at the glitzy Milken Conference in Beverly Hills, an annual convening for the Masters of the Universe to discuss the industry that had grown at warp speed.

Milgram was convinced credit underwriting had turned sloppy and loans were broadly overvalued, leaving the asset class disturbingly exposed if the economy turned.

The investor was the event’s token contrarian, a thorn in the side of his fellow panellists. Three years on, Milgram feels like a Cassandra.

Private credit has become one of Wall Street’s top worries this year. Several funds, managed by the likes of Blue Owl, Blackstone, Ares, Apollo and BlackRock have faced billions of dollars in redemptions amid questions about their exposure to software companies at risk of losing out to AI.

That’s where distressed-debt investors enter the frame. If the relentless bull market runs out of steam, it could potentially create a once-in-a-generation opportunity for the funds to work their craft.

Milgram, who founded Greenwich-based Marblegate Asset Management, said: “You will hear more and more people coming to our view because they are realising what we knew three years ago: this is not about a few bad loans, rather it is the systematic mischaracterisation of credit standards and asset quality.”

“We’re out in the market right now raising a new fund because this is the greatest opportunity I’ve ever seen in my lifetime,” he added. “I couldn’t imagine God would smile on me like this.”

Fortunes made during periods of corporate distress are the stuff of Wall Street legend.

David Tepper’s hedge fund Appaloosa famously made about $7bn during the financial crisis by buying up bonds and stocks of beaten-down banks for cheap, betting the US government would not nationalise private groups.

Davidson Kempner and King Street traded bankruptcy claims in the wake of Lehman Brothers’ collapse, with the former making $3bn from the bank failure. 

More recently, Oaktree Capital Management, Silver Point and Farallon scooped up secondary claims in failed crypto exchange FTX, and turned huge profits when coins were found and sold.

These investors specialise in buying distressed assets at bargain prices and many of them have identified a downturn in private credit as their best opportunity since the financial crisis.

The funds typically invest in companies with bad balance sheets but viable underlying businesses, and they’ve been largely sidelined for a decade as markets surged.

Now, some of them believe their time has finally come. According to Victor Khosla, founder of Strategic Value Partners, which manages $22bn in assets, it’s the “biggest opportunity since 2008”.

Wall Street has been ringing alarm bells over private credit for the past six months.

But in one pocket of the burgeoning industry, the party is still raging.

Apollo on Wednesday sealed a $14.2bn deal to cash out of its joint venture with Intel in a move that has investors cheering.

The sale of the 49 per cent stake of a semiconductor plant in Ireland back to Intel will generate a low to mid-teens internal rate of return on Apollo’s investment, which it made just two years ago, people briefed on the matter told the FT.

It will also pay down billions of dollars of debt held across Wall Street. That debt, which worked its way on to the balance sheets of insurance companies (including Apollo’s Athene) as well as into a nascent exchange traded fund offered by State Street, has come to represent Wall Street’s new gravitational centre.

Unlike the mid-market loans financing private equity buyouts that have Wall Street in a tizzy, Apollo’s Intel deal was what’s known in industry parlance as private investment grade debt.

The deal relied on complicated structuring (read: one long legal document) that meant Intel’s accountants didn’t treat the $11.2bn infusion as debt, which would have swelled its balance sheet with costly obligations and weighed on its credit rating.

At the same time, Apollo was able to win investment grade debt ratings for a large part of the financing, making it an appealing investment for the countless insurers it works with.

It was alchemy that created a stampede by Apollo’s biggest rivals, including KKR and Blackstone, as they raced to emulate the transactions.

Apollo will now have to find a way to replace the Intel debt once it is redeemed. In this market, that’s a good problem to have.

Chief executive Marc Rowan has set a lofty target for the firm to originate $275bn in deal flow a year, transactions that will go some way to filling the gap left by Intel.

The ‘Ari Emanuel’ of Big Law

Not many Kirkland & Ellis rainmakers want to give up such a prized and lucrative seat. But in 2021, Jon Henes, who ran big Chapter 11 bankruptcies, left the firm with bigger dreams.

He launched his own firm, C Street Advisory Group, that was going to be a big corporate boardroom player.

Five years later, Henes is back in a big way when it comes to corporate restructurings and financial distress, DD’s Sujeet Indap and Amelia Pollard report.

His C Street Advisory is doing less on the CEO front after a splashy DEI consulting effort fizzled almost immediately. The firm first pivoted into comms for bankrupt and distressed companies, taking on the likes of Joele Frank and FTI Consulting. 

Most interestingly, Henes has become a backroom player in the legal sector’s talent wars. In his biggest coup, Henes helped arrange for David Nemecek — his former colleague at Kirkland — to land at rival Simpson Thacher & Bartlett earlier this year.

Several major law firms have Henes doing management consulting-like reports on their practices, and helping them find and land lawyers, some of whom are getting $10mn and $20mn pay deals.

One satisfied customer called Henes the “Ari Emanuel” of Big Law for his wheeling and dealing, which admittedly sounds more fun than being just another middle-aged lawyer.

Job moves

• A source tells DD the boutique investment bank Ardea has hired Chris Deville as a partner focused on insurance. He previously worked at Fenchurch Advisory Partners.

• Morgan Stanley is set to hire former German finance minister Jörg Kukies as head of Germany and Austria.

• Linklaters has elected 37 new partners from offices including London, New York and Hong Kong. The group includes five attorneys in the firm’s banking practice and five in its capital markets practice.

• McDermott Will & Schulte has hired William Kloos as a transactions partner and Gregg Galardi as co-head of its restructuring practice, both in New York. Kloos rejoins the firm from Cerberus and Galardi joins from Ropes & Gray.

• Ángel Escribano, chair of Spain’s aspiring defence champion Indra, has quit after clashing with the government that appointed him over a planned acquisition involving his brother.

Smart reads

Against the grain While rivals pursued aggressive asset growth, Oaktree Capital remained relatively smaller and prioritised investment returns. The wisdom of that decision is now being tested as private credit comes under stress, Sujeet Indap writes for FT Opinion.

Zombie factories As the US’s electric vehicle plans unravel, factories built across the country to manufacture parts are sitting empty, the Wall Street Journal reports. What comes next is anyone’s guess with the future of American carmaking now in flux.

Changing tastes OpenAI is going somewhat out of fashion, Bloomberg reports, with investors on the secondary market preferring to buy shares of its cheaper, fast-growing rival, Anthropic.

News round-up

SpaceX filing kicks off largest IPO process in history (FT)

OpenAI raises $3bn from retail investors as part of record funding haul (FT)

Coffee chain Blank Street in talks to raise more than $100mn in fresh funding (FT)

Airlines in crisis mode as Iran war hits jet fuel supplies (FT)

Chelsea FC posts record Premier League loss (FT)

Eli Lilly wins US approval for weight-loss pill (FT)