Has private equity become a Ponzi scheme?

One thing to start: Elon Musk is demanding Tesla workers show up for at least 40 hours a week in the office or find another employer.

In today’s newsletter:

• Amundi’s private equity Ponzi theory

• Segantii’s rise to block trade fame

• Asoka Wöhrmann’s exit from DWS

The trouble with throwing out the P-word

Is it bad that a top executive at Europe’s biggest asset manager just likened the private equity industry to “a Ponzi scheme”?

Arguably, it’s not ideal. The private equity industry is charged with looking after $6tn of assets for public pension funds, insurance companies, and other deep-pocketed institutions.

Neither its clients nor its billionaire leaders are likely to relish the comparison with Carlo Ponzi, who swindled New England residents out of their savings in the 1920s, promising that his scheme to arbitrage the price of postage stamps would double their money in 90 days.

DD hopes that Vincent Mortier, Amundi Asset Management’s chief investment officer, savoured a sharp intake of breath before he made the assessment on Wednesday.

“Some parts of private equity look like a pyramid scheme in a way,” he said during a presentation. “You know you can sell [assets] to another private equity firm for 20 or 30 times earnings. That’s why you can talk about a Ponzi. It’s a circular thing.”

It’s one thing to talk about Ponzi schemes, and another to be sure you’ve found one out in nature.

Federal prosecutors in California claimed in February that they had caught a cryptocurrency-flavoured specimen weighing in at $2bn. The details needn’t worry us, but in announcing the charges the authorities helpfully spelt out the elements of “a textbook Ponzi scheme”:

“[The alleged malefactors] . . . touted . . . substantial profits and guaranteed returns. In reality, the purported technologies generated no such profits, and merely functioned as a cover for the Ponzi scheme [and] earlier investors were paid with money from later investors.”

If that doesn’t sound much like a private equity fund, that’s because it isn’t. 

Private equity firms usually buy and sell companies in arms-length transactions with unrelated parties. And while exceptions to that pattern aren’t unheard of — DD’s Kaye Wiggins has reported on a few — they’re, without exception, out in the open.

Still, Mortier can’t be alone in feeling a sense of vertigo at the workings of this particular wheel of fortune.

It’s not at all that uncommon for one private equity firm to sell an asset to another that has some of the same underlying investors. Industry insiders are the clearest winners from such transactions.

As in casinos and other legitimate moneymaking operations, the house always wins.

The banks turning on Blackpool’s block trade king 

In the seaside town of Blackpool, Simon Sadler is a local hero.

After buying his home team Blackpool FC in 2019, the financier was described by The Guardian as a “local boy done good”.

But in a lucrative corner of the finance industry, the banker-turned-hedge fund tycoon is known for something else: being one of the most aggressive buyers of block trades.

As US authorities continue their months-long investigation into whether banks have been improperly profiting from the large-share sales, Sadler’s job could become more complicated.

The FT revealed last week that Sadler’s $6bn Hong Kong hedge fund Segantii Capital had been informed by Bank of America and Citigroup that they would suspend all equity trading with the firm due to concerns about its block trading activities. The fund has not been accused of any wrongdoing.

Since it was founded in 2007, Segantii has carved out a profitable niche by making huge bets on the sale of large blocks of shares. Its counterparties, ie banks, have earned huge fees in the process.

“For years he was willing to be big, consistent, aggressive, a real risk-taker on blocks,” one Hong Kong banker told the FT’s Tabby Kinder. “Even across market cycles he never backed away. I knew that if I had something to sell that [Segantii] would give me their price.”

Block trading isn’t for the weak. Hedge funds typically buy the blocks at a discount, setting themselves up for a big gain if the stock trades well after the sale, or steep losses if it doesn’t go their way.

In addition to the financial risks, traders must also navigate a legal grey area. The equity sales are usually big enough to depress a company’s share price, meaning banks arrange them privately away from exchanges.

Segantii’s ability to expertly navigate those risks quickly earned it “priority customer” status on Wall Street, according to a former prime broker in Hong Kong, as it expanded its booming Asia business westward.

The hard-charging mentality has also manifested itself within Segantii’s corporate culture, according to half a dozen counterparties and former employees who were interviewed by the FT, with one person close to the fund describing it as “highly political and highly territorial”.

Even though Sadler has earned a reputation for being abrasive, according to people interviewed by the FT, banks are reluctant to stop doing business with his fund. The reason? Segantii is one of the few big players in Asia that can keep the fees coming.

The final whistle blows on Wöhrmann’s time at DWS

After nabbing the dubious honour from Deutsche Bank, Credit Suisse may be delighted to hear that its German neighbours are once again becoming Europe’s top financial institution when it comes to making headlines for the wrong reasons.

On Wednesday, Asoka Wöhrmann, the chief executive of Germany’s top money manager DWS Group, resigned hours after the company’s offices in Frankfurt were raided and evidence was seized by police investigating claims of greenwashing. DWS is majority owned and controlled by Deutsche Bank.

The search follows probes by Germany’s financial watchdog BaFin and US authorities, which stemmed from allegations by former DWS executive Desiree Fixler that the company had made misleading claims that more than half the group’s $900bn assets were invested using environmental, social and governance criteria.

It’s not the first time that Wöhrmann has gotten caught up in a scandal since taking the helm at DWS in 2018. Earlier this year, he came under scrutiny from regulators and his former employer Deutsche Bank following a deal for a new Porsche Panamera gone awry.

The saga doesn’t reflect so well on Deutsche’s deputy chief executive and DWS chair Karl von Rohr. After receiving Fixler’s whistleblower letter in March 2021, he declined to flag the issue with US regulators and has downplayed the issue until very recently, as the FT’s Olaf Storbeck tweeted — despite the fact that he’s supposed to be on holiday right now.

Very clever of Deutsche Bank to wait until @OlafStorbeck is lycra-clad in rural Devon to announce a massive re-org of embattled asset management subsidiary.

— Joe Miller (@JoeMillerJr) June 1, 2022

It’s also another setback for Deutsche and its chief Christian Sewing — a close ally of Wöhrmann’s — who has been keen to move on from a decade of scandals and multibillion-euro losses.

Shortly after Fixler, who was sacked from her role as global head of sustainability last year, made her allegations, Sewing said discussions about alleged greenwashing were mere “noises”. 

DD wonders if he intends to walk back those statements.

Job moves

• Sheryl Sandberg is stepping down as the chief operating officer of Facebook’s parent company Meta after 14 years, a major shake-up in which chief executive Mark Zuckerberg will lose one of his closest lieutenants.

• Kelly Grier, the first woman to lead EY in the US, quit the Big Four auditor after a power struggle with its global boss Carmine Di Sibio, underlining the tensions between the group’s competing factions as it considers a radical plan to break itself up.

• Clayton, Dubilier & Rice has hired John Koch, the former president and chief executive of moving and storage group PODS Enterprises, as an operating adviser.

Smart reads

Drugs & Davos The World Economic Forum looked different this year, and not just due to the lack of snow. Psychedelics took centre stage at the conference as the industry looks to build credibility in scientific and financial circles, The Guardian reports.

Imperial yachts Meet the secretive service provider at the heart of the oligarch-industrial complex. Surprise, surprise, it’s based in Monaco. And US authorities have questions, the New York Times reports.

And one smart listen The FT’s Behind the Money podcast is back with part two of its crypto mini-series, digging into the surprising backstories of Giancarlo Devasini — the plastic surgeon-turned boss of crypto exchange Bitfinex and its sister currency Tether — and his business partner Jean-Louis van der Velde. Listen here.

News round-up

Pfizer to exit GSK consumer health joint venture after London listing (FT + Lex)

SoftBank and Goldman invest in electric supercar group Rimac (FT)

JPMorgan chief says ‘hurricane’ is bearing down on economy (FT)

Xiaomi-linked companies halt IPOs after Chinese regulator scrutiny (FT)

Mike Ashley’s Frasers Group buys Missguided out of administration (FT)

Tullow caps comeback with Capricorn merger (FT + Lex)

Simpson Thacher lawyers dominate mega-deal wave (Reuters)

Listen up, New York — Florida sucks, and you’ll all be back in five years (New York Post)