Under the covers of an industry no one talks about

One scoop to start: Reorg, the distressed debt and bankruptcy information provider backed by private equity firm Warburg Pincus, has hired advisers to explore a sale of all or part of the business that could value it at more than $1.5bn, DD’s James Fontanella-Khan and Sujeet Indap report. 

In today’s newsletter:

• Who rules the porn industry?

• Credit Suisse’s cyberweapon woes

• Bridgewater bets on bad news

Meet the people leveraging lust 

Is it possible to raise almost half a billion dollars on Wall Street for a roll-up of the pornography industry?

The answer is most definitely yes — if you can handle high drama, thumping advisory fees, and an interest rate that would even look pricey in the 1970s.

Our colleagues Patricia Nilsson and Alex Barker spent months investigating who really rules the big business of online porn for a new FT podcast series, Hot Money.

The first two episodes start with what will sound like a familiar finance story for DD readers: a debt-fuelled acquisition spree to reshape an industry struggling to cope with digital disruption.

But in the porn business, the story has that extra edge.

Through a three-year buying spree, starting around 2009, German coder Fabian Thylmann built Manwin into the world’s dominant provider of online porn, buying up sites such as Pornhub, YouPorn and Brazzers. At its peak, Manwin’s profit margin was around 50 per cent.

The company is today known as MindGeek, and Thylmann is long gone. But he is remembered for changing the face of the industry, in part by working out how to make money from sites that served up free porn to huge audiences.

What made Thylmann stand out was his ability to raise debt in a business starved of finance. He explained to our colleagues how — with a small army of advisers led by Raymond Chabot Grant Thornton — he managed to raise $362mn in loans on Wall Street for a business that was seemingly untouchable.

One of Thylmann’s advisers, Rick Rosenbloom of Fuel Break Capital, recalls his lonely march around New York firms trying to drum up interest in lending to Manwin. Most places shut the door in his face. His breakthrough was meeting the founder of an alternative investment fund called Colbeck Capital, run by two former Goldman Sachs bankers.

Rosenbloom warned them the Manwin deal “had hair on it”. But with interest rates in excess of 20 per cent, Colbeck concluded they could live with it. They pulled together a syndicate that included JPMorgan Chase, the buyout group Fortress, and even an investment manager working for Cornell University.

One detail that didn’t make the podcast was the fees. Thylmann’s advisers collectively took a 5.5 per cent cut — more than $20mn. 

Go deeper with the series here on Apple Podcasts, Spotify, Pocket Casts, Stitcher or wherever you listen to podcasts.

Credit Suisse: What happens when you finance cyberweapons 

Picture this: you’ve lent money to a company that hasn’t signed any new clients for months — and has been plunged into financial turmoil, taking a $10mn emergency loan to meet its payroll.

But making new sales isn’t easy for the borrower.

That’s because its product is a military-grade cyberweapon that authoritarian regimes have used to silence dissent, according to the US government.

We’re talking, of course, about NSO Group — the Israeli company that makes the hacking tool Pegasus — and Credit Suisse.

New insight shows how the Swiss bank, which has lent money to NSO, responded as the company faced a cash crunch towards the end of last year — triggered by reports about the misuse of Pegasus.

The decision by the US to blacklist NSO in November added to its problems.

In December, lawyers for a group of NSO’s lenders — including Credit Suisse and the hedge fund Senator Investment Group — wrote to Berkeley Research Group, which manages the private equity fund that owns NSO.

They said they were “troubled” by a claim from NSO that BRG was preventing it “from pursuing and obtaining new customers”. This “has deepened the company’s current liquidity crisis”, they added, and NSO “must be able to conduct its normal operations, with proper oversight, during this critical period.”

The problem, BRG responded, was that the only potential new bookings were from what it called “elevated risk customers”, an interesting piece of corporate speak.

Human rights groups have documented the abuse of Pegasus by Saudi Arabia, the UAE, Mexico and more than a dozen other countries against journalists, dissidents and academics.

Catch up on all the details with this scoop from DD’s Kaye Wiggins and Ortenca Aliaj and the FT’s Mehul Srivastava.

Credit Suisse has a responsibility to, well, not lose the money that it lends out. But it also has a stated commitment to “ESG investment principles”. 

In this case those two things seem particularly difficult to square. But encouraging spyware sales is certainly an interesting way to approach it.

Bridgewater bets against corporates

There have been a lot of warnings about the perils facing the global economy. You can add Bridgewater Associates to those predicting doom and gloom.

The world’s largest hedge fund is betting that a looming global growth slowdown will significantly impact European and American companies and has built a short position in corporate bonds.

“We’re in a radically different world,” Greg Jensen, one of Bridgewater’s chief investment officers, told the Financial Times. “We’re approaching a slowdown.”

A bet against corporate bonds indicates that Bridgewater thinks some of the companies that have binged on debt during the years-long low interest rate environment will struggle to pay it back.

So how do you bet against corporations? According to people familiar with Bridgewater’s trade, it used baskets of credit derivatives in Europe and the US to make the trade in April.

You can think of these instruments as insurance policies linked to corporate debt where the fund pays a monthly premium but can earn a huge payout if the price of bonds falls.

Some DD readers may remember a similar trade by Bill Ackman that pocketed his firm $2.6bn in early 2020 as the coronavirus surged through the US and stock prices tanked.

At that time Bridgewater was having a terrible year with its flagship fund down 20 per cent by mid-March. Its founder, Ray Dalio, said at the time that it didn’t have an “edge in trading it.”

But macro events — including rate rises and inflation — are very much in the fund’s wheelhouse. Pure Alpha is up 26.2 per cent through May.

Job moves

• Jill Woodworth is stepping down as chief financial officer of Peloton and will be replaced by Liz Coddington, who is vice-president of finance at Amazon Web Services.

• Insurer LV has appointed Simon Moore as chair to replace Alan Cook, who stepped down earlier this year following its aborted sale to US private equity company Bain Capital.

• Matt Dunn, who was previously a partner at Clifford Chance, is returning to the firm’s global leveraged finance team after leaving Arthur Cox.

• Nadiya Nychay has joined Jones Day as a partner in its government regulation practice in Brussels. Nychay was previously a partner at Dentons.

• Jessica Jenner is joining Linklaters as a partner in its real estate practice as well as part of its corporate and structured lending group in London. She was previously at Ashurst.

• Mitchell Reiss will join Brunswick Group as a partner and co-lead of its geopolitical practice group. Previously, he served as president and chief executive of the Colonial Williamsburg Foundation and president of Washington College.

Smart reads

Collecting nickel You might smirk at the idea that the London Metal Exchange has violated the human rights of Elliott Management, one of the most aggressive activists in the world. But the hedge fund’s lawsuit should help shed light on what went on during the now infamous metal trading scandal, the FT’s Helen Thomas writes.

Italy’s walled gardens Italy may have spawned some of the greatest meritocratic thinkers, but its corporate sector is still defined by family-owned businesses that leave little room for talent to climb up, Bloomberg reports.

Wartime crowdfunders Attention has focused on Russian oligarchs since the country’s invasion of Ukraine began. But the FT reports Ukrainian oligarchs, who played a major role in helping resist Russia’s invasion of Crimea in 2014, are finding their influence has weakened.

News round-up

Thoma Bravo’s renegotiated deal has US investors wondering who’s next (Reuters)

Toshiba chief willing to sell company ‘to make it great’ (FT)

UK waste manager Biffa receives £1.4bn takeover bid (FT + Lex)

Musk’s Twitter deal threats put new financing on ice (Reuters)

Preferred bidder for Ted Baker pulls out of acquisition process (FT)

Adviser to LeBron James, Arnold Schwarzenegger gets $1.1 billion for deals (BBG)

‘Liquidity is terrible’: poor trading conditions fuel Wall Street tumult (FT)

Large private-equity firms turn attention to vast retail market (WSJ)

​​EQT, Mubadala buy medical freight firm in $3bn deal (BBG)