In recent months, investment bankers have cheered themselves up by telling themselves that the deals will come back, they have to come back because the private equity funds and leveraged buyout sponsors still have big funds to work with. But the latest news about Citrix’s take-private deal isn’t encouraging.
Citrix was one of the last major leveraged buyouts to be completed before the Russian invasion of Ukraine and the end of the 2021 deals boom. It’s been working its way through the pipeline ever since. Debt Capital Markets (DCM) portion of the transaction came out this week and the news isn’t good — there’s about a $500m syndicate that includes Goldman, Credit Suisse and Bank of America.
The headline count, if any, understates how poorly this deal went. The yield to be offered was well above the peak value estimated just a few weeks ago, and the order book was barely covered. Rather than deciding which clients to allocate the limited supply of bonds to, the underwriters were apparently limited to phoning smaller hedge funds that typically didn’t even invest in high-yield just to get the sale to happen at all. And up to $1 billion of the bonds ended up with Elliott Investment Management, the deal’s original sponsors.
In other words, and to put it bluntly, it was a disaster. This isn’t exactly the first writedown on the LBO business – it was a feature of Q2 accounts season – but it’s another downtrend and the price set by Citrix bonds is likely to impact the mark-to-market for the third quarter which have exactly seven trading days left.
Furthermore, it is very difficult to see anything recovering by the end of the year. Given how much of this type of debt is stuck on banks’ balance sheets, there is a significant risk that a “fire sale” dynamic is developing; If a big player decides to bother before the end of 2022 and start the new year with free capital to do something else, everyone else could be pressured to do the same, leading to an undignified scramble by whom nobody profits and write-downs like it hasn’t been seen in years.
The problem is that if investors don’t want to buy that debt, nothing happens. In good times, bankers like to recite industry clichés like “the moving business, not the warehousing business.” But if you don’t have a place to move stuff to, you’re in the storage business whether you like it or not. Before there can be a rebound in private equity transactions, there must be signs that investors are ready to clear the backlog and receptive to new issuance. That could mean Citrix and similar transactions could weigh on bonuses and hiring for some time to come.
Elsewhere, private debt and direct lending funds are one of the hottest areas of alternative investment — essentially similar businesses to banks but without the overheads of a regulated business and with hedge fund investors rather than depositors. Private debt funds might end up with their own problems, but with leveraged finance deals struggling, you’d think the investment team at Tennenbaum Capital Partners, a private debt firm acquired by BlackRock in 2018, was going to have a great year.
Apparently not so. About a third of them have left the company since the acquisition, with a number of departures in the past six months (possibly reflecting some of the senior staff having four- or five-year retention plans). It seems that compensation is part of the problem – BlackRock just doesn’t pay that well.
More important seems to have been that the Tennenbaumers simply don’t feel respected. Apparently, one particular point of complaint is that they thought they could set up a special situations fund, but were told to stick with direct lending and not meddle in the turf of David Trucano’s existing special fund. BlackRock doesn’t really seem to regret the deal — they’ve increased assets under management significantly — but they might do well to think a little more carefully about these types of overlaps in future deals.
In the meantime …
Credit Suisse is considering splitting its investment bank into three parts: the advisory business, a bad bank and the rest. It still wants to sell the securitized products business. (financial times)
Big Tech is also trying to cut costs without giving the impression that they are doing mass layoffs. Teams will be reorganized and employees will be invited to apply for a limited number of alternative roles across Google and Meta. They only have a short time for this; Employees refer to being put on the “30-day list”. Because tech companies don’t value bonuses as much as banks do, they have far fewer opportunities to make personnel costs more flexible without laying off employees. (WSJ)
Apparently towards the end of Josh Harris’ tenure at Apollo Management, colleagues became increasingly frustrated with how difficult it was to get through to him because he had spent so much time on the sports teams he had bought. (business insider)
The downside of being part of Citi’s Málaga team is that demonstrating a penchant for work-life balance may put you down a less prestigious ‘mommy track’ in your career. (The advantage is of course that you are in Malaga). (FT)
Anthony Hartley has resigned as Citigroup’s Head of European Healthcare Investment Banking. It’s not clear why or where he’s going, but Citi is definitely keen on the sector, having hired six senior staffers in April and creating a “health, wellness and consumer supergroup” — sometimes that sort of reorganization destabilizes the incumbents Company. (financial news)
How does it feel to leave your startup? While there are complicated emotions for fintech founders, there is a general consensus of “pretty good, if only from a financial standpoint.” (sifted)
A “ransomware simulator” to test how good your instincts might be when negotiating with hackers (FT)
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