Hedge funds dive into private credit

One scoop to start: Nearly four in 10 UK takeovers were reported in the media before their announcement in the 14 months to May this year, triggering concerns at the financial regulator that the London stock market is becoming leakier.

In today’s newsletter:

Why hedge funds love private credit

Hedge funds such as Millennium and Point72 attract investors with the lure of predictably strong returns with low volatility.

But institutional investors have increasingly turned to private credit funds to satiate their need for reliable returns deemed insulated from the vagaries of markets.

Now some hedge funds are encroaching on the territory of private credit, according to DD’s Amelia Pollard and Eric Platt and the FT’s Harriet Agnew.

Among those expanding into the sector are Millennium, Point72 and Third Point, some of the world’s oldest and largest hedge funds.

Third Point made its name on the back of the activist campaigns waged by founder Dan Loeb. The $20bn firm now plans to launch a publicly traded private credit fund, called Third Point Private Capital Partners, to lend directly to businesses.

Meanwhile, Izzy Englander’s Millennium is considering launching its first new fund in more than three decades to invest in less liquid assets, including private credit.

Point72, the hedge fund founded by New York Mets owner Steve Cohen, has been on a private credit-tinged recruiting spree, hiring executives from Blackstone, Carlyle and Brookfield. 

For hedge funds such as Millennium and Point72, private credit provides an interesting draw.

Multi-managers operate as a series of independently run “pods” each run by a separate team. That model has attracted lots of cash with its promise of steady returns. But even the most talented portfolio managers are often constrained by their risk budgets, which limit how much they can allocate to potentially lucrative strategies.

Private credit presents a new market with less tightly wound risk budgets, allowing funds to get more from their investment maestros.

It could also help hedge funds transform into mainstream financial institutions, potentially giving their ageing founders a valuable legacy. 

The FT has reported that Millennium is in talks to sell a minority stake at a $14bn valuation, a multiple that pales in comparison to private credit outfits, as Lex noted.

However, it begs the question of what the hedge funds will bring to bear — besides more competition in an already hyper-competitive market where returns are falling.

“You’re going to see that some of these newer entrants, or what I might call tourists, aren’t going to be able to generate the same types of returns as the more established platforms,” said one executive at a private credit firm.

“You can’t just raise some capital and say, hey, we’re open for business.”

Meta’s massive $29bn data centre deal

Two of the buzziest stories in finance criss-crossed on Friday.

Tech companies are pouring money into artificial intelligence, and private credit outfits are searching for places to invest the hoards of cash they’ve raised in recent years.

So it checked out last week when it emerged that private credit investors were in talks with Meta to raise tens of billions of dollars to fund the tech giant’s AI data centre push.

Meta is in discussions with private credit investors including Apollo, KKR, Brookfield, Carlyle and Pimco on a gargantuan $29bn financing for its data centres, the FT reports.  

Meta wants to raise $3bn of equity and a further $26bn of debt in what would be one of the largest private fundraisings of its kind.

It comes as tech groups compete to secure computing capacity for their resource-hungry AI models. 

Companies such as Meta and OpenAI are battling to build out and monetise their AI offerings.

Meanwhile, private credit groups have started to take on money from insurers and annuities providers, which need high-quality investments to satisfy regulators.

The result is that those private credit firms are eager to lend to blue-chip companies, and large-scale projects such as data centres are in their crosshairs.

Last year Apollo agreed an $11bn financing deal for Intel’s chip manufacturing plant in Ireland. 

More recently in May, Blue Owl agreed to help fund a $15bn data centre project for OpenAI.

Meta’s latest data centre deal comes as it ramps up AI spending and races to catch up with rivals.

What’s interesting about these deals is that the tech groups involved could easily have tapped more traditional sources of funding, such as the corporate bond market, as the FT’s Robert Armstrong points out.

But for groups like Meta, such private credit arrangements offer a unique opportunity: the deals are often structured to keep debt-like fundraisings off their balance sheets, avoiding an impact on leverage and ratings.

BP’s crown jewels 

For months BP’s future has been an open question.

The company has found itself at the centre of takeover speculation amid a slide in its share price.

Last week one potential BP suitor, Shell, quashed rumours of a takeover bid for its rival energy major by categorically denying talks or any intention of pursuing a deal.

Under UK takeover regulations, Shell is now prevented from approaching BP for at least six months except in certain circumstances.

While the chatter is unlikely to dissipate as BP remains under pressure, one potential obstacle to a takeover is that few competitors would really want to purchase all of the company, the FT’s energy team has reported. 

Instead, rivals are tempted by a few of the group’s crown jewels, including its deepwater oil operations in the Gulf of Mexico, its US shale arm BPX, its oil and gas businesses in Abu Dhabi and Azerbaijan, and the company’s liquefied natural gas assets. BP’s lubricants business Castrol is also up for sale. 

BP’s chief executive, Murray Auchincloss, has tried to ringfence what he sees as the group’s core assets. The question is whether the company will now be forced to go further than Auchincloss wishes, especially with activist investor Elliott Management lurking in the background

While BP is navigating various external factors, it also must find a replacement to chair its board. 

Sam Laidlaw, former chief executive of British Gas owner Centrica, told associates he withdrew from the chair selection process as he thought BP would either be sold to a rival or would require painful restructuring, the FT revealed last week.

Ken MacKenzie, former chair of the mining company BHP, has also been approached, but a person close to him confirmed he wasn’t seeking a role. Former Anglo American CEO Mark Cutifani also said he had no interest. 

BP has said its chair search was “moving at pace”. The company’s next leader will face a lengthy to-do list. 

Job moves

• Boeing has named Jesus “Jay” Malave as its new finance chief, replacing Brian West. Malave most recently served as CFO at Lockheed Martin and will join Boeing in August.

• The American Investment Council has named Will Dunham as its new president and chief executive. He was most recently executive vice-president of government affairs at the AIC.

• Moelis & Company has appointed Mark Milano as a managing director in London, where he will focus on business and industrial services in the Emea region. He joins from HSBC, where he led Emea business services coverage.

• Olympus Housing Capital, an Apollo Global Management affiliate focused on homebuilder financing, has launched with Andrew Brausa as chief executive. Brausa founded and managed Brookfield’s land financing strategies.

• Proskauer has appointed Sarah Stasny as a partner and head of private equity transactions. She joins from Paul Weiss, where she was a partner. 

Smart reads

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News round-up

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Bupa fined $23mn in Australia after ‘unconscionable conduct’ (FT)

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