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How investing in private equity is like ‘walking into a jungle’


One deal to start: FTSE 100 asset manager Abrdn is finalising a deal to buy Interactive Investor, the UK’s second-largest fund supermarket, for £1.5bn, in a bid to deepen its direct-to-consumer business. It would mark the most eye-catching move yet by Abrdn chief executive Stephen Bird, and would override Interactive Investor’s plans for an initial public offering.

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But Where Are the Customers’ Yachts?

But Where Are the Customers’ Yachts? asked Fred Schwed in his seminal 1955 book. In the title anecdote, a visitor to New York admires the yachts of the bankers and brokers, and then wonders aloud where all the customers’ yachts were. Of course, there were none. The premise of the book — and a perennial frustration of investors — is that there is far more money in providing financial advice than there is in receiving financial advice.

A current iteration of this is playing out in the private equity industry. My colleague Chris Flood has a must-read report on how private equity managers are exploiting opaque fees and expenses to boost their own profits. Think making investors foot the bill for everything from private jets to cyber security services, on top of the already rather expensive “two and 20” fees, and you are on the right track.

This alignment of interests between unsuspecting investors and the private equity managers who heap expenses on to them at their own discretion is “completely crooked”, says Ludovic Phalippou, a professor of finance at Oxford university’s Saïd Business School.

As the private equity industry surges to new highs (don’t miss Mark Vandevelde’s deep dive on how private equity came to resemble the sprawling empires it once broke up) and these strategies are moving further into the investing mainstream, regulators are finally taking note. Gary Gensler, chair of the Securities and Exchange Commission, is among those to call for reforms to enhance fee disclosures by private funds.

But for now, old habits die hard. “At the moment, investing in PE is like walking into a jungle,” says Phalippou. “All you can hope is that the lions will be friendly.”

Baillie Gifford’s Anderson: Don’t ‘give up on China’

“When the facts change, I change my mind. What do you do, madam?”

Winston Churchill’s words (sometimes also attributed to John Maynard Keynes) must have a certain resonance for foreign investors in China these days. Since the summer, the speed and scope of President Xi Jinping’s clampdown on sectors including education, tech and video games has left investors scratching their heads. Does this mean an end to the decades-long tech-driven China growth story? Are foreign investors still welcome?

In this opinion piece, Allianz economic adviser Mohamed El-Erian explores whether investors are facing a Yukos moment in China.

Meanwhile, I caught up with renowned China bull James Anderson, who runs Baillie Gifford’s £21.2bn Scottish Mortgage Investment Trust, to hear about what he’s thinking about China. Baillie Gifford followers will remember that Anderson backed food delivery app Meituan, TikTok owner ByteDance and ecommerce giant Alibaba when they were still private companies, and China is of growing importance for Scottish Mortgage. All of this to say that Anderson has a lot riding on China.

Baillie Gifford has “not felt any hostility, we have not felt any unwillingness on the part of the companies to talk to us directly, though of course not being able to be in China at the moment is a huge difficulty”, he says.

Anderson is sticking to his view that China presents a more compelling source of investment opportunities than Silicon Valley. “I don’t think it’s right to give up on China. I don’t think the golden goose has been killed off at all . . . from the point of view of building companies.”

Read the full interview here, including a rare mea culpa on why “we should have seen more of this coming than we did”.

Meanwhile, an unexpected item in the third-quarter results of Amundi last week illustrated the risks to asset managers of doing business in China. Europe’s largest asset manager said it was hit by a specific one-off outflow of €11.6bn from a joint venture with the Agricultural Bank of China after ABC decided to reallocate the money away from the joint venture and run it internally. This reflects how banks in China have been encouraged to finance more of the national economy and “reinternalise” their proprietary assets and cash flow.

Tom Mills, an analyst at Jefferies, sounded a note of caution for the early overseas movers into the world’s second-largest economy (take note: BlackRock, Goldman Sachs Asset Management, JPMorgan Asset Management).

“Joint ventures between Chinese banks and western asset managers have been growing very quickly and are starting to get more lucrative. This may result in a question of whether the local banks want to continue to give up part of the economics to their partner — or whether they want to go it alone. The risk over time is that the Chinese banks de-emphasise these partnerships.”

Chart of the week

Column chart of proportion of S&P 500 constituents (%) showing US companies are continuing to outperform expectations

An unexpectedly strong third-quarter earnings season has powered stock markets’ recent rally to record highs, insulating equity investors from the volatility that has rocked bond markets. Of the more than 400 companies in the S&P 500 that had reported their results by last Thursday, 81 per cent of them reported higher earnings than consensus estimates, according to FactSet data.

Nine unmissable asset management stories this week

The era of unlimited central bank largesse is drawing to a close, injecting volatility into bond markets. Laurence Fletcher and Kate Duguid report on how some big name hedge fund managers, including Chris Rokos and Crispin Odey are among those nursing big losses. It is spurred by a sudden reassessment of the manner in which central bankers will head for the exit.

The headline-grabbing promise made at the COP26 climate conference to commit $130tn to decarbonise the global economy presents a daunting task for regulators. Chris Flood explores how financial watchdogs across the world are sharpening their scrutiny of potential “greenwashing” in the investment industry on rising concerns capital is getting deployed based on misleading claims.

Tabby Kinder reports on another casualty from the blow-up of the Archegos Capital family office. Snow Lake Capital, a Hong Kong-based hedge fund that bought up Chinese stocks during the wind down of Archegos, is liquidating one of its two main funds after the resignation of both of its portfolio managers.

In this intriguing indication that the expanding size of Tesla has become a distortive force in financial markets, Robin Wigglesworth reports on how the stock market rally in Elon Musk’s electric car maker has helped inflict the worst month of performance on growth-focused US mutual funds in two decades.

Undeterred by the scandal at its London-based subsidiary H20 Asset Management, the boss of France’s Natixis is on the lookout for international asset managers to buy and could list its recently scandal-hit division to build firepower for a large purchase. “We are clearly the consolidators of this industry,” says chief executive Nicolas Namias, adding that “Asia is for sure an area for expansion”.

Another week, another mainstream asset manager pushing deeper into the fast-growing alternatives business. This time Franklin Templeton is buying private equity specialist Lexington Partners for $1.75bn.

Bad news for UK retirement savers: Josephine Cumbo reports on how millions of them will find themselves blocked from taking action to preserve access to their pensions at age 55 under a dramatic overnight move by the Treasury.

Villain or victim? Read this riveting report on the mysterious Austrian entrepreneur Cevdet Caner. He’s the property magnate in the midst of a fight with short-sellers who claim he is at the centre of “secretive, kleptocratic cabal”.

A question for our times. Brokerages such as Schwab, Robinhood and Fidelity have snared legions of day traders. But are their apps too easy to use? Madison Darbyshire explores how regulators are worried that confetti, emojis and other attention-grabbing artifices might be dangerous.

And finally

Lauren Cuthbertson as Giselle at the Royal Opera House in 2016
Lauren Cuthbertson as Giselle at the Royal Opera House in 2016 © Tristram Kenton/ROH

Prima ballerina Lauren Cuthbertson returns to the stage at the Royal Opera House after the pandemic to dance the title role in Giselle Peter Wright’s acclaimed production of the greatest of all Romantic ballets. Mesmerising.

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