The study that rattled the entire private equity industry

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Welcome to the Due Diligence briefing from the Financial Times. If this was forwarded to you, get DD delivered to your inbox here. Get in touch: Due.Diligence@FT.com

Private equity thinks its fees are perfectly justified

Nobody likes to be told they’re overpaid and that their work’s not that impressive.

Those are the charges laid at the door of the private equity industry in a report this week from Oxford university, provocatively titled “An Inconvenient Fact: Private Equity Returns & The Billionaire Factory”.

The report’s author Ludovic Phalippou says private equity funds have returned about the same as public markets since at least 2006, but generated about $230bn in performance fees for a small number of people.

He goes on to accuse the industry of a “wealth transfer from several hundred million pension scheme members to a few thousand people working in private equity” and to say it’s “difficult to see how the private equity model could add up given how costly it is”.

(Side note: the Harvard economist Josh Lerner also found private equity returns lagged behind stocks over the past decade, in this report from February.)

This is the kind of thing that really gets under private equity tycoons’ skin.

In an unusual move, Phalippou showed his academic study to Blackstone, KKR, Carlyle and Apollo and the lobby group the American Investment Council before he published it and invited their comments. They didn’t hold back.

Blackstone went as far as to write a 2,150-word statement accusing the academic of “a number of very serious statistical and conceptual errors”. There were sharp exchanges of words with the others, too.

You can read all of the to-ing and fro-ing in the paper here, and DD recommends you should, because it makes for a rigorous debate even if it’s tediously predictable in places.

And you can delve into the reams and reams of online commentary that the report has provoked, like the 300-plus comments on the story by the FT’s Chris Flood and a busy Reddit thread. In an era when nuance on social media often seems to be dead, some of the debate is pretty high quality.

Things get particularly contentious when it comes to the reasons why institutions choose to invest in the funds — a timely consideration since the US’s largest public pension scheme, Calpers, has just said it’ll move deeper into private equity, seeking to juice returns.

Phalippou’s take on the pension funds question: some institutions’ private equity specialists don’t complain about returns for fear of losing their jobs, and some trustees may lack financial literacy.

Blackstone is unimpressed. “We fundamentally disagree with your portrayal of public pension officials,” the private equity group writes. “These are exceptionally sophisticated investors.”

Germany sends message on CureVac

Germany is in the business of creating national champions — at least when it comes to coronavirus.

In a surprise announcement in Berlin, Angela Merkel’s administration said it would plough €300m into CureVac, one of a trio of biotech companies believed to be at the forefront of developing a Covid-19 vaccine.

The immunology method used by the Tübingen group — called mRNA — is as yet untested, but if successful, it could bring a vaccine to market quicker than traditional methods.

That’s what may have prompted Donald Trump to make an offer to the privately held company in March — an approach denied by management, but which provoked fury among senior ministers in Berlin.

On Monday, Merkel’s government hit back, taking a 23 per cent stake in CureVac, with economics minister Peter Altmaier emphasising that “Germany does not sell its silverware”.

The reason for the rushed announcement became apparent hours later. A letter from Germany’s finance ministry, seen by the FT, said CureVac was preparing for a listing on the Nasdaq in July, and that it feared the company, and its potential vaccine, would be poached by a foreign power.

Ultimately, however, CureVac’s decision to raise money it needs for an increase of vaccine production on the capital markets in New York may point to a larger problem for Berlin. Its “silverware” tends to need to look abroad when it needs a polish.

Read the full story from the FT’s Joe Miller and Clive Cookson.

Hertz: buyer beware

The last time we visited rental car company Hertz, things were getting a little out of hand.

Even though the company filed for bankruptcy on May 22 and its stock price was on a fast track to zero, there was no stopping retail investors from performing what can only be seen as a market miracle.

Less than two weeks after Hertz sought bankruptcy protection, its stock price shot up almost 900 per cent.

There were a lot of raised eyebrows and head scratching from pretty much everyone who wasn’t buying Hertz stock. Ultimately, we deemed it the work of day traders on the millennial-friendly Robinhood app. It was evident that we needed some adults in the room.

Well, don’t look to bankruptcy courts. In a move that was emblematic of the anthem “Don’t Stop Me Now” by Queen, Judge Mary Walrath of the US bankruptcy court in Delaware gave Hertz approval to sell up to $1bn of new shares to speculators.

As DD’s Sujeet Indap wrote on Friday, virtually all companies going through bankruptcy are forced to tap pricey loans to help them survive financial restructuring. It’s unheard of for a company to tap equity markets for this kind of funding because if Hertz can’t pay its creditors, its stock will be worthless. We’re still talking about a company that is $19bn in debt.

Then again, can you blame Hertz for seizing on the market madness? They can argue it’s not up to them to save inexperienced investors from themselves. If you can choose between issuing some new “potentially worthless” stock or taking out an expensive loan, it’s a no-brainer.

Over the weekend, bankers at Jefferies were busy getting documents ready for Hertz’s $500m share sale. Included in the regulatory filings are some pretty telling risk factors including this little nugget of information:

“Consequently, there is a significant risk that the holders of our common stock, including purchasers in this offering, will receive no recovery under the Chapter 11 cases and that our common stock will be worthless.”

To break that down for you: a bankruptcy judge has given permission to a bankrupt company to sell stock that the bankrupt company itself admits has “significant risk” of being “worthless” just because there are some day traders out there (guided by the don of day trading, David Portnoy) who think they can call the top without getting burnt. You love to see it. Go deeper with Lex.

Job moves

Simon Dingemans, who stepped down as chairman of the UK accounting watchdog in May after just eight months, has resurfaced at US private equity firm Carlyle Group as a managing director in charge of UK buyouts. More here.

Henrik Poulsen, chief executive of Orsted, has resigned after an eight-year stint in which he transformed the Danish utility into the world’s biggest offshore wind developer. More here.

Barclays has hired Georgi Balinov as its head of global technology payments banking. Balinov, who will be based in New York, joins from Bank of America.

Searchlight Capital Partners has hired former CVC Capital Partners director James Redmayne as a partner.

Robert Noel, the former chief executive of Land Securities, will succeed David Tyler as non-executive chair of Hammerson.

Smart reads

Benamor vs board How’s this for an unconventional boardroom battle? Amigo founder James Benamor is looking to depose the subprime lender’s entire board in a move that could change the fate of the business. (FT)

Homecoming At the heart of China’s ambitions to become technologically self-sufficient is a relatively unknown company called Semiconductor Manufacturing International Corporation. After delisting from the New York Stock Exchange in June, it is now preparing to return home for an offering on Shanghai’s new Star market. (FT)

Staying put The impact of coronavirus on the travel and tourism industry, where one in four of all new jobs were created over the past five years, is expected to have lingering effects on global growth. (FT)