The Vulture’s Descent: Private Equity in the Crosshairs

To kick things off: Negotiations are ongoing for Amazon to acquire the satellite telecommunications conglomerate, Globalstar. This transaction would bolster the e-commerce titan’s endeavor to establish its proprietary low Earth orbit satellite venture.

Another development: A record quantity of mega-transactions were finalized during the initial quarter of the year. Corporations disregarded the conflict in the Middle East and a significant reshuffle in the software industry, driving mergers and acquisitions to a global total of $1.2 trillion.

In today’s dispatch:

The prospects brighten for distressed credit market specialists

Andrew Milgram was accustomed to the isolation that stemmed from his skepticism during the golden age of private credit. 

Let’s recall 2023: the investor focused on distressed debt was positioned on stage at the opulent Milken Conference in Beverly Hills, an annual gathering for the financial elite to deliberate on an industry that had expanded with astonishing rapidity.

Milgram was convinced that credit vetting had grown lax and that loans were generally overvalued, leaving the asset category perilously exposed should the economy falter.

The investor served as the event’s designated dissident, a source of irritation for his fellow panellists. Three years onward, Milgram senses a kinship with Cassandra.

Private credit has emerged as a primary concern for Wall Street this year. Multiple funds, managed by entities such as Blue Owl, Blackstone, Ares, Apollo, and BlackRock, have confronted billions of dollars in withdrawals amid inquiries regarding their exposure to software enterprises at risk of being displaced by AI.

This is precisely where investors specializing in distressed debt step in. Should the relentless bull market lose its impetus, it could potentially forge a once-in-a-generation prospect for these funds to employ their expertise.

Milgram, the founder of Greenwich-based Marblegate Asset Management, asserted: “An increasing number of individuals will align with our perspective as they grasp what we recognized three years ago: this isn’t merely about a handful of problematic loans, but rather the systemic misrepresentation of lending benchmarks and asset caliber.”

“We are presently in the market, raising a fresh fund, because this represents the most significant opportunity I’ve ever encountered in my lifetime,” he continued. “I could not have imagined such fortune.”

Fortunes amassed during periods of corporate hardship are the substance of Wall Street lore.

David Tepper’s hedge fund, Appaloosa, famously accumulated approximately $7 billion during the financial downturn by acquiring undervalued bonds and equities of struggling banks, wagering that the US government would refrain from nationalizing private entities.

Davidson Kempner and King Street traded bankruptcy assertions following the collapse of Lehman Brothers, with the former generating $3 billion from the banking failure. 

More recently, Oaktree Capital Management, Silver Point, and Farallon purchased secondary claims in the failed crypto exchange FTX, realizing substantial gains when digital assets were located and liquidated.

These investors specialize in acquiring troubled assets at advantageous prices, and many have identified a downturn in private credit as their prime prospect since the financial crisis.

These funds typically invest in companies possessing weak balance sheets but viable core operations, and they have largely been sidelined for a decade as markets surged.

Now, some among them believe their moment has finally arrived. According to Victor Khosla, founder of Strategic Value Partners, which manages $22 billion in assets, it represents the “largest opportunity since 2008.”

Wall Street has been sounding alarms regarding private credit for the past half-year.

Yet, within one segment of the expanding industry, the festivities continue unabated.

Apollo on Wednesday finalized a $14.2 billion agreement to divest its joint venture with Intel, a move that has investors applauding.

The sale of the 49 percent stake in an Irish semiconductor facility back to Intel is projected to yield a low to mid-teens internal rate of return on Apollo’s investment, which was made just two years prior, sources privy to the matter informed the FT.

It will also facilitate the repayment of billions of dollars in debt held across Wall Street. That debt, which found its way onto the balance sheets of insurance providers (including Apollo’s Athene) as well as into an emerging exchange-traded fund offered by State Street, has come to symbolize Wall Street’s fresh gravitational hub.

Unlike the mid-market loans funding private equity buyouts that have Wall Street in a state of agitation, Apollo’s Intel arrangement fell under the industry term of private investment-grade debt.

The transaction relied on intricate structuring (meaning: a lengthy legal document) which ensured Intel’s accountants did not categorize the $11.2 billion infusion as debt. Doing so would have inflated its balance sheet with costly liabilities and negatively impacted its credit rating.

Concurrently, Apollo succeeded in securing investment-grade debt ratings for a substantial portion of the financing, rendering it an attractive investment for the numerous insurers with whom it collaborates.

It was a form of financial alchemy that triggered a rush by Apollo’s principal competitors, including KKR and Blackstone, as they hastened to replicate such dealings.

Apollo will now be tasked with identifying a means to substitute the Intel debt once it is redeemed. In the current market, that is a fortunate predicament.

Chief executive Marc Rowan has established an ambitious objective for the company: to generate $275 billion in deal flow annually, transactions that will contribute significantly to filling the void left by Intel.

The ‘Ari Emanuel’ of Major Legal Practices

Few Kirkland & Ellis rainmakers are willing to relinquish such a coveted and profitable position. However, in 2021, Jon Henes, who oversaw significant Chapter 11 bankruptcies, departed the firm with grander aspirations.

He established his own enterprise, C Street Advisory Group, which aimed to become a prominent player in corporate boardrooms.

Five years later, Henes has made a substantial comeback in the realm of corporate restructurings and financial distress, as reported by DD’s Sujeet Indap and Amelia Pollard.

His C Street Advisory is now less involved on the CEO advisory front after a high-profile DEI consulting initiative quickly lost momentum. The firm initially transitioned into communications for bankrupt and distressed companies, competing with entities like Joele Frank and FTI Consulting. 

Most notably, Henes has emerged as an influential behind-the-scenes figure in the legal sector’s talent competition. In his most significant achievement, Henes helped facilitate David Nemecek — his former colleague at Kirkland — joining rival Simpson Thacher & Bartlett earlier this year.

Several major legal practices have Henes undertaking management consulting-style assessments

on their professional activities, and assisting them in identifying and securing legal counsel, with some attorneys commanding remuneration packages of $10 million and $20 million.

An elated client dubbed Henes the “Ari Emanuel” of the legal behemoths due to his adept negotiations and transactions, a role that, it must be conceded, appears more engaging than merely being an ordinary mid-career attorney.

Professional Transitions

• An insider informed DD that the specialized investment firm Ardea has brought on board Chris Deville as a partner, concentrating on the insurance sector. His prior employment was with Fenchurch Advisory Partners.

• Morgan Stanley plans to appoint former German finance minister Jörg Kukies to lead its operations in Germany and Austria.

• Linklaters has chosen 37 new partners across various offices such as London, New York, and Hong Kong. This cohort comprises five legal professionals in the firm’s banking division and an equal number in its capital markets division.

• McDermott Will & Schulte has brought in William Kloos as a partner specializing in transactions and Gregg Galardi to co-lead its restructuring department, both based in New York. Kloos returns to the firm after a stint at Cerberus, while Galardi arrives from Ropes & Gray.

• Ángel Escribano, who presided over Spain’s burgeoning defense powerhouse Indra, has resigned following disagreements with the appointing government concerning a proposed takeover connected to his sibling.

Insightful Articles

Counter-conventional approach While competitors chased rapid asset expansion, Oaktree Capital maintained a comparatively more modest size and emphasized the primacy of investment yields. The sagacity of this choice is currently being scrutinized as the private credit market faces pressure, as articulated by Sujeet Indap in FT Opinion.

Dormant production facilities With the US’s electric vehicle initiatives experiencing difficulties, manufacturing plants constructed nationwide for producing components stand vacant, according to the Wall Street Journal. The subsequent developments remain uncertain, given the current fluidity in the trajectory of American automobile production.

Evolving preferences OpenAI is losing some of its allure, Bloomberg indicates, as investors in the secondary market show a preference for acquiring equity in its more affordable, rapidly expanding competitor, Anthropic.

Current Events Summary

SpaceX’s submission initiates the most substantial IPO procedure ever recorded (FT)

OpenAI secures $3 billion from individual investors, contributing to an unprecedented capital influx (FT)

Coffee retailer Blank Street engaged in discussions to procure over $100 million in new capital (FT)

Air carriers face severe difficulties as conflict in Iran impacts aviation fuel provisions (FT)

Chelsea FC declares its largest Premier League deficit to date (FT)

Eli Lilly obtains US endorsement for its anti-obesity medication (FT)