It just don’t stop do it?
I feel like a fraud… My name is not even actually Ashton. Ashton is my middle name.Ashton Kutcher
On the 24th of July 2020, the FT ran one of their signature Lunch with the FT pieces where https://twitter.com/harrietagnew sat down with Jim Chanos, for a new-normal lockdown lunch. She was at Oswald’s whilst Chanos joined from Prime 112 steakhouse via video. Check it out if you have the time https://www.ft.com/content/ccb46309-bba4-4fb7-b3fa-ecb17ea0e9cf . The Wirecard scandal had just broken and Chanos had made out like a bandit. His contention is that “We’re in the Golden Age of Fraud“. It made for an interesting read, especially after Wirecard, Luckin Coffee and a number of other “champions” fell over in the subsequent months. Of course, everybody blamed COVID initially but really, when the dust settled those names were up to no good.
A couple of months back, the Greensill drama had just come to centre stage and the world (including us) thought it was the usual old story of misaligned incentives (hence the need for an iHuddle type platform – shameless self plug alert!). We had thought that all the parties involved were just trying to push product to get paid, the investor be damned and had messed up good, old-fashioned underwriting discipline.
The last few months have been sobering. There have been allegations of circular trading (i.e. millions of pounds of steel, sold to third-party buisnesses run by people known internally as “friends of Sanjeev”, creating an invoice that Greensill would lend millions against, with GFG buying the steel back), allegations of fictional invoices (https://www.ft.com/content/e450c8f9-29fa-432b-98fd-5885edb4680f), allegations by banks of inaccurate bills of lading (https://www.mining.com/web/as-sanjeev-gupta-rose-from-trader-to-tycoon-several-banks-backed-away/) and self financing by UK banks owned by the Gupta family. This Saturday, the Serious Fraud Office has opened an investigation into the GFG Alliance (https://www.bloomberg.com/news/articles/2021-05-14/u-k-fraud-prosecutor-opens-investigation-into-gfg?sref=dg6kE46V). This saga now has repurcussions for the taxpayer and has become a big deal.
None of this is good news for the private credit industry or for smaller, newer companies trying to raise capital. As always, the good guys i.e. the guys who play by the rules, have to suffer as a consequence of some rotten apples. There is no schaudenfreude here, just a genuine worry for the real economy and for Main Street. Britian didn’t need this. COVID and Brexit are bad enough when it comes to liquidity and equity providers freezing the UK mid-market, worry about fraud could be the death knell.
We need to invest in UK businesses. We need to make the real economy work for all our sakes. Always invest with and in people you trust and those who have skin-in-the-game. Remember, if it looks too good to be true, it probably is.
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Bring us your ideas, bring us your deals – we’ll collate them for you, be your trustees and make sure that you can even on-sell your own exposure to other co-investors frictionless and hassle-free.
Walk with giants!
In the last decade, venture capital has finally become large enough as an asset class to drive demand for liquidity.
That sounds like an incredibly boring way to begin a blog post but it’s surprisingly important, which is why we’ve decided to spend a bit of time this week talking about it. This one is all about secondaries in venture capital funds and how it’s a prime asset class for smaller investors.
A lot of funds (whether they are private equity funds, credit funds or venture capital funds) are set up as limited partnerships. This is mostly done for tax reasons. A partnership is tax transparent which means that the fund does not have to worry about how to treat distributions made to its investors. The investors are paid gross and the onus is on them to declare tax in the appropriate way in their jurisdiction. It allows funds to market their strategies to a number of investors in different parts of the world. The investors are called limited partners or LPs.
In more traditional asset classes like private equity and private credit, a pretty strong secondary market exists. Large funds allow their LPs to sell the interests to other investors (subject to minimum size constraints). This is a pretty key distinction – new investors are not buying a stake in a specific asset. No, no – they are buying a stake in a fund from an existing investor. Typically, this is done for 2 reasons
The sale of an LP interest is a market transaction. The incoming investor is willing to pay a certain amount, the exiting investor needs a certain amount of cash and the two agree terms. Really, its just a super sophisticated marketplace
Now there’s a new asset class out there entering the secondaries space (Huzzah! Happy New Asset Class everybody!!) in a meaningful way – venture capital funds!
Purchasing LP stakes in a venture capital fund used to be uncommon for a number of reasons:
So why is this important and why are we banging on about it. The answer is simple – SIZE
Look, in theory iHuddle works well for secondary stakes in private equity, credit and property funds as well. But, those sizes are still quite large. An existing LP may want to sell $10 million of their stake in the secondary market and ten iHuddle members can, in theory, put in $1 million cash each to buy this stake via iHuddle. But it’s still $1 million per person! That is a LOT of money for Regular Joes (in fact, let’s just agree that if you can sink $1 million on an investment, you’re well on your way to becoming an Irregular Joe). Sure, you could in theory find 100 friends to put in $100k each but how practical is that?
Venture capital funds are different. You have a number of funds from those with total assets under management (“AUM”) under $1 million to those like General Atlantic (the largest VC fund at $31 billion AUM). But that is still small compared to credit and private equity funds. The big boys in those categories are well into the hundreds of billions (which is kind of ridiculous when you think about it).
Most VC funds are well under $1 billion in terms of AUM. The LPs in those funds are very happy selling secondary stakes for $1 million or under. Now all of a sudden it suddenly becomes a game the little guys can play in. We can finally compete with the big boys!
It’s suddenly possible to get 5 – 10 friends and cobble together $500k in a trust and buy a secondary stake in a VC fund that gives you diversified exposure to the next Uber, Deliveroo, Revolut and Seedlegals. That could make all the difference to that college fund for your kids.
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Bring us your ideas, bring us your deals – we’ll collate them for you, manage the trust and make sure that you can even on-trade your own exposure to the LP in the venture capital funds you’ve invested in.
Another darling bites the dust
A lot has been made about the reasons behind the collapse of Greensill: the withdrawal of trade credit insurance by Bond & Credit, too much exposure to the GFG Alliance, allegations of all sorts around loans made to key decision makers and influencers, risk committees at Credit Suisse being overruled and so on and so forth. The best places to find a concise summary of articles remain the usual suspects i.e.
Robert Smith and his colleagues at the FT https://www.ft.com/stream/1b922032-dfbe-4026-acf0-cc26be850f32
The entire team at Bloomberg https://www.bloomberg.com/search?query=greensill&sref=dg6kE46V
However, a surprisingly positive side effect of this whole saga was the discovery of this incredibly well researched website and blog. These guys really do their homework and we suggest that you check them out:
At the end of the day, it all comes down to the oldest lesson in the book. Make sure you only lend money to, and invest in, somebody who has “skin in the game” and a lot to lose.
Greensill went over its concentration limits because it could – after all, it was other people’s money! Lex has made his millions. Something tells me that notwithstanding the winding down of his precious paper unicorn, we aren’t going to see him at the local food bank.
It is estimated that he still owns over $150 million of property. You may have lost your money but be assured that he is going to grieve on your behalf at one of his many houses as he chases summer around the globe like a migrating bird.
Sanjeev Gupta borrowed other people’s money from Greensill and went on a wild shopping spree, overpaying for demonstrably underperforming assets in the hope that the sum of parts would magically be greater than the whole. Even if it didn’t work (and it now hasn’t), he allegedly has enough salted away – the £4.5 million estate in Chepstow, the A$38 million Potts Point mansion and the recently purchased £38 million house in Belgrave Square.
Even Credit Suisse played along. After all, allocating $10 billion of other peoples’ money into this merry-go-round whilst introducers allegedly got £12 million success fees window-dressed as loans (an absolutely amazing piece of investigative work by the superstars at behindthebalancesheet.com), risk managers got overruled and senior managers got great bonuses for creating an “innovative” product for their patsies…. oops! I mean key investors and very important clients – sorry, sorry! (On a serious note, it amazes us how private banks continue to get away with it).
Softbank put in $1.5 billion because…. you get the point. Take other people’s money – gamble it away and who knows, if the ball lands on the Straight then you get a 35:1 payout, take your performance fee and buy your G5. If it doesn’t land (and most times it won’t), no worries – no performance fee for you but you still get your management fee and that will help with the ski chalet in Verbier, thank you very much.
People continue to use your money to get rich and have nothing to lose when their gambles don’t work out.
Invest in someone you know, invest in someone you trust – at least you know they’ll give it everything and will fight tooth and nail to get the money back. And now, you can do it while having a frictionless secondary market. We’re working on getting you the liquidity (hey we just started!) but at least the possibility exists and as our platform grows, your liquidity will increase!
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Tokenization-schmokenisation! Digitse – widgetize!…. What are we really on about?
There was a very interesting piece on Coinbase by the ever incomparable, always cerebral, forever insightful Frances Coppola last year. It addressed the real world issues around digital coins, tokenising assets and the actual custody of the underlying assets. For those who are interested, the link can be found here:
We agree with her on the general principle behind her column. The sad truth is that we, the founders of iHuddle, are no longer young and starry eyed and have been around the block for a while. Ergo, our hunger to make the world of asset management and disintermediated investment a “real” thing, is tempered by experience over the last two decades that shows that
This is why people invest their savings in regulated asset or investment managers. Apart from track record (we’re all humans and would rather invest with somebody who has won more than he or she has lost), we’re all hoping that a national regulator has done the needful to weed out the fraudsters, tricksters, hucksters and liars.
Not that it always works – BaFin really dropped the ball on Wirecard.
You don’t even need to be a “bad guy” who wants to steal other peoples’ money. You could just be a really good guy, suffering from insane amounts of hubris because you benefited from the low rate bull cycle and thought you were untouchable. In common parlance this is referred to as “Who cares what the fund prospectus says eh? I know better!” akay the Woodford Syndrome.
Talk about chutzpah!
So… where do we come in?
If you’re a little guy, and you can’t meet the minimum ticket size to invest in Apollo Fund V (or even if you did and you just don’t want them skimming mad fees off the top), chances are you’re going to invest in a private club deal. You’ll have somebody in your circle who needs cash in some form or another, who you or your network knows, who is trustworthy, can’t run away. Provided that you are comfortable with the risk (and not some graduate at a banking desk), your personal syndicate is going to advance the funds. So far, so good. But!
That’s where we come in:
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