Elliott and Carlyle’s multibillion-dollar brawl

One scoop to start: UK fintech Revolut is targeting a valuation exceeding $40bn in a share sale that would cement its status as Europe’s most valuable start-up, according to three people with knowledge of the plans.

And Will Lewis’s ties to the PR firm bearing his initials: Washington Post publisher Will Lewis is facing a PR crisis. It’s the sort of problem that he has, until recently, tried to solve for clients with his communications firm WJL Partners, named for his initials.

In today’s newsletter:

• Elliott and Carlyle’s brewing fight

• Private equity firm 3i’s big windfall

• Bermuda’s financial regulator cracks down

Elliott challenges a troubled Carlyle buyout 

Paul Singer’s much-feared hedge fund Elliott Management is challenging a $7bn deal engineered by private equity giant Carlyle Group to salvage one of its largest and longest-running investments.

The brewing fight involves Veritas Holdings, a software business Carlyle carved out of cyber security company Symantec in 2016. Ordinarily, Carlyle would have sold Veritas long ago, but the investment is now part of a record $3.2tn stockpile in ageing deals across the industry that face a treacherous future.

Carlyle’s 2013 vintage buyout fund, which acquired Veritas, doesn’t have enough cash to help refinance more than $4bn in debt maturing in 2025. So the buyout group found an elegant solution earlier this year when it struck a deal to combine Veritas’s core business with artificial intelligence software company Cohesity in a $7bn merger that gives the investment added runway. 

But Elliott has thrown a wrench in Carlyle’s plans, report DD’s Sujeet Indap and Antoine Gara.

Late on Monday, Veritas filed details of talks that revealed an impasse with an Elliott-led group of creditors in the negotiation of a multi-step debt repayment and exchange offer it says will pay off the debt approaching 100 cents on the dollar.

The combined Cohesity is set to raise $3.2bn in new debt and send $2.5bn back to Veritas. Creditors of Veritas are then to receive 56 cents on the dollar in cash. The remaining creditor pay-off is to come in the form of fresh debt issued by the remaining business of Veritas. That debt is secured, in part, by Veritas’s portion of the equity in Cohesity.

But Elliott, which built its investment when Veritas was trading around distressed prices, has disputed the value of the package that Veritas offered, said people familiar with the hedge fund’s thinking.

A person close to the Veritas camp described Elliott’s brinkmanship (a little hyperbolically) as “terrorism 101”, and said the deal was a “huge net positive for everybody involved”. 

The dust-up is symptomatic of broader issues in private equity that are now percolating. 

PE firms are sitting on ageing investments made when money was free, which now hold questionable worth. Cash-starved PE fund investors are loath to throw more money at old deals, leaving groups such as Carlyle to engineer increasingly complex salvage efforts.

Carlyle feels it conjured a winning merger of Veritas and Cohesity, whose backers include SoftBank, Sequoia Capital and Brian Sheth, a billionaire technology investor. But Elliott’s challenge threatens to scupper the whole deal.

Other Veritas creditors include BlackRock, Pimco, Canyon Partners and Silver Rock Financial, an investment firm funded by Michael Milken. Carlyle has expressed optimism that some of these players can help bridge the chasm between Elliott and the company.

Elliott and several of its allies, however, have formed a “co-operation agreement” that binds this group to collectively adopt a unified posture against Veritas and Carlyle.

“Someone involved is frankly overplaying their hand,” said one adviser in the middle of the stand-off.

Private equity firm 3i’s ‘massive ride’ on a Dutch retailer

3i’s acquisition of Action might be Europe’s most successful leveraged buyout ever, with the British private equity firm now set to receive a nearly €1.1bn debt-fuelled windfall from the discount retailer.

When 3i was founded in 1945 by the Bank of England and the largest British banks, it existed to provide long-term funding to businesses devastated by the second world war.

But almost 80 years later, it’s veered far away from those origins. 

Now, more than 60 per cent of its portfolio is made up by Dutch discount retailer Action, which sells a mix of homewares, long-shelf-life groceries and seasonal products. And it’s paying exceptionally well.

Last week, Action began marketing a whopping €2bn share buyback, made up of term loans and spare cash. The debt-funded payday, otherwise known as a dividend recapitalisation, is one of the biggest this year. 

“There are 50 Ferraris full of petrol in the West End thanks to this one transaction,” said one credit fund manager. “It’s not like it’s a dirty secret. The business has been a massive ride [for 3i]. It’s been a continuous dividend recap story.”

3i has been a huge beneficiary of the Dutch retailer’s success. It has returned £2.9bn to the private equity firm since it paid just €130mn for a controlling stake in 2011.

Now, the value of its direct stake comes in at more than £14bn. Add on stakes it manages on behalf of third-party investors, and the firm controls 85 per cent of the retailer.

3i’s enjoying just a slice of a market filled with dividend recaps right now.

So far this year, some $36bn-equivalent of loans have been raised for dividend recaps in Europe and the US, according to data from PitchBook LCD.

To put that in perspective: that matches the record rate of issuance hit over the same period in 2013.

Bermuda financial regulator’s reinsurance crackdown

Bermuda has been a happy hunting ground for US dealmakers in recent years, as insurers offloaded hundreds of billions of dollars in insurance liabilities to firms in the British overseas territory known for its white roofs and vibrant reinsurance sector.

But recent events at one Hamilton-based reinsurer, 777 Re, have thrown a spoke in the wheel.

The reinsurer at the heart of Josh Wander’s Miami investment firm 777 Partners’ funding strategy ran into problems with its regulator, rating agency and insurance partners after driving up its exposure to assets affiliated with its private-equity backer.

Bermuda’s financial regulator the Bermuda Monetary Authority, lauded by local and overseas firms for its flexibility on investments and new innovations, is now cracking down on affiliated assets at other local reinsurers, the FT’s Ian Smith reports.

“It’s kind of a swing of the pendulum,” said one Bermuda veteran of the BMA’s probe, as the regulator tries to ferret out any other problematic arrangements.

One banker, speaking privately, said the tightening and other changes to insurer rules were part of a sustained effort by the BMA to eliminate any gaming of its regulatory approach by overseas groups.

Meanwhile, Bermuda itself has come under increasing scrutiny.

Global regulators have started to keep an eye out for private capital-backed life insurers that are taking outsized liquidity risks and leaning on less tightly regulated jurisdictions.

The challenge for some others will be how far the regulator can now be convinced that their affiliated investments — properly collateralised and with legitimate counterparties — provide a decent match for their promises to policyholders.

But the BMA suggests that will be an “extremely challenging” case to make.

Job moves

• Citigroup has appointed Ignacio (Nacho) Gutiérrez-Orrantia as chief executive of Citibank Europe plc and vice-chair and member of the supervisory board of Citi Handlowy. He was most recently co-head of the bank’s Emea capital markets and advisory business.

• MKP Advisors has hired Thomas Nienaber to its leadership team to expand the firm’s event-driven research. He most recently worked at Arrowgrass, and previously worked in M&A advisory at Lehman Brothers. 

• Crescent Capital Group has promoted Christopher Wright to president. He previously worked as managing director and head of private credit. In addition, the firm has named COO Joseph Viola and Crescent Capital BDC chief executive Jason Breaux to the operating committee.

Smart reads

Wrong turn Hertz’s private equity owners initially made a killing after buying the company out of bankruptcy. But troubles are mounting — and the situation could be costly to fix, Lex writes.

Training ground Top hedge funds such as Citadel and Point 72 have developed in-house training programmes to churn out homegrown, superstar traders, Bloomberg writes.

Court scandal One bankruptcy judge helped make Houston the busiest court in the country. But he had a big conflict of interest he didn’t disclose. The Wall Street Journal investigates.

News round-up

Everton enters exclusive sale talks with billionaire Friedkin family (FT)

NatWest to buy most of Sainsbury’s Bank (FT)

Boyd Gaming makes acquisition approach to Penn Entertainment (Reuters)

KPMG to cut further 200 UK jobs amid market slowdown (FT)

TikTok argues US disregarded national security plans before ban (Bloomberg)

Tate & Lyle says $1.8bn ingredients deal will help boost health of products (FT)

US Supreme Court sidesteps wealth tax question in closely watched case (FT)