Private credit’s ‘damage control’ moment

One ‘carried interest’ tax caveat to start: Shadow Chancellor Rachel Reeves has signalled that Labour would continue the UK’s favourable tax treatment of private equity executives in instances where fund managers put their own capital at risk.

In today’s newsletter:

• When a private credit deal goes sour  

• Deutsche Bank’s hiring spree for dealmakers

• UBS tries to mend the Greensill scandal

Vista deal tests private credit’s friendly ways

Private credit has a reputation for being chummy: lenders and private equity sponsors work together, hand-in-hand, on investments that famously don’t go sour.

But that vision is getting its first true test with a deal involving private equity firm Vista Equity Partners.

Vista’s buyout of education software business Pluralsight didn’t go exactly as planned. The private equity firm sent shockwaves through the private credit market in recent weeks when it decided to rearrange the business’s assets in order to access about $50mn for an interest payment.

It involved pushing Pluralsight’s intellectual property into a different entity, a move that weakened lenders’ collateral. While that sort of no-holds-barred behaviour is common in the syndicated loan market, it’s unheard of in private credit.

“The esprit de corps has been a little undermined,” said one adviser involved with the deal, referring to the culture of collegiality that had historically dominated the sector.

To make matters worse, the lenders involved are a who’s who of the industry: Ares Management, Blue Owl, Goldman Sachs Asset Management, Oaktree, BlackRock, Golub Capital and Franklin Templeton’s Benefit Street Partners.

Vista has tried to smooth things over with the group, with one person describing it as “damage control”.

On top of everyone supposedly being pals, private credit is supposed to have tighter loan documents than the syndicated loan market, specifically to avoid this kind of mischief. But this move by Vista has challenged that assumption.

“It’s all fun and games when they’re all making money together,” another person involved in the deal said. “But it’s a zero-sum game in every restructuring. That’s creating new sources of tension.”

The move is a symptom of larger problems plaguing buyout shops right now. The Federal Reserve’s interest rate rises over the past two years curbed valuations across the board, and made it harder for levered-up portfolio companies to keep up with debt payments.

“Sponsors will protect that risk because for them it’s a disaster . . . to go from a balance to a zero,” Jarrod Phillips, the chief financial officer of Ares, said at a conference earlier this month. “And that leaves them a large hole to dig out of.”

DD’s keeping an eye out for other private credit deals out there that might be curdling.

Deutsche Bank goes on a hiring spree for dealmakers

Over the past 18 months, Germany’s biggest lender has been bringing in hundreds of investment bankers — partly through hires and also via its takeover of UK brokerage Numis — in a bid to build out its dealmaking expertise.

The move is reminiscent of Deutsche’s acquisitions of Morgan Grenfell and Bankers Trust, which led it to becoming a top-tier investment bank in the 1990s.

It’s also a stark reversal of the pressure the bank has been under since the global financial crisis, as it looked to reduce costs and cut risk.

The drive aims to offer an alternative revenue source to bond trading, Deutsche’s speciality, which can be volatile and capital intensive.

But unlike previous expansions, Deutsche is not focused on market dominance in investment banking.

“We’re not looking to go back to being a top-five bank globally, across all the bulge bracket firms,” Fabrizio Campelli, head of Deutsche’s corporate and investment bank, told the FT’s Owen Walker and Olaf Storbeck.

“This is more about choosing our spots strategically and winning in those,” he said.

Among the bank’s key hires over the past year-and-a-half are Alison Harding-Jones, who joined from Citigroup as global head of M&A; former Lazard banker Ken Oliver Fritz, who’s now vice-chair in Emea of origination and advisory; and William Mansfield, who is head of M&A for Emea and was previously at Credit Suisse.

UBS tries to mop up Credit Suisse’s Greensill mess

When UBS took over its rival Credit Suisse in a shotgun marriage arranged by regulators last year, it’s fair to say the Swiss bank came with a fair amount of baggage.

A big issue was the legacy of the Greensill Capital scandal, in which Credit Suisse stuck $10bn of its clients’ money into funds linked to a dubious lending start-up that went bust in March 2021.

With only $7bn of client funds recouped and the process of chasing down delinquent borrowers predicted to take years, UBS on Monday announced it’s now offering to pay affected clients amounts equivalent to 90 per cent of the funds they invested.

The move to draw a line under the mess means Switzerland’s biggest bank will take a $900mn provision in the second quarter.

If you’re wondering why UBS is so willing to compensate clients over the affair, it’s worth remembering the investors in these funds were not everyday mom-and-pops.

Credit Suisse shepherded its most-prized private banking clients — such as Qatari royal Sheikh Hamad bin Jassim al-Thani — into the so-called supply chain finance funds, which it marketed as a safe alternative to cash.

From this perspective, $900mn can be seen as a small price to pay to restore some of the goodwill that Credit Suisse destroyed with its most important clients in its dying days.

Job moves

• Kingfisher has hired Bhavesh Mistry as chief financial officer, succeeding Bernard Bot, who plans to retire. Mistry is currently the CFO of British Land, and previously worked for Tesco.

• Milbank has hired James Weingarten as a partner in the firm’s antitrust and competition group. He most recently worked as chief trial counsel for the Federal Trade Commission’s bureau of competition.

• FGS Global has hired Mark Harris as chief financial and operating officer. He previously worked for headhunter Heidrick & Struggles.

• Cooley has hired Jaclyn Rabin as fund formation partner in New York. She was previously a partner at Kirkland & Ellis, and most recently founded New Austin Venture Advisory.

Smart reads

Banker upset Junior staffers are feeling the burden of rising workloads amid intense competition, DD’s Sujeet Indap writes. Their managers are also feeling the pressure.

‘Insane’ pay “Magic circle” firms are now offering junior lawyers £150,000 to compete with US rivals, the FT writes. Will that bumper pay impact their wellbeing?

Credit card mess Wells Fargo partnered with a start-up to launch a credit card with a perk that sounded too good to be true. It’s costing the bank millions, the Wall Street Journal reports.

News round-up

Russian billionaire Alisher Usmanov sues UBS over German probe (FT)

Nigel Farage’s Reform pledges £88bn in ‘radical’ tax cuts (FT)

Billionaire under sanctions could get $300mn in controversial US-Congo deal (FT)

Citigroup facing new regulatory knock on its living will (WSJ)

Italian shipbuilder Fincantieri chair Claudio Graziano found dead (FT)

German union unleashes battle over pay by demanding 7% wage rise (FT)