Rishi Sunak loves Blackstone

One scoop to start: Brookfield Asset Management is in advanced talks to buy a majority stake in $22bn private credit manager Castlelake as the world’s second-largest alternatives group uses acquisitions to push further into lending and debt investments that are benefiting from higher interest rates.

In today’s newsletter:

• Sunak and Blackstone

• KKR tries to be more like Berkshire

• Accounting retirees revolt

It’s all love between Sunak and Blackstone

Rishi Sunak was all smiles. It was February, and the UK prime minister was posing for photos beside Blackstone founder Stephen Schwarzman at a groundbreaking ceremony for the private equity giant’s new European headquarters in London.

“Where’s my office?” Sunak quipped, shovel in hand as he pointed to a model of the planned 10-storey development. He was kidding, but some who heard the remark thought it hinted that he was starting to think about his future after this year’s general election, which his Conservative party is expected to lose. (Downing Street denies this.)

The battered British economy needs private investment badly. Blackstone turned up at just the right time. The group has ploughed more than £70bn of investments into the UK, buying everything from banal assets including caravan parks and warehouses, to icons such as the London Eye.

Despite the much-needed investments, the relationship hasn’t always been smooth, with Blackstone at one point imposing big rent increases for railway arches occupied by small businesses.

Still, there’s a lot of love, reports the FT.

At the groundbreaking, which took place the day after Valentine’s Day, Schwarzman was pictured wearing a hard hat emblazoned with a blunt message: “BX <3 London”.

The path from Downing Street into business is not always straightforward. After resigning in 2016, former prime minister and now foreign secretary David Cameron went to work for finance group Greensill Capital, and also tried (but failed) to set up a $1bn UK-China investment fund. (Greensill collapsed in 2021.)

If Sunak learned anything from Cameron’s escapade in finance, he should know that the line separating lobbying former colleagues from dealmaking can get messy very fast.

Sunak knows his way around Wall Street firms. His background in the financial sector means he’s seen by some as more of a known quantity than his predecessors: after leaving Goldman Sachs, he worked at hedge funds Children’s Investment Fund and Theleme Partners.

Sunak’s still close to Lionel Assant, Blackstone’s head of European private equity, according to people familiar with the relationship. He’s also gotten to know the firm’s president, Jonathan Gray.

But the contacts between Sunak and some of the most powerful men in US finance have fuelled speculation — including inside the firm — that the prime minister has consulted Schwarzman and Gray on his post-political career.

That is vehemently denied by Blackstone and Downing Street, with the company saying it is “categorically false” and a person close to Sunak saying he has had “no discussions whatsoever with anyone about a future back in finance”.

DD’s soliciting guesses on where Sunak might be headed next.

KKR’s co-heads prep for their first trillion

When Henry Kravis and George Roberts, the billionaire pioneers of the leveraged buyout industry, created KKR in 1976 they spotted an opportunity to trim down US conglomerates overloaded with disparate and undervalued business lines.

Early famed takeovers struck by the small mercenary group of dealmakers such as Houdaille Industries and Beatrice hinged on brutally reining in what at the time were bloated giants.

Nearly 50 years on, a lot has changed inside modern day KKR. The group, which has $90bn in market capitalisation, is turning into a financial superstore of private market investments that has expanded far beyond buyouts.

And a new generation of leaders are increasingly embracing strategies employed by Warren Buffett, the architect of America’s pre-eminent investment conglomerate, reports DD’s Antoine Gara.

Scott Nuttall and Joseph Bae, the two co-heads of KKR who formally took over from Kravis and Roberts in 2021, have pinned much of the group’s earnings growth on a near $20bn stockpile of assets that have some similarity to the conglomerates of old.

Recently, KKR renamed the asset stockpile “strategic holdings” and has begun telling shareholders it will turbocharge growth.

Earnings from KKR’s directly owned investments are targeted to rise from $15mn in 2023 to $300mn in 2026, and above $1bn by 2030, according to KKR.

The unit was created by the co-heads to replicate the success of Berkshire Hathaway, which they noted has grown from a market cap of $40bn market cap to $900bn during their careers at KKR, making it more valuable than all public asset managers combined.

At KKR’s investor day this week, the $553bn-in-assets group laid out a goal to join Blackstone in surpassing $1tn in assets within the next five years. It plans to raise $300bn in new assets by 2026 among dozens of funds.

In an interview with the FT, Nuttall and Bae said they were seeing an opening of financial markets that will make it easier to exit assets.

Nuttall said: “The IPO markets are starting to open up a bit, and leveraged credit markets have opened. We’re starting to get more [approaches] from strategic buyers.”

Bae added: “Valuations are reasonably robust for exits and the financing markets are coming back. We have a lot of activity in flight.”

US accounting firm retirees escalate revolt

We’ve been following private equity’s increasing interest in the US accounting sector, where two of the top 10 accounting firms have signed deals this year to sell a majority stake to private equity investors. 

To catch you up to speed: in February, US accounting firm Baker Tilly agreed to sell a majority stake to Hellman & Friedman and Valeas. A month later, Grant Thornton US agreed to sell a 60 per cent stake to New Mountain Capital.

Other big firms are in negotiations about following suit, we’ve been told, which is why dealmakers and executives alike are closely watching the goings-on at GT. Its deal is the biggest private equity investment in the sector so far, and the firm’s retired partners are not pleased, the FT’s Stephen Foley reports.

The retirees don’t have a vote, but they do have a voice. They are among the firm’s largest creditors and their unfunded retirement benefits are being paid out of the partnership’s cash flows. The plan, in common with other deals in the sector, is for GT to swap those payments for a lump sum when the deal closes, to get the liability off the books and boost ebitda.

At issue is just how much the lump sum should be. GT has calculated a net present value for the retirement payments every former partner is owed. But the retirees say the firm has picked a discount rate and actuarial tables that lowball the offer, so that current partners can keep more of the deal proceeds for themselves.

Now a group of former partners has lawyered up to challenge the terms. Some dissidents say GT’s partnership agreement entitles them to an undiscounted sum, while others at least want a bigger incentive to sign away their rights to take the matter to arbitration.

GT has promised constructive engagement with the former partners, and NMC will not want a big financial and legal dispute still hanging over the firm when the deal closes. But it sounds as if the two sides are far apart.

Job moves

• Fenchurch Advisory Partners, the UK-based investment bank focused on the financial sector, has hired two managing directors in New York as founder Malik Karim eyes expanding in the US. Peter Manley will specialise on insurance, and was previously at Talcott and JPMorgan. Mark Karasik will focus on asset and wealth managers, and comes from Moelis, DD is first to report.

Smart reads

Inequity accounting A California family thought a deal to sell its supermarket chain to Kingswood Capital was all but done. Then came the private equity hardball, FT Alphaville writes.

Longevity master Edward Thorp, the legendary hedge fund manager who mastered besting casinos, is now 91 and taking on his next challenge: beating ageing, Bloomberg reports.

Treasure chest Shareholders are starting to ask questions over who really owns the art on companies’ balance sheets, the FT’s Leo Lewis writes.

News round-up

Exxon chief earns four times as much as bosses at Shell and BP (FT)

BlackRock loses appeal over UK tax on $13.5bn BGI deal (FT)

More US regulators join Morgan Stanley wealth management probe (FT)

Drugmakers race to find alternative suppliers as US cracks down on Chinese biotech (FT)

Vietnamese property tycoon sentenced to death over $12bn fraud (FT)