All that Glitters is not Gold

The collapse of Greensill involved a predicable cast of unwise enablers, but it should serve as a warning to the growing number of Alternative Asset buyers on the dangers of complex deals which promise much but deliver less. Due diligence is critical in the highly illiquid alternatives sector.

Blain’s Morning Porridge – March 23 2021:  All that Glitters is not Gold

“If I take that bet I am sure I will end up with an ear-full of cider…”

This morning – The collapse of Greensill involved a predicable cast of unwise enablers, but it should serve as a warning to the growing number of Alternative Asset buyers on the dangers of complex deals which promise much but deliver less. Due diligence is critical in the highly illiquid alternatives sector.

It’s a year since Lockdown begun. Amuse yourself with happy memories from the FT: The UK economy: one year on from the start of the first lockdown.

You really can’t make it up when it comes to the collapse of supply chain charlatan Greensill. I suspect it will make a great film… It should also send a judder down our spines, reminding us things are seldom what they seem in complex structured finance:

  • I’m wondering how many fund managers are quietly nervous about what’s really in their alternative asset/direct lending investment buckets this morning?
  • If I was a holder of complex European securitisation/receivables deals that promise much, but actually provide very little information on the performance of underlying assets, then I might suddenly find an anxious desire to check just how they are REALLY doing.

At least former UK premier David Cameron will be happy. A majority comprising Tory MPs on the UK’s Treasury Select Committee blocked an inquiry into Greensill yesterday … on the basis it may be politically influenced. The fact Call-Me-Dave was texting chancellor Rishi Sunak pleading for GFC to be a special case for Covid Bailout loans says it all about the dangers of lobbying. The SNP will be equally delighted at the lack of scrutiny of dodgy dealings up in the Highlands.

The Greensill collapse is unlikely to be the last time financial chicanery is exposed as sham. And that is why holders of European Alternatives and Asset backed transactions should be nervous. The lessons of the Greensill deals are multiple:

  • Don’t assume the deals you are sold are what you are told they are,
  • There is no substitute for deep due diligence.
  • Companies that look impossible to finance do not suddenly become AAA credits after a sprinkling of magic secured funding dust.
  • Anything promising of low-risk/high-returns from complex structuring and technical innovation is suspect.

Let’s review the unfolding Greensill mess:

There over 1000 holders of the $10 bln plus of defaulted Greensill investment structures packaged and issued by Credit Suisse – which marketed them as ultra-safe secured investments. Under the law, what the holders recover on these deals will rather depend on how much the administrator and the courts can jemmy out of Sanjay Gupta’s dead-firm walking; steel and commodities business GFC Alliance. (I have no hesitation in saying GFC will go to the wall – there can’t be a single sane financial firm on the planet willing to finance them as the story of its’ Greensill relationship emerges and its connected in-house banking arrangements become clearer – although, apparently, a state rescue is under consideration to save jobs.)

Investors will be lucky to see much more than the 30% recovery already in the pot from non-Gupta related investments in the Greensill funds – but Credit Suisse may decide to make its investors good.  The reputational damage of seeing their private and investment banking clients clobbered for their stupidity, which would negate their private banking brand, may mean it’s worth taking the hit. No wonder CS staff are very grumpy about their bonuses.

Successful financial scams require willing participants. All the usual fools are there in the mix.

Yet again the German regulator missed what was going on in Greensill’s German bank and its exposures to Gupta. The team at Credit Suisse who agreed to warehouse Greensill originated “future receivables” and sell them as pristine secured assets have a limited shelf life. The insurance broker who managed to convince an insurance fund the underlyings were AAA quality looks vulnerable. Or what about the sales teams in Morgan Stanley who actually marketed the deals. Yet again Softbank is in the frame after it invested in excess of $1.5 bln at a $4-7 bln valuation, hailing Greensill as a leading Finech, when the actual truth is that its high-tech driven lending algos were nothing more than basic Excel spread sheets.

Greensill’s financial magic was little more than sheer chutzpah – being able to persuade investors that the dull old low margin conservative business of factoring – short-term secured lending against invoices and accounts receivable, was something incredibly clever, undervalued and able to generate huge returns based on unique proprietary tech.

Greensill deals went further. Rather than just factoring Gupta’s bills to suppliers and its invoices, the firm conjured up “future receivables” – pledging the company’s expected future earnings for lending now. That’s not necessarily a bad thing – its basic credit – but it only works if these earnings were completely predictable like obligated mortgage payments. What Greensill was doing was lending on future earnings on very volatile commodities. Remember – oil prices went negative in 2020.

In return for funding challenging names we know Greensill took divots out these clients. It made over £36 mm financing Gupta’s deals in Scotland, and an amazing $108mm in fees from the $850mm Bluestone coal deals in the US – for which it is now being taken to court. All these fees gave Lex Greensill the wherewithal for his private Air Greensill fleet – but didn’t make the financings any safer.

Any smart investors would probably have asked questions – but what’s not to like about a deal that’s secured on receivables, offers a high coupon, is wrapped with an insurance package from reputable insurer and involves major investment firms like Credit Suisse banking them, and Morgan Stanley marketing them?

One question is how did Greensill get away with it so long?

It was clear as early as 2017 there were major issues with some of the supply chain financing deals Greensill was putting together. The following year a major Swiss investment group, GAM, blew up when deals a leading fund manager had bet the shop on were questioned internally. A review by external investigators discovered a lack of information and documentation on a whole series of Greensill deals. They questioned how due diligence was done on the deals. The fund manager was suspended and later dismissed – triggering a redemption run on the fund. The whistle-blower was also shown the door on the back of massive client exits.

GAM invested in the funds because it’s very hard to turn down the promise of a low risk / high return deal that promised so much more than the tiny yields available in conventional credit markets.

Despite the events at GAM, Credit Suisse went on to package $10 bln plus of Greensill deals. It was all done with an insurance wrap from a single name put them in its safe bucket. I know other insurance firms refused the deals. The trigger for the collapse of the Greensill scam was the withdrawl of that critical insurance – causing Credit Suisse to stop. Greensill has known for a year Tokyo Marine (which sacked the underwriter involved) would not renew and had been unable to find alternative cover.

Perhaps Credit Suisse bought the story and Softbank link that Greensill was a remarkable new Fintech with the Midas touch of changing dull, conservative factoring into a money machine? All that glitters is not gold.

One of the major developing themes in markets has been a shift from financial assets – which are seriously mispriced due to monetary distortion and financial asset inflation – into real assets, the so-called alternatives market. Alternative because they are not stocks or bonds, but cash flows and real assets. The collapse of Greensill will heighten awareness of due diligence risks in these non-standard, off-market, asset backed alternatives. Alternative asset holders will be looking at holdings for what else might be wobbly.

For instance, I might urge them not to be hypnotised by the assumptions underlying a well-known fund investing in music royalties, the basis of which is also being questioned by analysts. (I certainly won’t mention the fund by name as the manager is a well-known litigant.) I have no reason to believe or disbelieve what analysts, the FT and a US investment bank have said about it overpaying for assets or questioning the valuation hikes it puts on future revenues when it acquires catalogues. Personally I like music assets, know their value, and, given certain circumstances the fund in question might come good. Equally.. it might not.

To understand how these deals works its critical to understand exactly what’s occurring within the structures – how real are the assets, how the cash flows, how its accounted, and where it goes. That’s why having top notch accountants and lawyers is such an important requirement for any deal. However, if they are working in the interests of the issuers and bankers – then investors are the likely patsies. There is a real difference between the way US and European Asset Backed deals are structured – basically US deals are transparent. European deals tend to be opaque.

Alternative deals based on real assets and tangible cash flows are often, but not always, decorrelated from distorted financial assets, allowing low risk deals to yield better long- term returns. They tick can the box in terms of risk vs return and provide significant diversification away from conventional markets. The major negative is there is little pretence they will be liquid assets. If you want to sell – even in good markets it will not be easy. 

The only way you should participate in Alternative type deals is by knowing exactly what’s going on. And – yes, my day job is Head of Alternative Assets. Happy to discuss in depth any time.

Five Things to Read This Morning

WSJ – Bond Rout Hits Safest Corporate Debt

BBerg – Treasury Auctions Primed for a Smooth Run as Markets Stay Calm

BBerg – A Pox on Your Americana: What’s Next for US – China Relations

Torygraph – This investment “safe haven” is about to hit very stormy seas

FT – Wall Street Banks diverge in views on Bitcoin boom

Out of time, and back to the day job..

Bill Blain

Shard Capital


  1. Two observations. 1: Previous civilisations were ended by barbarians from outside (or sometimes inside) the gates. Ours is imperilled by financial chicanery. 2: In a sane world your job title would be Head of Assets and the financial jiggery-pokery would be the Alternatives.

  2. Barron’s
    Hipgnosis: the Fund Revolutionizing Music Management and Striking a Chord With Investors
    By Lina Saigol
    Updated March 25, 2021 11:59 am ET / Original March 25, 2021 4:45 am ET
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    “I don’t sing for nobody,” Neil Young crooned in This Note’s for You.

    Now, he’s singing for Merck Mercuriadis, the 57-year-old entrepreneur revolutionizing music management.

    The chief executive of Hipgnosis Songs Fund snapped up 50% of the Canadian folk singer’s entire catalogue of 1,180 songs in January as part of his mission to turn song ownership into a stable asset class that isn’t a slave to the rhythms of the stock market.

    Since listing on the London Stock Exchange in 2018, Hipgnosis has raised $2 billion in debt and equity, and Mercuriadis has been buying music rights at lightning speed.

    Read: Neil Young strikes heart of gold with 50% sale of song catalog to publishing house

    In December and January alone, the fund did deals with Shakira, Fleetwood Mac’s Lindsey Buckingham and superstar producers Jimmy Iovine and Jack Antonoff. It now boasts more than 60,000 songs bought for about $1.75 billion. Last week, it added the music catalogue of pop songwriter Carole Bayer Sager to its portfolio.

    Mercuriadis’s mission is disarmingly simple: Hipgnosis raises money from investors and buys revenue rights to hit songs. It then gets paid every time one of its songs is played, performed or used in TV, movies or video games.

    The rise of streaming apps like Spotify has changed the way people play and pay for music. One of Mercuriadis’s big ideas is that these subscription services make music revenue more reliable.

    “I could see very clearly that streaming was going to take music from being a discretionary or luxury purchase, to being a utility purchase,” Mercuriadis said in an interview with Barron’s.

    “Great songs are predictable and reliable in their income streams.”

    Read:Artists Are Striking Gold by Selling Their Music Rights. How Investors Can Cash In.

    It is an industry step-change that investors and analysts are buying into, although some have concerns over the lack of transparency in how much Hipgnosis is paying for songs and how they are valued.

    Much of the fund’s attraction lies in Mercuriadis’s industry insider background. His long career includes stints managing Beyoncé, Elton John and Guns N’ Roses.

    But it also claims returns will be independent of economic and market cycles, making it a good diversification for investors and offering steady dividends.

    “People consume music whether they’re living their best lives, or whether they’re experiencing challenges and looking for comfort and escape,” Mercuriadis said.

    Investors humming along with Hipgnosis include the Church of England, Aviva, and Axa. Newton Investment Management, a subsidiary of BNY Mellon, nearly doubled its stake recently to 10%.

    Mercuriadis has several strategies to boost cashflows and returns. First is what he calls “active song management,” which involves generating more revenue from a focused portfolio of high-value hits.

    Too many well-loved songs, Mercuriadis said, are left to languish by industry giants like Universal Music Group, Sony and Warner. “We put time and effort into ensuring that those songs are getting real opportunities and being nurtured back to life.”

    For example, when Hipgnosis bought the catalogue of Al Jackson, the former drummer of Booker T and The MG’s, it was generating $400,000 a year in reliable income. But Al Green’s Let’s Stay Together generated more than 80% of that. Mercuriadis has lifted the catalogue’s revenue to $600,000 a year by getting more out of five or six other songs, including Green Onions, which Jackson co-wrote and Mercuriadis calls “probably the greatest instrumental of all time.”

    He will also seek to boost revenues by aggressively pursuing “synching” – placements in movies, TV shows, computer games and adverts. “Synching will be a massive, massive revenue stream,” he said. “The consumption of music is at the heart of selling every product.”

    He placed the Eurythmics’ Love Is A Stranger into the latest series of The Crown, and just signed a $2 million deal for the use of Don’t Stop Believin’ by Journey. Peloton, TikTok, Roblox, and Minecraft will provide even more opportunities, Mercuriadis said.

    Alongside reviving forgotten songs, Mercuriadis aims to make revenue collection more efficient. He believes that could deliver another sales boost of between 10% and 35%.

    Shares in Hipgnosis are down 0.81% in the year to date, according to data from FactSet.

    Read:Iconic Rock Songs Are Suddenly Hot Commodities. One Reason: Streaming.

    Still, some analysts question how Hipgnosis values the assets that it has acquired and how it calculates the multiples that it discloses in its financial reports.

    The fund has only disclosed the price it has paid twice: $23.75 million for buying the The-Dream’s catalog in 2018 and $322.9 million to buy 33,000 songs previously managed by Kobalt.

    Mercuriadis said Hipgnosis is bound by confidentiality agreements with the artists concerning deal pricing. Investec analysts said recently that makes it difficult to fully analyze the portfolio.

    An independent third-party assesses the value of each music catalogue after Hipgnosis buys it. But analysts are concerned that the valuer applies the same discount rate to all Hipgnosis catalogues even though these come with different levels of risk and popularity. It has also led to quick gains on the Hipgnosis fund’s net asset value.

    “This is despite the manager not having had sufficient time to add value or for underlying market assumptions to have materially changed,” analysts at Stifel wrote in December.

    In its recent half-year report, Hipgnosis said a lower discount rate reflected music’s ever more stable and predictable earnings through paid streaming.

    “These catalogues are increasing in value very, very quickly and are only available for a short period of time at attractive prices,” Mercuriadis said. “And what we buy over the next two years is going to triple in net asset value inside of the decade.”

    Mercuriadis has yet to buy his favourite songs, which include A Day in The Life by The Beatles, Wish You Were Here by Pink Floyd, or Papa was a Rolling Stone by The Temptations. But if investors keep handing Hipgnosis more money, he might one day get his hands on them.

    Conversation1 Comment
    Emanuel Cohen

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    Emanuel Cohen
    40 minutes ago

    Neil Young, Shakira, Lindsey Buckingham et all, are willing and able to sell the stable income stream from their hard work to a fund by the name of HIPGNOSIS. You may wonder who is being hypnotised here? It will not be the artists and their lawyers, nor the fund manager.



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