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The Future of Fintech: AI & Blockchain

Sun, 06/28/2020 - 1:03pm

Sweeping global regulations, the growing penetration of digital devices, and a slew of investor interest are catapulting the fintech industry to new highs.

Of the many emerging technologies poised to transform financial services, two of the most promising and mature are artificial intelligence (AI) and blockchain.

74% of banking executives believe AI will transform their industry completely, and 46% of global financial services employees expect blockchain to improve transparency and data management.

In The Future of Fintech: AI & Blockchain slide deck, Business Insider Intelligence explores the opportunities and hurdles of adopting the two technologies within financial services.

This exclusive slide deck can be yours for FREE today.

Join the conversation about this story »

German fintech star Wirecard said $2 billion went 'missing' from its bank accounts. Analysts and accounting professors explain how it could have happened.

Sun, 06/28/2020 - 12:40pm

  • Wirecard is a German digital payments business. It was, until recently, one of the country's most successful tech companies. 
  • This week Wirecard announced that $2 billion had gone "missing" from its balance sheet. The company's former CEO, Markus Braun, resigned and was arrested on suspicion of false accounting and market manipulation.
  • Business Insider spoke to fintech analysts and academics who study accounting fraud to figure out how that $2 billion might have disappeared.
  • One possibility is that Wirecard committed financial fraud and its auditor, EY, didn't thoroughly evaluate the company's financial statements, according to the analysts and academics. The German regulator BaFin has also come under fire for failing to detect evidence of financial fraud at Wirecard.
  • Wirecard likely buckled under the pressure of the coronavirus recession, the experts we spoke with said, and it could no longer keep up the charade about the growth of its business.
  • Visit Business Insider's homepage for more stories.

Wirecard AG was a German tech darling.

In September 2018, the Munich-based digital payments company replaced Germany's second-largest lender, Commerzbank AG, on the Dax 30. That's the stock-market index for the 30 major German companies trading on the Frankfurt Stock Exchange, all of which are automatic investments for pension funds. Wirecard, which counts Apple Pay and Google Pay as clients, reported a net revenue of €2.1 billion that year.

This week, Wirecard announced that it was "missing" €1.9 billion, or about $2.1 billion, in cash, later saying it likely never existed. EY, Wirecard's auditor, called it "an elaborate and sophisticated fraud." Former CEO Markus Braun resigned and was arrested on suspicion of false accounting and market manipulation. Authorities are searching for Wirecard's former chief operating officer, Jan Marsalek, who is also suspected of market manipulation. The company said it would file for insolvency. 

The downward spiral comes more than a decade after suspicions were first raised about Wirecard's financials, and five years after The Financial Times started reporting on red flags in the company's accounts.

But how, precisely, does $2 billion go missing? 

We talked with fintech analysts and professors of accounting to find out what might have happened. 

Fabricating cash is much rarer than fudging revenues

Wirecard appears to have counted cash held in escrow accounts on its financial statements, The Financial Times reported. Money in escrow is held and disbursed by a third party, which would theoretically explain why Wirecard didn't have immediate access to the cash.

The Financial Times also reported that an internal whistleblower at Wirecard alleged that the company had used a strategy called round tripping. That involves repeatedly buying and selling shares of the same security in order to make it look like a lot of transactions are taking place.

Enron, the disgraced Houston-based energy company that filed one of the largest corporate bankruptcies in American history after several executives were charged with conspiracy, insider trading, and securities fraud, was famously accused of round tripping.

In Wirecard's case, reports indicate that the company appears to have funneled money through three third-party companies in the Philippines, Singapore, and Dubai.

It's hard to fabricate transactions "inside your own major operations," said Ruben Davila, a forensic accountant and a professor of clinical accounting at the University of Southern California's Marshall Business School. That's because "there would be a record of them." Instead, Wirecard said the transactions had gone through offsite entities. "It makes it more plausible that you don't have the detail," Davila said.

Now it appears, per further reporting, that transactions that supposedly took place between Wirecard and those third parties were falsified. When KPMG asked Wirecard to produce records of those transactions, Wirecard failed to come up with the original bank records for €1 billion of payments.

Wirecard did not respond to a request for comment. It has previously denied any financial impropriety.

EY, Wirecard's auditor, reportedly didn't request bank statements for three years 

The professional-services firm EY had been auditing Wirecard since 2008, when suspicions about Wirecard's financials were first raised. During that time, Wirecard received clean audits from EY. 

Then, in June 2020, Wirecard announced that it was postponing reports for 2019 and the first quarter of 2020. These reports had already been delayed three times, Markets Insider's Shalini Nagarajan reported. Wirecard said on June 18 that EY could not find "sufficient audit evidence" of $2 billion on Wirecard's balance sheet. 

EY has since faced criticism for failing to spot what it has called "an elaborate and sophisticated fraud." Bloomberg reported that EY was sued in Germany, in June. The lawsuit alleges that the firm didn't flag that Wirecard improperly booked $1.1 billion in assets in their 2018 accounts.

On Friday, The Financial Times reported that for three years EY did not request statements from a Singapore bank where Wirecard claimed it had up to $1 billion in cash. EY instead relied on screenshots and documents from Wirecard and from a third-party trustee, according to The Financial Times. (Wirecard told auditors that in late 2019, it moved that money to banks in the Philippines.)

At another company that EY audited, Chinese coffee chain Luckin Coffee, an internal investigation found that employees had fabricated part of its reported 2019 revenue. EY said it flagged this fraud when auditing Luckin Coffee's 2019 financials, The Wall Street Journal reported

Public accounting firms do make mistakes

A recent report from the Public Company Accounting Oversight Board found that in 2018, 27.3% of EY's audits had "deficiencies," meaning the auditor didn't have sufficient evidence at the time to support its opinion on the company's financials. A deficiency doesn't necessarily mean the auditor's assessment of the company's financials was wrong. EY isn't alone: The PCAOB found that Deloitte's rate of deficiencies was 20% and KPMG's was 50% in 2018. (The "Big Four" public accounting firms are EY, Deloitte, KPMG, and PwC.)

It's possible that EY did conduct a thorough audit of Wirecard's internal controls and found them sufficient, said Daniel Taylor, an associate professor of accounting at the Wharton School of the University of Pennsylvania. (Taylor has also not studied Wirecard specifically.) Taylor said even robust internal controls are designed to catch one or two people in an organization who are engaged in fraud. If, as Taylor said is likely, there were multiple people at Wirecard engaged in fraud, the company's internal controls may not have been able to pick up on that.

Cash fraud is uncommon, Taylor said, "mainly because of the thought that it's relatively straightforward to audit cash holdings." Presumably, the cash is either in the bank or not. That's what makes Wirecard's fraud "unparalleled," he added.

In an email to Business Insider, a spokesperson for EY Germany said, "Collusive frauds designed to deceive investors and the public often involve extensive efforts to create a false documentary trail. Professional standards recognize that even the most robust and extended audit procedures may not uncover a collusive fraud."

The spokesperson added, "With knowledge that 2019 bank statements, confirmations and other routine documentation were falsified, we cannot rule out that prior years' documents and confirmations are suspect."

Wirecard called on the professional-services firm KPMG to conduct a special investigation in late 2019. In its April 2020 report (the text is in German), KPMG said that it couldn't verify that the "lion's share" of Wirecard's profits between 2016 and 2018 were authentic, and that there were "obstacles" to the investigation. On Wirecard's website, the link to the report is posted along with the statement that KPMG had found no incriminating evidence for allegations of balance-sheet manipulation.

German financial regulator BaFin has also received criticism for its oversight of Wirecard

The German financial regulator BaFin has also come under fire for potentially failing to detect evidence of financial fraud at Wirecard. In 2016, short sellers using the pseudonym Zatarra published a report alleging that Wirecard had engaged in money laundering. BaFin responded by investigating Zatarra for alleged market manipulation. In 2019, when The Financial Times reported on Wirecard's legal staff at its Singapore headquarters who were investigating three members of the finance team, BaFin opened an investigation into The Financial Times over an allegation of market manipulation.

It's possible that BaFin was concerned that short sellers were influencing the Financial Times. "Regulators have always been very skeptical of the incentives of short sellers," said Taylor, the Wharton professor, though he's not familiar with BaFin's approach specifically.

On Monday, BaFin President Felix Hufeld said at a conference in Frankfurt, "I completely accept the criticism that all of us including BaFin have to review a couple of strategies and measures, which we have taken or have not taken, once we sort out the immediate crisis."

Now, the European Union is investigating BaFin to determine whether BaFin responded appropriately to allegations of financial fraud at Wirecard, Reuters reported.

In an email to Business Insider, a spokesperson for BaFin said it does not and did not supervise Wirecard AG. Instead it supervises Wirecard Bank AG, within the Wirecard group.

Wirecard likely buckled under the financial pressure of the coronavirus recession

The house of cards likely came down this week because Wirecard was facing increased pressure due to the global recession underway. "The company wasn't doing as well as it was projected to everybody and they did everything they could to hide that," said Sarah Kocianski, the head of research at the consultancy 11:FS. (Kocianski previously worked at Insider Inc.) But it could no longer maintain the charade.

Once KPMG indicated that it couldn't verify the authenticity of the bulk of Wirecard's profits, "Wirecard has no option but to come clean," Kocianski said.

Wirecard has seen roughly 99% of its market value erased in just the last six trading days as its stock has plummeted from 104 euros, or about $116, to less than 2 euros as of this writing.

SEE ALSO: Here's how Wirecard went from analyst darling to a $2.2 billion accounting scandal - and cost SoftBank hundreds of millions in the process

Join the conversation about this story »

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Warren Buffett has warned about the dangers of speculating for years. Day traders aren't listening.

Sun, 06/28/2020 - 8:55am

  • Day traders have recklessly bought into bankrupt and distressed companies in recent weeks.
  • Billionaires Mark Cuban and Howard Marks compared the buying frenzy to the dot-com bubble.
  • Warren Buffett has warned against speculating and discussed market bubbles many times.
  • "Normally sensible people drift into behavior akin to that of Cinderella at the ball," he said.
  • Visit Business Insider's homepage for more stories.

Day traders have piled into bankrupt and distressed companies in recent weeks, thumbing their noses at experts and proclaiming that "stocks only go up."

Warren Buffett, perhaps their favorite punching bag, has warned for years about the dangers of mindless buying.

Taking on the 'suits'

Thousands of people, stuck at home during the coronavirus pandemic with casinos closed and live sports suspended, have turned to playing the stock market on Robinhood and other zero-commission trading platforms.

They have sent shockwaves through the investment community with their contrarian moves. Those include plowing cash into struggling businesses such as airlines and cruise lines, and snapping up shares in Hertz, JCPenney, and other bankrupt companies despite the high risk of getting wiped out.

These irreverent amateurs have also taken swipes at industry veterans. Dave Portnoy, their self-proclaimed captain, has dismissed Buffett as "washed up" and wrong in his decisions. The "suits" who whine about him and his followers are just jealous of their success, he says.

Read more: Jefferies says buy these 14 cheap stocks that are financially strong and positioned for market-beating returns

Billionaire investors and market commentators have rushed to sound the alarm on the trend.

"Shark Tank" star Mark Cuban and Oaktree Capital chief Howard Marks both said the buying frenzy reminds them of the dot-com bubble.

Meanwhile, "Mad Money" host Jim Cramer, Omega Advisors boss Leon Cooperman, and Wealthfront investment chief Burton Malkiel have all warned the new market entrants that wildly speculating will almost certainly lose them money and might accelerate a market crash.

'One helluva party'

Buffett hasn't publicly commented on the day-trading boom, but he's discussed similar behavior in the past.

The billionaire investor and Berkshire Hathaway boss defined speculation in his letter to shareholders in 2000 as focusing "not on what an asset will produce but rather on what the next fellow will pay for it."

Speculators may knowingly pay more than what a stock is worth in the hope of selling it for an even higher price, he said in his 1992 letter.

Buying Hertz shares with the goal of dumping them before the stock becomes worthless fits that description.

Read more: The stock market's fear gauge is sending a persistent warning that has a 30-year track record of signaling meltdowns ahead

Amateur traders who cashed in during the recent stock rally may also be overconfident and greedy for more profits. Buffett described the phenomenon in his 2000 letter.

"Nothing sedates rationality like large doses of effortless money," he said. "Normally sensible people drift into behavior akin to that of Cinderella at the ball."

"They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice," Buffett continued.

"But they nevertheless hate to miss a single minute of what is one helluva party," he said. "Therefore, the giddy participants all plan to leave just seconds before midnight."

"There's a problem, though: They are dancing in a room in which the clocks have no hands," Buffett added.

In other words, speculators don't know when the music will stop and reality will set in, wrecking their portfolios.

Learning their lesson

Buffett compared the tech-stock fever in the late 1990s to a contagious infection in his 2000 letter.

"It was as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them," he said.

However, irrational exuberance and boundless optimism is never sustainable.

Read more: A market-crash expert known as 'Dr. Doom' warns a 10-year depression is coming — and says investors are far too confident about a possible recovery

"A pin lies in wait for every bubble," Buffett said.

When a bubble pops, "a new wave of investors learns some very old lessons," he continued. One of those is that "speculation is most dangerous when it looks easiest."

Gambling versus investing

Buffett also discussed rampant speculation during Berkshire's annual meeting in 2017, according to a transcript on Sentieo, a financial-research site.

"There's nothing more agonizing than to see your neighbor, who you think has an IQ about 30 points below you, getting richer than you are by buying stocks," he said.

"Markets have a casino characteristic that has a lot of appeal," Buffett continued. "People like action and they like to gamble."

"If they think there's easy money to be made, you get a rush," he added. "And for a while, it will be self-fulfilling and create new converts until the day of reckoning comes."

Read more: From a late-night infomercial to a 1,040-unit empire worth $188 million, how Jacob Blackett perfected his real-estate-investing strategy after losing $70,000 on his first deals

The good news about bubbles inevitably bursting is that investors can profit, Buffett said. Those who resist the hype and keep their nerve when the market crashes may find themselves with ample cash and opportunities to invest it, he said.

The Berkshire boss put his philosophy to work during the financial crisis, when he struck lucrative deals with Goldman Sachs, General Electric, Harley-Davidson, and other companies hungry for cash.

He was far less active during the coronavirus crash because he worried about the pandemic's fallout, the US Treasury and Federal Reserve swiftly moved to help companies and shore up markets, and private-equity firms lined up to offer cheaper bailouts than Berkshire.

Day traders are ruling the roost for now, but Buffett is likely shaking his head at their reckless behavior and waiting for his moment to shine.

Read more: The chief strategist of $2.5 trillion State Street recommends 7 ETFs for investors looking to profit from a permanently altered post-coronavirus landscape

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Wirecard is 'beyond salvageable,' according to one analyst, who says the company's rivals won't be able to benefit from its downfall

Sun, 06/28/2020 - 8:53am

  • Munich-based Wirecard, founded in 1999, was established with the intention of assisting websites with credit card payment collections from customers.
  • In the past week, the company has witnessed a spectacular fall from grace amid a massive accounting scandal, its former CEO's arrest, and an insolvency filing.
  • But can fintech rivals benefit from its downfall? One analyst says that it is possible.
  • Wirecard is "beyond salvageable," Neil Campling, Head of TMT Research at Mirabaud Securities said.
  • Visit Business Insider's homepage for more stories.

German fintech group Wirecard became one of the hottest European stocks while battling endless allegations of fraud.

The former-CEO Markus Braun claimed a clean sheet for the company until as recently as May 17 when he tweeted: "When all the noise and dust settles, Wirecard will still be a company that generates a billion Euro of EBITDA this year and is one of the fastest growing in its industry."

The allegations intensified when the company claimed €1.9 billion from its balance sheet probably never existed, and Braun was arrested. Wirecard filed for insolvency on Thursday, ending a dizzying few days for the scandal-hit company.

Read more: Jefferies says buy these 14 cheap stocks that are financially strong and positioned for market-beating returns

When the company's shares dropped by nearly 90%, it would have been easy for hedge funds with short positions to take a profit and run, said Peter Hillerberg, co-founder of Ortex Analytics.

But data shows that a vast majority of short sellers held on to their positions, and in some cases increased them, in anticipation of a further reduction in share price.

"It looks like their patience will pay off," Hillerberg said. 

Some hedge funds have already won big, however, with the Financial Times reporting that UK and US funds have reaped more than $1 billion in profits this week from the stricken fintech.

But how did things go so wrong for Wirecard? No one can know for sure right now, but questions are now being asked about whether the company's rivals will be able to benefit from its spectacular fall from grace.

Read more: A market-crash expert known as 'Dr. Doom' warns a 10-year depression is coming — and says investors are far too confident about a possible recovery

A Boon for fintech peers? 

Rivals can expect only a "very small opportunity" for some incremental business since most of Wirecard's transactions were fictitious, according to Neil Campling, Head of TMT Research at Mirabaud Securities.

Wirecard's peers do not stand to gain from its insolvency, he said.

"Yes there could be scraps for Adyen, Square and PayPal to pick up but do you really think Wirecard has 300,000 paying customers as they claimed? There never was €1.9 billion." 

Its insolvency is "not a boon," he continued.

Side note: Boon was the name of Wirecard's app at the centre of their "ecosystem". 

Read more: The stock market's fear gauge is sending a persistent warning that has a 30-year track record of signaling meltdowns ahead

Mirabaud Securities does not expect Wirecard to continue as a going-concern since it no longer has any assets of value.

In all likelihood, Visa and MasterCard may revoke their licences as the firm is in breach of their code of conduct, and only few "real" customers will seek alternative payment providers. 

Wirecard is "beyond salvageable," Campling said.

Here's how Wirecard went from analyst darling to a $2.2 billion accounting scandal — and cost SoftBank hundreds of millions in the process

SEE ALSO: Alexandria Ocasio-Cortez fought off a Wall Street-backed election challenge. Here are some of the titans of finance who backed her opponent, Michelle Caruso-Cabrera.

Join the conversation about this story »

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Renowned strategist Tom Lee says investors should take a 'leap of faith' on select stocks despite a crisis that's 'worse than the Great Depression'

Sun, 06/28/2020 - 8:50am

  • The coronavirus pandemic is a crisis that's "worse than the Great Depression," but investors should take a "leap of faith" and invest in stocks that would benefit from the reopening of the US economy, Tom Lee said in a CNBC interview on Friday.
  • Lee did not waver on his bullish call on stocks, but did say that in the short term, stocks are overbought and the market needs to digest its recent gains.
  • While a spike in coronavirus cases in some states is a valid concern, Lee is constructive on the fact that individual states can open safely, pointing to states like New York and New Jersey, among others.
  • Lee said he expects a "binary reaction" in the markets if there is a breakthrough in a COVID-19 vaccine or even cure, and the stocks that stand to perform the best if that happens are the "reopening stocks" like airlines, casinos, and hotels.
  • "The best-performing stocks after the dot-com crash were the internet names, because the ones that survived were structurally long-term winners," Lee said, in defense of why he is bullish on the stocks.
  • Visit Business Insider's homepage for more stories.

Tom Lee is not wavering one bit on his bullish call on stocks despite the global coronavirus crisis being "worse than the Great Depression."

In a CNBC interview on Friday, the strategist said investors should take "a leap of faith" and invest in the "reopening" stocks that stand to benefit from the US economy opening back up.

Lee's FundStrat prepared a list of these "epicenter" stocks that investors should consider buying as the economy slowly reopens. The "reopening" stocks include airlines, cruise lines, hotels, and casinos, among others.

Read more: Jefferies says buy these 14 cheap stocks that are financially strong and positioned for market-beating returns

"If these companies aren't destroyed on both the equity and credit side, especially credit, I think they're a lot more resilient than people realize," said Lee. "If they're showing durability here, these are actually really attractive companies because they survived the greatest stress test in over 100 years," he continued.

"The ones that survive are going to be unkillable," Lee explained.

Lee pointed out that "the best-performing stocks after the dot-com crash were the internet names, because the ones that survived were structurally long-term winners," in defense of why he is bullish on the stocks.

Read more: The stock market's fear gauge is sending a persistent warning that has a 30-year track record of signaling meltdowns ahead

Lee is also bullish due to individual states being able to safely open, pointing to New York and New Jersey as recent examples. Alternatively, surging coronavirus cases in states like Florida and Texas prove that the reopening process for states is a delicate process.

Lee said that it makes sense for stocks to cool off, given that they are overbought in the short term and consolidation is healthy for markets. Additionally, Lee expects selling into quarter-end as investors rebalance their portfolios following a strong quarter for stocks.

But as long as the markets continue to hold their 200-day moving average, that's "good news," said Lee. The economy is resilient and we can still get a recovery "even if we're wearing masks and social distancing," Lee added.

Read more: From a late-night infomercial to a 1,040-unit empire worth $188 million, how Jacob Blackett perfected his real-estate-investing strategy after losing $70,000 on his first deals

Lee concluded the interview by observing that from the market's perspective, any breakthrough in the development of a vaccine or cure for COVID-19 will help "investors see a real path to normalcy" and will benefit the reopening trade. 

Lee pointed to $5 trillion in cash on the sidelines and bearish sentiment as all the more reason to stay bullish.

"The lack of a vaccine has kept people really cautious, that's why there's $5 trillion of cash on the sidelines, and AAII investor sentiment is the 3rd worst negative reading since this crisis started so people are as bearish today as they were when we nose dived to 2,200," said Lee.

Read more: A market-crash expert known as 'Dr. Doom' warns a 10-year depression is coming — and says investors are far too confident about a possible recovery

Join the conversation about this story »

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Jefferies says buy these 14 cheap stocks that are financially strong and positioned for market-beating returns

Sun, 06/28/2020 - 8:43am

  • Strategist Steven DeSanctis of Jefferies says companies with lower returns on equity have done shockingly well in the last few months, but he says the trend is about to break.
  • He notes that those low returners have gotten expensive, and recent earnings and economic trends are good news for higher-returning stocks.
  • Rounding up a series of key market trends, he's created a list of 14 buy-rated small-company stocks that are high returners, look inexpensive compared to their future earnings, and are financially healthy.
  • Click here to sign up for our weekly newsletter Investing Insider.
  • Visit Business Insider's homepage for more stories.

Jefferies Strategist Steven DeSanctis is probably speaking for a lot of people when he says stock performance "has been very odd during this rebound."

One odd but well-known issue is that ultra-low interest rates unleashed huge returns from stocks that were in bad financial shape, since the easy financial conditions helped them the most. But he adds that stocks with low returns on equity are actually outperforming stocks that are more efficient at returning money to investors.

In a recent note to clients, he explains that a big rally in health care stocks, which are generally lower returners, is one key reason for that strange result. The lower returners are much more expensive than usual while higher returners look cheap compared to their own histories.

DeSanctis, a small- and mid-cap strategist, says the market is coming to a turning point and it might be time to look elsewhere.

"The lowest ROE names held up better in the downturn but the gap with the highest ROE names is now above the one-standard deviation line," he wrote. "When we touched this level in the past, High ROE outperforms by an average of 5.5% over the subsequent three months, by 11.1% over the next six months, and a whopping 43.4% for the full year."

DeSanctis thinks smaller and less expensive companies are likely to stay on top, as easy money and an economic rebound are very good news for both of those groups of companies.

"Cheap stocks are still very cheap on an absolute basis despite rising 50+% from the market lows," he said. "The Fed has the credit markets' back and this really helps small caps more than large caps."

To bring those trends together, DeSanctis offers this list of high-returning small-company stocks that are financially healthy and fairly inexpensive based on their projected earnings.

Specifically, the companies have market capitalizations between $1 billion and $30 billion and returns on equity of 10% or more. Their debt-to-capital ratios are either falling or have risen by less than 5%, which shows that their financial health is stable or improving.

Lastly, they're all cheaper than at least 60% of stocks based on their expected earnings for next year. All 14 have "Buy" ratings from Jefferies analysts.

Read more:

SEE ALSO: A high-growth fund manager is tripling her peers' returns in 2020 while targeting nontech industries like beer and restaurants. She breaks down how she picked out 5 of the most innovative companies.

1. Lithia Motors

Ticker: LAD

Sector: Consumer discretionary

Market cap: $3.1 billion

Price-to-earnings ratio: 11.7

Return on equity: 19.3

Source: Jefferies Group



2. Core-Mark

Ticker: CORE

Sector: Consumer discretionary

Market cap: $1.1 billion

Price-to-earnings ratio: 13.5

Return on equity: 10.6

Source: Jefferies Group



3. LKQ

Ticker: LKQ

Sector: Consumer discretionary

Market cap: $7.4 billion

Price-to-earnings ratio: 11.6

Return on equity: 12.0

Source: Jefferies Group



4. BorgWarner

Ticker: BWA

Sector: Consumer discretionary

Market cap: $6.8 billion

Price-to-earnings ratio: 10.4

Return on equity: 15.9

Source: Jefferies Group



5. Signature Bank

Ticker: SBNY

Sector: Financials

Market cap: $5.4 billion

Price-to-earnings ratio: 9.9

Return on equity: 11.6

Source: Jefferies Group



6. Synchrony Financial

Ticker: SYF

Sector: Financials

Market cap: $13.5 billion

Price-to-earnings ratio: 8.1

Return on equity: 21.9

Source: Jefferies Group



7. LPL Financial Holdings

Ticker: LPLA

Sector: Financials

Market cap: $5.9 billion

Price-to-earnings ratio: 13.7

Return on equity: 55.4

Source: Jefferies Group



8. Virtu Financial

Ticker: VIRT

Sector: Financials

Market cap: $2.8 billion

Price-to-earnings ratio: 11.2

Return on equity: 15.1

Source: Jefferies Group



9. McKesson

Ticker: MCK

Sector: Healthcare

Market cap: $24.4 billion

Price-to-earnings ratio: 9.2

Return on equity: 13.7

Source: Jefferies Group



10. Oshkosh Truck

Ticker: OSK

Sector: Industrials

Market cap: $4.7 billion

Price-to-earnings ratio: 13.0

Return on equity: 18.7

Source: Jefferies Group



11. HD Supply

Ticker: HDS

Sector: Industrials

Market cap: $5.3 billion

Price-to-earnings ratio: 11.9

Return on equity: 29.8

Source: Jefferies Group



12. Alliance Data Systems

Ticker: ADS

Sector: Information technology

Market cap: $2.1 billion

Price-to-earnings ratio: 3.7

Return on equity: 25.1

Source: Jefferies Group



13. Eastman Chemicals

Ticker: EMN

Sector: Materials

Market cap: $9 billion

Price-to-earnings ratio: 10.1

Return on equity: 13.5

Source: Jefferies Group



14. Celanese

Ticker: CE

Sector: Materials

Market cap: $9.8 billion

Price-to-earnings ratio: 9.6

Return on equity: 27.1

Source: Jefferies Group



The stock market's fear gauge is sending a persistent warning that has a 30-year track record of signaling meltdowns ahead

Sun, 06/28/2020 - 8:41am

There were a few days in March when investor fear was so rampant that trading halts became commonplace.

That unnerving period of frequent circuit breakers is long gone now — but there still remains a palpable sense of uncertainty about what the future holds for publicly traded companies. 

For proof, look no further than Wall Street's so-called fear gauge formally known as as the CBOE Volatility Index, or VIX. It was near 36 on Friday, up 11 percentage points while stocks slumped, in keeping with its inverse relationship with the S&P 500. At that level, it was well above its long-run average of 19, according to data compiled by BTIG.

Perhaps the VIX was itself a tell-tale sign of the decline. After all, a rising VIX indicates that various S&P 500 index options that offer insurance against future losses are commanding higher premiums.

If history is any guide, the relatively elevated VIX may be signaling that more losses are afoot in the stock market. 

"Investors should be mindful of the 2020 declines in stocks as VIX rose through 25 in late February, past 45, to peak at 85.47," said Julian Emanuel, BTIG's chief equity and derivatives strategist, in a recent client note.

He added, "In 30 years of data, VIX between 25 and 45 has been accompanied by large net declines for the S&P 500."

Emanuel's analysis of the VIX from its inception in 1990 through June 2020 showed that when it traded in a range between 25 and 45, the S&P 500 fell by a cumulative 79%. On a daily basis, the losses averaged out to -0.1%. 

To be sure, the VIX traded in this range roughly one-fifth of the time under consideration, notes David Rosenberg, the chief economist & strategist of Rosenberg Research & Associates. But that does not make the VIX any less prophetic, in his view.

He noted that when the VIX traded between 30-35, the average monthly change in the S&P 500 was -1.1%. At 40 and above — where the index was trending towards on Friday — monthly losses averaged -4.3%.

Rosenberg further noted that the market's impressive 45% jump from its coronavirus-driven trough did not sufficiently drive down the VIX — at least when compared to history. 

In 1990, the S&P 500's first 40% rally pushed the VIX down to 12. In 2002, a comparable rally compressed it to 13. In 2009, the VIX retreated to 24. 

But in 2020, the VIX briefly bottomed near 25 before advancing to the zone in the 30s that Rosenberg and Emanuel consider dangerous. The historic volatility in March likely kept the VIX higher than usual this time around.

However, other experts are keeping close tabs on elevated levels of fear and uncertainty on Wall Street. After all, there is a lot to still worry about, including the recent rise of hospitalization rates in several states.

"While equity volatility should normalize further with a better macro backdrop, it is likely to remain elevated compared with long-run history in the coming months," said Christian Mueller-Glissmann, a managing director of portfolio strategy and asset allocation at Goldman Sachs.

He continued: "Our volatility regime model, which aggregates macro, macro uncertainty and market indicators, suggests that the high vol regime might linger. Uncertainty indicators in particular are still high due to the COVID-19 newsflow."

In other words, this is no time to be complacent. Emanuel reminded clients that unemployment is still historically high and the so-called second wave of infections is actually a fast-rising first wave in many states.   

He recommends that investors cash in on lingering greed by identifying stocks where traders are overwhelmingly bullish, and then selling near-term, out-of-the-money calls. Boeing, Tesla, Delta Air Lines, and Spotify are a few of the companies he spotted with relatively flat skew, meaning traders are paying a greater premium for upside calls versus downside puts. 

SEE ALSO: Morgan Stanley handpicks 10 stocks to buy now for the richest profits as travel and outdoor activities transform in the post-pandemic world

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The pandemic decimated the flex office space. Here's how companies like Convene and Industrious are getting creative to bounce back.

Sun, 06/28/2020 - 7:54am

  • Flexible office providers are adapting their businesses to meet the different demands of their clients as offices across the country begin to reopen.
  • Serendipity Labs has launched a subscription service that is targeted at big companies that are looking for individual private office space close to employees' homes.
  • Convene is launching a digital conference tool that will facilitate both all-digital and hybrid digital and in-person conferences as the virus has led to cancellations of large events.
  • The pandemic has also spurred flex office players to create an industry council to share best practices.
  • Visit Business Insider's homepage for more stories.

Coronavirus, and the massive remote work expansion that followed it, has massively destabilized the office. While it is unclear what the long-term effects will be, companies are reimagining how their real estate footprint responds to the challenges of social distancing in a pre-vaccine world, and what that will look like in the longer term. 

For flex office providers, this could be a major opportunity to snap up customers who don't want to sign long-term leases while the world is so uncertain. 

The pandemic has put the flex office industry at an inflection point. The coronavirus pandemic rocked the sector as the startups and entrepreneurs that it counted on as clients have decided to either stop using their workspaces or just stopped paying rent. Big players like Convene and Industrious announced layoffs in March and April as America worked from home, and even as the hardest-hit cities reopen, the rise of remote work risks continues to be an existential threat to the business.

Now, flex office providers are becoming even more flexible in an attempt to align more closely with their customers' needs during this period of immense uncertainty.

"For now, companies are listening to their employees and everyone wants something different – so rather than a future that favors either office or remote-centered work, I believe flexibility will be the real long-term shift we see," Michelle Killoran, a real estate investor at OMERS Ventures, told Business Insider.

Serendipity Labs, a nationwide flex office provider that has a majority of its spaces in suburban and smaller cities, like Kansas City and Nashville, has launched a subscription service aimed at employers who want to supplement their staffs' home office with another flexible workspace. Convene, which offers flexible offices as well as meeting and event spaces has quietly launched digital conferencing tools and workplace consulting services to serve a wider range of clients.

Companies are also looking to highlight how they can provide an even safer workplace experience during the pre-vaccine period, with enterprise-focused flex provider Industrious helping to launch an industry group focused on cleanliness and hygiene.

Subscriptions and suburban office space

The buzziest terms in the office world are "distributed work" and the "hub and spoke" model, ideas that look to find a middle ground between one central office and the fully-remote workspaces. By providing a variety of working locations, firms hope to see higher employee satisfaction and more resiliency during crises like the pandemic. 

The strategy gives workers options to work closer to their home, whether in the outskirts of a city itself or in the suburbs. While large coworking spaces in an urban center may come to mind when discussing the flex industry, many companies already operate flex centers outside of the central business district. 

Office Evolution, a flex provider that focuses on suburban markets and smaller cities has seen an increase in demand for private office space, according to CEO Mark Hemmeter.

Hemmeter said that most demand so far has come from small businesses and freelance workers, but that he expects larger corporations to start renting more space as employees push their employers to offer a workplace somewhere between the downtown office and the employees' home.

Read more: The coronavirus is a 'nuclear bomb' for companies like WeWork. 10 real-estate insiders lay out the future of flex-office, and how employers are preparing now.

"Where we're going to see is the driver of the individual versus the employer that is going to really change the landscape of real estate strategy in the future," Charlie Morris, the leader of Avison Young's US Flexible Office Solutions, told Business Insider.

Serendipity Labs operates both suburban and urban locations. CEO John Arenas told Business Insider that inquiries for suburban locations are up to 90% of pre-COVID levels, while urban locations are only at 40% of pre-COVID levels. He said that 35% of demand is coming from companies reevaluating their office space after the pandemic. 

The company has launched a temporary subscription program that allows companies to provide individual workspace for employees close to where they live. The plan is fungible between employees and locations and has a rolling start date. Unlike coworking companies, the space is a private, enclosed office but offers coworking-like flexibility on use and location. 

The company also offers by-day desk rentals to support those who only occasionally need to leave the house for work. 

"We knew that large company clients, it makes less economic sense for them to be in a traditional lease for a secondary market and suburb, but they also have to react to and support a more mobile and remote workforce," Arenas told Business Insider about the origins of the plan. 

Breather, a flex office and meeting space company, has always had just-in-time and subscription booking models. CEO Bryan Murphy told Business Insider that this model has attracted a lot of interest.

"The number of leads, phone calls coming in looking for flexible has doubled in the last thirty days," Murphy said. "There are no traditional leases being done right now." 

Flexible business models and a flexible industry

Others in the industry are exploring digital means of keeping clients. 

Convene, which provides office space but largely focuses on events and meetings, has launched a digital conference tool. The tool, which CEO Ryan Simonetti described to Business Insider as "the digital twin to Convene's onsite experience," will facilitate both entirely online conferences and "hybrid" events, that combine a smaller in-person meeting with a digital stream of the events.

Convene employees will stand in as consultants who can help to prepare and test the technology before the meeting and provide support for any tech hiccups along the way. The company will also offer comprehensive post-event data that analyzes the attendees. 

Convene CEO Ryan Simonetti said that the company's funnel of confirmed events at the last half of the year makes it seem like "we're going back to normal in September," but that larger events are also still being affected. The digital conferencing tool allows for conferences to have smaller in-person events for local attendees while also reaching a larger, farther away audience. 

Read more: WeWork is bringing corporate staff back to New York offices in 3 waves as the city enters the next stage of reopening. Here are the details the coworking giant just gave workers.

Flex companies also starting to interact with each other for the first time to create industry standards, which they hope will make clients more comfortable about returning to their spaces. Industrious has led the formation of a Workplace Operator Readiness Council, which is sharing best practices for cleanliness and preventing disease transmission across 25 international operators, such as IWG, CBRE's Hana, Convene, and Serendipity Labs.

Industrious CEO Jamie Hodari told Business Insider that the council was created because flex companies, who tout their ability to create the best places to work, need to actually share best practices in order to deliver a quality, and safe experience to their customers. 

"We need to be in the 98th and 99th percentile of American businesses in how we approach the return to work," Hodari said. 

In the spirit of flexibility, Hodari hopes that the council will eventually evolve beyond sharing best practices for hygiene, to operating as an industry-wide council that promotes standards across companies. 

Read more: 

SEE ALSO: WeWork is bringing corporate staff back to New York offices in 3 waves as the city enters the next stage of reopening. Here are the details the coworking giant just gave workers.

SEE ALSO: The coronavirus is a 'nuclear bomb' for companies like WeWork. 10 real-estate insiders lay out the future of flex-office, and how employers are preparing now.

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Accenture is laying people off as Wall Street braces for big cuts next year

Sat, 06/27/2020 - 12:14pm

 

Welcome to Wall Street Insider, where we take you behind the scenes of the finance team's biggest scoops and deep dives from the past week. 

If you aren't yet a subscriber to Wall Street Insider, you can sign up here.

Accenture is cutting US staff, and top execs just warned of more pain to come as the consulting giant promotes fewer people and looks to control costs, Meghan Morris and Dakin Campbell first reported. Their story got a lot of attention this week, and for good reason. It could be an indicator for how the firm's own clients are weathering a downturn, and consulting likely won't be the only industry to feel the crunch.

We also took a look at who's most at risk once Wall Street kicks off the tidal wave of layoffs many banks had put on pause — and why boutique firms without a strong restructuring practice could be "dead in the water," as one recruiter put it. 

Dakin along with Casey Sullivan got an inside look at Egon Durban, who became co-CEO of Silver Lake Partners in December. They spoke with more than 40 people who have worked with Durban, or across from him on deals, to understand his rise at the tech-focused private-equity firm he joined as a young banker in 1999.  

Read the full story here: 

40 insiders reveal the meteoric rise of Silver Lake's Egon Durban, the tech-focused PE firm's No. 1 dealmaker who strong-armed his way to the top and is about to get $18 billion more to invest

Keep reading for a look at why one of the earliest forms of alt-data is breaking down; a rundown of Amazon's rapid-fire moves to scoop up warehouses; and a deep dive into the culture at BTIG. 

Have a great weekend, 

Meredith 

Inside BTIG

The financial-services industry has tried to clean up its image in recent years, but shades of an earlier era on Wall Street have lingered at the firm BTIG, a Business Insider investigation by Nicole Einbinder and Rebecca Ungarino has found. 

Read the full story here: 

Former employees say BTIG had a toxic party culture that was stuck in the '80s Why alt-data fans are struggling

As Dan DeFrancesco and Bradley Saacks report, one of the earliest and most popular forms of alternative data is proving more difficult to handle these days. Investors like hedge funds have long leaned on credit-card data to uncover everything from new retail trends to the health of specific businesses.

But the pandemic has transformed shopping habits and made data unreliable. Vendors have been forced to do more hand-holding with clients, while banks are using techniques like post-stratification weighting and "swarming" to help make sense of the information. 

Read the full story here:

Credit-card data is broken. Here's how hedge funds and banks are being forced to rethink one of the earliest alt-data plays. Amazon adds to its warehouse empire

As Dan Geiger reports, Amazon just signed its largest lease ever in New York City. It's also negotiating to lease a 620,000-square-foot office and warehouse space in Red Hook, Brooklyn, that is under construction, a source with direct knowledge of the negotiations told Business Insider.

The moves mark the latest in a dramatic expansion of the $1.3 trillion company's logistics operations — which serve as the backbone for Amazon's booming e-commerce business.

Read the full story here: 

Amazon just signed its largest-ever warehouse lease in NYC. Here's how it's been making deals left and right to grow its massive storage and distribution network. What's next for buy now, pay later fintechs

Buy now, pay later, also known as point-of-sale financing, has been surging as consumers shift their spending online. Fintechs like Affirm, Afterpay, and Klarna are now looking to expand beyond their installment-lending roots. Affirm is exploring more financial products with the launch of a high-yield savings account, and Klarna just rolled out a loyalty program for users.

As Shannen Balogh reports, with growth comes new challenges, like managing consumer credit at scale. The fintechs could start looking for partnerships with banks, or find themselves to be acquisition bait.

Read the full story here:

From Affirm to Klarna, buy now pay later startups are booming. But experts warn juggling explosive growth with responsible lending is a tricky balance. FA recruiting is transforming 

As Rebecca Ungarino reports, elements of virtual financial adviser recruiting will stay with the industry post-pandemic as wealth management firms have adapted during remote work. 

"All of this is going to be much easier to move advisers, clients; all of this happening together is going to support a whole lot more movement," one veteran adviser recruiter said. 

Read more:

Wealth managers could save millions in costs from a snappier recruitment process. An analyst lays out the 3 firms that could benefit most. On the move

Citigroup has poached a top exec from Wells Fargo to run operations and anti-fraud within its Global Consumer Banking division — a unit that has been remodeled over the past year with ambitions of growing revenues and better competing with other top US banks. 

Titi Cole, previously EVP and head of operations and contact centers for the consumer and small business division at Wells Fargo, will join Citi in August as head of global operations and fraud prevention in the consumer bank, according to memo from Jane Fraser, president of Citi and CEO of GCB. 

Banking Deals Real estate Wealth management Hedge funds and investing  Fintech  Markets

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30 Big Tech Predictions for 2020

Sat, 06/27/2020 - 12:02pm

Digital transformation has just begun.

Not a single industry is safe from the unstoppable wave of digitization that is sweeping through finance, retail, healthcare, and more.

In 2020, we expect to see even more transformative developments that will change our businesses, careers, and lives.

To help you stay ahead of the curve, Business Insider Intelligence has put together a list of 30 Big Tech Predictions for 2020 across Banking, Connectivity & Tech, Digital Media, Payments & Commerce, Fintech, and Digital Health.

This exclusive report can be yours for FREE today.

Join the conversation about this story »

30 Big Tech Predictions for 2020

Sat, 06/27/2020 - 12:02pm

Digital transformation has just begun.

Not a single industry is safe from the unstoppable wave of digitization that is sweeping through finance, retail, healthcare, and more.

In 2020, we expect to see even more transformative developments that will change our businesses, careers, and lives.

To help you stay ahead of the curve, Business Insider Intelligence has put together a list of 30 Big Tech Predictions for 2020 across Banking, Connectivity & Tech, Digital Media, Payments & Commerce, Fintech, and Digital Health.

This exclusive report can be yours for FREE today.

Join the conversation about this story »

Wall Street firm BTIG had a toxic party culture that was stuck in the '80s, former employees say

Sat, 06/27/2020 - 11:33am

  • The financial-services industry has tried to clean up its image in recent years, but shades of an earlier era on Wall Street have lingered at the firm BTIG, a Business Insider investigation has found.
  • Interviews with more than half a dozen former BTIG employees, and a review of court records and Equal Employment Opportunity Commission documents, reveal allegations of a boys'-club culture, excessive drinking at company events, and sexual banter at least into 2019.
  • You can read the full investigation here.

In December, the financial-services firm BTIG made a surprise announcement: The company would no longer serve alcohol at its winter holiday party, which had gained a reputation on Wall Street as an annual anything-goes affair.

Instead, the company said, it would opt for healthier alternatives such as smoothies and fruit-infused water, offering activities like yoga and bootcamp-style workouts.

As a new generation of finance professionals enters the workforce, the financial industry has struggled to convince the public that it now embraces groups that Wall Street has long excluded. For BTIG, rebranding its holiday party with a more wholesome touch — it had been a raucous, lavish event for employees and clients held at swanky New York nightclubs like Catch and Provocateur — was an attempt to do just that. (Neither venue responded to requests for comment.)

But as the firm, which is privately held with main offices in New York and San Francisco, attempts to tweak its image outwardly, some of the old Wall Street ways persisted internally in recent years, Business Insider has learned.

Interviews with more than half a dozen employees who left the firm within the past six years, as well as a review of court records and documents from the Equal Employment Opportunity Commission, revealed allegations of a boys'-club culture marked by conduct that some described as inappropriate workplace behavior, excessive drinking at company events, and sexual banter.

YOU CAN READ THE FULL STORY HERE: Former employees say BTIG, a Wall Street firm backed by Goldman Sachs and Blackstone, had a toxic party culture that was stuck in the '80s

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The Death of Cash

Sat, 06/27/2020 - 10:00am

Both globally and in the US, the payments ecosystem is evolving.

Two related trends: the slow death of cash and the fast rise of digital payments, are transforming how consumers, businesses, governments, and even criminals move money.

Annual global non-cash transactions are expected to pass the 1 trillion milestone by 2024. This major transformation is being propelled by several factors, including increased usage of digital wallets, more small vendors adapting to accept credit cards, and the explosive growth of mobile commerce.

In The Death of Cash slide deck, Business Insider Intelligence projects what the payments ecosystem will look like through 2024 by examining the driving forces powering digital payment proliferation.

This exclusive report can be yours for FREE today.

Join the conversation about this story »

The Death of Cash

Sat, 06/27/2020 - 10:00am

Both globally and in the US, the payments ecosystem is evolving.

Two related trends: the slow death of cash and the fast rise of digital payments, are transforming how consumers, businesses, governments, and even criminals move money.

Annual global non-cash transactions are expected to pass the 1 trillion milestone by 2024. This major transformation is being propelled by several factors, including increased usage of digital wallets, more small vendors adapting to accept credit cards, and the explosive growth of mobile commerce.

In The Death of Cash slide deck, Business Insider Intelligence projects what the payments ecosystem will look like through 2024 by examining the driving forces powering digital payment proliferation.

This exclusive report can be yours for FREE today.

Join the conversation about this story »

We spoke to 40 Silver Lake insiders about how Egon Durban amassed power at the media-shy private equity firm

Sat, 06/27/2020 - 9:00am

Egon Durban, the co-CEO of private equity firm Silver Lake Partners, is a newly-minted billionaire drawing comparisons to Warren Buffett, with membership in some of golf's most exclusive clubs and an inside track to the Oscars.

A Texas native who made his name acquiring and then selling Skype, he has rapidly become the lead dealmaker on investments spanning entertainment, media, and technology. 

Under Durban, Silver Lake's name has recently been associated with pandemic-era investments into social media platform Twitter, home-for-rental company Airbnb, and travel site Expedia. Those deals and others have led some Silver Lake insiders to wonder if Durban may be flying too close to the sun.

The investments are flashier than the staid but dependable investments upon which Silver Lake made its name, backing the operations of software and hardware companies.

Silver Lake is almost finished raising its latest fund — one source said it could settle on as much as $18 billion — making it one of the largest buyout funds focused exclusively on tech investments, with the opportunity to reshape entire industries. 

Business Insider interviewed more than 40 people close to Durban and Silver Lake, including those who do or have worked directly with him and across from him, to understand his management style and how he's been able to amass his power inside the notoriously media-shy firm. 

SUBSCRIBE TO BUSINESS INSIDER TO READ THE FULL STORY: We talked to 40 insiders about the meteoric rise of Silver Lake's Egon Durban, the tech-focused PE firm's top dealmaker who's about to get $18 billion more to invest

SEE ALSO: Hollywood's top talent agencies may need a bailout from their PE backers as the coronavirus hammers big bets on live sports and studio production

SEE ALSO: Silver Lake has been plowing money into bets like Airbnb, Twitter, and Waymo. Here's a look inside why it's being called the Warren Buffett of tech.

SEE ALSO: Silver Lake just added to a string of bets in the struggling travel sector by leading a $108 million investment in vacation property startup Vacasa

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Vacancy rates are soaring in Washington DC's normally recession-proof office market. Here's how experts think this downturn will play out — and why some are still optimistic.

Sat, 06/27/2020 - 8:56am

  • Washington DC's office vacancy rate has surpassed 15% for the first time. 
  • Meanwhile, this recession's bailout doesn't appear to expand the footprint of government as other downturns have.
  • Without government agencies and related tenants active in the leasing market, the city may not be immune to this downturn in the way that it was to previous recessions.  
  • Despite the headwinds, some investors are optimistic they can capitalize on the demand in recent years for new or renovated offices.
  • For more stories like this, sign up here for our Wall Street Insider newsletter.

Girded by a federal government that has only grown during recent recessions, Washington DC's office market has appeared unsinkable even in the worst of times.

But amid the twin crises of an economic downturn and a virus pandemic that has forced tenants to rethink how they will occupy the workplace, the city may not be as resilient this time.

Washington DC's office vacancy rate rose to 15.2% at the end of the second quarter, according to data from CBRE, the first time it has surpassed 15% in the 28 years since brokerage and real estate services firm began tracking the measure and 1.3% higher than it was just six months ago. Past periods of strength, such as during the mid-2000s, have pushed Washington DC's vacancy to less than half of that.

Read More: Companies from banks to tech giants are looking to shed huge chunks of office space. Here's a look at 8 key sublease offers — and what they mean for rents in big-city markets.

The real-estate brokerage and services firm Savills, found that the availability rate, which measures both current vacancies and spaces that are expected to become empty in the coming months, has reached even higher, hitting 17.6%.

The federal government and the large constellation of lobbying firms, contractors, and service providers that benefit from federal spending, have previously buoyed the market during dips, but few experts expect those office users to race to the rescue this time.

"In 2009, the government stepped in with stimulus and there was a rapid expansion of government tenancy where it absorbed a whole bunch of vacancy," said David Lipson, a vice chairman at Savills who leads its Washington DC based public sector services group. "There's no part of the stimulus now that seems as if it is going to result in a major expansion of government jobs."

Office vacancies have been building 

The roughly 120 million-square-foot Washington DC market's weakening has been in the making for years.

Vacancy has steadily accrued over the last decade as new office supply has been built. During the past four years alone, about 6 million square feet of new space has been added to the market, according to CBRE research. Those shiny new offices lured away tenants, but left behind vacancies in older office properties that have been harder to fill, adding about 2 million square feet of net vacancy to the market, CBRE found.

"There's a phenomenon in Washington DC called the 'muffin top' where the tops of buildings lease because they have higher ceilings, better views or were newly added onto an existing building," said Craig Deitelzweig, the president and CEO of Marx Realty, which owns three office properties in the Washington DC market. "The bottom floors linger empty."

Read More: WeWork is ditching a major Manhattan office, and it's the first big step in a turnaround that's put its entire real-estate portfolio under review.

Why past recessions were different for commercial real estate

Past downturns have spurred watershed moments for Washington DC leasing activity, even as other office markets across the country were sent reeling.

The attacks of 9/11, which came just after the dot-com crash spurred a recession, established the Department of Homeland Security, which has since grown into one of the Washington DC region's largest tenants at nearly 5 million square feet, according to the real estate services and brokerage firm JLL.

Asking rents came tumbling down in places such as Manhattan and San Francisco during that downturn, falling 29% and 49.6% on average respectively, according to JLL. In Washington DC, rents rose during the same period.

In the recession a decade ago, the number of jobs in the city actually swelled by 10%, according to JLL, as government grew rapidly to administer a massive bailout of the financial system and added staff to oversee a tightened regulatory regime. Towards the tail end of that downturn in 2010, 4.3 million square feet of space was absorbed, a record figure, according to CBRE data and vacancy swung from 11.8% to 9.8%, a major tightening of the office market.

Manhattan's average asking rent fell 38.4% and San Francisco's dipped 25.0% during the financial crisis, but Washington DC's only fell by a modest 2.5%, JLL reported. 

The market has since stagnated, with average asking rents rising only modestly over the last decade from $51.19 per square foot in 2010 to $58.97 per square foot now, according to CBRE. Rental rates have actually fallen during that period, according to Savills, when factoring in the incentives landlords lavish on tenants, such as periods of free rent and contributions to the costs of building out their office interiors.   

The $2 trillion CARES Act, which was passed in March, hasn't ushered in the same government hiring that has translated into market booms in the past.

"For many government tenants now, it's a pivot rather than an expansion," Lipson said.

Despite the headwinds, some investors are optimistic

There are some signs for optimism. Washington DC lost about 337,000 total jobs year over year in April compared to nearly 2 million in New York City, about 1 million in Los Angeles, 630,000 in Chicago, 485,000 in Boston, and 375,000 in San Francisco, according to data from Cushman & Wakefield.

The CARES Act has spurred a surge in spending on lobbying, which in the past has translated into modest upticks in leasing activity, especially for pricey, high-end offices that many firms in that industry prefer.

That's the kind of demand that Deitelzweig is counting on for his firm's recent acquisition of 1307 New York Avenue NW, a roughly 125,000-square-foot office building that Marx Realty purchased for a little over $40 million in April.

Deitelzweig said the company plans to invest roughly another $40 million renovating the property, which will be fully vacant by the end of the year.

Marx Realty is aiming to operate the building in a manner akin to a hotel, employing features it has used to reposition other buildings it owns, such as 10 Grand Central, a roughly 430,000 square foot office building in Midtown Manhattan, where it has a doorman and concierge desk, a tenant lounge and outdoor space, and even a signature scent and soundtrack in the building's common areas.

Nearly a century ago, the building served as a headquarters for the newspaper the Washington Times-Herald, including its printing operations, according to Deitelzweig. Because of that, it features high ceilings in its lower floors that were necessary to house the printing equipment. Deitelzweig said those airy rooms will now help his firm avoid the typical difficulties filling lower level spaces.

"The in-place rents in the building were in the $20s per square foot," Deitelzweig said. "We're aiming for the $60s and $70s."

Have a tip? Contact Daniel Geiger at dgeiger@businessinsider.com or via encrypted messaging app Signal at +1 (646) 352-2884, or Twitter DM at @dangeiger79. You can also contact Business Insider securely via SecureDrop.

SEE ALSO: Amazon just signed its largest-ever warehouse lease in NYC. Here's how it's been making deals left and right to grow its massive storage and distribution network.

SEE ALSO: A flagship Neiman Marcus store in the glitzy Hudson Yards mega-mall is being marketed as office space, showing how developers are making a big pivot as retail bankruptcies mount

SEE ALSO: Companies from banks to tech giants are looking to shed huge chunks of office space. Here's a look at 8 key sublease offers — and what they mean for rents in big-city markets.

Join the conversation about this story »

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The stars are aligning for a V-shaped rebound in US housing — and ING says it could kickstart a swift recovery in other parts of the economy

Sat, 06/27/2020 - 8:27am

  • There are early signs that a V-shaped recovery may be underway in the housing market. 
  • A slew of data this week either showed early signs of recovery, or represented the low from the shock of the coronavirus pandemic. 
  • This could help lift other areas of the economy, especially those linked to housing, according to James Knightley of ING. 
  • "As people move to a new home they typically also spend money on new furniture and home furnishings, garden equipment and building supplies such as a new paint job and a bit of home improvement," said Knightley. 
  • Visit Business Insider's homepage for more stories.

Like most parts of the economy, the housing market was slammed by the coronavirus pandemic and sweeping shutdowns to curb the spread of disease that kept consumers on the sidelines. 

But now, as states across the US reopen, there are signs of a rebound in housing demand that are encouraging and could lead a recovery in other parts of the economy, according to economists at ING. 

This week, new home sales jumped 17%, more than economists expected, as buyers rushed back to the market. Mortgage applications to purchase a home dipped slightly this week, but are a staggering 18% higher on the year and last week hit an 11-year high.

And, even though existing home sales stumbled in May, falling 9.7%, the National Association of Realtors expects it was the low point before what's expected to be a solid rebound.

"At face value this is remarkable given the scale of joblessness in the economy and the ongoing uncertainty relating to the path of Covid-19," wrote James Knightley, ING's chief international economist, in a Wednesday note. 

All things considered, "the outlook for housing transactions, construction activity and employment in the sector is looking much better than what looked possible just a couple of months ago," he said. 

Read more: A market-crash expert known as 'Dr. Doom' warns a 10-year depression is coming — and says investors are far too confident about a possible recovery

These early signs of a solid "V-shaped" recovery in the home market could have positive implications for other parts of the economy — especially those that are connected to housing, such as retail sales. "As people move to a new home they typically also spend money on new furniture and home furnishings, garden equipment and building supplies such as a new paint job and a bit of home improvement," said Knightley. 

Going forward, a number of factors are likely to provide a "decent platform" for a recovery in housing and associated sectors. Mortgage rates remain at historic lows, and the Federal Reserve has signaled that monetary policy will remain accommodative for some time. 

In addition, the economy is adding jobs, which will further help fuel spending on big-ticket items such as homes, Knightley said. 

Read more: From a late-night infomercial to a 1,040-unit empire worth $188 million, how Jacob Blackett perfected his real-estate-investing strategy after losing $70,000 on his first deals

Still, there are potential risks of a setback, Knightley cautioned. Unemployment remains high, with millions of Americans collecting benefits and filing on a weekly basis. And, while the extra $600 in weekly unemployment benefits have helped support consumer spending, they are set to end in July and it's unclear that further stimulus will be approved. 

That could mean that households that've experienced job losses could soon feel significant financial pain. "Should this result in rising mortgage delinquencies and defaults this could derail the recovery phase with forced sales boosting supply and depressing prices," said Knightley. 

Read more: The chief strategist of $2.5 trillion State Street recommends 7 ETFs for investors looking to profit from a permanently altered post-coronavirus landscape

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A market-crash expert known as 'Dr. Doom' warns a 10-year depression is coming — and says investors are far too confident about a possible recovery

Sat, 06/27/2020 - 8:04am

  • Nouriel Roubini, an economics professor at New York University's Stern School of Business, thinks the economy is hurtling toward a prolonged economic depression.
  • To bolster his thesis, he rattles off a plethora of negative trends and features that are now being exacerbated by the prevalence of the coronavirus. 
  • Roubini thinks the recovery from the virus will be "anemic," and that markets are pricing in a scenario that is "totally not consistent" with the underlying environment. 
  • Roubini has been nicknamed "Dr. Doom" for his repeated pessimistic forecasts.
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Nouriel Roubini, a professor of economics at New York University's Stern School of Business, has a knack for calling bubbles.

In 2006, a full-year before the financial crisis sent the global economy spiraling into turmoil, Roubini — who has been dubbed "Dr. Doom" — was calling foul on the housing market. 

Today, in the wake of the coronavirus, he's warning of a prolonged economic depression spanning the next decade.

"For a quarter or two, it may look like a 'V' shaped recovery," he recently said at the Bloomberg Invest Global conference. "But the way I differ from consensus is that, consensus believes that by next year the 'V' shaped recovery is going to continue — that growth is going to be something like 6% in United States, three times as much potential."

Roubini came prepared with a litany of reasons backing his divergence in opinion, including:

  • Huge piles of public and private debt
  • Aging demographics
  • Disappearing jobs
  • Slack in goods and real-estate markets
  • Deglobalization
  • Rising tensions between the US and China 
  • Negative supply shocks

Although many of these trends were in place before the virus struck, Roubini thinks the coronavirus crisis has exacerbated their ferocity. What's more, he believes the culmination of these forces will "lead us to a greater depression."

"There's going to be a painful process of deleveraging, both by the corporate sector and the household sector," he said. "They have to be spending less, saving more, and doing less investment, capex, or residential investment."

That said, Roubini thinks calls for a 'V' shaped recovery are dubious. To him, those prognostications are "totally not consistent" with the underlying economic milieu. As a result, he's projecting more of a 'U' shaped rebound that features a stretch of slow growth.

"I see the recovery being strong all in the third quarter, and then fizzling out by the forth quarter, and then becoming very anemic by next year," he said. "Most firms are highly leveraged. They have to survive and thrive by cutting costs and saving more."

As financial stress mounted during the ongoing crisis, the list of notable virus-induced bankruptcies gained steam. Roubini thinks there are more to follow.

"So many firms right now are either bankrupt or on the verge of bankruptcy," he said. "They have to take action to try and survive."

"How are they going to do it?" he asked. "By reducing labor costs. First, firing people and then rehiring them in a more flexible way. The trouble is that what's my labor cost is somebody else's labor income."

In Roubini's mind, all avenues seem to lead to less growth and a sub-par, sputtering economic recovery for years to come.

SEE ALSO: A 30-year market veteran explains why we're in 'one of the nutsiest bubbles in the history of bubbledom' — and warns of an 'underwater' economy for the next several years

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40 insiders reveal the meteoric rise of Silver Lake's Egon Durban, the tech-focused PE firm's No. 1 dealmaker who strong-armed his way to the top and is about to get $18 billion more to invest

Sat, 06/27/2020 - 8:00am

  • Egon Durban became co-CEO of Silver Lake Partners in December, giving him more control of the tech-focused private-equity firm he joined as a young banker in 1999.
  • As Durban rose through the firm, he pushed Silver Lake to expand its investment targets outside of tech and into live events, travel, and content, industries that are particularly challenged by the coronavirus pandemic. 
  • Business Insider spoke to more than 40 people who have or currently work with Durban, or across from him on deals, to understand his rise, including a moment when some of those sources said he led an effort to push the firm's founders for control. 
  • Sign up here for our Wall Street Insider newsletter.

It seems like nothing can touch Egon Durban. 

Durban, the co-CEO of private equity firm Silver Lake Partners, is a newly-minted billionaire drawing comparisons to Warren Buffett, with membership in some of golf's most exclusive clubs and an inside track to the Oscars. A Texas native who made his name acquiring and then selling Skype, he has rapidly become the lead dealmaker on investments spanning entertainment, media, and technology. 

When Twitter shareholders demanded the ousting of its CEO, Jack Dorsey, Durban stepped in and put up $1 billion. The lead instigator, Elliott Management's Jesse Cohn, settled his campaign. And when home-for-rental company Airbnb faced a dropoff in business, Durban again pulled out his private-equity wallet.

Business Insider interviewed more than 40 people close to Durban and Silver Lake, including those who do or have worked directly with him and across from him, to get inside the media-shy firm and understand how Durban will drive its investment choices for years to come. 

They described how one of the most prolific private-equity executives climbed the ladder in an organization, pushed for more control, and then proceeded to put his mark on the firm. 

Read more: Silver Lake has been plowing money into bets like Airbnb, Twitter, and Waymo. Here's a look inside why it's being called the Warren Buffett of tech.

One person who attended Silver Lake's annual gathering — a virtual event this year, rather than at a San Francisco hotel — noted that it was Durban who spoke for the majority of the time allotted. In the past, according to the repeat attendee, the air time would have been more evenly split among top executives. 

"It was the epitome of how the firm has transformed from what it was to what it is today," the person told Business Insider. "It's become the Egon Durban show." 

Flying too close to the sun

Already, Silver Lake is invested in Hollywood, media and global sports, and there's a clear sense that its expansion has only just begun as competitors such as SoftBank Group retreat from a series of losing investments and Buffett stands on the sidelines.

The firm is almost finished raising its latest fund — one source said it could settle on as much as $18 billion — making it one of the largest buyout funds focused exclusively on tech investments, with the opportunity to reshape entire industries. 

Some insiders now wonder whether Durban may be flying too close to the sun, striking deals in the middle of a pandemic that's decimated live events and travel. Companies like Airbnb and Twitter are a far cry from the staid but dependable investments upon which Silver Lake made its name, backing the operations of software and hardware companies. 

A review of his track record shows it's not the first time Durban has demonstrated an appetite for bold bets. And in other cases, he's emerged from them with greater returns than others thought possible. 

At the same time, while Durban's investing prowess has only grown during his more than two decades at Silver Lake Partners, his rise has fueled internal rivalries, with influence and power resting with those in his inner circle, and others left on the outside, sources told Business Insider.

Some said executives' success at Silver Lake could hinge on proximity to Durban, and that dynamic created internal competition.

People who have worked closely with Durban and Silver Lake spoke with Business Insider on the condition of anonymity, either because they were not authorized to speak publicly or feared repercussions for talking candidly about its executives. 

Read more: Hollywood's top talent agencies may need a bailout from their PE backers as the coronavirus hammers big bets on live sports and studio production

A Silver Lake spokesman declined to make Durban, or co-CEO Greg Mondre, available for an interview, while offering this statement: 

"This story blatantly disregards the facts, relying instead on gossip, rumor and speculation to paint a grossly inaccurate and distorted picture," it said. "Silver Lake is focused on creating value by partnering with CEOs and management teams to build and grow great companies in a socially responsible manner, where success is defined by trusted relationships, long-term performance and merit-based talent development in a highly collaborative culture.  We are all close friends and proud of building the firm together in partnership with our leadership team. Silver Lake did not participate in this story."

From Georgetown to Wall Street

Durban, a serious Georgetown University student according to former classmates, began his career at Morgan Stanley, a plumb post at what was then one of the leading Internet tastemakers. 

It was there that Durban first showed a steely resolve, exhibiting a rare fearlessness to working with clients much older and more experienced than him, according to Gordon Dean, a banker who worked with Durban back then and has stayed in touch.

"Egon has always been very comfortable sitting at the grown-up table," Dean said.

In 1999, Durban left for Silver Lake where he was on the ground floor of something that had never been done before: an investment firm that poured money into technology companies, taking them over and making big changes in order to jack up their value and sell them at a higher price. 

Cris Conde, the former CEO of SunGard, one of Silver Lake's first LBOs when it was done in 2005, recalled his early experience interacting with the firm's executives. Durban, he said, had suggested that he put more money into research and development, which he said transformed the company. Conde said he didn't mind the grilling he received from Silver Lake throughout the process, but others did.

"I could see I had members of my team that found their bedside manner to be a little too aggressive," Conde said. "In retrospect, I should have said 'lower your volume from 8 to 7, people might hear you better.'"

Silver Lake and its partners made $2.2 billion on that investment when they sold it to Fidelity National Information Services Inc. in 2015.

Read more: Wall Street is betting AMC is in a downward spiral. Here's the inside story of how the world's biggest movie-theater chain is battling for a comeback.

Others didn't go as smoothly.

In another instance, Silver Lake went through three different CEOs after buying Serena Software in 2005, according to three people with direct knowledge of the matter.

After a Silver Lake executive told the first CEO it wasn't working out, two subsequent CEOs didn't work out either, with one of them expanding the company into a new area of sales that didn't catch on. It was a huge frustration to executives who ran the company at the time Silver Lake acquired it.

On that investment, Silver Lake lost money. The owners sold Serena Software to another private-equity firm, HGGC, in 2014 for $450 million, after buying it for $1.2 billion. 

Nonetheless, Silver Lake's returns have been above average. The firm's fourth fund delivered a net return 25.3% through last year, according to data from Washington state's pension plan, placing it in the top quartile of funds tracked by Cambridge Associates. A fifth fund raised in 2018 missed the top quartile with a 15.8% return. 

Running the London office

In 2005, Durban was dispatched to London to build out Silver Lake's European presence, an assignment that helped establish him, among peers, as a clear future leader.

He built out the office and led deals, but above all, became a charismatic figure — a center of gravity that led others to want face time, according to people with direct knowledge of the matter. He had a Southern charm that grew on colleagues, a Longhorns fan who wasn't accustomed to the British dialect of locals. 

"He was a genuinely down to earth, humble guy," said one person who was close to him.

He was also loud and temperamental, said people who knew him. 

Colleagues admired the fact that he wasn't afraid to make bold decisions, clashing with traditional financial modeling when it came to deciding which companies to invest in, and what to do with them once Silver Lake took control. 

One person who worked there recalled lengthy decks about investment theses, where executives sifted through the contents and wondered what exactly Durban saw in a prospective target. 

But time and again, his convictions proved accurate, cementing a reputation for seeing business combinations that others didn't. 

Climbing the ranks at Silver Lake 

Back in New York, one of Silver Lake's founders, Glenn Hutchins, had started to lose his footing. 

Hutchins, a mustachioed financier who liked to go shoeless in the office, would lead the firm's Monday morning meeting and liked to appear on financial news channels. A former private-equity executive at Blackstone before founding Silver Lake, he was well-known in New York's social and philanthropy circles. 

But when the financial crisis hit and markets plunged, the stress proved too much. Hutchins became withdrawn from some colleagues, taking time off from the firm to recuperate.

Silver Lake kept moving forward. Durban soon inked a deal, partnering with Andreessen Horowitz and Canada's pension plan in 2009 to buy Skype from eBay for $1.9 billion.

The early video conferencing company was burdened by intellectual property lawsuits and slowing user growth. EBay's CEO had started prepping for a Skype spinoff when Durban swooped in, quickly settled the lawsuits, sunk money into development and hired a world-renowned chief executive. 

In 2011, Silver Lake sold Skype to Microsoft in an all-cash deal worth $8.5 billion. Silver Lake tripled its money in 18 months, according to someone close to the deal. 

That success gave him increased standing in the firm just as Silver Lake was beginning to think about raising money for its fourth flagship fund.

Durban took the opportunity to seize more power.

He pushed Hutchins and Silver Lake's other two founders, Jim Davidson and David Roux, for a greater share of Silver Lake spoils — earnings that, between pay and dividends, could translate to hundreds of millions of dollars, according to three people familiar with the matter. Mondre, Ken Hao, and Mike Bingle, members of a younger generation, also asked for greater responsibility and the compensation that came with it.

The talks were contentious at times and by then Durban and Hutchins, while similar in some regards, were not getting along, according to people with direct knowledge of the talks.

Roux, more open to making a lifestyle change than the others and already satisfied with his wealth and outside projects, stepped aside and began his formal transition in 2012, according to a person familiar with the matter. 

Hutchins, who enjoyed his stature in New York financial circles, was less willing to hand over control. The younger execs gained backing from Davidson, seen by people there at the time as critical leverage to force Hutchins' hand, according to people with direct knowledge of the matter.

After resisting, Hutchins finally agreed to give up control, though he continued working in the firm's New York office for several more years, investing on behalf of his family office. 

Davidson stayed on for some time in an operating role, though he agreed to reduce his stake in the partnership. A statement announcing Silver Lake's fourth fund listed him alongside the four younger execs as managing partners, then the firm's top title.  

A person who was there at the time acknowledged that in many partnerships there are ambitions, emotions and rivalries.

Gathering influence

With the founders taking on a reduced role, Durban's influence only grew. 

Around that time, he led the purchase of a 31% stake in William Morris Endeavor, Hollywood's largest talent agency, and joined the board. The investment spawned an internal joke that Durban wanted to buy it simply so he could attend the Oscars, according to two people with direct knowledge of the matter. 

Silver Lake, and Durban, would make a splash with an agreement in 2013 to buy Dell Technologies, the Round Rock, Texas-based personal computer maker. Silver Lake put about $1 billion into that $25 billion deal, and more into Dell's 2016 purchase of EMC, the largest tech deal in history. The roughly one third of the company it now owns is worth about $4.9 billion.

Several years later, Durban took further steps to improve his ability to rub elbows with current and prospective business partners – on the golf course. 

Once considered a mediocre golfer during his London days, Durban turned the company's Menlo Park gym — a perk for analysts, associates and principals working late into the evening — into a practice facility for improving his golf game, according to former employees. 

Only he and a few senior partners had a key.

By 2016, employees had to tap their connections to access other firms' gyms, either walking to Blackstone's facility across Sand Hill Road or down the street to KKR, according to someone with direct knowledge. 

Durban now boasts an 8.4 handicap, and memberships in some of the world's most prestigious clubs including Cypress Point, San Francisco, and Nanea, the Hawaii course conceived by his friend and mentor, KKR's George Roberts. 

Company politics

As Durban gained power, Silver Lake was becoming more cliquey and hierarchical, according to people with direct knowledge of the matter.

Some executives latched onto Durban, filling his ears with words of praise, and going out golfing with him, according to one of these people. Others found that he no longer associated himself as much with them, which could affect the kind of work they received and their influence in investments, several people said.

One friend who benefited from his continuous loyalty was Mondre, who joined Silver Lake with Durban back in 1999 as an associate. They grew up at the firm together and helped each other out, with Mondre taking on responsibilities in some of Durban's most challenging deals, including SunGard, according to one person with direct knowledge of the matter. 

And yet Mondre is considered by some to be aloof, arrogant and easily aggravated. A couple years ago, one story about the dealmaker that spread through Silver Lake's halls was that he threw a deal toy after getting upset that a meeting had been scheduled around someone else's calendar, rather than his own, according to two people who said it had become the talk of the office. 

Four other Silver Lake insiders who have worked with Mondre perceived him to be a weaker investor than Bingle, another executive who has recently taken on a reduced role, with one pointing to companies like communications firm, Avaya, that did not pan out.

Another executive who worked his way into Durban's orbit was Joe Osnoss, a graduate of Harvard with an affinity for the French language. Osnoss joined Silver Lake in 2002 and transferred to London just as Durban relocated to the United States, and his relationship with Durban was sometimes uncertain, according to a person who knows both men.

Only when Osnoss figured out how to work with Durban did his influence at the firm increase, the person said. In December, when Silver Lake said Durban and Mondre would become co-CEOs, Osnoss was made a managing partner.

'Next generation coup'

Others have taken smaller roles, including two of the original group that took over from the founders. 

Ken Hao, who led Silver Lake's investment into Alibaba, keeps out of office politics and is considered by some insiders to be a better investor than Durban. He agreed in December to become chairman, which some saw as him taking a smaller part in the firm's management. 

The December announcement also said Bingle, an expert in financial-technology investments, would move to the chairman emeritus role, with the understanding that he would not participate in Silver Lake's next fund. One source familiar with the matter called the transition a "next generation coup."

Bingle, who had made a name for himself on investments that had been more traditional Silver Lake plays — Instinet, Mercury Payments and Blackhawk — was soft spoken, collegial and well-liked internally.

Moving far afield of Silver Lake's roots

Today, Silver Lake has owned WME parent Endeavor, which houses mixed martial arts league UFC and the Miss Universe competition, for eight years, a relatively long time in private-equity circles. Last September, as Endeavor was heading for an IPO, Silver Lake and the management team had to cancel it when investors balked at the price

It also owns a $500 million stake in the Manchester City soccer club, nearly 10% of Madison Square Garden Sports and sunk $100 million into Oak View Group, a stadium construction and rehabilitation business. 

Other private equity firms like Apollo Global Management have steered clear of using investor dollars to finance sports teams, out of fear that executives could fall in love with their investments and make decisions that run afoul of investors' best interests. Mondre is a longtime fan of the MSG-owned New York Rangers hockey team, according to one person with knowledge of his allegiances. 

Read more: We talked to billionaires, business titans and an NBA star about the Apollo cofounder who wants to buy the New York Mets. Here's how he can apply his private equity turnaround playbook to a team that haven't won a World Series since 1986.

The coronavirus pandemic hasn't done Durban any favors, suspending sports seasons and slowing the pipeline of production in the business of Hollywood, where his friend Ari Emanuel has instituted across-the-board pay cuts and layoffs by the hundreds. 

An investment in AMC Theatres, the largest US movie chain, looks no better – in April, Fitch Ratings placed an AMC loan on a list of "loans of concern." In early June, AMC issued a warning that it had "substantial doubt" about whether it could continue as a going concern in the face of lost business from the pandemic. A week later, AMC announced plans to reopen theaters in 450 locations on July 15, initially facing backlash from customers, because the company's CEO said it wouldn't require workers to wear masks. He later reversed the call.

Yet it may be Silver Lake's recent investment in Airbnb – which Durban made without meeting CEO Brain Chesky in the flesh – that's led people close to him to privately question his own judgment. The home-stay company, perhaps the most well known of the Silicon Valley unicorns, saw business fall as the coronavirus forced governments to institute stay-at-home orders and global travel ground to a standstill. 

As economies have opened, Airbnb's business has started to come back and a planned public offering may yet happen this year.

If Airbnb completes a successful offering, the investment may still count among Durban's wins. The private equity firm owns an equity option, giving it the ability to participate in some upside.

But to those close to Durban, it's still too early to evaluate his recent forays into travel, live events and content, or, for that matter, the December management changes. Supporters insist that he'll moderate his take-charge approach as he ages, while detractors see in his reign the beginning of the end to Silver Lake's two decades of success. 

"He's charming. He is smart and charismatic — he's all those things that make you successful," according to one former executive. "The question is: what's the motivation? Is it for your investors to make money? Or is the motivation for Egon to be the biggest guy in private equity?"

Billions of dollars in investment gains or losses rest on the answer to those questions.

SEE ALSO: Silver Lake has been plowing money into bets like Airbnb, Twitter, and Waymo. Here's a look inside why it's being called the Warren Buffett of tech.

SEE ALSO: Private equity bet billions on live entertainment in 2019. Here's how the coronavirus has turned that investment thesis on its head.

SEE ALSO: Hollywood's top talent agencies may need a bailout from their PE backers as the coronavirus hammers big bets on live sports and studio production

Join the conversation about this story »

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Here's who's most at risk once Wall Street kicks off the tidal wave of layoffs many banks had put on pause

Sat, 06/27/2020 - 7:54am

  • Many banks had pledged they wouldn't slash jobs during the coronavirus pandemic.
  • Europe's biggest bank, HSBC, has restarted plans to slash 35,000 jobs. Goldman Sachs will resume normal cuts next year, its CEO said. 
  • Boutique firms without a strong restructuring practice are "dead in the water," one investment banking executive recruiter told us. Bankers in the upper-middle ranks at these firms may be most at risk. 
  • Perella Weinberg's restructuring practice is up 100% this year in terms of revenue, yet the firm this month laid off 50 bankers.
  • Sign up here for our Wall Street Insider newsletter.

Many Wall Street giants made pledges to keep jobs safe during the pandemic. But promises of job security can only go so far. 

Take Goldman Sachs. The bank's CEO, David Solomon told Bloomberg TV on Wednesday that the firm will resume job cuts next year. 

The bank hasn't made any cuts in 2020 "because it hasn't been appropriate," he said, adding that Goldman hires 2,000 to 3,000 people out of school each year and normally looks at the firm's bottom 5% to make room for new blood. He also noted Goldman still has medium and longer-term goals to run more efficiently that it had laid out at its first-ever investor day.   

Johnson Associates, which published the latest edition of its closely-watched Wall Street pay report on Tuesday, noted that the remote-work shock has fast-tracked the need for cuts.

"Going forward, there will be lower headcount even with normal business volumes. The change may be jolting, not incremental, and be particularly difficult to manage at the end of this painful year," the report said. 

Some global banks have already resumed massive cuts they'd put on pause.

Europe's biggest bank, HSBC, last week restarted plans to slash 35,000 jobs. Most cuts of those will be back-office jobs in investment banking and trading; senior bankers in Britain; and support staff around the world, according to media reports. Deutsche Bank is also moving ahead with layoffs it put on ice in March, CEO Christian Sewing said at the firm's annual general meeting in May. 

And other industries like consulting haven't been shy about making cuts during the pandemic: Accenture is cutting US staff, and top execs just warned of more pain to come as the consulting giant promotes fewer people and looks to control costs. 

What remains to be seen is how things will shake out for US bankers once the world moves past peak crisis, and what, if any, backlog of cuts could be unleashed.

To be sure, many North American banks have been stronger performers overall than European peers. Banks may be reluctant to make any rash decisions and lose their grip on top talent — especially if a backlog of deals could also be waiting on the other side of the pandemic.

Equity capital markets and debt capital markets activity has surged during the pandemic, with even IPOs starting to roar back in recent weeks. Still, announced M&A volumes have dropped, and banks are constantly under shareholder scrutiny for ways to cut costs — particularly as ultra-low interest rates crimp overall profits.

But compared to other business lines that have long been under pressure — asset management, for example — even M&A advisory may remain relatively attractive. As Business Insider already reported, life-insurance giant Transamerica told all its salaried workers they need to take a one-week unpaid furlough, and investment manager TIAA is offering 75% of US employees buyouts. 

"It's a cyclical business, and we're in a downcycle, which is normal but it's being further exacerbated by pandemic related headwinds including the inability to travel and meet with potential M&A targets in person, which we think is more important than in some other capital markets businesses," Devin Ryan, an analyst at JMP Securities, told Business Insider in an email.

But M&A advisory is a great "non-commoditized" business, he said, with strong long-term growth potential that is more attractive than many other areas of finance. 

"While M&A is clearly one of the more challenged businesses at the moment, which will weigh on overall industry results, we don't think these difficult near-term dynamics will have a big long-term impact for most companies, " he said. 

Here's a look at how things are shaping up across Wall Street: 

What Wall Street banks are saying about job security

Morgan Stanley CEO James Gorman has said the bank won't cut staff during 2020. Bank of America chief Brian Moynihan has gone on record saying there would be no coronavirus-related cuts this year, and a spokesperson for the bank told Business Insider that remains the case.

Citi has said at the height of the pandemic that it had "suspended new reductions for the time being," and a spokesperson told Business Insider that there was no update to that guidance. 

Still, those kinds of pledges may mask planned cuts that could resurface down the road. And headcount had already been shrinking across Wall Street. 

RBC had been planning to cut staff in its US investment bank in March, according to sources familiar with the matter, but as the pandemic gripped the country those plans were shelved. The company said it now has no plans for cuts in US investment banking in 2020.

According to data published in May by research firm Coalition, headcount across trading and investment banking shrank at the fastest pace in six years in the first quarter. To be sure, certain firms can sway the overall rankings — Deutsche Bank, for example, announced plans to quit equities trading entirely last year. Investment banking jobs were flat from a year earlier, but headcount has generally been shrinking in recent years. 

While highly-paid bankers are prized for landing deals and generating lucrative fees, compensation costs a key lever that banks can pull to improve their profitability. The amount of money earned per each front-office banking job rose across the board in the first quarter, according to the Coalition data.

Bankers at boutiques without big restructuring practices 

Advisory boutiques could be especially hard-hit in 2020 amid the M&A drought.

Unlike bulge-bracket competitors — who have an array of business lines that are firing even in the absence of megadeals, including red hot debt and equity underwriting operations — their revenue streams rely heavily on deal activity. 

Many of these firms have built out an important counterweight since the last financial collapse — restructuring and debt advisory services for troubled companies, a business that has flourished amid the economic chaos wrought by the pandemic. 

Firms have been coping with the decline in deals by deploying junior bankers and senior bankers with relevant experience to help with restructuring work. The influx in debt advisory mandates provides a salve against losses, but even top-tier restructuring practices don't compensate for the dropoff in deal fees.

Firms without a strong restructuring practice are "dead in the water," one investment-banking executive recruiter told Business Insider.

Perella Weinberg's restructuring practice is up 100% this year in terms of revenue, according to a source familiar with the matter, yet the firm this month laid off 50 bankers, or 8% of its staff. 

That included a handful of bankers in the firm's underperforming media and telecom group. Woody Young, who led the team, stayed on in as a chairman of M&A and remains involved with major accounts, but is no longer running the group day-to-day, sources told Business Insider. Perella Weinberg declined to comment. 

To be sure, if the economy reopens and deals roar back in the second half of the year, the fee losses could be tempered. 

Read more: With retailers like J. Crew and Neiman Marcus floundering, top restructuring bankers are seeing a surge in work. Here's how firms like Lazard, Evercore, and Moelis are staffing up.

Some boutiques made pre-pandemic cuts after rapid growth

Some boutique firms had trimmed their numbers even before the pandemic hit. Lazard closed several offices and cut 200 jobs in late 2019. Evercore, meanwhile, announced company-wide layoffs in January — the first broad-based reduction in force the firm has undergone — with plans to cull 6% of the staff.

Evercore CEO Ralph Schlosstein said in his first-quarter earnings call that the firm had no plans for further layoffs, but headhunters said cuts may prove necessary if deals don't rebound. 

The company has significantly expanded its senior ranks in recent years, and it's known for paying-top dollar to bring elite bankers into the fold, including lucrative guaranteed payouts during new bankers' ramp-up phase. The firm added 31 senior managing directors in 2018 and 2019 —  more than half of them recruited from the outside — bringing the total for the firm's advisory group to 112. 

"Evercore has a solid team, but they have hefty guarantees," one executive search consultant said. 

SMDs at Evercore typically earn a percentage of the revenues they generate so as to align compensation with performance, according to people familiar with the matter.

Earlier this month, Evercore offered $25,000 to incoming analysts to defer their start date for a year.

Upper-middle ranks are in no man's land

Bankers in the upper-middle ranks — like directors and non-partner MDs — may be most at risk. While VPs and associates are coveted, since they have execution experience but come with comparatively cheap salaries, these bankers take in big paychecks but don't yet have the same kind of Rolodex and book of business as senior bankers.

These staffers can get stuck in banker no man's land, according to recruiters, if they are working for a rainmaker but don't yet have much opportunity to develop clients of their own. One escape valve is to jump to a firm still building out its M&A platform, including bulge-bracket banks that are expanding.

After the last crisis, banks could be more inclined to keep senior talent 

But if job cuts do materialize, they're unlikely to be among senior bankers, according to several recruiters, as at most boutiques their comp is weighted toward performance.

Moreover, one of the lingering lessons of the last crisis, when large investment banks cut their ranks only to have M&A surge in subsequent years, was to hold on to senior talent.

"The banks drastically cut their bankers and the markets came roaring back in '09 and '10 and they were left flat footed," one headhunter said.

Areas that are heating up

Banks are now looking to beef up areas in high demand, like distressed debt-trading, one banking and financial services-focused New York-based recruiter said. 

"They're going to need to hire in those areas," the recruiter said, referring to distressed debt units as where it's "all guns blazing" inside firms right now. 

For live roles particularly within the distressed space and for restructuring-focused firms looking to staff up, some have met for interviews face-to-face, though still from a distance. Banks are also staffing up in risk and compliance roles, he said. 

"I've had interviews where they met for a socially distant meeting, for something like a walk along the beach," he said.

Keep reading:

SEE ALSO: nd other industries like consulting haven't been shy about making cuts during the pandemic: Accenture is cutting US staff, and top execs just warned of more pain to come as the consulting giant promotes fewer people and looks to control costs.

SEE ALSO: POWER BROKERS OF DISTRESSED CREDIT: Meet 11 Wall Street stars trading busted bonds, bankruptcy claims, and other fire-sale securities

SEE ALSO: Equity is the new debt, with Corporate America selling record amounts of stock to stockpile cash. Here's what prompted the sudden shift.

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