Market Thinking

making sense of the narrative

An April Fool and their money..

Normally on April 1st in the UK we would expect to see various spoof articles in the paper and on the TV, but on the basis that almost everything announced over the last 12 months might previously have been considered utterly unbelievable, it’s difficult to see how anyone could come up with something sufficiently ridiculous as to actually compete with what passes for real life in 2021.

Perhaps the news on the front pages this morning that the Deliveroo IPO has apparently flopped is actually a spoof and that in fact it has gone up 7 fold at the opening as the market embraced the idea of buying into a company that managed to lose a lot of money in what should have been perfect conditions for them and that last summer told the UK Government that they were about to go bankrupt? Perhaps the market loved the idea of the dual listing giving the former Morgan Stanley banker and founder more than 50% of voting shares with only 6% of the stock – even as he cashed out tens of millions while early investor Amazon also sold out lots of stock and just as lockdowns (and their ‘perfect conditions’ for deliveroo) are about to be lifted? Perhaps potential investors considered that the recent legislation on Uber drivers that was about to make the, already poor, economics in a ruthlessly competitive marketplace even worse didn’t matter? Or perhaps it wasn’t a spoof and in a world where truth, logic, facts and fundamentals seem to have been abandoned or at least put on hold, the IPO really did flop and it took April 1st to break the spell?

In a time of Universal Deceit, telling the truth is a revolutionary act

Not actually George Orwell, but should have been.

Were Deliveroo trying to tell us something?

If only it were a mere 20% off at the opening

Pumping GBP1bn into what is, in reality, a low tech business with minimal barriers to entry would only make sense if your plan is to price out all the competition and then raise prices once a monopoly is established – in a manner similar to Amazon. But if that is going to work, why is Amazon itself selling? Indeed, as is increasingly the case, a third of the money raised is not going into the business but rather going to ‘existing investors’, or should that be exiting investors?

This is only FinTech in that the Financial Sector are trying to pretend that a logistics business is ‘Tech’ in order to extract lots of money for insiders from a loss making business

J P Morgan and the ubiquitous Goldman Sachs were both pushing for an ambitious price target (translation = made up as big a number as they thought they could get away with) with fees to match, but were unable to pull the old trick of getting a FTSE 100 listing (and thus guaranteeing the tracker funds had to buy it) on account of the governance structure. Meanwhile with a number of high profile UK investors announcing in advance that they weren’t going to participate, the usually ruthlessly effective financial PR machine stumbled.

Touting Deliveroo to UK retail investors as the next Amazon was always going to be a stretch, not least as Amazon themselves were selling out, but also they tried that line with The Hut Group last September. The other issue of course was the sheer size and the timing. Raising GBP1.5bn with an IPO on the last day of the month/quarter was always going to be tricky and bankers thinking that investors would welcome the chance to ‘window dress’ their quarterly results with an IPO ‘pop’ clearly did not think of the other side of the equation – nobody wanted to crash their q1 performance with a flop and no time to make it back. As with the Margin call story at the end of last week, the lure of fees meant that the decisions were not be made by the ‘right people’. Also, as with the recent Lex Greensill/Sanjeev Gupta scandal (the gift that keeps on giving), one has to think of need for an update to Fred Schwed’s famous question “Where are all the customers’ Private jets?”

Perhaps also there was some added urgency as the type of competition coming after Deliveroo is also coming for the bankers themselves. We may think of Special Purpose Acquisition Companies (SPACs) as absurd structures involving high profile individuals raising money as front-men for other money men to invest in a backdoor way of taking companies public, but they are basically a market response to the Banking Cartel and their IPOs. Deliveroo was the largest IPO in the UK since the (equally opportunistic) issue by Glencore at the height of the commodity boom in 2011. At 285p, Glencore is a little over half its debut price, having been below a pound in the meantime. Total fees back then were around GBP400m

The brokerage Fees for the Deliveroo IPO were apparently GBP50m, approximately 3% of the total raised, not materially changed from a decade ago. In the US they can be up to double this and just as with the Prime Brokerage and Bill Hwang, Wall Street is starting to ‘eat itself’. Lurking in the background is Blockchain (not necessarily bitcoin) with its notion of the distributed ledger, which means that you can not sell the same digital product to more than one person (which would presumably also limit the ability to pledge the same assets as collateral to 7 different Investment Banks – Mr Hwang again)

The conclusion of all this has to be that as the Fed policy of free money to financial institutions to leverage everything up moves to the Treasury policy of free money to politicians to simply pump into lots of ‘real’ assets, so Wall Street is having to change its policies and products to keep up and regulators are, as usual, still further behind. As Wall Street seeks to extract rent through fees rather than debt, transaction bankers are dominating. Hedge Funds like Bill Hwang are avoiding regulatory scrutiny by restyling themselves ‘family offices’ while private businesses are avoiding a lot of regulatory disclosure by doing what used to be known as ‘reversing into a shell company’ but is now known as a SPAC. Issuing ‘junk bonds’ to buy back equity awarded to insiders is being adapted to awarding insiders up to 20% of the SPAC that buys the company outright. Companies who have seen their share prices squeeze rapidly higher over the last year are being encouraged to ‘cash out’ with new equity even if the size (and the client base) are more suitable for the broker than the company itself (witness the issuance in Viacom that went to a large number of leveraged hedge fund (or family office) clients and ultimately triggered the margin call last week).

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