Multi-billion Archegos losses will prompt banks to check hedge fund exposures

Are there more Archegos Capital Managements out there? That is to say, are there more obscure investment firms, making highly concentrated bets using vast quantities of borrowed money, that can fail suddenly and inflict multi-billion losses on some of the world’s biggest banks?

If the answer is “no”, it’s tempting to sit back and enjoy a familiar tale of hubris and greed. Credit Suisse and Nomura, the main losers in this saga, plied Archegos with credit in their roles as “prime brokers”, or suppliers of services to hedge funds, and were stung. Archegos couldn’t meet calls to put up more capital after an out-sized bet on US media firm ViacomCBS went sour. Cue a $20bn fire-sale.

As so often, the use of derivatives contracts may have obscured the true levels of financial leverage being deployed. And another familiar element is that Goldman Sachs and Morgan Stanley, representatives of old Wall Street, were quicker to smell trouble and escaped with minimal damage in their own capacity as prime brokers. For Credit Suisse, confessing to a “highly significant and material” impact on first-quarter numbers, it’s another humiliation to add to its central role in the Greensill debacle.

As things stand today, the whacks to Credit Suisse and Nomura, whose shares fell sharply, are mainly of concern to their own investors. Hedge funds collapse occasionally. The worry, though, is that this example of stupid risk-taking – on the part of Bill Hwang’s Archegos and the lenders – is a sign of wider delusional thinking. ViacomCBS’s shares, note, had trebled in three months and the specific problem began only when the company tried to raise fresh capital at the higher level. It rather suggests nobody truly believed in the rally.

Markets were calmer than expected on Monday and, for now, the theory that Archegos is a one-off is intact. But let’s see what the next few weeks brings as every big investment bank in the world checks its hedge fund exposures. Stock markets are displaying pockets of extreme valuations, at least by historical standards. If some banks’ risk-control departments have been asleep, there is potential for trouble.

Deliveroo says that, in pricing its flotation, or IPO, at the bottom end of the original £7.6bn-£8.8bn range, it is acting “responsibly”. What a shame it didn’t tell us earlier that the top of the range was irresponsible. Still, a dab on the brakes is the right decision for three reasons.

First, the one that Deliveroo mentioned: a few US tech IPOs had soggy launches last week, which dampens the general mood.

Second, Deliveroo has done a poor job of defending its “piecework” approach to paying riders. Aviva Investors, Aberdeen Standard and BMO may not be the prime targets for the float, but those big funds’ scepticism about the long-term sustainability of Deliveroo’s model can’t be ignored. The warm-up to the float has shown that the debate about fair pay in the gig economy will run and run.

Third – and most importantly – Deliveroo was valued closer to £5bn in a private fundraising round as recently as January. Stock market investors accept a bit of price inflation at IPO, but Deliveroo’s backers were pushing their luck in aiming quite so high so soon. An outbreak of (relative) restraint on price was necessary.

London’s investors will, though, be denied the chance to buy shares in Cazoo, the online retailer of second-hand cars. Alex Chesterman of LoveFilm and Zoopla fame is taking his latest creation to New York’s stock market. Inevitably, it’s via one of those “blank cheque” special purpose acquisition companies.

“US investors understand better businesses investing in the short term for future growth,” said Chesterman, which is probably true if superior understanding, in this context, means more inclined to place an $7bn valuation on a loss-making company whose revenues this year (it hopes) will be only $1bn.

Over in the US, there’s the example of Carvana, which is in the same online-only game and is now worth an astonishing $43bn. So, yes, it’s more tempting to pitch yourself as a European version of the same revolution in how consumers will buy cars in future.

Back in the UK, sceptical investors may point out that competition to dominate the European market is already up and running. Both Germany and France have companies that operate a similar model to Cazoo. Maybe they can all succeed, but there is traffic on the road ahead and the old-style dealerships will join it.

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