The activist hedge fund humbled by ESG

One scoop to start: Bankers have sounded out buyers for a stake in Sotheby’s as its owner Patrick Drahi comes under pressure to sell assets at his indebted telecoms group Altice. Those approached included European billionaires and Qatar’s sovereign wealth fund. Details here.

In today’s newsletter:

Investors call time on Jeff Ubben’s ESG fund

In 2020, activist investor Jeff Ubben declared that “finance is, like, done”. 

He announced he was embarking on a new adventure — an impact fund that would invest in companies and push them to be more environmentally and socially conscious. 

And so was born Inclusive Capital Partners, a firm whose fund names were inspired by Rachel Carson’s landmark environmental book Silent Spring. The so-called impact fund had previously sat within Ubben’s former hedge fund ValueAct, but he told the FT at the time that it had been too “confusing” for investors. 

The reason he gave was that those investors who opted for the impact fund were worried about leaving returns on the table and those who invested in ValueAct’s flagship fund were concerned about not being portrayed as ESG friendly. 

It turns out that confusion never went away, reports the FT. 

Ubben told investors last week that Inclusive was shutting down less than three years after its launch. It had significantly missed its goal of raising $8bn in assets with potential investors confused about what strategy the fund was trying to pursue. 

As Oxford professor Robert Eccles put it, it was not easily classified as a sustainability “impact” fund, which tends to focus on private assets, and it was not an activist hedge fund.

The closure capped off a tumultuous few years for Ubben, who has made a series of unfortunate investments, including in companies such as Nikola — which settled fraud charges with the US Securities and Exchange Commission — and Enviva, a wood pellets producer whose stock price has fallen 98 per cent in the past year alone. 

But beyond bad bets, the real problem investors appear to have had with Ubben’s firm is that it straddled this grey area between seemingly being an ESG fund while investing in companies such as ExxonMobil. 

At the same time, Ubben made public comments that alienated the ESG community and openly admitted that he didn’t even have ESG-focused investors in his fund. 

The issue is that Ubben was effectively doing exactly what he had done at ValueAct — buy a stake, get on a company’s board and push for changes — but with the hot new ESG angle. 

That was great in 2020 but the market has cooled significantly since then and without the returns to show for it, investors weren’t interested in Ubben’s idea of inclusive capitalism or ESG 2.0. 

Ubben himself predicted earlier this year that the first model of the ESG investing movement would eventually disappear. It turns out the second model wasn’t far behind and neither was his firm. 

Byte-sized buyback

The Chinese social media giant behind TikTok has a massive cash pile — topping $51bn — and a valuation that dwarfs many public companies.

But there’s no clear path for ByteDance to enter the public markets and allow its shareholders to exit.

So what is the company, which is valued at about $260bn, to do?

ByteDance plans to buy back up to $5bn worth of stock from its investors, DD’s Arash Massoudi and Ivan Levingston and the FT’s Eleanor Olcott report.

The company is able to tap a cash pile that is growing thanks to a powerhouse business. All those viral videos on TikTok and the Chinese version Douyin may be short, but they have added up to a long stream of revenues.

As a group, ByteDance raked in $29bn in revenues in the three months to June, up about 40 per cent from the previous year, said people briefed on the figures. Earnings before interest and tax, ByteDance’s preferred metric of profitability, were $9bn. 

However, while its latest buyback will value the company at about $260bn, that’s down from closer to a $300bn valuation that came during an employee share buyback last summer.

ByteDance does not publicly disclose its revenue and profitability figures.

Backed by investors including General Atlantic and SoftBank, ByteDance was founded in 2012 and has been one of the fastest-growing companies to come out of China. However, it has postponed an intended Hong Kong IPO several times since Beijing launched a crackdown on big tech groups in late 2020.

That has made the company’s progress bittersweet for some shareholders, even as the group attracts billions of users.

“The numbers are wild, but none of it matters until the Chinese government decides if they can go public,” an investor said.

Carson Block takes on an arm of Blackstone

Earlier this year, Blackstone president Jonathan Gray celebrated his firm’s decision to dispose of most of its office buildings before the pandemic and rising interest rates wiped out what many believe is hundreds of billions of dollars in value.

“We’ve made a conscious choice really over a long period of time to de-emphasise that asset class,” Gray told investors in May, noting that offices were just 2 per cent of the more than $300bn in real estate assets that Blackstone manages. That compares with 60 per cent in 2007.

The same can’t be said for a publicly traded vehicle carrying Blackstone’s name.

Carson Block, the outspoken short seller best known for taking on Sino-Forest and NMC Health, is targeting an arm of the Blackstone empire loaded with exposure to offices.

At the Sohn investment conference in London on Wednesday, Block said he is shorting Blackstone Mortgage Trust, a publicly traded real estate investment trust Blackstone took control of a decade ago as it began expanding into new markets like lending.

Block is shorting BXMT because of what he believes is “a lot of rot in its book”, principally the about $8bn it has lent to office buildings.

He believes the trust will have to “substantially cut its dividend” as higher rates and a weaker real estate market make its office borrowers unable to service or refinance their debts.

While BXMT’s borrowers have hedged much of their variable-rate loans against higher interest rates, Block said those hedges would soon expire, exposing them to the full force of higher rates.

“I feel it’s an inevitability that the cash flow gets significantly diminished by this macro environment,” Block said in an interview.

BXMT said it was “well positioned to navigate this environment” and had more than fully covered its dividend by generating earnings equivalent to 126 per cent of its quarterly dividend.

Job moves

• UK ministers have picked veteran television executive Samir Shah as BBC chair to replace Richard Sharp, the former Goldman Sachs banker who resigned earlier this year. 

Smart reads

Trading terror Claims that some investors made fortunes shorting Israeli stocks before the October 7 Hamas attacks need a closer look. FT Alphaville investigates. 

Weed killer Years after Bayer completed its $63bn takeover of US seeds and chemicals group Monsanto, the cost of the deal continues to grow, The New York Times reports.

Sanctions busting Moscow’s income from oil exports is higher now than before its full-scale invasion of Ukraine despite far-reaching sanctions, Bloomberg writes. 

News round-up

BAT to take £25bn hit on US cigarette brands (FT)

AbbVie to buy drugmaker Cerevel for $8bn (Reuters)

ExxonMobil aims for higher oil production with capital spending boost (FT)

Investors bet on rapid ECB rate cuts as economic outlook darkens (FT)

McKinsey shrinks new partner class by roughly 35% (WSJ)