WeWork on track for profits and positive cash flow in 2021, says chairman

WeWork is on track to have positive cash flow in 2021, a year ahead of schedule, after it cut its workforce by more than 8,000 people, renegotiated leases and sold off assets, its executive chairman said.
Marcelo Claure said in an interview that the SoftBank-backed office space provider had seen strong demand for its flexible work spaces since the start of the coronavirus pandemic.
In February, Mr Claure set a target of reaching operating profitability by the end of next year and he said WeWork remains on track to meet it.

The New York-based company, which aborted its hotly anticipated initial public offering last year, has moved aggressively to reduce its cash burn and shed costs. It has slashed its workforce from a high of 14,000 last year to 5,600 people, a figure that has not been previously disclosed.
“Everybody thought WeWork was mission impossible. [That we had] zero chance. And now, a year from now, you are going to see WeWork to basically be a profitable venture with an incredible diversity of assets,” said Mr Claure.
While the shift to homeworking has seen a reduction in office space demand, some companies turned to WeWork to provide satellite offices closer to where their employees live and to spread out their staff beyond their main offices, said Mr Claure.
Mastercard, TikTok-owner ByteDance, Microsoft and Citigroup are among the companies that have signed new lease agreements with WeWork over the past month.
“We have companies like Facebook, Google and Amazon who have told their employees that they can work from wherever they are. We have a lot of those employees who basically now come to a WeWork facility to use it one day, a week, two days a week, three days a week,” Mr Claure added.
However, other tenants refused to pay rent or asked to terminate their leases during the pandemic. WeWork burnt through $482m of cash in the first three months of the year, cutting its cash on hand to less than $4bn. 

It has not yet reported second quarter sales figures to its creditors, but Mr Claure said revenues were flat during the crisis. WeWork drastically slowed its expansion last year after churning through capital. 
The company’s outstanding $669m debt has rebounded over the past two months, trading at 49 cents on the dollar last week. While that is down from the 89 cents at which it traded in February and remains deep in distress territory, it is up 42 per cent from a March low, data from Finra showed. 
Mr Claure’s upbeat assessment comes just nine months after SoftBank, where Mr Claure is chief operating officer, stepped in with a multibillion-dollar rescue package to prevent WeWork from running out of cash. SoftBank and WeWork remain in litigation over the bailout, which included a $3bn share buyout that was never consummated. 
The near collapse of the office group ultimately prompted an acknowledgment from Masayoshi Son, SoftBank’s founder, that its initial investment in WeWork had been a mistake. The Japanese technology and telecoms group has poured more than $10bn into the office company, whose valuation tumbled from $47bn at the start of 2019 to $2.9bn this March.
Mr Claure, who is credited with turning round US wireless carrier Sprint and negotiating its merger with rival T-Mobile, was installed as chairman in October after WeWork co-founder Adam Neumann stepped down as chief executive. The company hired property veteran Sandeep Mathrani this year and charged him with cutting costs and putting the company on a path to profitability. 
WeWork has sold off non-core businesses like coding academy Flatiron School, software company Teem and its stake in co-working start-up The Wing, and has also terminated lease agreements on properties in Baltimore and New York. Mr Mathrani told staff last week that the restructuring he had embarked on in February that included thousands of job cuts had been completed, according to a memo seen by the FT. 
In June, the company recorded its strongest sales month since February, the memo from Mr Mathrani showed, and WeWork has spent more than $20m to renovate spaces to distance customers from one another.
“Our demand for private spaces is through the roof,” Mr Claure said. “Maybe the buildings are not going to be as dense as they were before for the community side of the business. But the demand for high-quality workspaces that are sanitised, that [make] people feel comfortable will be at an all-time high.” 

China Moly strikes $550m precious metal deal with Elliott-backed miner

China Molybdenum Co has sold the rights to future gold and silver production from its Northparkes mine in Australia to a company backed by US hedge fund Elliott Management, according to people with knowledge of the transaction.
Under the deal, CMOC, which is listed in Shanghai and Hong Kong, will receive $550m in cash upfront from Triple Flag Precious Metals Corp plus ongoing payments in return for a share of all gold and silver output from the mine.
The agreement between CMOC, which has a market value of $12bn, and Triple Flag is the first so-called streaming transaction involving a Chinese mining company.

Royalty and streaming transactions — acquiring long-term rights to buy metal from mines in return for an upfront payment — have become big business in recent years. Companies active in the space include Franco-Nevada, Wheaton Precious Metals, Royal Gold and Triple Flag.
A raft of big streaming and royalty deals were announced during the commodity prices crash of 2014 to 2016 as cash-strapped miners rushed to bolster their balance sheets and reduce debt. 
While the mining industry is in much better financial shape today, bankers still expect a steady flow of royalty and streaming deals this year as the relative value of gold to copper provides an opportunity to tap into a fresh form of financing.
Gold has been one of the best performing assets in 2020, rising almost 20 per cent to a nine-year high of more than $18,000 an ounce, while copper is up just 3.5 per cent.
In a recent interview with Bloomberg, David Harquail, the chief executive of Franco-Nevada said there was a large number of base-metal companies considering selling big precious-metal streams from their assets.
Located 380km west of Sydney, Northparkes is an underground copper mine that also produces gold and silver as a byproduct. Last year, it churned out 36,000 tonnes of copper, 25,000 ounces of gold and 308,000 ounce of silver.

Toronto-based Triple Flag is run by Shaun Usmar, the former chief financial officer of Barrick Gold. It was founded four years ago with financial backing from Elliott and now has 40 assets in its portfolio.
The deal with CMOC is its biggest to date and the ninth-largest in the history of the streaming industry. The support of Elliott has allowed the company to write large cheques for big streaming deals.
CMOC has been one of the most acquisitive Chinese mining companies. In 2016 it paid $2.65bn for Tenke Fungurume, the giant copper and cobalt mine in the Democratic Republic of Congo, and spent $1.5bn to purchase Anglo American’s niobium and phosphate mines in Brazil.
It purchased an 80 per cent stake in Northparkes, a fully mechanised, underground mine, from Rio Tinto in 2013 for $830m. The rest of the mine is owned by Sumitomo Metal Mining.

Hedge fund titans grab lion’s share of industry spoils

Paulson & Co and Lansdowne Partners this month decided to shut their flagship hedge funds after periods of disappointing performance that destroyed much of the wealth created by these managers in earlier years.
The erratic performance of many hedge funds means investors can be charged high fees for disappointing returns. But at the same time some hedge fund titans, including John Paulson, still walk away with multibillion-dollar personal fortunes.
US pension schemes earned just 5 per cent a year on average from their hedge fund investments between 1998 and 2017 according to data from more than 200 public and private retirement plans compiled by CEM Benchmarking, a Toronto-based investment consultancy. The pension schemes earned annualised returns of 9 per cent over the same period from S&P 500 stocks, an investment that could be made in a tracker fund costing just a few basis points.

Yet more than half of the profits earned by hedge funds over two decades were taken by their managers, a revenue split that will fuel debate over whether investors are receiving fair value for the performance fees they are being charged. 
The debate over profits comes at a difficult time for the hedge fund industry as a growing list of former star managers, such as Silver Ridge, Stone Milliner, Jabre Capital, Omega Advisors and Eton Park, either shut funds or close their doors entirely.
Performance fees traditionally accounted for 20 per cent of any profits created by a hedge fund above an agreed benchmark, an arrangement intended to align the interests of managers with their clients. 

There is a considerable disconnect between the returns generated and incentive fees earned across all but the worst-performing 5 per cent of hedge funds

But the inconsistent returns delivered by many managers and the early closure of many hedge funds after bad results have resulted in investors often paying substantial fees for mediocre performance.
Investors earned $228bn in aggregate gross profits and paid $133bn in incentive fees in a sample of 6,000 hedge funds (over a third of the hedge fund industry) between 1995 and 2016, according to a study by the finance professors Itzhak Ben-David and Justin Birru from Ohio State university and Andrea Rossi from the University of Arizona. 

“There is a considerable disconnect between the returns generated and incentive fees earned across all but the worst-performing 5 per cent of hedge funds,” says Mr Ben-David.
After including annual management fees that are paid regardless of performance, investors earned just 36 cents of each dollar of gross profits generated by the funds above their benchmark. The other 64 cents were collected by hedge fund managers.
“Adding insult to injury, these results are obtained before even adjusting fund returns for the risk embedded in these investments,” says Mr Rossi.
A senior executive from a major hedge fund, who did not want to be identified, says ending management fees would make the hedge fund industry much more “robust”.

The study concluded that investors would have paid $70bn less if the hedge fund managers had made repayments from their own pockets for any periods of underperformance.
“A clawback provision could drive the effective performance fee down,” says Mr Rossi. Yet, only fewer than one-in-six hedge funds offer investors any clawback of past fees in case of poor performance.
More symmetric agreements, known as fulcrum fees, which are designed to ensure that a manager holds real “skin in the game” beside their clients’ money, could have saved investors about $194bn over the 22 years if applied across the entire hedge fund industry, according to the academic study.
“Despite the long history of poor outcomes associated with the prevailing fee model, the hedge fund industry does not appear to be moving en masse towards a more symmetrical incentive structure,” says Mr Birru.
Tension over fees between clients and managers have risen in recent years, leading to an erosion of the industry’s historic “two and 20” fee model. More than half of the respondents in a survey of 227 institutional investors with $706bn in hedge fund assets were renegotiating or looking to renegotiate fees in 2019, according to JPMorgan.
It found that 17 per cent of its respondents had implemented a “one or 30” model. Under this, an investor pays a 1 per cent management fee that switches to a 30 per cent performance fee once an agreed target has been reached.
DE Shaw, one of the world’s oldest and most successful hedge funds, increased its fees last year to “three and 30” on the back of strong performance. Steven Cohen, the founder of Point72 Asset Management who opened his family office to outside investors in 2018 following a two-year ban by the Securities and Exchange Commission, now charges a 2.85 per cent management fee and performance fees that can go up to 30 per cent depending on returns. 
But loading up incentive fees might not improve the link between long-run performance and fund costs or reduce the total amount paid by investors over a full market cycle, warns Mr Ben-David. “Increasing the incentive fee rate is unlikely to protect investors from paying managers that perform poorly in the long run,” he says.
Chris Walvoord, global head of hedge fund portfolio management and research at Aon, the investment consultant, says the academic study paints an unrealistically bleak picture of the fees paid by investors.
“A carefully constructed portfolio of a dozen hedge fund strategies seldom matches the aggregated risk and return of the entire hedge fund industry,” says Mr Walvoord.
“There are positives and negatives to hedge fund performance fees that investors need to consider carefully. The lower fees that an investor can negotiate, then the better off they will be. Investors would be better off negotiating a 10 per cent performance fee in return for a slightly higher management fee”, he says.

Aon pays close attention to the capacity limits of hedge fund strategies — maximum effective operating size — when constructing portfolios.
“Funds that attract a lot of assets and exceed the capacity of their strategy can earn high management fees as well as large performance fees in good years. But their returns over time tend to be substandard and they go out of business. So the capacity of a strategy is a very important consideration when constructing a portfolio of hedge funds,” says Mr Walvoord. 
High fees and lacklustre returns have prompted some investors to look for lower cost alternatives, leading to net withdrawals of $175bn from hedge funds since the start of 2016, according to HFR, the data provider.
But interest from US pension schemes, the hedge fund industry’s most important client group, has weakened only slightly. Hedge fund allocations by US pension schemes rose from 1.5 per cent in 1998 to a peak of 8.4 per cent in 2014 before dipping to 6.6 per cent in 2017, according to CEM Benchmarking.
Credit Suisse recently surveyed 160 institutional investors with $450bn invested in hedge funds and found a clear improvement in appetite.
“Hedge funds are the top investment strategy choice for asset allocators moving into the second half of this year. A net 32 per cent of the investors surveyed plan to increase their hedge fund allocations as these strategies performed as well or better than expected during the market turmoil triggered earlier this year by coronavirus,” says Vincent Vandenbroucke, head of capital introduction and prime consulting in Europe at Credit Suisse.
Mr Vandenbroucke says there is evidence that hedge fund managers are responding creatively to pressure from investors for a stronger alignment of interest with more customised managed accounts. These products can be better tailored to suit client needs, with a variety of fee discounts and a greater range of enhanced terms.
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“More than a third of investors receive fee discounts in return for agreeing to longer lock-up periods or for ‘big-ticket’ orders,” said Mr Vandenbroucke.
But divergences between managers and investors over fees and terms persist. About 57 per cent of investors see hurdle rates — agreed targets that trigger performance fee payments — as valuable. But hurdle rate conditions are agreed with fewer than a third of investors, according to Credit Suisse.
Clawbacks to recover fees after disappointing performance are highly valued by a third of clients but just 15 per cent are provided with such facilities.
“Clawbacks are perceived to be difficult to implement fairly in pooled vehicles where there are regular investor inflows and redemptions. Managers also believe that clawbacks are inconsistent with their fiduciary duty to all clients — past, present and future — in their fund,” says Mr Vandenbroucke.
Offering preferential fees and terms might persuade some clients to remain loyal but big improvements in performance will have to be achieved if more of the hedge fund industry’s wealthy titans want to avoid following Mr Paulson through the exit door.

SEC commissioner calls for better ESG labelling

One of the US investment industry’s top regulators has called for asset managers to provide clearer explanations of how environmental, social and governance metrics could affect the performance of ESG-labelled funds.
Sustainable investment funds are gathering record-breaking inflows and attracting mounting scrutiny from US regulators, who are concerned that not enough information is being provided to retail investors to allow them to properly compare available choices.
Elad Roisman, one of the four most senior officials at the Securities and Exchange Commission, said asset managers that wanted to use the labels “ESG”, “green” and “sustainable” to name or advertise funds should be required to explain how these terms would influence the strategy and objectives of an investment product.

“Retail investors who want ‘green’ or ‘sustainable’ products deserve more clarity and information about the choices they have,” said Mr Roisman at the Society for Corporate Governance’s national conference.
Improvements in disclosure standards by asset managers would help investors to better understand whether an ESG fund was prioritising environmental or social goals above financial returns.
“Do retail investors know if they are leaving money on the table?” asked Mr Roisman.
He questioned if asset managers were using ESG as a “virtue signalling tactic” to present themselves favourably to investors that wanted to achieve the double benefit of doing well financially while also doing good for society.
Mr Roisman expressed concerns about so-called greenwashing after highlighting the misleading claims about positive environmental benefits made by an unnamed green bond fund.
“The asset manager was taking credit for all the environmental accomplishments of every project it had invested in, rather than the fund’s share alone,” said Mr Roisman.

Jay Clayton, SEC chairman, last month warned about the risks of investors being misled by ESG ratings which combined environmental, social and governance metrics into a single score.
The comments from two of the SEC’s top officials highlight the growing tensions between US regulators and asset managers who are pressing for improvements in ESG disclosure and reporting standards.
A report published last week by the US Government Accountability Office highlighted the difficulties faced by asset managers and public pension plans in comparing ESG data released by public companies.
The investor advisory committee that sits inside the SEC has also recently recommended that the regulator should adopt new rules to ensure greater harmonisation of ESG disclosures by public companies.
But Mr Roisman expressed his “serious reservations” about the calls for the US government to require public companies to disclose a wide range of ESG information in reports to regulators and investors.
Noting that public companies are already required to disclose “material information” to their investors, Mr Roisman said that the SEC should stick to its principles-based approach to regulation and not abuse its power by pursuing an environmental and social vision for the world.