Robinhood, GameStop and a last-minute dealmaking dash

One scoop to start: the former UK chancellor George Osborne is joining the boutique British advisory firm Robey Warshaw, dropping the eclectic set of jobs he has taken since leaving government to become a full-time mergers and acquisitions banker. Read more here.

Welcome to the Due Diligence briefing from the Financial Times. Not a subscriber to DD? Sign up here. Drop us a line and join the conversation: Due.Diligence@ft.com 

🚀🚀🚀To the moon: Robinhood’s eleventh-hour dealmaking mission

To the professional envy of many of us covering the saga, one hard-hitting interviewer took to the airwaves of social media audio app Clubhouse on Sunday night to pose the question on everyone’s minds.

“Spill the beans, man, what happened last week? Why couldn’t people buy the GameStop shares?” Elon Musk asked of Robinhood chief Vlad Tenev.

The commission-free trading app that sought to “democratise finance” had suddenly infuriated its merry band of retail investors last week when it restricted trading on shares in GameStop, AMC and other market-roiling, so-called meme stocks with little explanation.

But the company had no choice, Tenev said, as a $3bn deposit requirement arrived from the National Securities Clearing Corporation, the clearing house that processes its stock trades, around 3am Pacific time on Thursday. 

Through some successful negotiation, Tenev explained, Robinhood was able to lower that figure to $1.4bn, and then finally down to $700m after proposing to limit the offending stocks to position-closing only.

Needless to say, the situation still spooked Robinhood, which realised margin requirements would only balloon with its rapidly expanding user base and trading volumes. 

One of the start-up’s early investors, Ribbit Capital, sprang into action, arranging a round of convertible debt financing. Iconiq Capital, another existing investor, followed on. 

At the end of Thursday the company was touting that it had raised $1bn. By Monday that total had increased by $2.4bn, with a laundry list of the company’s backers participating. 

As to whether Citadel Securities, the trading company owned by Ken Griffin that acts as one of Robinhood’s intermediaries, could’ve had anything to do with the NSCC’s decision, Tenev waved away the idea as “getting into conspiracy theories”.

It was a good save on Robinhood’s part, but an even better score for its venture capital investors. 

In exchange for providing Robinhood fast capital in its time of need, investors who went in last week will be able convert the debt to equity at either an implied valuation of $30bn or a 30 per cent discount to the company’s initial public offering price, whichever is lower. Investors who piled in later had to settle for a $33bn cap and a lower standing in the company’s capital structure, insiders told DD’s Miles Kruppa.

Central to Robinhood’s plight was an error in messaging. The app branded itself to its raucous army of day traders as anti-establishment while at the same time trying to play within the confines of an extremely regulated industry.

The hedge fund titan Jim Chanos, also known as “Darth Vader of Wall Street” and the “LeBron James of short selling”, would agree.

“We’re seeing a level of misunderstanding about how markets work that is being brought on by a whole new generation of investors who have never seen a bear market and somehow think that they’re being held back from their rightful place at the table by these evil hedge funds,” he told DD’s Ortenca Aliaj in an interview.

Is Kirkland’s success a double-edged sword?

When are “good financials” not necessarily good financials? When they were generated in a global pandemic. 

That appears to be the sentiment at Kirkland & Ellis — the world’s highest-grossing law firm — on track to generate a record $5bn in the 12 months to the end of January after soaring demand from clients, as revealed by the FT’s Kate Beioley and DD’s Arash Massoudi. 

Insiders say the firm is closing in on a 20 per cent revenue boost compared to the previous year after three of its strongest practice areas worked flat out. Private equity, restructuring and litigation all surged in concert, a rare occurrence as they often perform well at different points of the cycle.

It is a sign of how law firms, like investment banks, can thrive in volatile times such as these, the FT’s Lex column notes. 

No public champagne-popping for the Chicago-founded megafirm, though. “We’ve certainly had a really good year, but we can’t say that too loudly when so many people are suffering,” one partner said. 

The potential reaction from clients could be playing on its mind too. Although many will tolerate high fees for life-saving restructurings, others might be keen to rethink the bills they pay if their lawyers look too comfortable. 

It was only last summer, after all, that KKR demanded discounts on fees from its lawyers in the spirit of “sharing the pain”. Kirkland’s equity partners earned more than $5m on average in 2019. 

At the same time, the firm has received some perhaps unwanted attention following a New York Times report which suggested Kirkland-alumnus Jeffrey Clark had been devising ways to cast doubt on Joe Biden’s election victory (allegations which Clark disputes). 

That’s just one of Kirkland’s links to prominent figures in the era of Donald Trump. Also among its notable alumni:

• former US attorney-general William Barr, a Trump loyalist until his resignation in December;

• Brett Kavanaugh, Trump’s second Supreme Court pick;

• Alex Acosta, the former labour secretary who in his days as a Florida federal prosecutor approved Jeffrey Epstein’s 2008 plea deal;

•  Kenneth Starr, who led the effort to unseat Bill Clinton two decades ago and was part of Donald Trump’s impeachment defence team last year. 

It’s not clear what all of those links will mean for Kirkland’s outlook in a Democratic era. For now, it’s well worth digging into the back story on how the hard-charging law firm came to be the highest-grossing in the world with this FT deep-dive.

A DD saga four years in the running takes a shocking turn

Back when we launched the Due Diligence newsletter in March 2017, there was one big dealmaking mystery we couldn’t quite crack: why was a regional Chinese airline operator spending money hand over first to snap up stakes in everything from Deutsche Bank to Hilton International?

From a Buddha-shaped building on the tourist island of Hainan, China’s HNA Group transformed into a sprawling transport-to-finance conglomerate through a debt-fuelled $40bn dealmaking binge. It began to unravel just as quickly.

In the early days of DD, we had our own theories about what the mysterious group was up to. 

Now, four years later, we have the closest thing yet to an answer: in a statement to the Shanghai stock exchange this weekend, Hainan Airlines Holding Co said that “self-investigations” revealed billions of dollars of company funds had been used for non-business purposes.

The bombshell announcement of apparent embezzlement was the latest astonishing twist in the story after the shocking and tragic death of co-founder Wang Jian, who died after falling from a wall while sightseeing in southern France in 2018.

It’s easy to forget years later, just how firmly HNA ensconced itself among western financial elites. 

Just over a year before his death, for example, chairman Wang Jian was honoured by Blackstone’s Stephen Schwarzman at the Jewish Museum’s 31st annual Purim Ball in New York.

But the heady ascent of HNA also featured a colourful cast of lesser-known middlemen, associates and advisers, including:

•  Bharat Bhise, an Indian-American dealmaker, who was not only instrumental in the Chinese conglomerate’s early acquisition spree, but also temporarily held a large stake in the group, ostensibly as a favour.

•  Lars Windhorst, a flamboyant German businessman whose travails have regularly featured in DD, who tried to help sell an expensive bond deal for HNA in 2012.

• Christian Angermayer, another German entrepreneur who made headlines last year when it emerged he brokered SoftBank’s investment in Wirecard, who helped devise HNA’s complicated investment in Deutsche Bank.

If you need to refresh your memory, this 2017 interview between HNA’s chief executive Adam Tan and DD’s Arash Massoudi is a great place to start.

Job moves

• Simpson Thacher is opening an office in Brussels to be led by Antonio Bavasso, who joins from Allen & Overy, where he was co-head of the firm’s global antitrust and telecoms, media and technology practices. More here.

• Michael Russell has rejoined Wilson Sonsini from Goodwin Procter as a corporate partner, and will co-lead the firm’s M&A practice with longtime partner Robert Ishii. Russell will be based in the Palo Alto and San Francisco offices.

• Wakam, one of France’s oldest insurers, recruited former PartnerRe chief executive, Emmanuel Clarke, as its new chairman. More here.

• Investcorp has named Andrea Davis as its first head of corporate strategy. She will continue to be based in London and maintain her existing role, head of portfolio operations and chief operating officer of Investcorp’s European private equity business.

Smart reads

Bull speed ahead Aggressive bets on disruptive tech companies, with Tesla as its pièce de résistance, has pushed New York-group Ark Investment ahead of Wall Street’s most feared titans. (FT)

A cautionary private equity tale KKR bet big on the risky allure of the swiftly emerging Indian credit market, but a shadow-banking crisis in the country would derail its decade-long hunt for returns, and light a match to more than 40 per cent of its capital. (Bloomberg)

Benchwarmer brands Blue-chip companies like Budweiser and Coca-Cola, who for decades slung millions into the most coveted advertising slots of the year — the Super Bowl — are sitting on the sidelines this time as the pandemic forces them to rethink their budgets. (FT)

News round-up

Billionaire Tilman Fertitta floats entertainment empire in $6.7bn Spac deal (FT) 

Asos to buy Topshop and other Arcadia brands for £265m (FT)

Marston’s rejects £700m offer from private equity group Platinum (FT) 

Companies consider writing Hong Kong out of legal contracts (FT) 

Kuaishou IPO boosts biggest rival to China’s TikTok (FT) 

Wheels Up set to go public via Spac merger (FT) 

BP sells $2.6bn stake in Oman gas block to Thailand’s PTT (FT) 

Hargreaves benefits from wave of younger retail traders (FT)

Silver/WallStreetBets: mission creep (Lex) 

Former FT editor and BBC chief among investors to buy The New European (FT)