Barbarians flee the floodgates

One scoop to start: Artificial intelligence start-up Cohere is seeking to raise more than $500mn in new funding, aiming to catch up in the hugely expensive race to build cutting-edge AI models alongside rivals such as OpenAI, Google and Anthropic.

In today’s newsletter:

• KKR backs out of Thames Water

• PE’s big three diverge

• A quant fund titan’s AI “surrender”

Hot potato at Thames Water

There aren’t many deals at KKR these days that need the finesse of Henry Kravis, the private equity firm’s legendary co-founder.

Yet over the weekend, he came out of the woodwork as the UK government attempted to salvage a deal for KKR to plough £4bn of equity into distressed water utility Thames Water.

But assurances made to Kravis that Keir Starmer’s Labour government were pro-investment failed to convince the billionaire investor. By Tuesday morning, KKR withdrew from the deal, leaving the fate of Thames Water in limbo.

It was an embarrassing moment for a government that has been trying to flaunt a business-friendly agenda to attract investment into the country.

At the same time, Starmer and Labour have talked a tough game on the utilities sector. Fear of political interference, together with the potential for further uncertainty under future governments during the extensive period needed to nurse Thames Water back to health, seems to have spooked KKR.

The utility has teetered on the brink of insolvency, weighed down by a mountain of debt piled on to it during its years of private ownership.

That’s presented problems for the government, which needs to find new investment to prevent a costly renationalisation while contending with a public furious at perceived mismanagement by groups including Macquarie, the Australian infrastructure investor.

KKR had hoped to persuade Ofwat, the UK water regulator, to reduce fines it had levied on Thames Water.

But last week, Ofwat said it would fine the utility £123mn for breaking the rules on its wastewater operations and for paying millions of pounds in dividends despite poor performance.

Ofwat itself has come under fierce scrutiny. The same day the KKR deal fell through, an official review said the current regulatory system had “largely lost public trust”.

The onus now falls on the senior lenders, such as Elliott Management and UK asset manager Aberdeen, who own the majority of Thames Water’s nearly £20bn in debt.

Last week, holders of the utility’s top-ranking debt outlined a turnaround plan and indicated they would inject billions of pounds of new equity funding into the business.

That would add to a separate £3bn emergency loan they provided in March.

Other bidders are circling, but they’ll find it difficult to replicate quickly the necessary due diligence that KKR had carried out.

If all else fails, the taxpayer will have to foot the bill for a costly temporary renationalisation, a nightmare for the government.

But as the FT’s editorial board has argued, it’s the right step for the indebted utility.

How Blackstone, Apollo and KKR drifted apart

Be it the next large corporate takeover, infrastructure deal or private financing, the executives at Blackstone, Apollo and KKR are prepared to wage war against each other to win.

While these firms are in daily competition, their ability to win deals and attain further glory in the high-stakes private capital industry will come down to novel but growing contrasts in their business models.

DD’s Antoine Gara explains how the uniform march of the three private market megafirms to the apex of finance has taken a turn recently. Each has made a radically different bet on the future of private markets.

Blackstone’s leadership, including co-founder Stephen Schwarzman and Jonathan Gray, have bet that their tried and tested model will continue to be fruitful.

They hope that the $1.2tn-in-assets alternatives giant can continue growing as it has for its first 40 years, raising money from third-party investors to plough into an increasingly broad array of funds and marketplaces.

The model has turned Blackstone into one of Wall Street’s big dividend payers, despite holding $7bn in net cash on its balance sheet.

Apollo is headed in a different direction.

Under chief executive Marc Rowan, it’s hitched its wagon to a large captive insurer called Athene, which it owns. Athene turbocharged Apollo’s growth and allowed it to rival large banks in originating loans for investment grade-rated companies such as Intel.

However, Apollo has embraced a banklike structure: its $395bn in assets are 12.2 times its $32bn in equity, a leverage ratio similar to JPMorgan Chase’s.

KKR also has acquired a large insurer, but the pioneer of the buyouts industry founded nearly a half-century ago by Henry Kravis, George Roberts and Jerome Kohlberg has invented a twist.

Its leadership, having long admired the success of Berkshire Hathaway, is building a pot of assets called “strategic holdings” that can compound in value and earnings over time.

“Everybody’s doing the same thing on the front of the house,” says one private capital executive, referring to the everyday dealmaking of large private capital groups. “It’s the back of the house where the differences emerge . . . and these are pretty radically different businesses.”

DD has watched these firms march in new directions, which could be special weapons during tumultuous markets — or lead to unforeseen vulnerabilities.

Recently, amid volatile markets, Apollo publicly traded barbs with Blackstone. It’s a sign that as pressure mounts on these groups, their unique bets will be tested.

Cliff Asness stops raging against the machine

Hedge fund co-founder Cliff Asness isn’t afraid to take the contrarian view.

Beyond his fame as one of quant investing’s pioneers — he studied under Eugene Fama at the University of Chicago and later started quant giant AQR Capital Management — he’s well known for his hot takes on social media.

Asness sat down with the FT’s Costas Mourselas and DD’s Amelia Pollard at AQR’s offices in Greenwich, Connecticut, to talk about its relatively recent embrace of artificial intelligence, and specifically, machine learning.

(He also hit on what he saw as perennial risks in the buzzy world of private capital, something he’s talked about for years: “there’s a lot of BS out there”.)

Asness was a longtime AI sceptic, wary of the pitfalls that any hedge fund might run into if they charged towards the technology without the right safeguards.

What started as one-off experiments with machine learning several years ago have blossomed into a more wholehearted implementation.

It wasn’t always this way. Back in 2017, Asness told the FT that the firm was in the early days of experimenting with certain types of AI to parse through “big data”. But he had his doubts.

The hedge fund’s machine learning era comes as it recovers from what’s become known as the “quant winter”: a painful stretch from 2018 to 2020 when quant funds such as AQR lost billions of dollars.

The firm today manages $136bn, after a trough of $98bn a couple of years ago. It’s a trend that Asness doesn’t show any signs of wanting to slow down.

“What drives me most is revenge upon my enemies,” he joked in the interview. “I want to show the world that we were right and that we can do even better. I have a chip on my shoulder about it.”

Job moves

• Prosus chief investment officer and group president Ervin Tu will step down from the firm, which he joined in 2021. He will serve as an adviser moving forward.

• Financial data provider FactSet has appointed Sanoke Viswanathan as its chief executive. Viswanathan is CEO of international consumer and wealth at JPMorgan Chase and orchestrated the launch of the bank’s UK digital business.

• Bennett Blau is leaving Goldman Sachs to join Evercore as a senior managing director, a source tells DD. He will focus on the investment bank’s medical technology sector advisory work.

• JPMorgan’s global head of loan capital strategy, Andy O’Brien, will retire at the end of the year after 40 years at the bank.

• JAB Insurance has named Jin Chang as a partner. Chang was most recently senior vice-president of finance at Athene, Apollo Global Management’s insurance business.

Smart reads

People problems Walmart has boosted its revenues while cutting its headcount, the FT reports. The retailer’s success raises troubling questions for the sector’s workers.

Waymo’s world Google subsidiary Waymo is winning the race for robotaxis, The Wall Street Journal writes. The uncanny vehicles are becoming a part of everyday life in some cities.

China’s speakeasies Beijing’s high-end watering holes are being supplanted by unlicensed “homebars” as consumers cut back their spending, the FT writes.

News round-up

BlackRock removed from Texas blacklist after climate policy rollback (FT)

New spying claims emerge in Silicon Valley corporate espionage scandal (FT)

Ex-Janus Henderson analyst part of greedy ‘secret trading club’, jury hears (FT)

Toyota to buy out key supplier in $33bn take-private deal (FT)

Thoma Bravo’s $34bn fundraising haul bucks private equity slowdown (WSJ)

Swiss bank Julius Baer lays out plan to move past Signa scandal (FT)

Private credit could ‘amplify’ next financial crisis, study finds (FT)

BlackRock-backed fintech raises funds to be ‘European Charles Schwab’ (FT)