The Saturday - 4/3/21 Edition
Volume 2, Issue 12
Good morning,
Crowdfunding platform Republic recently announced the launch of a new multi-sector real estate fund that will invest in homes, hotels, malls, and mixed use properties, across a variety of sub-markets.
Unlike its previous funds that focused on the boring physical world of yesteryear, however, these new developments will all be in virtual worlds, such as Cryptovoxels (where parcel prices rose 374% last year) and Axie Infinity (where an ambitious developer recently spent $1.5M for 8 lots).
Speaking about the opportunity, Republic’s Head of Real Estate explained that “buying land today in virtual worlds may end up feeling a lot like buying land in Manhattan in the 1750s.”
I mean, sure, that works… if you overlook one fundamental difference:
Unlike land in 18th century New York, even the most remote parcels in Decentraland have internet connectivity. Get them while they’re hot!
Location, location, location. It’s the oldest rule in real estate… you just need to know where to look.
It’s Saturday April 3, 2021.
Bad April Fools
On Monday (March 29), “leaks” “revealed” that Volkswagen would become an electric-first company and change its name to Voltswagen.
On Tuesday, the company’s American subsidiary confirmed the rumor, but the German mothership denied it, so everyone was confused until Wednesday - March 31st - when the company admitted that it was an Aprils Fool joke.
Instead of achieving its desired comedic effect, however, the prank ended up antagonizing the media and most of Twitter, for whom this was just another lie from the company who gave us DieselGate.
Unlike Halloween, April Fools isn’t burdened by existential crises over whether or not it’s a real holiday; April 1st is closer in sanctity and substance to National Cheeseburger Day than it is to Easter, so it’s hardly worth getting upset over.
Still, the debacle reminded us of every parent’s favorite saying: if you’re going to do something, do it right.
For starters, April Fools jokes are best served on… April 1st. Wearing fangs and a cape to the office on October 26th isn’t exactly a career move and that logic carries over surprisingly well. Transitive property or something.
More importantly, April Fools jokes are better when they are funny.
Remember when the Long Island Iced Tea Corporation changed its name to Long Blockchain Corporation and the stock shot up 200% that day? Now that was funny.
There’s just no excuse to settle on Voltswagen over SPACwagen.
Anyways… Volks finished the week up 6%, so what do we know?
Good April Fools
This is how you do it, Volkswagen.
Same Same
Yum! Brands’ digital sales grew 45% last year, reaching $17B. On Monday, the KFC/Pizza Hut/Taco Bell owner doubled down on its online and mobile ordering channels by announcing the acquisition of Tictuk Technologies.
Not to be confused with the Chinese social media app, Tictuk is an Israeli company that “specializes in conversational commerce and omnichannel ordering.” In plain english, Tictuk developed tech that will allow customers to text Yum’s restaurants and place orders directly from their preferred messaging apps, such as WhatsApp and Facebook Messenger.
Pretty cool stuff!
Tictuk might not be as flashy as TikTok, but at least no (former) President is trying to ban it!
Archegos
Last week, we discussed the mysterious coordinated sell-off in seemingly unrelated American and Chinese companies, like Viacom, Discovery, Baidu, and Tencent Music.
At the time, news outlets dissected each individual company’s movements in isolation, but we noted the following:
Elsewhere, however, the rumor mill and (i) a few (ii) Twitter (iii) accounts believe that an over-levered Asian TMT (technology, media, and telecom) whale was blown up and forced into liquidation, with blocks of 35M VIAC shares, 16M DISCA, 10M BIDU, and more sizable share blocks being force-sold. […]
The prevailing rumor in the dark corners of the internet - and it is important to note that this is only a rumor - is that Archegos Capital Management, LP, an Asia-focused offshoot of famed Tiger Management, may be the victim.
This bit was written Friday night. By mid-day Saturday, the rumors had been confirmed: Archegos had collapsed.
Up until last weekend - when The Saturday kinda broke the news! - you likely had never heard of Archegos and neither had we; it was an under-the-radar fund with no outside investors and whose trades were purposefully secretive.
So what is Archegos?
Archegos is a family office owned by Bill Hwang, a rags-to-riches character who moved from Korea to America as a teenager, was hired by Julian Robertson’s storied hedge fund Tiger Management, and performed so well that Robertson eventually provided the financial backing for Hwang to launch his own fund, Tiger Asia, in 2001.
In 2012, however, Tiger Asia pled guilty to wire fraud charges and had to pay a $44M fine. In light of the criminal investigation, Hwang returned investors their money and converted Tiger Asia into Archegos, a private fund managing only Hwang’s money.
Over the years, Hwang worked on restoring his public image, found religion, and continued to grow his personal war chest. Two weeks ago, thanks to a series of sizable and successful bets, his net worth was estimated at roughly $8B-$10B.
Now, thanks to a perfect confluence of factors, that money’s gone.
Here’s what happened.
First, espousing a trading style more reminiscent of WallStreetBets than Wall Street proper, Hwang invested his entire fortune in a small group of volatile companies and, despite being up well over 100% on the year, never sold or took gains. Diamond hands, as the cool kids say.
Next came leverage. Archegos magnified the size of its bets through the use of total return swaps (TRS); products where, in exchange for a fee, banks would purchase and hold the stocks themselves, but Archegos would get all the upside (and downside).
According to the WSJ, financing arrangements with Goldman Sachs, Morgan Stanley, Credit Suisse, and Nomura regularly allowed Archegos to put up only $15 in collateral to borrow $85. This allowed the $10B fund to amass positions nearing $50B in notional value.
In addition to leverage, the TRS structure also served another purpose. Under Regulation 13D, beneficial owners of 5% or more of a company’s stock must publicly disclose their positions and, once ownership levels exceed 10%, the owners are considered insiders and are subject to additional disclosure obligations.
Although Archegos indirectly held greater than 10% stakes in at least two companies, with the TRS, the banks held the actual stock and the fund’s derivative interests did not count as 13D beneficial ownership. Because of this, Archegos didn’t have to report its trades.
At the fund-level, given their historically smaller size and the absence of outside investors, family offices like Archegos are also subject to fewer disclosure rules than hedge funds and other financial institutions. Of particular note, Archegos was thus exempt from Form 13F reporting obligations, which require investment managers to disclose their funds’ positions on a quarterly basis.
In other words, Archegos (i) made highly concentrated bets, (ii) used tremendous amounts of leverage, and (iii) its own banks likely didn’t know the real size of the trade, thanks to exemptions from trade-level and fund-level reporting requirements.
When Viacom and Baidu hit otherwise benign speed bumps last week, Hwang found himself over-levered, with positions too large to unwind in an orderly fashion. The trade went upside down fast, margin calls were triggered, and Archegos couldn’t post collateral. According to reports, the fund’s banks then all got on a conference call to try to broker an orderly liquidation, but those efforts failed.
Just like that, the sell-off was on and Hwang’s fortune evaporated in what is likely the largest fund collapse since Long Term Capital Management required a Fed bailout in 1998.
As for the banks, sources estimate Credit Suisse’s losses at $4B, while Nomura projected its own losses at $2B. Goldman Sachs and Morgan Stanley liquidated their positions earlier and are believed to have avoided major losses.
On the upside, this will make for a great sequel to one of the nine GameStop movies currently in the works.
Have a great weekend!