Morning Coffee: 36-year-old hedge fund manager's big new office comes at the wrong moment. Did Deutsche Bank waste $500m?

Along with all the other stock picking factors like momentum, value, quality and the like, there’s a little used indicator which can sometimes be used to spot when previous outperformers might be about to take a turn for the worse.  The “HQ Factor” doesn’t stand for “high quality”; it’s a warning that when a company moves to a flashy new headquarters building, it’s time for investors to get out.

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There’s a certain amount of logic behind the rule.  An expensive new building might be a sign of hubris, or of a company that is expanding too quickly and stretching its finances and capability.  Chief executives have been known to get caught up in the pleasures of deciding on their new real estate and take their eye off the business. Alternatively, the fancy office rule can reflect mean reversion. Companies, and hedge funds, move into new premises to accommodate the growth that comes with success, but these extraordinary runs rarely last. 

This final scenario fits the FT's description of the recent experiences of Hamza Lemssouguer at Arini Capital. Lemssouguer has had a meteoric career ever since he generated 5% of Credit Suisse’s fixed income trading revenues on his own aged 29, then left to found Arini. He's been through previous drawdowns in the high single digits to mid-teens of per cent, but has more normally generated returns between 10% and 25% per year.  With the support of a large fan base among Gulf investors, it must have seemed like a reasonable move to take on no fewer than eight floors of space formerly occupied by Apollo, just around the corner from Hanover Square in Mayfair.

But just as luck wouldn’t have it, shortly after signing the lease, Arini got caught in a credit crunch, with several of its biggest positions (including the debt of Aston Martin, Merlin Entertainments and Very Group) going sour.  This year, the total drawdown has reached 26%.  And worse than that, the FT notes thatthe news is out on the Street, which means that other traders are shorting Lemssouguer’s holdings in the hope he’ll be forced to liquidate.

The HQ rule is by no means infallible, although we have to note that it did pick up signs of impending bad luck at Eisler Capital last year.  Goldman Sachs, for example, has pretty much gone from strength to strength since moving into 200 West Street in November 2009. JPMorgan's new Park Avenue office went from costing $3bn to an estimated $6bn, and all seems to be fine. Lemssouguer is still in a position to raise new capital from investors; he had $1.5bn of commitments at the start of last month on re-opening a closed strategy.  But it might raise an ironic smile at Arini Capital to realise that despite their modern and aggressive approach in the cutting edge markets for distressed credit and private investments, they’ve fallen to an age old proverb coined by a restructuring specialist in the 1980s.

Elsewhere, Deutsche Bank bought the UK brokerage Numis in 2023 for £410m ($550m at the time), in the expectation that they would be buying a prime position when IPO volumes on the London Stock Exchange recovered.  If that had happened, it would have looked like an absolute bargain of a deal.  But they haven't and it doesn't.

Ross Mitchinson, the chief executive of Deutsche Numis, has described the last few years as “a challenging period for UK capital markets”, which is if anything an understatement.  There have only been five IPO deals so far this year, and although Numis has made money out of M&A, it isn’t particularly cheerful to be advising your clients on how to sell themselves to foreign buyers.

Are people getting grouchy? Yes and no.  There is some suggestion in the Bloomberg report of a few issues of cultural fit – Numis bankers tended to take a relaxed approach in “shirts and chinos”, while Deutsche still prefers suits.  But although there have been some high level departures like Alex Ham and Stuart Ord (often replaced by former Citi bankers), turnover doesn’t really look any higher than other domestic players.

Unfortunately, equity capital markets business is like fishing – if they aren’t biting, then there’s not much you can do, and all you know is that if you leave the riverbank you won’t catch anything.  Deutsche wanted to build back their market share in the UK by buying an incumbent and they have done.  Now all they can do is wait and hope.

Meanwhile …

Mark Tweedie, formerly the head of EMEA fintech coverage at Citi, is going to join KBW as head of European investment banking. (Financial News)

The integration of Credit Suisse into UBS is now absolutely complete, and a final 200 roles have been cut from the London office.  There might not be quite that many redundancies though, as some of them have been offered jobs elsewhere in UBS. (Bloomberg)

“We simply don’t see the need for a local presence” – Sequoia is refocusing on Silicon Valley and closing its London office, claiming that it can serve European startups just as well from San Francisco.  They are also scrapping their Monday meetings, saying that “Founders operate 24/7, and so do we. Founders shouldn’t have to adhere to our process - we will do our best to adhere to yours”, so it looks like they will be getting up in the middle of the night rather than asking Europeans to do so. (X)

Hudson River Trading is now active on the Kalshi prediction market, but so far only for trading “up or down” markets based on financial and commodities derivatives rather than betting on sports or election results. (Bloomberg)

Lots of people think they are getting enough sleep but aren’t; if you only manage six hours a night for two weeks, your performance is as badly impaired as it would be after an all-nighter. (FT)

Private jets might be a bit more luxurious, but commercial aeroplanes tend to have more engines and to be safer.  (Business Insider)

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