Downfall of a star fund manager

One thing to start: Archer Daniels Midland shares tumbled by nearly a quarter on Monday after the global agricultural commodities trader placed its CFO on leave and delayed its quarterly earnings release as it investigates accounting practices in its nutrition business.

In today’s newsletter:

• The finance bromance gone wrong

• McKinsey’s internal management battle 

• Pension funds adopt new borrowing tactics

The ballad of Lars and Bruno

In the realm of international finance, there are larger than life characters and then there is Lars Windhorst.

Hailed as a “wunderkind” in his teens by German chancellor Helmut Kohl in the 1990s, the German financier has since weathered everything from corporate and personal bankruptcies to a suspended prison sentence, while even surviving a plane crash that claimed the life of one of the pilots.

Windhorst has the network of high-powered contacts befitting a consummate survivor, with his Rolodex including everyone from reformed junk bond king Michael Milken to Hollywood A-lister Michael Douglas.

Regular DD readers will by now be versed in his exploits, from his problematic entanglements with Goldman Sachs to the spying scandal that ended his tenure as owner of Hertha Berlin football club.

But you may be less familiar with the life and times of Bruno Crastes, the buccaneering macro trader who blew up his career betting big on Windhorst.

Crastes’s firm H2O Asset Management oversaw more than €30bn at its peak, discreetly managing billions of dollars for some of the most powerful sovereign-wealth funds in the world, such as Singapore’s GIC and the Abu Dhabi Investment Authority.

That was before DD’s Robert Smith and FT investigative journalist Cynthia O’Murchu exposed that H2O had poured nearly €1.5bn into Windhorst’s network of rickety ventures back in 2019.

Pandemonium ensued. H2O experienced €8bn of redemptions after their story. It was forced to freeze its funds a year later under regulatory scrutiny. Then, one year ago, Crastes was struck off from managing funds for half a decade by the French regulator.

But a question remained: why did H2O — whose very name was a nod to the importance of liquidity — pour its investors’ money into illiquid assets linked to a racy financier with a criminal past?

Now in an FT Magazine feature, Cynthia and Rob reveal in startling detail how one of the finest fund managers of his generation ignored his closest confidants and risked billions on a man with a visible trail of wreckage behind him.

Many of the most jaw-dropping scenes take place on Windhorst’s superyacht, where Crastes and his family even joined Windhorst and his fiancée for a Caribbean holiday in the final days of 2018. In previously unreported emails seen by the FT, Crastes and Windhorst told one another that they considered each other “family” after the trip.

Read the full lavish story of treachery and deceit in the world of high finance here. And if you have a fun anecdote about Windhorst (as do many in European finance), don’t hesitate to get in touch.

McKinsey boss’s re-election challenge

In 2021, Bob Sternfels took the reins at McKinsey after his predecessor, Kevin Sneader, became the firm’s first global boss since 1976 to not secure a second term.

Sneader’s three-year stint at the top of the consulting firm was overshadowed by a legal and public backlash over McKinsey’s work for opioid manufacturers, causing friction in the partnership that ultimately led to his defenestration.

Sternfels is now facing his own re-election challenges. The Californian Rhodes scholar failed to win a second term as global managing partner on the first round of voting after a backlash to his restructuring programme and a slowdown in growth. 

Under McKinsey’s idiosyncratic election process, the firm’s 750 senior partners can vote for anyone from within their ranks in the first round as long as the candidate can serve a full term before turning 60. If a candidate fails to win 50 per cent of first preference votes, the top 10 names go forward to a second round. There can be up to three rounds of voting. 

Although Sternfels is still widely seen as the favourite to win, the process has shone a light on the internal debate within McKinsey. Current and former partners pointed to last year’s redundancy programme affecting 1,400 back office employees, which was codenamed Project Magnolia, as one source of uncertainty over Sternfels’ leadership.

His opponents in the second round of voting include: Carter Wood, chief risk officer; Rodney Zemmel, global leader of McKinsey Digital; Asutosh Padhi, McKinsey’s North America managing partner; and his predecessor in that role, chief client officer Liz Hilton Segel. 

In the 2021 vote, Sneader failed to make the final two, ending his time atop the global management consultancy. Despite challenges, Sternfels will be determined not to suffer the same fate as his direct predecessor.

Pension funds turn to debt to manage their leveraged buyout bets

Investors in private equity funds have always embraced leverage as a perceived way to beat public markets, but some of the industry’s largest players are turning to new forms of borrowing to manage their portfolios.

US public pension funds like Calstrs are looking at new borrowing strategies to manage their illiquid private market bets, relying on the debts to generate short-term cash flows during periods of market illiquidity, reports the FT.

This month, Calstrs voted to allow the fund to borrow as much as $30bn, or 10 per cent of its portfolio. The strategy allows it to use loans to smooth out its cash flow needs and keep its portfolio in balance. Calstrs is among at least seven other public pension plans that are adopting the use of leverage to manage their portfolios.

Using borrowed money and derivatives can help boost returns, rebalance portfolios and give the funds access to cash without having to resort to fire sales of illiquid assets during times of market stress, according to their thinking. It also comes as giant funds have tied up a larger share of their assets in illiquid investments such as private equity.

The fund-level leverage mirrors some of the tactics DD has covered closely, such as buyout firms’ use of net asset value loans to generate distributions for investors, or to pump cash into ailing companies.

Borrowers generally expect the debts will satiate liquidity needs that are shortlived.

“We are not looking to immediately borrow capital, but this an investment tool to utilise, particularly during market disruptions,” Scott Chan, deputy chief investment officer of Calstrs, told an investment committee meeting.

But debt is no panacea: “There is still a risk that assets will have to be sold at low prices, to repay the borrowing, locking in losses,” said Alasdair Macdonald, head of investment strategy with WTW, a professional services firm.

Job moves

• UBS has named Jeff Hinton as global co-head of M&A. He joined last year from Barclays as co-head of M&A for the Americas. Marc-Anthony Hourihan has been appointed chair of global M&A, alongside Scott Lindsay and Robin Rankin. Solon Kentas will be Americas head of M&A, while senior Americas M&A banker David Descoteaux will be leaving the firm.

Smart reads

Reading Ackman The billionaire hedge fund manager Bill Ackman’s social media posts are the stuff of a brilliant fictional character, Kurt Andersen writes in The Atlantic.

Defcon wine Yes, the UK has strategic wine reserves. The government’s cellar is worth £3.7mn and FT Alphaville has done a full review.

Talk to Chuck Last year, Charles Schwab weathered a banking crisis, lay-offs and a falling stock price. Internally, employees are preparing for another year of uncertainty, according to The Wall Street Journal.

News round-up

Ex-Freshfields tax chief should be spared prison, his lawyer says (FT) 

Commodity trader ADM probes accounts and puts finance chief on leave (FT)

Argus Media head becomes majority owner as Hg sells stake (FT)

Crédit Agricole takes 7% stake in payments group Worldline (FT) 

Française des Jeux buys Sweden-listed betting group Kindred (FT)

Sony calls off $10bn Zee merger in India after two years of talks (FT)

Share price surge helps largest hedge funds to biggest profits on record (FT)

Macquarie raises record €8bn for Europe infrastructure fund (FT)