| A very long time ago, I was an investment banker at Goldman Sachs Group Inc. This was so long ago that, when I started, Goldman was not yet a bank holding company. (It became one in 2008, for reasons.) It was just an independent investment bank that couldn't take deposits. Some of its competitors — Morgan Stanley, Bear Stearns, Lehman Brothers — were also like that, independent investment banks, but others — JPMorgan Chase & Co., Citigroup Inc. — were big "universal banks" with banking licenses and huge retail branch networks and lots of low-cost deposits that they could lend to companies. The conventional wisdom at Goldman at the time was that this put us at a bit of a disadvantage in doing deals. We'd go to a company and say "hey you should buy this other company," and the company would say "great, but that will require money, will you lend it to us?" And we'd say "oh no we're not that kind of bank, we're an investment bank, we don't have money lying around to lend you." And then JPMorgan would come in and say "but we do!" And then JPMorgan would get the job as lead adviser on the merger, because it could also lend the company the money, and we couldn't. I don't want to exaggerate this; this story is not completely true. The universal banks would often syndicate those loans rather than holding them themselves, and the independent investment banks had lots of money and did do lots of lending. But there was a perception that the universal banks had much more money to lend, which gave them an advantage in doing deals, and that the independent investment banks had to overcome that advantage by working harder and being better at coverage. You had to be more charming and give better advice, because you were getting hired only for your advice; your competitors could get hired for their money. This was a long time ago. Since then, the big investment banks have become, or been acquired by, universal banks. But meanwhile years of regulation and risk aversion have made it so that the universal banks tend not to have money lying around to lend to clients. "You should buy this other company," a bank will tell a client, and the client will say "great, but that will require money, will you lend it to us," and the bank will say "yes absolutely, we will help you raise that money from investors by underwriting a bond deal or syndicating a loan, here are some indicative terms." And then the client will mostly say "great," but sometimes it will instead say "well but couldn't you just lend us the money yourself instead of spending weeks marketing the deal to investors," and the bank will say "oh no no no no no, lending money to a client to buy a company is risky, and we are tasked with the sacred trust of safeguarding retail banking deposits, we can't just give it to you to do an acquisition." And then Apollo comes in and says "ahh we have piles of money, here, take some." Because now if you want funding for an acquisition, particularly a leveraged buyout, you are increasingly likely to get it from a private credit fund run by a manager like Apollo Global Management or Ares Management Corp. Because the private credit managers control actual pools of long-term, locked-up, relatively unregulated cash, which they lend to fund buyouts. And the banks have much larger pools of highly regulated demand deposits, which are harder to use to fund buyouts. But the banks still advise on mergers, and also finance them by underwriting bond deals and syndicating loans. And, crucially, they have people to do that: They have mergers-and-acquisitions and leveraged-finance bankers who go out to clients to try to make deals happen. I wrote a few months ago: If you are a company looking to borrow money, the best user experience is something like "one person, whom we trust, shows up at our office, gives us a menu of borrowing options, lists the pros and cons of each one, and then goes and gets us the one we choose." Traditionally that person was an investment banker, and she'd show up with a pitchbook on the pros and cons of bonds and bank loans. The current situation is, I guess, that she shows up, does her pitch, leaves, and then you have appointments with six private lenders who offer alternatives. But that seems unstable. In the long run, the best user experience is probably that the investment banker adds another column, for private credit, to her pitchbook.
How does that happen? Well, the investment bank could just open its own private credit business. The bank has money, and it also has an asset management business that can raise money from the sorts of long-term investors (insurance companies, endowments, rich individuals, etc.) that invest in private credit. Just raise a private credit fund and offer private credit to clients who want it. As we have discussed, banks are definitely doing that. Today Bloomberg's Todd Gillespie and Sonali Basak report on the other approach: Citigroup Inc. and Apollo Global Management Inc. are teaming up in the fast-growing private credit market, agreeing to work together on $25 billion worth of deals over the next five years. The two Wall Street heavyweights have struck an exclusive partnership to arrange financings for corporate and private equity clients, according to a statement seen by Bloomberg. Mubadala Investment Co. and Apollo's insurance unit Athene will also participate in the venture, which will initially focus on North America. "This is where the industry is going," Apollo Co-President Jim Zelter said in an interview, describing the relationship between private capital providers and banks. "Citi goes from a very active M&A banker with a few tools to having the complete toolbox."
Just sort of an incredible quote: Before this deal, Citi was pretty good at M&A, it had some of the tools to do M&A, but it didn't have a very important tool, which was money to lend buyers. Now, though, it has teamed up with Apollo, so it does have the money to finance M&A. Finally, after years in the wilderness, a global bank with a $2.4 trillion balance sheet can lend money to clients. But it makes sense, right? Apollo is essentially in the business of managing money, raising it from investors (and from Athene) and investing it in loans. It is not, essentially, in the business of coverage; it doesn't have armies of bankers who call on companies all day to ask about their financing needs. Citi, meanwhile, has the bankers, but it didn't previously have that third column in its pitchbooks: Long seen as rivals in providing financing to companies, the two industries have increasingly converged. Banks are looking for ways to maintain their fee streams without tying up their own balance sheets as they grapple with regulation and capital requirements. Private credit managers, meanwhile, are under pressure to find new avenues to source investments after raising record amounts of cash. Citigroup will rely on its investment banking expertise to source new debt deals among its clients and will earn a fee for originating the transactions. Apollo and its partners will provide the cash. The offering will become a third prong in the bank's debt capital markets strategy, complementing its existing business of arranging loans and bonds for distribution in the public markets. "We lose a number of transactions to private credit," Richard Zogheb, Citigroup's head of debt capital markets, said in an interview. "The great news for us now is that we can maintain incumbency and offer that solution."
Great. Two other points here. First: There is something a bit weird about the fact that many of the big private credit managers are also big private equity managers. It is awkward for Apollo to be a private-credit lender to an Apollo private equity buyout (there are conflicts of interest), and it is awkward for Apollo to be a private-credit lender to a non-Apollo private equity buyout (Apollo and the sponsor of the deal are competitors). These are not unsolvable problems, and obviously private credit works well with private equity, but arguably there is something nice about interposing a third party (Citi) between the lenders and the sponsors. Second: In many ways private credit firms are competitors to banks, and banks lose bond-underwriting or syndicated-loan business when companies take private credit loans instead. But banks are not entirely frozen out of those deals, because private credit firms often get leverage from banks: Instead of using $100 of their own investors' long-term locked-up money to fund a loan, a private credit fund might use $50 of its investors' money and $50 borrowed from a bank. In some ways this is a natural development: Lending money directly to fund buyouts is risky for a bank, but lending money to a private credit fund to lend to fund a buyout — taking the senior tranche of the loans — is safer. And if a big part of your financing business is lending money to private credit firms, partnering with them to find more deals is just good business. I suppose there is another path for private credit, though. Instead of letting big banks "maintain incumbency and offer that solution," the private credit firms could just … become investment banks? Hire a lot of coverage people and go out and pitch deals? That is also happening, sort of, Bloomberg's Eleanor Duncan, Silas Brown, Ellen Schneider and Paula Seligson report: "We've seen a change in the appetite for larger private credit — aka 'mega' — funds to hire from leveraged finance [desks at banks]," says Harry Oliver, a headhunter at Paragon Search Partners. … Bonus-starved bankers are being seduced by fat pay deals, often including a cut of a firm's performance fees, and by the chance to work in a hot part of the market that offers more freedom than increasingly rule-bound investment banking, according to several people who've made the jump and spoke to Bloomberg on condition of anonymity. Fewer working hours is another draw. … "Private credit is a relationship business," says Aymen Mahmoud, managing partner and co-head of transactions at law firm McDermott Will & Emery. "Those bankers will have strong relationships with large private equity firms, so it makes a ton of sense for the private credit firms to hire them."
You don't need to partner with Citi (and pay it fees) to source your private credit deals, if you just hire its bankers instead. I feel a little silly writing about OpenAI's governance because all of it is probably fake? Like here is a simple story of OpenAI that, I think, explains everything essential about it: - OpenAI is a hot startup with a $150 billion valuation.
- It is worth that much because it has products that seem likely to make it a lot of money in the future.
- Right now, though, it spends more than it makes, so it has to keep raising money.
- It can raise that money from investors because they expect to get rich off its future profits.
- Its charismatic founder has become a billionaire from his large stake in the valuable company he founded.
This story is not especially different from the story of any other hot startup; this story more or less described Stripe or SpaceX or Facebook or Amazon at some point in their histories. If you have a promising tech startup, you can raise a lot of money from people who want to share in the future profits, and you will get rich yourself. And then, layered over that simple normal correct story, there is a lot of legal structuring that gets a lot of attention, including from me, but turns out not to matter? Technically OpenAI is not a hot startup with a $150 billion valuation; it is a nonprofit organization that controls a capped-profit subsidiary that has raised money from investors at prices that imply a $150 billion valuation with some assumptions about the cap, blah blah blah, you can get all worked up about this but it doesn't matter. And Sam Altman, OpenAI's co-founder and chief executive officer, doesn't technically own a stake in the company, because it's not a company, it's a nonprofit, blah blah blah, but not really: OpenAI is discussing giving Chief Executive Officer Sam Altman a 7% equity stake in the company and restructuring to become a for-profit business, people familiar with the matter said, a major shift that would mark the first time Altman is granted ownership in the artificial intelligence startup. The company is considering becoming a public benefit corporation, tasked with turning a profit and also helping society, said the people, who asked not to be identified because the information is private. The transition is still under discussion and a timeline has not been determined, one of the people said. OpenAI was founded in 2015 as a nonprofit research organization with the goal of building artificial intelligence that would be safe and beneficial to humanity. In keeping with those origins, Altman had not taken equity, stressing the company was meant to broadly benefit society and that he had enough money. Yet as the value of the business soared, it's been increasingly difficult to stick with those ideals.
At one level, Altman currently owns 0% of OpenAI, and if it restructures along the lines reported by Bloomberg and others, he will end up owning 7%, worth about $10 billion. At another level he clearly owns at least 7% now, no? When he was briefly fired as CEO last year, the valuation of OpenAI supposedly dropped from $86 billion to zero. There is some source of economic value located somewhere in or near the OpenAI offices, and that source of economic value is partly controlled by OpenAI's nonprofit board and partly by Microsoft Corp. and its other big investors and partly by its researchers and partly by Altman, and I submit that it is mostly controlled by Altman, and if he extracts only 7% of that value for himself then he's being pretty generous. Oh but OpenAI has a nonprofit charter, oh but Elon Musk is suing it to make it stay a nonprofit, oh but the operating agreement tells the investors that "it would be wise to view any investing in OpenAI Global, LLC in the spirit of a donation," whatever. "Information wants to be free," people used to say, but one interesting fact about modern tech capitalism is that good technology products seem to want to make their owners rich. OpenAI, notionally, wanted to build artificial intelligence products that benefited humanity without making its founders and venture capitalists rich, and somehow it couldn't do that. Altman tried his best not to get rich off OpenAI, and failed. It is understandable that OpenAI would have to become a for-profit company: It still uses more cash than it makes, it needs to raise billions of dollars from investors, and those investors want a return. The current structure — they invest in a for-profit subsidiary, but their profits are capped and, crucially, the subsidiary answers to a nonprofit board of directors who have no fiduciary duties to the investors — is obviously unsatisfactory for someone looking to invest billions of dollars. It doesn't matter — in fact, the nonprofit board of directors obviously has to do what is in the best interests of investors, since the investors have the money — but now the legal structure will align more closely with the reality. But why does Altman need 7%? One possible answer is "he wants 7% and the board knows he's worth it," which is a fine answer — as I said, he clearly controls more than 7% of the economic value of the company — but doesn't match with his own (correct) claims that he "had enough money." The better answer is probably: He is the founder and CEO of a hot startup, and the founder and CEO of a hot startup is supposed to own equity. Not just for his sake — not just so that he can be rich — but to align incentives. OpenAI is a normal startup, and it is raising billions of dollars from investors, and those investors want the normal thing that startup investors want, which is a talented founder-CEO who is all-in on building the company. "I am all-in on building the company for the benefit of humanity, and I have taken no equity to make sure that I am focused on that mission" is not a good sign, from a normal startup investor's perspective. "I am all-in on building the company for the benefit of investors, and the 80% of my net worth is in company stock" is fine, even if the other 20% of your net worth is billions of dollars and "enough money" for you to live on forever. Some formalities — the nonprofit structure, etc. — don't matter, but others — the founder owning a lot of stock — do. Meanwhile a ton of OpenAI people just quit? Just random coincidence though: OpenAI Chief Executive Officer Sam Altman said that executive departures at the artificial intelligence startup were unrelated to a restructuring as the company weighs moving to a for-profit structure. "I saw some stuff that this was related to a restructure, that's totally not true," Altman said on stage at the Italian Tech Week in Turin on Thursday. "This is just about people being ready for new chapters in their lives."
Weird? If you were committed to OpenAI's nonprofit vision, you might be annoyed by the pivot to profit. Or, more plausibly, if you are a senior executive at a hot $150 billion startup, it would be reasonable for you to exercise your options, cash in your stock, call in rich and spend some time at the beach. I'm sorry, this is not really my beat, but I do love a bribery case, and this one is extremely funny. New York City Mayor Eric Adams was indicted today, and the allegations are that Adams (1) was bribed by a Turkish government official in the form of free flights on Turkish Airlines and (2) the bribes induced Adams to allow Turkey to open a consulate in New York without a fire inspection. Just incredible work. Like, for one thing, I'm sure the seats are nice, but bribery in the form of "free flights to Turkey" is somewhat inconvenient for the mayor of New York. From the indictment: Because the Turkish Airline provided free travel benefits worth tens of thousands of dollars to ERIC ADAMS, the defendant, he flew the Turkish Airline even when doing so was otherwise inconvenient. For example, during the July and August 2017 trip, Adams's Partner was surprised to learn that ADAMS was in Turkey when she had understood him to be flying from New York to France. ADAMS responded, in a text message, "Transferring here. You know first stop is always instanbul [sic]." When Adams's Partner later inquired about planning a trip to Easter Island, Chile, ADAMS repeatedly asked her whether the Turkish Airline could be used for their flights, requiring her to call the Turkish Airline to confirm that they did not have routes between New York and Chile.
We have talked a lot recently about the scalability of various dodgy arbitrages: You can make a profit from your Spotify or Citi Bike account, but can you turn that profit into real money? I feel like this case raises a related intellectual puzzle, something like "how much of your lifestyle could you fund using unlimited free business-class travel on Turkish Airlines?" I am sure some of my pointsmaxxing readers will reply "oh man I could retire early and buy a mansion with unlimited free Turkish Airlines flights," but for normal people like me and Eric Adams, unlimited free Turkish Airlines flights wouldn't even cover all of our air travel needs. "Call the Turkish Airline to confirm that they did not have routes between New York and Chile," come on man. Well, he also allegedly got a lot of campaign contributions from Turkish officials, which were allegedly funneled through US straw donors, which is probably more of the point. But in US law there is a polite fiction that "campaign finance violations" and "bribery" are different things: People are allowed to give elected officials money to pay for their campaigns (though not foreigners, and not through straw donors), but they are not allowed to give them money or another "thing of value" to pay for their personal lives in exchange for favors. Adams is charged with both campaign finance violations and bribery, and the free flights (and hotel stays) are the alleged bribes. And in exchange he allegedly did favors for the people bribing him. What favors? I mean? In September 2021, the Turkish Official told ERIC ADAMS, the defendant, that it was his turn to repay the Turkish Official, by pressuring the New York City Fire Department ("FDNY") to facilitate the opening of a new Turkish consular building — a 36-story skyscraper — without a fire inspection, in time for a high-profile visit by Turkey's president. At the time, the building would have failed an FDNY inspection. In exchange for free travel and other travel-related bribes in 2021 and 2022 arranged by the Turkish Official, ADAMS did as instructed. Because of ADAMS's pressure on the FDNY, the FDNY official responsible for the FDNY's assessment of the skyscraper's fire safety was told that he would lose his job if he failed to acquiesce, and, after ADAMS intervened, the skyscraper opened as requested by the Turkish Official.
I hope that he literally called him up and said "you've gotten a few free business-class flights, now it is your turn to repay the favor," and Adams was like "I'm ready, who do you need killed" and the guy was like "oh no we just need a temporary certificate of occupancy for this building we own." Honestly, having done very minor home renovation work myself, I can understand why someone might pay a bribe for a COO, and it's a little wild that "free flight to Paris connecting through Istanbul in exchange for a COO" will bring down the government of New York. Big corporate predators bolster global M&A market. When Will Money-Market Funds Lose Their Allure? Saudi Arabia ready to abandon $100 crude target to take back market share. Google Files EU Antitrust Complaint Against Microsoft. Vanguard plans fresh push into active fixed-income market. Former Morgan Stanley CEO John Mack Lists $29.5 Million Caribbean Mansion. To Get What You Want, Try Shutting Up. Bridgerton Ball. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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