Morning Coffee: The 41-year-old ex-gas trader and the “unlimited” money. Private equity firm cuts jobs

Brannin McBee is a billionaire. But as of his interview with the Financial Times on Wednesday, he is probably worth less than before. McBee is among the founders of CoreWeave, the $39bn "neocloud" provider beloved of places like Jane Street. His comments to the FT came during a week when CoreWeave's stock at one point declined 28% amidst a surge in the cost of insuring against a default on the $35bn of debt that CoreWeave carries on its balance sheet alone. Following this, the WSJ noted that one of CoreWeave's bonds was trading at distressed levels.

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What did McBee say exactly? Several things. Speaking to the FT while wearing trainers (sneakers), bangles and what appeared to be a Patek Philippe perpetual calendar chronograph, McBee said CoreWeave wants its debt to have an investment grade rating so that it can borrow money from insurers whose pockets are immeasurably deep. Their capital, “is unlimited. Like, that’s all the money in the world that sits in the insurance tranche,” he pondered.

This appears to have freaked out investors, who were already wondering when the borrowing might stop. The implication is maybe never. 

The FT's interview with McBee also suggests that Coreweave is, at heart, a kind of project financing firm. The FT didn't quote him directly, but noted that CoreWeave is a 'financing machine.' CoreWeave owns hundreds of thousands of NVIDIA AI chips and it uses them as security for loans in so-called 'offtake' contracts, under which clients pay to rent GPU clusters that haven't been built yet. “You say, here’s an idea, and then you forward-sell contracts associated with that idea, and you use those contracts with that collateral to go finance it,” declared McBee.

While this happens, the chips sit in subsidiaries. McBee informed the FT that each dollar they earn first pays interest, principal and running costs, with the remaining 20 cents going to the parent. That parent is CoreWeave. 

CoreWeave's leveraged project finance vibes have been noted before. Offtake structures are usually used to finance power plants and McBee is not afraid to point this out. McBee himself helped pioneer the method for financing GPUs, with the help of bankers at Morgan Stanley and MUFG. 

McBee knows a few things about energy and power plants because before he found himself a billionaire wearing an apparent Patek Philippe watch, he was a project manager in the energy industry and a prop trader working in the energy sector. Early in his career, he completed a one year internship at McBee Oil Corp in Dallas, suggesting his family might know about the energy industry too.

What now? McBee might not be giving unfettered FT interviews in the future. CoreWeave shares recovered yesterday after Jensen Huang at NVIDIA helpfully declared “CoreWeave’s strength is improving every day.” But doubts remain over CoreWeave's debt. What happens, for example, if the NVIDIA chips become outdated and worthless by the end of the contracts? What happens if CoreWeave's customers on short term contracts decide they want to use someone else's data centres instead? What happens if CoreWeave's borrowing costs keep rising?

McBee is untroubled by these questions. Or at least he was, when he spoke to the FT. CoreWeave's debt structure is not "scary debt at all. I look at that as accelerating debt and great debt,” he said.  

McBee also observed that he has no intention of riding into the sunset. “We could go off to a ranch and retire,” he told the FT of himself and his CoreWeave cofounders. “But you’re watching us show up every single day and put our time into this business.” It probably helps that the co-founders have already sold $3.3bn of CoreWeave shares and so are helpfully insulated from what happens hereafter. 

Separately, private equity jobs have historically been nice steady seats leading to nice steady carried interest payments, but this is no longer so. 

Carried interest is harder to get now. And at least one private equity firm is cutting jobs. 

Bloomberg reports that Partners Group, a Swiss-based firm with an unfortunate array of deals cut in 2021 and 2022, has been cutting or 'reassigning' dozens of jobs in its private equity division.

In a comment to Bloomberg, Partners Group declared that the size of its private equity team, "remains consistent with its long-term average, while we have significantly strengthened our senior operational capabilities over the past year.” It also said: “This reflects a buyout environment in which creating long-term value and driving distributions require greater operational intensity.”

Operationally intense times require operationally intense hires. Junior bankers maybe less so.

Meanwhile...

CoreWeave debt is priced for a 60% chance of default in five years. (Bloomberg) 

Deutsche Bank likes CoreWeave. “A confluence of factors appear to have led to a sharp selloff in CoreWeave’s public equity and debt over the past week...we struggle to find company specific factors that justify the recent move.” (Bloomberg) 

Telecom bonds began cracking six months before the dot-com crash. In 2007, subprime mortgage bonds peaked eight months before the S&P 500 did. Equity investors get paid to be dreamers. Lenders get paid not to lose money. (Semafor) 

Shares in Société Générale have dropped more than 20 per cent since the start of August, and BNP Paribas has tumbled 19 per cent. (FT) 

The British government is preparing to increase the tax on banks from 3% to 8%. The TUC wants a 16% tax and is saying: “Britain’s big four banks are making a billion pounds a week, while bonuses have hit a post-crash record. These are bumper profits – driven by high interest rates and households’ mortgage misery. It’s time to make sure banks pay their fair share.” (Guardian) 

Credit Suisse bankers lost their bid to get their bonuses back. The Swiss finance ministry cut bonuses for about 1,000 senior bankers at Credit Suisse. The executive team lost their bonuses entirely. Bonuses for managers one level below the executive board were cut 50%. while employees two levels below had their bonuses cut by 25%. The Swiss Supreme Court said this was fair. (FT) 

How it is when you work in AI. 'To seduce a U.S. diplomat in Russia, a foreign espionage operation first sent a blond woman to his hotel room with Champagne. When he declined, the spies sent a redheaded woman, and then next a young man.' (WSJ) 

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