General Atlantic (GA) was launched in 1980 by Chuck Feeney, an American billionaire who’d made his fortune and then given much of it away. He was a forward-thinking businessman, who’d helped create the whole notion of duty-free shopping, and then profited from it enormously. Feeney was also a secret philanthropist, whose $8 billion-plus in undercover charitable donations earned him the nickname ‘the James Bond of philanthropy’.
New York-based GA is no charity, though it has a reputation as one of the less rapacious firms in an industry known for aggressive investing techniques and short-term profiteering. GA today manages more than $80 billion and its clients include wealthy individuals and massive global pension funds. It aims to spot up-and-coming companies, buy stakes in them while they’re still relatively small, help them grow and then list the company’s shares on a public stock exchange or sell them on to another investor at a higher price. It looks for companies led by ‘visionary’ founders – like Feeney – with fast-growing businesses.
GA also focuses its investments around particular themes. When the team finds a company that fits into one of its themes, they dig and dig until they decide whether to invest. That decision is taken at an investment committee meeting, where partners of the firm grill the founders of the company that they’re thinking of backing. It’s a multi-layered process designed to filter out all but the best businesses to bet on.
Private equity firms like GA have seen their resources explode in recent years. By the late 2010s, they were sitting on $2.5 trillion in cash, and struggling to find places to invest. For businesses looking for investment from so-called PE firms, there was so much money sloshing around.
GA’s youthful European chief, Gabe Caillaux, a former Merrill Lynch banker, was already an old hand in the industry, having joined GA in 2004. He once told one of my Dow Jones colleagues in an interview that too many private equity firms relied on the ‘trick’ of financial engineering to generate returns, and that wasn’t sustainable. The implication was that you needed smarts, not just pots of cash, to make an investment pay off. Under Caillaux’s leadership, GA in Europe had a stellar track record. Several companies he’d invested in had listed their shares, netting GA enormous profits.
GA’s London-based finance-focused team had for years been looking at the supply chain finance sector, which was beginning to take off. The prospects were compelling. McKinsey & Company said that the overall universe of payments that could run on SCF programmes was in the trillions of dollars, but only a tiny fraction of the world’s payments had so far been tapped by SCF providers. GA’s view was that the traditional banks did a poor job of serving the market. There were a few small disruptors who were looking to do things differently.
From about late 2016, GA began homing in on Lex. He was a regular panellist at trade finance conferences and stood out as more charismatic and bolder than the techies and middle-ranking trade bankers who shared the stage. He also had impressive connections in government. GA also knew Maurice Thompson and David Brierwood, the ex-Citi and Morgan Stanley bigwigs who sat on Greensill’s board.
Caillaux’s team began digging deeper into Greensill and courting him at the same time. They introduced Lex to companies that were in their orbit that could potentially benefit from SCF. It was a way to help Lex build the business, while also finding out a bit more about how he worked. Gabe met with Lex every three or four months for breakfast and a catch-up. As the relationship grew, GA spoke to insurers and bankers who worked with Lex. They talked to technology platform owners who provided technology to Greensill. They spoke to Tim Haywood at GAM before his funds blew up; he was gushing, unequivocally positive about the Greensill business and Lex’s smarts.
In early 2018, Lex told his suitors that he would be open to them buying an equity stake. To GA, it sounded like a typical founder who’d decided that this was the right moment to seek more funds to grow his business. GA didn’t know that persuading them to invest had suddenly become critical. At GAM, Haywood’s position was looking increasingly untenable and senior executives were starting to put a block on more Greensill investments. In March 2018, Lex had phoned a senior manager at GAM, furious that the firm was refusing to roll over a $10 million loan – a relatively small sum, but Greensill was hanging by a thread. In that context, of course, Lex was suddenly open to an equity investment from GA. His business was in trouble. He’d take any money he could get.
Around the same time, Lex made some quick decisions to dress up the Greensill accounts. He made a loan to Tower Trade so that it could take a bunch of problem loans off Greensill’s balance sheet. The effect was to replace some bad assets – loans that were overdue and looked as if they couldn’t be repaid – with one new loan.
Lex also owed Neil Hobday a fee he’d been promised for introducing deals to Greensill. Ahead of the potential GA investment, Lex promised Hobday stock and paid him about £400,000 up front, plus a consulting fee of £15,000 a month for several years. In Greensill’s accounts, the stock wasn’t recorded, and the lump sum was booked as a loan.
The effect of these moves was to make Greensill’s accounts look better so that GA would put a higher value on Lex’s business. Oblivious to Greensill’s predicament and his accounting manoeuvres, GA began its due diligence process in earnest.
There were red flags. Caillaux and his colleagues noticed that much of Greensill’s business was concentrated in loans to a single businessman, Sanjeev Gupta. Here, they took some comfort from conversations with government sources, who told them Sanjeev was a preferred bidder for UK steel assets.
They were also concerned that Greensill seemed to be burning through cash at an alarming rate, even for a hot start-up. They noted that Greensill had a lower-tier audit firm in the UK and a tiny auditor in Australia too – that would have to change if they were going to get any bigger. There were worries about Greensill’s technology – it wasn’t up to scratch. Lex liked to say Greensill was a fintech. But GA’s team felt a $50–$60 million tech action plan, aided by a top consultant like Bain or Boston Consulting, was needed to bring the firm’s technology up to the right level. They also thought Greensill’s finance and accounting function was lightweight – not unusual for a new, fast-growing company – and that a lot of the business (too much) ran through Lex personally. These were all the sorts of problems GA’s executives thought they could fix, assuming they had a willing founder to work with, who would listen to advice, even when it was critical.
Was Lex that kind of founder?
On that, GA had less clarity. There were certain markers that Caillaux and the team fixated on. Lex already had a private plane at this point, which raised some eyebrows. It was unusual for a small firm to have its own aircraft. Gabe questioned Lex about it, telling him that it could be bad for his reputation, and that he could instead get a membership with NetJets, or some other aircraft-on-demand service. Lex pushed back: ‘Watch me work for a few months, see how much work I do on board the plane, and then let’s talk about it again.’
After issues with Tim Haywood began to emerge at GAM, GA also talked to some contacts there. Was there a Greensill problem? No, the issues were focused on Haywood, the wayward portfolio manager, his poor due diligence and record keeping. It was also partly a dispute between two colleagues who’d fallen out.
GA’s due diligence on Lex’s character threw up several naysayers. Insurers who’d been burnt by Lex, and competitors in the SCF space who said he was stretching the business model into places it didn’t belong. At times his business seemed too good to be true, and that was usually a sign that something was wrong.
Still, Caillaux’s team couldn’t tell how much of the criticism was real and how much was the jealous sniping of former colleagues or rivals who had missed out on Greensill’s success. GA kept pushing for hard evidence of fraud or that Lex had broken rules. In the absence of any, the GA team believed the criticism just sounded like sour grapes.
Some of the people GA asked about Lex Greensill during their due diligence thought they were talking in confidence. Somehow Lex found out what they had said. When he did, he left an angry message with one of them, accusing this person of ‘throwing a hand grenade’ into his deal.
He needn’t have been concerned. The grenade didn’t explode. Caillaux put Greensill in front of GA’s investment committee. Lex took part in a lengthy pitch. There was some pushback. Some partners questioned Lex’s character. He was undoubtedly driven and charismatic, even visionary perhaps. But he seemed to be in a rush and he thought he knew all the answers already. Could they work with him to fix the business? Would he toe the line? Could he be reined in? Would he listen to valid criticism and make adjustments to his business?
These were all very valid questions. Lex had been impatient for success since OzEcom. He’d pushed boundaries throughout his career. He’d covered over bad loans and other problems since the founding of Greensill Capital. But big private equity firms like GA stake their reputations on their ability to mould difficult businesses into winners.
In the end, GA’s committee decided to back Greensill. Lex was a disruptor. That upset some people. His business had some governance issues. That was not untypical of firms that were doubling in size every year or so. He was headstrong, but that was often the case with visionary leaders.
GA stumped up $250 million for an approximate 14 per cent stake in Greensill in July 2018. Whatever the internal doubts at GA, externally their investment was a ringing endorsement for Lex. He had the backing of one of the world’s premier investors. And his company was valued at about $1.7 billion.
In a story in The Wall Street Journal, Lex said he hoped his firm would now expand into new markets where GA had an established presence, including Brazil, India and China.
Bill Ford, the CEO of GA, touted Lex’s credentials: ‘We’re trying to lever technology to transform the financial services space, and in effect, fill voids that have been left behind by the large banks. Lex is nothing if not ambitious. We made this investment based on their growth story.’
If GA’s executives also hoped they could shape Lex, initial signs were not positive. Within days of securing GA’s investment, Lex splashed out on a new plane. At a cost of tens of millions of dollars, he told colleagues, Lex had upgraded his short-haul private aircraft for a bigger model, capable of flying longer journeys. Then he went on a victory lap around the globe, visiting potential business partners along the way, showing off his new plane and his elevated status.
What was left of the money hardly went towards the ambitious emerging market strategy Lex had outlined in the pages of the Journal. The GA investment landed just as things were blowing up at GAM, so some of the funds were spent bailing out of Haywood’s funds, buying back loans Haywood had made to Greensill itself. After that, and after the much-needed tech upgrade, there wasn’t much left for an expansion into emerging markets.
Lex saw another benefit of GA’s backing. Less than twenty-four hours after that Wall Street Journal story landed, Lex emailed it on to an insurance industry executive who had previously turned Greensill away. ‘I’m not sure if you saw our news yesterday,’ Lex wrote. ‘It would be great if this development would allow us to jointly reassess working together.’
The insurer, who’d been burnt by Lex in the past, declined his offer. It hardly mattered to Lex. He’d got GA on board, and it couldn’t have come at a more critical time.