Normal review process should've wrapped up a year ago. Is someone blocking the sale on a grudge or does Scaramucci have deeper regulatory problems?
With White House archenemy John Kelly under intense pressure, Anthony Scaramucci is back in the spotlight he loves, evidently less interested in burying the hatchet than wielding an axe.
He says Kelly has blocked him from getting close to President Trump. That claim is apparently true. The onetime presidential communications director has in fact been banned from visiting the offices that were briefly his stomping ground.
But Scaramucci also says Kelly has leaned on regulators to stymie the sale of his hedge fund firm SkyBridge Capital. That's an extremely serious charge that may hint at even stranger depths to the Scaramucci Saga -- especially if it isn't true.
Shadows and fog
Nobody who knows why the SkyBridge deal hasn't closed is talking about it. The sale was announced last January, but the fact that the buyer was based in China triggered a routine Treasury review.
Even so, the process should have been fairly straightforward. After all, individual hedge funds generally aren't considered national strategic assets -- buy one, Wall Street will spawn another -- and SkyBridge in particular seems unlikely to become a threat to U.S. security under foreign control.
For one thing, it's a fund of funds, so its assets aren't directly invested in dams, power plants, housing stock or farmland. Even if the more conventional hedge funds within the portfolio have a chokehold on core U.S. assets, SkyBridge doesn't control those funds or the assets any more than Vanguard controls Apple.
And SkyBridge was never a Vanguard. We're looking at a $12 billion fund at its peak. You probably know someone who manages more money than that. I doubt they're a strategic menace.
Nonetheless, it normally takes 30-75 days to review these deals and either deliver a firm decision or formally extend the timetable. Management initially sounded confident that the deal would close in the second quarter of 2017. Six months later, they pushed that timeline back to the third quarter.
That was the last we heard from them. The Treasury had nothing but silence until a few weeks ago, when rumors surfaced that there was a problem with the buyer, a Chinese conglomerate known as the HNA Group.
HNA is huge but nebulous, expanding over the last quarter century from regional airlines into luxury property, logistics, banking and other businesses. In theory SkyBridge would be simply another prize to bolt onto the overall framework -- management said at the time that they wanted to get into asset management, so this is a reasonable way to start.
Unfortunately, global regulators haven't been able to figure out who really controls the company and responses to the Treasury haven't really been satisfactory or complete. It doesn't seem to be a government puppet because there have been glitches in the financing structure and even missed debt payments in the last few months, which doesn't exactly feel like the kind of shadow Beijing would cast.
But as long as we just don't know, HNA deals are now officially frozen. Other Chinese investors are getting clearance to buy U.S. companies, so it's not like the review panel is completely understaffed or shirking its day-to-day duties.
Could John Kelly hate Scaramucci enough to lean on the regulators and lock down not only the SkyBridge deal but everything else HNA has in the pipeline? Anything is possible, but even if you allow a motive the opportunity looks pretty limited. Kelly isn't a bureaucrat. He doesn't fight with red tape.
Racing to nowhere
At this point inertia is the only real reason to even pursue the deal any further.
Scaramucci seemed happy running SkyBridge. If he didn't have White House ambitions, it's not hard to imagine him cheerfully running the fund and cashing checks for years to come.
However, going into government service gave him a chance to exit tax-free as part of the normal liquidation of outside interests, so he took HNA's offer and quit the firm on January 17 of last year.
At the time, his payout looked like it might be around $90 million. But looking back, the terms of the sale always seemed inflated -- was HNA really willing to pay about 1.25X annual revenue in order to get a toehold in the hedge fund universe?
After all, at the end of the day SkyBridge is just another fund of funds. Scaramucci was the rainmaker, so once he left, the business became less compelling even if it was sustainable.
It turns out that the business has deteriorated over the last year. HNA originally thought it was buying $12 billion in AUM last January. The firm admits to $10.3 billion now, so you're looking at 15% depreciation in what was a bull year for a lot of people.
You know that all the valuations run on AUM and fee income. In fund-of-funds land, the two metrics always move together, so a 15% dip in AUM means a 15% decline in revenue. Scale worsens. Profitability flags. However you slice that pie, it's nowhere near as good as it was a year ago.
And let's be blunt. SkyBridge isn't really a powerhouse. Clients have made 1.79% YTD and 8.7% over the last 12 months, again in the face of a hot tailwind blowing for vanilla index funds. Adjust for the expenses of the underlying hedge funds SkyBridge invests in, and those clients may not be dancing for joy right now.
Meanwhile, HNA has cash flow problems. Under normal circumstances, I'd think they'd be eager to pull the plug on this deal and save the $200 million or so that they would've spent. If nothing else, rational actors would renegotiate the price to compensate for the letdown between the company they thought they were buying and the one they're getting now.
But who knows? There may have been considerations behind the deal that nobody's talking about. It's hard not to speculate given the lack of real information.
And likewise, Scaramucci is going to need another dramatic spin of the political wheel to get back into the White House -- I don't even know if he got clearance in his 11-day odyssey.
If I were him, I'd return to the firm. After all, he still owns his 44% and controls the strategy. They should welcome him back.
Maybe he doesn't want it for some reason. We need to know more. Until we get it (and believe me, I'm all ears, Anthony), there's too many rumors and not enough news.
