Meet Alex Gerko: ‘king of the geeks’ #NewsMarket

One big venture fundraise to start: A venture firm founded by 28-year-old British podcaster Harry Stebbings has raised a new $400mn fund for early-stage start-ups, vaulting him into the ranks of Europe’s top tech investors.

And a scoop: Tortoise Media is in advanced talks to raise funds from Gary Lubner, the South African businessman and big donor to the UK Labour party, ahead of the online start-up’s proposed takeover of Britain’s Observer newspaper.

In today’s newsletter:

• How to build a British rival to Citadel Securities

• Is 3i’s bet on Action sustainable?

• Private credit: the great rise of PIK

UK’s secretive trading giant

In the space of 20 years, Alex Gerko has gone from studying complex algebra in Moscow to ranking as one of the UK’s wealthiest billionaires with an estimated £12bn fortune.

The unassuming sci-fi nerd has used his love of maths and artificial intelligence to build XTX Markets into one of the UK’s most profitable private companies — and build himself a life vastly different from his early years in Moscow during the dying days of the Soviet Union.

Housed in King’s Cross — just a stone’s throw from the UK outposts of tech giants Google and Facebook — XTX is one of the few British companies that has cemented its place globally. It competes with older US rivals such as Citadel Securities by combining finance and tech.

Using 25,000 mostly Nvidia AI chips and a supercomputer in Iceland, XTX competes ferociously in the business of market making — and reaps big rewards.

It made £1.5bn in profits across its UK and Singapore entities last year, and Gerko took £413mn from a pot of trading profits, while £334mn was split among 25 others.

XTX and Gerko’s interest in AI runs deep, extending to venture investments in self-driving carmaker Wayvemedical diagnostics company Eko and start-up Anthropic (whose investors once included the similarly named but ill-fated FTX cryptocurrency exchange.).

The Russia-born founder spends some of his money on an underground house nestled in the Chilterns, as well as maths charities and scholarships. Some of his time is spent trolling rivals and publicly denouncing Vladimir Putin and Hamas.

As someone who knows him said of XTX: “They’re mega geeks. They’re the kings of the geek world.”

The big discount retailer bet

An obscure discount Dutch retailer with warehouses filled with “very dusty old stock” was an unlikely candidate to become one of the most successful leveraged buyouts in history.

But Actionwhich sells an array of goods from cleaning products to toys all over Europe, has in recent years rescued Britain’s oldest private equity firm, 3ifrom irrelevance.

The buyout house, which in recent years has added to the majority stake it bought in 2011 for £114mn, now values its investment in the chain at almost £15bn. That bet’s paid off hugely: 3i’s shares have swelled more than 1,000 per cent.

But in recent weeks questions over 3i’s reliance on the retailer — which makes up 66 per cent of its portfolio by value — have grown louder.

In September, ShadowFalla hedge fund known for shorting the now-defunct and fraudulent German fintech Wirecardrevealed that it had built a multimillion-pound short position against the company.

The short fund’s managing director Matthew Earl told DD’s Alexandra Heal and Euan Healy that he believed the implied Action valuation of 18.5 times ebitda was too high. On top of that, he said 3i’s share price implies an even higher multiple.

But others interviewed by DD and the FT’s Laura Onita weren’t convinced by the thesis.

Clive Blackhead of consumer research at Shore Capitalsaid Action was a “formidable business and it hasn’t gained the valuation it has through market manipulation, it has done it through exceptionally strong sequential growth”.

Either way, the more important question for some is somewhat of an existential one: whether 3i keeps or sells the retailer. One former 3i executive said the rest of the group’s portfolio (excluding the retailer) “is now not of a scale that it probably survives on its own”.

“Being the next Action is really, really hard,” said Michael Sandersondirector in equity research at Barclays. The prospect of another investment doing as well is “almost impossible”.

A bit of private credit magic

Companies short on cash typically don’t have a whole lot of options when interest payments come due on their debt. But loans from private credit firms are different — there are more tricks, if you will.

And in recent months, more of these companies have been taking advantage of just that. They’re turning to their private credit lenders for a bit of relief, to conserve cash by delaying payments on their debt, DD’s Amelia Pollard and Eric Platt report.

The rate at which companies are choosing to increase their principal balance instead of paying cash, known as “payment-in-kind” or PIK, edged higher during the second quarter, according to a recent report from rating agency Moody’s.

The shift to PIK borrowing is just one risk being borne by the burgeoning private credit industry — sometimes also called “shadow banking” — where asset managers lend directly to businesses.

These types of loans have a catch: while they provide temporary relief, they often come with a higher interest rate on a mounting debt load as the deferred payments pile up.

The publicly traded private credit funds that the rating agency keeps tabs on reported the highest levels of PIK income since it began tracking the data in 2020. (The income is paper profit and it’s not clear how much of the gains will actually be realised.)

Blue Owl’s technology fund reported that 23.6 per cent of its income was in the form of PIK. Closely following that were funds managed by Prospect Capital, New Mountain Finance and Ares Management.

But there isn’t consensus on exactly how much PIK income was out there in the second quarter. Moody’s estimated that 7.4 per cent of the income reported by private credit funds was in the form of PIK; analysts at Bank of America pegged the figure at 9 per cent.

“PIK was born out of necessity and is something that people in the market viewed as a temporary situation,” said Sheel Patela partner at King & Spaldingreferring to recent high interest rates.

Even though central banks have already started to cut rates, PIKing is likely to stick around.

Job moves

• Claudia Berggeneral counsel at the Information Commissioner’s Officewill join Covington’s global antitrust and competition practice in London as a partner in January. She was previously a senior legal director for antitrust at the Competition and Markets Authority.

• Macfarlanes has hired Victoria Hills as a private capital partner. She joins from Freshfields.

• Apax Partners has decided to halt new investments into healthcare assets and disband its team, Bloomberg News reported.

Smart reads

Illuminating Lunate Abu Dhabi asset manager Lunate, which only launched in January, has already invested $5bn, the FT reports. How do its strong ties to ADQ affect its independence?

Prosperous plumbers Private equity firms across the US have scooped up home services companies — and minted a new class of millionaires along the way, The Wall Street Journal reports.

Not rich enough Does having $10mn make you “super-rich”? What about $30mn? The rapid rise of billionaires has raised the bar to join the club of the uber-elite, the FT writes.

News round-up

TPG and Blackstone team up to bid for eyecare group Bausch + Lomb (FT)

Evening Standard kept afloat with £44mn in loans from Lebedev and other investors (FT)

Rachel Reeves cuts National Wealth Fund budget despite UK investment drive (FT)

Elliott requests special meeting at Southwest Airlines (Bloomberg)

Biggest US public pension fund Calpers invests in UK’s Octopus Energy (FT)

ECB challenges Serbian bank’s takeover bid over money laundering concerns (FT)

Banks and fund managers call on EU to commit to shorter settlement plan (FT)

Intesa Sanpaolo apologises after ‘disloyal’ employee accessed Giorgia Meloni’s account (FT)