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💰Greensill Capital: $6 Billion Valuation Erased in One Week
The Vision Fund Tales #3: Greensill Capital
Greensill Capital was one of the top global players in supply chain finance reaching a valuation of over $ 6 billion. Last March, it went bankrupt after its main insurer company refused to renew its insurance policy.
Back when Lex Greensill was a kid in Australia, he would witness his parents, who owned a farm, struggling financially as they waited for payments for their produce. This triggered his interest in finance early on.
While Lex studied law, he later decided to move to the UK and pursue a career in banking. He joined the supply chain finance team at Morgan Stanley.
What is supply chain finance you ask?
It is buy now pay later for companies.
Suppliers usually have to wait before being paid for the products they sell to companies. Through supply chain finance, a third party would pay them early in return for a discount.
After the 2008 financial crisis, Morgan Stanley decided to focus on its core business. Supply chain finance wasn’t part of that. So Lex decided to move to Citigroup.
Some of his colleagues at Citi weren’t big fans of him. His big appetite for risk wasn’t welcomed by his superiors. They also might not have liked his love for the finer things in life. Once, he submitted a £ 4,000 expense claim for clothing after his flight was dekayed and he had to spend the night in Copenhagen!
It was clear to Greensill that he wasn’t gonna get along with those risk-averse bankers. He decided to start his own firm.
💸Enter Greensill Capital
Even though the supply chain finance sector isn’t highly regulated, traditional banks are. Starting an independent firm would give Greensill the freedom to get creative…maybe a little bit too creative.
Traditionally, firms provide financing for completed sales. Greensill being the risk lover that he is decided to provide financing for future sales as well.
Instead of the deals being funded by a bank, they were packaged into funds and sold to investors through Credit Suisse and GAM. The key to hedging the risk of the funds, they were insured by third parties.
A Small Hiccup
In July 2018, GAM had to suspend a star fund manager, due to his dealings with Greansill Capital. It was discovered that he had invested heavily in assets related to Greasill Capital in what was seen as a major misconduct.
After the incident, GAM had to liquidate several funds after investors flocked to get back their money. However, GAM continued to operate Greensill’s Supply Chain fund.
📈The Big Leap
The GAM crisis should’ve played havoc with Greensill’s reputation and growth but It didn’t. It went almost unnoticed.
Just a few weeks after the incident, Soft Bank’s Vision Fund poured $800 million into the company in a round valuing Greensill at $3.5 billion! It invested another $600 million by the end of 2019. Greensill was stronger than ever.
Lex decided to put the funds into good use…He added a $50 million private jet to the company’s airplane fleet. The fleet included two small Piaggio Jets, one Dassault Falcon 7X, and the newly added Gulfstream G650. He clearly wasn’t a big fan of flying commercial.
By October 2020, Greensill was working to raise $500 million at a valuation of over $6 billion. The company claimed that it experienced growth due to COVID as demand for its services increased. Many indicators however showed that the company wasn’t heading toward a bright future.
Several of Greensill’s customers were struggling. Some even collapsed.
The company’s Germany-based bank was investigated by the Association of German Banks due to its relationship with a British steel tycoon.
Italian Bank UniCredit decided not to participate in any deal related to Greensill.
A Hiccup… A Big One This Time
Due to all the issues that Greensill Capital was facing, its board pressured Lex to, wait for it, ditch the airplane fleet.
The step came as part of a campaign to prove to investors that Greensill was ready to change.
Unfortunately, the investors weren’t convinced and the company didn’t see a dime of the $500 million it wanted to raise.
Little did Lex know that the worst was yet to come.
Earlier in the story, I mentioned that a key element in Greensil Capital’s operations was the insurance it had covering its funds. Well, Greensill made a major mistake by relying mainly on one small insurer in Australia.
On March 1st of this year, a judge rejected Greensill’s request to force the insurance company to extend its policies which were set to expire at midnight. A week later, the company filed for bankruptcy.
This post is part of the Vision Fund Tales where we explore the fates of the companies backed by Soft Bank's $100 Billion fund.
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