CLO Managers, BlackRock Lend to Hacker Faulted by Rights Groups
CLO Managers, BlackRock Lend to Hacker Faulted by Rights Groups
(Bloomberg) -- When an Israeli developer of sophisticated smartphone-hacking software turned to Wall Street to finance a private-equity buyout, many debt investors found the company too toxic to touch. For some, including several collateralized loan obligation managers and BlackRock Inc., the deal was too good to pass up.
Filings and trustee reports are painting a picture of which firms bought a piece of the roughly $500 million loan that helped finance the buyout of NSO Group, which licenses its technology to governments and intelligence agencies globally to fight terrorism and crime. Banks had to sell the debt at a steep discount amid accusations that NSO’s software had also been used by countries including Saudi Arabia to target human rights defenders, journalists and dissidents.
Among the buyers: MJX Asset Management, Zais Group, Ellington Management Group and Saratoga Investment Corp. Those firms manage CLOs, which pool together risky loans and slice them into securities of varying risks. Mutual funds run by BlackRock and Principal Financial Group also bought a piece. Spokesmen for BlackRock, Ellington and Saratoga declined to comment, while representatives from MJX, Zais, and Principal Financial didn’t respond to requests for comment.
Few Takers
The criticism of NSO comes at a time of increased scrutiny toward banks and asset managers over their business interests in controversial sectors, and amid rising demand for strategies that use environmental, social and governance criteria to screen investments. BlackRock itself has thrown its weight behind responsible investing by calling on chief executives to look beyond profits, and by pressuring gun makers in the wake of a deadly U.S. school shooting.
Increased observance of such principles were a large reason that NSO found so few investors for its loan when it marketed the debt in March, people with knowledge of the matter said at the time.
Demand was so scarce that Jefferies Financial Group Inc. and Credit Suisse Group AG were initially forced to come up with the cash themselves before they sold the debt to investors in April at just 90% of face value. Proceeds from the loan were used to fund the company’s buyout by private equity firm Novalpina Capital Group and NSO executives.
NSO’s flagship software, known as Pegasus, is such a powerful tool that it’s licensed to foreign governments only with the approval of Israel’s Ministry of Defense, similar to an arms deal. Nevertheless, a United Nations expert last month called for an immediate moratorium on the sale of such products, depicting the private surveillance industry as a “free for all” causing “immediate and regular harm to individuals and organizations that are essential to democratic life.”
Organizations including Amnesty International and Human Rights Watch have also criticized NSO’s business.
NSO says that intelligence agencies and public safety officials rely on its software to combat increasingly tech savvy criminal enterprises, and that it has only identified three instances of client misuse in its history.
“It’s not surprising a number of responsible investors have recognized this as well and have chosen to lend their weight behind a company that is working to make the world a safer place,” an NSO spokeswoman said in an email response to questions.
BlackRock’s $4.6 million investment in NSO was made through its Event Driven Equity fund, which mostly makes bets on corporate events such as mergers and restructurings. The fund doesn’t have a specific mandate to incorporate ESG criteria in its investment process, nor do the funds managed by MJX, Zais, Ellington, Saratoga or Principal Financial.
To contact the reporter on this story: Davide Scigliuzzo in New York at dscigliuzzo2@bloomberg.net
To contact the editors responsible for this story: Natalie Harrison at nharrison73@bloomberg.net, Boris Korby
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