In the early summer of 2007 Robert Tchenguiz was sitting not just atop his 150ft yacht My Little Violet, in Monaco, but on top of the world. The property tycoon and financier had taken huge stakes in two of Britain's largest public companies – J Sainsbury and pub group Mitchells & Butlers – and was wielding his influence to campaign for a radical strategic shakeup of these conservatively run businesses. Both firms were dancing to his tune.
These were sluggish and bloated companies, he argued, resting on billions of pounds worth of freehold properties that could be sold off and then rented back to create a leaner, more responsive business. The prize for shareholders would be huge windfalls. And it was just the message the markets wanted to hear: shares in both firms soared.
But by the autumn of 2008 things had gone badly wrong for Tchenguiz. The credit crunch had set in and the banks were in meltdown. The Icelandic Kaupthing Bank – where Tchenguiz was the biggest customer for loans – collapsed and the repercussions cost the tycoon £1bn. His sprawling portfolio of businesses, from the Yates's wine bar chain to the Globe Pub Company, suffered badly in the recession.
Other investments were seized by the accountants called in to wade through the Kaupthing wreckage, sparking lengthy legal wrangles. Yesterday, however, the drama took another twist when investigators from the Serious Fraud Office and the City of London police raided seven London addresses at dawn and seven men, including Robert Tchenguiz and his brother Vincent, were arrested.
Four years ago, the Tchenguiz brothers were regarded as swashbuckling wheeler-dealers. A wave of hedge funds, billionaire investors and Middle Eastern wealth funds were all cheerleaders for the Tchenguiz model. (Tchenguiz, incidentally, is Persian for "Genghis".)
Robert was at the height of his powers, having spent years building on his already considerable family fortune through a series of breathtaking debt-financed real estate deals. Already an established name among Mayfair's property investors, he was regularly snapped in his trademark pink-tinted spectacles for society gossip columns alongside his glamorous wife, former Tatler journalist Heather Bird-Tchenguiz, who now runs an anti-ageing cream business.
But it was as activist investor in Sainsbury's and M&B that the billionaire investor was propelled centre stage into the glare of the public markets, a role he appeared to relish. Provocatively, he described Sainsbury's as "a real estate company with a retail business on the side". His words reverberated around UK plc, striking fear into the heart of many boardrooms. Operating from offices in Leconfield House, the former headquarters of MI5 in Curzon Street, Mayfair, Tchenguiz arguably did as much as anyone to set the bar for what, at the time, was called "balance-sheet efficiency".
Along with his considerable status and wealth, he gave more than £53,000 to David Cameron's Conservative party in 2006 through his R20 investment firm. His sister Lisa gave a further £100,000 two years later, while brother and sometime business partner Vincent has also contributed almost £20,000 – most of it as recently as last June.
Robert Tchenguiz's remarkable run of good fortune went into sharp reverse, however, in midsummer 2007 when the credit crunch saw banks pull their support for a debt-financed property deal at M&B. Months later, takeover talks at Sainsbury's were ended at the eleventh hour, with market uncertainty blamed.
By November 2007 Tchenguiz's investment business R20 took the unusual step of releasing a statement to the stock exchange denying "rumours and speculation" that it might be under pressure to sell down investments in Sainsbury's and M&B. "Unfounded speculation is a disservice to other shareholders," Tchenguiz said.
Rumours were swirling that tumbling shares would force Tchenguiz into an asset fire sale to cover loan demands. While there were successes elsewhere in the Tchenguiz empire – notably the £1.56bn sale of the grocer Somerfield, in which he had a major stake, to the Co-op – other operations were suffering, including his pub landlord business Globe and bar and restaurant brands such as Yates's, Slug & Lettuce and La Tasca. The commercial real estate market, another investment focus, was also falling sharply.
Behind the scenes, several lenders, including Dawnay Day, Morgan Stanley and KSF, appeared to be exerting pressure on Tchenguiz to put up more collateral against his borrowings. In his hour of need he turned to Kaupthing, which backed him to the hilt, repeatedly advancing loans to cover "margin calls" from other lenders looking to cover their exposure to the Tchenguiz empire. Vincent, too, stepped in to help out, putting up £220m of shares in private property companies as collateral against the Kaupthing loans to ease his brother's credit crisis.
By 2008 the brothers had combined borrowings from Kaupthing equivalent to about 55% of its capital base, according to figures from a 2,300-page "truth commission" report to the Icelandic parliament.
But it was a gamble that did not pay off. Kaupthing itself was in free fall, caught up in the midst of the global banking crisis, together with other Icelandic banks it was quickly identified as weak and, crucially, unable to rely on a state bailout. On 9 October 2008 the bank failed. Tchenguiz claimed to have lost about £1bn in the fallout.
The truth commission later concluded it was hard to see how some Tchenguiz loans were "decided with the banks' best interests in mind … The big increase in loan facilities from January 2007 until October 2008 is noteworthy in the light of the fact that in late 2007 Tchenguiz's companies started going downhill."
Some former Kaupthing insiders, and Tchenguiz himself, suggest this judgment underplays the level of inter-dependency between the bank and its largest client. Tchenguiz argues that Kaupthing was a minority partner in many of his underlying investments and that these holdings had become vital to the bank's fortunes. Failure to offer a lending lifeline to these enterprises, he insists, would have destroyed the bank even sooner.
If true, this bargain at the heart of Kaupthing's lending decisions which bound its fortunes to those of Tchenguiz may not be as clear to all the bank's investors as they would have liked. Establishing when and how any such pact was born, and tracing it as it grew and took a stranglehold over the bank and much of Tchenguiz's investment empire, will be a momentous task. For SFO investigators to prove it involves fraudulent activity may be tougher still.
