Shorts scorched at Darktrace

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This, it’s fair to say, is unlucky.

The above screenshot is from the FCA’s short position disclosure list (XLS download). The fund, Cadian Capital Management, is a New York long/short TMT equity hedge fund. The position, a 0.53 per cent net short as of April 24, is the first it has logged in Darktrace, a UK-listed cyber security maker that said today that it had agreed to be bought by Thoma Bravo.

Oof.

To be clear, we only know that Cadian crossed the 0.5 per cent disclosure level on Wednesday. It might have been building the position for a long time before that. We’ve emailed Cadian to ask, but don’t expect to get an answer, and last we checked the fund’s website was offline.

Cadian, being tech-focused, appears very rarely on UK regulatory filings. It shorted Blue Prism, a maker of automation software, since at least 2018 but by early 2019 was below the reporting threshold, so may have dodged the bid battle that took Blue Prism private in 2021. Its only other reported UK short was a bet against Auto Trader in the first quarter of 2020.

If the Thoma Bravo bid for Darktrace has caught Cadian by surprise, it’s far from alone. Even insiders and early investors seem to have been blindsided.

KKR’s NGT I technology growth fund, a pre-IPO Darktrace backer, last month cashed out its remaining 2.5 per cent stake in the software maker for 425p apiece.

A few days before KKR’s placing, Darktrace CEO Poppy Gustafsson and former co-CEO Nicole Eagan, its chief strategy AI officer, pushed the button on share sales that were worth about £700k and £3.9mn, respectively. The timing raised some eyebrows, since by the time KKR had finished selling the stock was down nearly 13 per cent.

For reasons why hedge funds have been betting against Darktrace, there are short-seller reports available here, here and here; a company response here; FTAV’s previous reporting here and here; and comprehensive coverage of the ongoing trial of Darktrace co-founder Mike Lynch on 15 charges of wire fraud and conspiracy here.

Even now, with a bid on the table, questions remain around whether Darktrace is the master of bleeding-edge technology it claims to be. Somehow, for example, the official documentation filed today includes a link to Ibis Hotels rather than its own investor relations website.

See Section 17, reproduced verbatim below.

Copies of the following documents will be available promptly on Darktrace’s website, subject to certain restrictions relating to persons resident in Restricted Jurisdictions, at https://ir.darktrace.com and in any event by no later than noon on the Business Day following this announcement . . . 

Looks like someone’s very keen to go away for a time. Not Mike, presumably.