Mutares tumbles as Gotham City highlights accounting irregularities

German private equity firm Mutares tumbled on Thursday after Gotham City Research put out a note pointing to accounting irregularities and suggesting that the company is "increasingly reliant" on debt.

Short-seller Gotham said the first-half balance sheet’s €394.2m reported cash position does not match the H1 2024 statement of cash flows’ €422.2m reported cash position.

It also argued that Mutares appears increasingly reliant on debt, as the firm has increased from low levels of debt before 2020, to €150m in debt by year-end 2023, and adding an additional €235m so far this year.

"Mutares reminds us of Aurelius in 2017 (when we issued our first report), except that Mutares may have less room for error, as it is currently in a net debt position, whereas Aurelius was in a net cash position in 2017," it said.

Gotham said Mutares reminds it of Aurelius before its share price declined.

"AR4 was a company we warned about seven years ago," it said. "We stated our opinion at that time, that AR4’s share price would fall circa 88%. AR4 has fallen 78% since then."

Gotham said there was a number of "qualities" at Mutares that remind it of Aurelius. It cited a rapid rise in and high levels of income from negative goodwill and discrepancies between published earnings and underlying cash flows.

It also pointed to the fact that Mutares claims to improve portfolio companies’ prospects for long-term success but said it found 50% of portfolio companies’ outcomes post sale "suspect", including numerous cases of insolvency.

"After we published on Aurelius, we did not expect to write again on a similar business model after Aurelius," Gotham said.

"However, given the apparent circular flow of cash flows, recent apparent cash balance irregularities, and Mutares’ increasingly rapid accumulation of debts from public markets, we believed it was in the public interest to share our opinions and supporting observations. We fear that something at least as bad with Aurelius, and likely far worse, might be at hand with Mutares."

At 1220 BST, Mutares shares were down 25% at €19.38.