Bill Ackman, legendary activist investor recently published its 1st quarter investment letter. The fund has performed strongly to date, with 9.3% returns and has large holdings in Canadian Pacific, General Growth Properties, Citigroup, and J.C. Penney. If he still owns them, the latter two companies may create some trouble for his firm in the future.
In this investor letter, Ackman discusses the idea of time arbitrage, which is taking advantage of forced sellers for the benefit of long term profit. This is because stocks are often more volatile than their underlying businesses, and few firms and individuals can stomach volatility.
He also discusses that private equity portfolio companies, because of their higher implied leverage, have much more volatile returns, but unfortunately, you do not see a mark-to-market as you do in publicly traded equities.
In the latest hedge fund letter, portfolio manager William Ackman goes over his positions in General Growth Properties, Borders, Sears Canada, Craft, Citigroup, and Alliansce. At the time the letter was written, Citigroup made up 9% of the fund’s holdings with the following rationale:
“We recently acquired 146.5 million shares of Citigroup, representing approximately 9% of fund capital. We believe that recent events surrounding the financial reform bill, alleged fraud at Goldman Sachs, the overhang of the sale of the U.S. government’s 27% stake in Citi, and distress in Europe have created a compelling opportunity to purchase Citi shares at a meaningful discount to their fair value.”
Goldman Sach’s recently issued a bullish outlook for the industry, with overweight ratings on technology, energy, and basic material stocks. Especially after the beating energy shares have taken over the past five weeks, the time may be right to buy. This link was provided by ZeroHedge.
The report highlights GS’s investment process and ranking methodology.
Management consulting is a very difficult field to enter. I read this guide today from Kellogg and thought it would be helpful to LA readers brushing up for the interviews. Next year’s recruiting season will be very strong. Best of luck to you. ~Leverage Academy
According to Marketwatch, “Third Point LLC, a $3 billion hedge fund firm run by Dan Loeb, generated big gains during the first quarter, helping to recoup a lot of the losses suffered during the financial crisis of late 2008 and early 2009.
Third Point Offshore, the firm’s largest fund, was up 7.9% in March, leaving it with a 15.3% gain during the first three months of 2010, according to a recent update sent to investors. MarketWatch obtained a copy of the update.
Third Point Partners, a smaller fund, gained 8.8% in March and 16.6% in the first quarter.
Loeb, who started Third Point in 1995, is best known as an outspoken activist investor, taking big stakes in companies and pushing management to make strategic changes. Check out activist methods.
However, activist positions have never taken up a large portion of Third Point’s portfolio. The firm focuses on value investing and trading around corporate events like reorganizations and mergers and acquisitions.
When the financial crisis struck in 2008, Third Point was hit hard, ending the year down almost 33%. Between June 2008 and March 2009, the firm lost roughly 35%, its biggest drawdown ever. However, the firm rebounded strongly by the end of 2009, generating returns of 38.2%.
Some of Third Point’s gains have come from credit market bets, rather than equity investments. Indeed, by the end of the first quarter of 2010, credit positions made up 64% of the firm’s total exposure, while equity accounted for less than 50%. Hedge funds often have more than 100% exposure because they use leverage, or borrowed money, to magnify their bets.
Third Point’s top three positions at the end of March were in securities of car company Chrysler, auto-parts maker Delphi Corp. and lender CIT Group.
These companies emerged from major bankruptcy reorganizations last year. Such restructurings usually involve giving new equity to debt holders.
CIT emerged from bankruptcy in December and its new shareholders are a who’s-who of the hedge fund industry. Icahn Associates, run by activist investor Carl Icahn, Greenlight Capital, headed by David Einhorn, and Oaktree Capital, run by Howard Marks, are among the company’s top five owners.
Third Point is the 19th-largest CIT shareholder, behind other hedge-fund giants including Paulson & Co., run by John Paulson, Marc Lasry’s Avenue Capital and Eddie Lampert’s ESL Investments, according to FactSet data.
CIT shares jumped 41% in the first quarter of 2010.
Third Point’s other top positions are in securities of PHH Corp. /quotes/comstock/13*!phh/quotes/nls/phh (PHH 24.03, 0.00, 0.00%) , a fleet-management and leasing company, and Dana Holding /quotes/comstock/13*!dan/quotes/nls/dan (DAN 11.78, 0.00, 0.00%) , another auto-parts maker that emerged from bankruptcy in early 2008, according to the hedge fund firm’s recent investor update.
PHH shares soared 46% in the first quarter, while Dana shares climbed 10%.”
According to NYMAG, “Loeb (founder of ThirdPoint) is a focus guy. Each morning at 5:30, he makes his way from his West Village townhouse to a yoga center and puts his feet behind his neck, which Loeb maintains is good for concentration. Still, at the moment, Loeb seems distracted. His hair, which is starting to gray, sticks up in patches. He wears white corduroys. His shirt, with pink and purple stripes, is untucked. “Let’s put it in context,” he says. “It’s never fun to lose a lot of money.” But it’s only $20 million. “We lost a little over 1 percent of the fund,” he points out. He calls for a trash can for his tea bag.
By contrast, the Ross matter seems a bit of fun, a mood elevator. Loeb places the press release on the table. It seems that Loeb and Ross, who has his own private equity fund, find themselves in the same investment. Recently, Loeb purchased $37 million of bankrupt Horizon Natural Resources, a coal company. Ross heads the committee guiding the company through bankruptcy.
In this capacity, Loeb says, warming up, Ross has committed “an egregious example of greed and self-dealing.” From Loeb’s point of view, he overweights his compensation, a mistake Loeb suggests may be a reflex from “the many years you spent generating fees . . . ” Loeb accuses Ross of “double-dipping,” a charge that sent Loeb’s jittery lawyers running for cover. “He’s a bit of a blowhard,” says Loeb, who knew Ross wouldn’t sue. Blowhard, apparently, isn’t entirely pejorative. Loeb admires Ross’s success in the steel industry—“no disrespect,” says Loeb.
Disrespect, though, is kind of a Loeb sideline. Since 1995, Loeb has run Third Point Management, a hedge fund he started with $3.3 million from family and friends. He now has eight other investment personnel and $1.7 billion, which to Loeb’s mind isn’t particularly exceptional these days. At a hedge-fund charity event, he asked for a show of hands: Anyone here not run a $1 billion hedge fund? His fund has returned over 25 percent annually to investors.
Loeb is well known in Hedgeworld for his attacks on what he views as greedy execs who also happen to be depressing shareholder value. Of shares he owns. “The moral-indignation business,” Loeb sometimes calls it.
Hedge-fund guys love to read Loeb’s attacks—“he articulates what people feel,” says one. Usually, the letters accompany Loeb’s government filings. If you buy 5 percent of a public company, you must file with the SEC; Loeb once increased his holdings, at a cost of more than $4 million, just so he could file a letter.
Loeb is proud of his letters, which are thorough, well argued, and filled with clever turns of phrase. (He had a batch prepared for his high-school English teacher.) In a letter to the CEO of Warnaco, he referred to the CEO’s “imminent involuntary extraction.” To the CEO of Bindview Corp., a software company, he wrote of “your seemingly perpetual failure.” He’s gone after Intercept, Potlatch, Penn Virginia. There’s one where he calls the CEO “Chief Value Destroyer,” which he abbreviates CVD. “I’m surprised some CEO hasn’t had him shot,” says one manager.”
Pali Capital, a well known boutique investment bank and underwriter recently filed for bankruptcy after a failed merger attempt. The firm was founded in 1995 by former MDs at Merrill Lynch.
According to Bloomberg, “Pali Holdings has filed for bankruptcy protection after failing to sell its boutique securities firm, Pali Capital.
Pali’s Chapter 11 petition, filed in federal Bankruptcy Court in Manhattan on Thursday, listed $716,300 in assets and $31.8 million in debts.”
More from Bloomberg:
“Pali Holdings filed the instant Chapter 11 bankruptcy case to obtain protection from its creditors while it continues to liquidate and wind down Pali Capital,” Gerald Burke, a director of Pali Holdings, said in an affidavit filed with the bankruptcy petition.
The privately held company was in talks to sell the brokerage business to ex-Bear Stearns Companies finance chief Samuel Molinaro and had told shareholders it might go out of business without a sale or cash infusion.
The parent company, based in New York, had an estimated loss of $18.3 million in 2009 and said in a Jan. 14 letter to shareholders obtained by Bloomberg News that it could run out of money by the end of February. The broker-dealer Pali Capital, with expertise in derivatives, fixed income, and investment banking, said Feb. 16 that it would begin to wind down operations.
According to the SF Chronicle “When a brokerage fails, the Securities Investor Protection Corp. names a trustee to protect assets and return customers’ cash and securities. When Lehman Brothers Holdings Inc. filed Chapter 11 in 2008, the SIPC appointed lawyer James Giddens as brokerage trustee. The bank’s North American brokerage business and associated real estate were then sold to London-based Barclays Plc for $1.54 billion.
The largest unsecured creditor named in the Pali Holdings filing was Panama-based Mandeville Holding Ventures Co.
Pali Holdings has had four chief executive officers or co- CEOs in the past 17 months and its chairman stepped down in December. The firm focused on equity and fixed-income sales, trading and research for institutional clients such as money managers and hedge funds. The company had offices in London, San Francisco, Newport Beach, Chicago and five other U.S. locations, according to its Web site.
Pali Holdings received $3 million of “emergency bridge financing” in November and has lost about $40 million in the past two years, according to the company’s letter, signed by directors Kevin Fisher and Burke.
Shareholders, including former Pali CEO Bradley Reifler, wrote in response that the company should pursue alternatives to a sale, such as a recapitalization. In their undated letter, signed by Reifler, Wolfgang Stolz and John Staddon and also obtained by Bloomberg News, the shareholders requested a special meeting be held to elect a new board.
Molinaro, the former Bear Stearns executive, was helping Braver Stern Securities Corp. negotiate the potential purchase of Pali Capital and was to become CEO of the combined firm, overseeing about 250 people, people familiar with the talks have said. Molinaro was Bear Stearns’s chief financial officer from 1996 until 2008, when JPMorgan Chase & Co. purchased the company to save it from bankruptcy.
Separately today, New York-based JPMorgan filed a $4.5 million lawsuit in New York State Supreme Court in Manhattan against Pali and Reifler, alleging a loan default.
“Pali was responsible” for the debt, Reifler said in a telephone interview. “When I left in October 2008, there was $66 million in cash, and the loan should have been paid from those funds.”
The case is In Re Pali Holdings Inc., 10-11727, U.S. Bankruptcy Court, Southern District of New York (Manhattan)”
According to ZeroHedge,
The reason for the bankruptcy was provided in the filed affidavit as follows: “Pali Capital experienced consistent pre-tax losses commencing with the second quarter of 2008 and continuing through and including the fourth quarter of 2009, caused by among other things, a substantial slowdown in sales and trading by Pali Capital’s primary institutional clients. These losses are projected to continue into at least the first quarter of 2010. As a result, it was difficult for Pali Capital to maintain adequate levels of excess regulatory net capital to support normal business operations, although Pali Capital is in compliance with its minimum regulatory net capital requirements through February 28, 2010.” So after 4 CEOs in 17 months all Pali is left with is a list of secured and unsecured creditors. And in probably not the wisest move for the privacy of said creditors, the firm has listed the home addresses of Kevin Fisher, Ari Nathan, Leon Brenner and some other rather high profile financiers.
List of largest secured creditors (and home addresses):