Invest Like the Best with Patrick O'Shaughnessy
00:28:02 · Dan Loeb
[00:28:02] S2: I'll come back to the story about Sotheby's in a second. Board members often feel a sense of status for being on these boards. And I think that in itself needs to be dispelled because I think if you're on a board because you are either getting status or you're getting income and that's your primary reason for doing it, not for representing shareholders, then that's where we come in to try to disintermediate that and take away some of the status or increase the cost of doing that. Sotheby's I thought was just an interesting company. It was a pretty small company and a small target for us. It's actually a very good example of what you're talking about because although it was a public company, it wasn't really run for the shareholders. It was run because I think people did feel like it was a high status business, had been mismanaged, it didn't really recover from an antitrust violation that spilled into criminal charges brought against the company and some of the individuals. The business itself was a good business, but just run unbelievably, unprofitably. The company had been around since the seventeen hundreds and some of the business practices had not really been updated since that time. We took a position, we bought 9.9% of the company. We went after the board, but really just wanted them to implement some basic business practices that we thought would be better. The CEO that was there, he didn't have a particularly deep knowledge of art. I think he came out of the rug division, didn't really have deep relationships with the collectors either. So we came in and gave him a shot for a year and then I think the board came to realize he wasn't the right guy. We brought in a guy named Tad Smith who was terrific from MSG, cleaned up the operations, improved the technology, they sold the company. Good result. Yeah, was a good result. Do you
00:30:03 · Patrick O'Shaughnessy, Dan Loeb
[00:30:03] S0: think that there's a lot of that lurking out there today? If one wanted to start a career and only do that, go find companies where it was kind of mediocre or bad management, where if it was good management, the company would do way, way, way better. Do you think there's still a lot of that out there? [00:30:19] S2: I think there's probably some of that in the sub $2,000,000,000 market cap space and not necessarily even bad management, but b plus management, not optimizing. What we're finding is that it's almost like a negative selection process. We'd much rather invest in a great company with awesome management that's doing the right things and cheer them on then kind of find something that but for mismanagement, the company would be worth a lot more. So what you find is that if the things that you've identified are badly run, then there's probably 10 times more things that are badly run.
00:30:19 · Dan Loeb, Patrick O'Shaughnessy
[00:30:19] S2: I think there's probably some of that in the sub $2,000,000,000 market cap space and not necessarily even bad management, but b plus management, not optimizing. What we're finding is that it's almost like a negative selection process. We'd much rather invest in a great company with awesome management that's doing the right things and cheer them on then kind of find something that but for mismanagement, the company would be worth a lot more. So what you find is that if the things that you've identified are badly run, then there's probably 10 times more things that are badly run. [00:31:02] S0: One of the interesting things about their point is that if I understand it correctly, it's something like 60% credit, which I think would surprise a lot of people. And also when you started, I think you started with no institutional investors. It was individuals, families, things like this. And it seems like you sort of have felt your way into the strategy. The strategy as it exists today probably wouldn't go on like a clean PowerPoint deck. If you were a new firm doing this from scratch, it would be hard to pitch what you have now. And I'm really interested by that by a firm which has evolved into its model, and it's 60% credit today, and it's a blend of other things. And I'd love to just talk about that evolution and why it is and the value of that evolution versus predicting, okay, here's exactly what we're going to do.
00:31:44 · Dan Loeb, Patrick O'Shaughnessy
[00:31:44] S2: First of all, third point is a whole collection of businesses. My main focus is on the hedge fund strategy, which started at $3,000,000 It's now about $9,000,000,000 today, That fund itself is about 30% credit in total. The rest of the portfolio, it moves all over the place. It is primarily equities and I think our equity book is generically around 110 long by 30 or 40 short, but that can be all over the place. Going into the war, it was down. We really dialed back our risk. Think for the first time since 2009, we did have more credit exposure than equity, but we very quickly have taken that back up. The hedge fund were still more equity than credit, but across the fund we have a CLO business with about $7,000,000,000 in it. Within Third Point itself, have about 30%, which would make it about close to $3,000,000,000 in structured credit and corporate credit, but that's within the hedge fund. And then we have an insurance company that we manage about a billion dollars in credit. We have a couple billion dollars in asbestos liabilities that we manage in its own pool. And we just started a private credit business, which is small. [00:33:06] S0: What's the thread that unites all those things like asbestos liability and private credit and corporates? It seems all over the place.
00:33:06 · Patrick O'Shaughnessy, Dan Loeb
[00:33:06] S0: What's the thread that unites all those things like asbestos liability and private credit and corporates? It seems all over the place. [00:33:15] S2: I've worked in venture capital, I've worked in risk arbitrage, I've worked in credit, I've worked in equities, having a view of value, and thinking about valuing enterprises, whether there are earlier stage, mid stage or mature businesses, and looking to invest in whatever the fulcrum security is in that enterprise. Obviously, for an early stage company, the only fulcrum is the equity. [00:33:43] S0: What does that mean fulcrum?
00:33:44 · Dan Loeb
[00:33:44] S2: The one that's going to have the best risk reward. It's usually used in terms of companies that have debt and equity. Do you want to be in the equity? Do you want to be in this junior debt? Do want be in the senior debt? Let me give you an example. Like when Credit Suisse was going through its troubles and being bought by UBS, you could invest in the preferred shares, you can invest in the Holdco paper, or you can invest in the OpCo paper, which was most senior within the capital structure. This fulcrum there was actually the holdco paper that had the most upside, but the opco paper also did well, the pref was wiped out. So that was the wrong place to be. But there are always different interesting places within the capital structure to play. And having a comprehensive view of these companies gives you a really great vantage point to make alpha generating investment decisions. Let me give you two examples. We had a good enough knowledge of Twitter and XAI to understand the equity value of both of those businesses. And without making a decision whether or not we wanted to own equity in XAI, There were two financing transactions that came up, one for XAI and another one for Twitter. The Twitter debt was a resale of the financing debt that was offered when Elon bought the company. Morgan Stanley sat on it for a while. It was deep underwater. When it got close to par, they decided to sell it. Most credit investors were really scared and nervous to buy that even though it was like ninety six, ninety seven cents on the dollar. It was yielding around a 12% yield. We were comfortable enough with the underlying value of the business and with the fundamentals that we made that at that time our largest credit position. Then when xAI did a debt financing, very few credit people wanted to play in that one because there was no cash flow. Dollars 2,000,000,000 in revenues and a $20,000,000,000 enterprise value, but we were very comfortable that this was a real business. We looked at them as credit investors, but we also were able to bring in the resources of our private investing knowledge.