Invest Like the Best with Patrick O'Shaughnessy
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.
00:36:02 · Patrick O'Shaughnessy, Dan Loeb
[00:36:02] S0: Yeah, it's a fascinating example of the value of seeing across the whole ecosystem and being able to invest however you want, which brings me to the question of, again, I understand it, you're sort of still the single portfolio manager that sits on top of all these assets across all these different buckets, like ultimately, you have to make the decision to buy or sell something. [00:36:19] S2: Let me just push back on that. Sure. I'm the portfolio manager of the hedge fund. But private credit, CLO, [00:36:26] S0: operate independent, [00:36:27] S2: structured credit, a high yield business, they'll have their own PMs. I will come in if there's an interesting opportunity. We supersize both of those, both Twitter and xAI when I got involved, but I'm not even on the investment committees of those businesses. [00:36:44] S0: So to zoom in, I'm just the hedge fund where you're the PM. You mentioned before you could be a great investor and not bother with tech Warren Buffett style or something. And now today, the market's 70% tech. What do you think of that complex of companies today, the sort of Amazon, Microsoft, Google, big technology companies, relative to the last ten years of watching them and investing in them carefully. What does the setup feel like to you today?
00:36:44 · Patrick O'Shaughnessy, Dan Loeb
[00:36:44] S0: So to zoom in, I'm just the hedge fund where you're the PM. You mentioned before you could be a great investor and not bother with tech Warren Buffett style or something. And now today, the market's 70% tech. What do you think of that complex of companies today, the sort of Amazon, Microsoft, Google, big technology companies, relative to the last ten years of watching them and investing in them carefully. What does the setup feel like to you today? [00:37:07] S2: I think the setup's great. You can still buy Nvidia, maybe the multiple slightly higher right now. But there's such a catch up trade in Nvidia at 15 times 27, 12 times 28 for the most dominant, very fast growing company at its size. I looked through our whole semis, cap equipment, hyperscaler portfolio, and I thought my instinct was gonna be okay, we've got to take profits here. I looked at the valuations, I looked at their growth rates. Unless you are really draconian or negative, and you think that somehow the AI world is going to roll over in '31 or '32. I think it's most attractive sector right now is where the bulk of our capital is invested. [00:37:54] S0: As a person that was born in this sort of value discipline and made a lot of money in that kind of investing, those people who tend to have not evolved as much would point today and say, oh, it's just like another classic example of like a giant bubble in the making. Do you feel seeds of that at all? Are there aspects of the market that feel euphoric or strange?