Third Point

Third Point Management was founded by Daniel Loeb in June 1995 with $3.3 million from friends and family. Since its inception the fund has returned 25% a year on average outperforming the S&P 500 index by 16% and currently is valued at $2.4 billion with a total of 38 positions.

After graduating from Columbia University in 1983 with a degree in economics, Mr. Loeb worked at a variety of firms, before joining the brokerage firm Jefferies & Company where he made a name for himself. While at the brokerage, he came across the bankruptcy of Lambert Drexel. While going through Drexel’s disclosure statement, he noticed that the company had these obscure securities called ‘Drexel CBI-As’, or certificates of beneficiary interest, which were entitled to proceeds from the liquidation of the firm. Mr. Loeb’s research and analysis brought to attention the fact that these securities were worth much more money than the price at which the European banks were holding them. He convinced the banks to sell the CBI-As, finding buyers in hedge funds and investment bankers. Mr. Loeb ended up earning his investors $0.30 to $0.40 per claim acquired at $0.03 on the dollar.

It was not only that Mr. Loeb made a splash for himself and his investors, but more importantly it was the circle of people that he was introduced to, and built relationships with, that gave him the chutzpah to start his own fund. After working for Citibank for a couple years, Mr. Loeb felt it was time for him to go on his own. So in 1995, Third Point Management was conceived in, no other than, David Tepper’s office on the eve of Mr. Loeb’s wedding day..

Today, Mr. Loeb’s lavish office in Manhattan and his $45 million penthouse on Central Park West are almost an extension of his own boisterous and larger-than-life personality. Now in his late forties, he insists that his strident days are over, and that both he and the fund have evolved. Labeled as an activist, strong-arming companies to make corporate changes to increase share prices, Mr. Loeb defends his stance as being synergistic with management rather than self-assertive.

Mr. Loeb insists that Third Point is not an activist fund but a worldwide one with a long/short event-driven approach. This is the hallmark of Third Point’s investment strategy: investing in companies going through a corporate-event, i.e. bankruptcy or spin-off. It harkens back to the Drexel Burnham bankruptcy in 1990, which according to Mr. Loeb was “one of the most successful bankruptcy investments ever”, where he developed the ability for identifying mispriced asset classes, whether they be distressed debt or small-cap stocks. His dexterity in “investment’s black art”, his fine-tuned strategy to buy into troubled companies, has made Third Point an immense success in the industry. It is the best way to have a company trimmed of millions in debt and buy it at a discount. Mr. Loeb applied this strategy with Warnaco with flying colors: buying the equivalent of $6.50 a share at a 59% discount over the trading price, and eventually selling for $16.50 a share.

“We have a very strong team of people,” points out Mr. Loeb,” who are specialists in a variety of industries, geographies, and asset classes, who have been imbued with our event-driven approach to investing.” While this being Third Point’s inceptive mandate, it has expanded its investments beyond the United States and also trades shares to buy, or ones to sell short, which will produce an annualized return of 30 to 50 percent. It runs a concentrated portfolio with the top ten holdings responsible for 50 percent of its long positions and a minimal amount of leverage, with gross exposure at 100 to 200 percent and net exposure of 30 to 70 percent.

Even though Mr. Loeb is known for his long positions, about half of the fund’s assets are shorted. Unlike many managers, Mr. Loeb, with an eye for questionable companies, likes shorting shares finding the strategy a lot harder than buying stocks. He believes that even though making money on the long side is a more beneficial activity, it is the shorts that give a fund the staying power to endure arduous market conditions. Mr. Loeb had after all managed to profit on the short side even during the years of the internet bubble and still actively seeks to invest in similar companies.

Despite such investments, Third Point makes the majority of its money through traditional value investing in companies with solid franchises that have an attractive valuation and that have a substantial amount of free cash flow. The key to Third Point’s success is that it has become more institutional and has developed a solid team of investment professionals. Mr. Loeb gives due credit to his team, which he encourages to maintain a spirit of entrepreneurship and creativity.

In the debacle of 2008, the flagship Third Point Offshore Fund fell by 32.6 percent, the worst loss since its foundation. Mr. Loeb learned the hard way how precarious investments in hard-to-sell positions can become when markets turn volatile. His losses in Plains Exploration & Production Co., Radia Communication, Chrysler and Target made him go back to his roots, concentrating on event-driven and special-situation investments, and focusing on distressed debt and high-yield bond.

QUOTES

“Perhaps our leaders will awaken to the fact that free market capitalism is the best system to allocate resources and create innovation, growth and jobs.”

“Notwithstanding the sorry state of the company, the apparent lack of financial controls, the consistently disappointing results and the abysmal investor relations, we estimate that the value of Ligand’s assets far outstrip the current enterprise value,”

“I am sure, if we are really nice and stay quiet, everything will be alright and the President will become more centrist and that all his tough talk is just words; I mean he really loves us and when he beats us, he doesn’t mean it; he just gets a little angry.”