Apollo Global Distressed Asset Investor

Understanding debt structure and becoming value a distressed asset investor is the other end of the spectrum in becoming very rich as an investor; the opposite side is to find what the next next big thing would be as a selected equity early stage investor. In both, it is important to do own study and go for what you believe in.

Private equity: Apollo’s charge to the top

A deep understanding of debt has helped the firm become the industry’s most powerful player

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Late last year Apollo Global Management sold its last chunk of LyondellBasell, the chemical company that many had given up for dead years earlier. With that final sale, Apollo’s profits from its buyout of the company reached $10bn, sealing what was probably the greatest private equity deal of all time.

It was also a very risky and unusual deal. It did not start with an auction, as many private equity deals do. Instead, Apollo gained control of Lyondell by buying up parts of the company’s $25bn debt load over many months. It was able to buy the debt at steep discounts because there was so much of it – and because nobody else would touch it. Apollo’s great rival, Blackstone Group, avoided troubled companies such as Lyondell in the immediate aftermath of the financial crisis, Blackstone executives say. But Apollo and Leon Black, its founder, could not get enough of the debt.

As the crisis worsened many competitors bet that Lyondell and other troubled companies in its portfolio would bring Apollo down. But Apollo’s staff knew the chemicals industry intimately. The investment firm kept buying debt, and for 200 days the price kept falling.

“Earnings went to nothing with blinding speed. The ratings dropped with blinding speed. The company ran out of money at blinding speed,” says Josh Harris, who along with Marc Rowan and Mr Black founded Apollo.

“That was the defining moment in the success of Apollo,” says Steve Schwarzman, Blackstone’s founder, who has been competing with Apollo for more than 20 years. “Most people freeze but Leon went into action. You absolutely have to have a cast-iron stomach and Leon apparently does. He is unbelievably smart.”

When Apollo revealed last week that its three founders had earned more than $1bn in 2013 – more than the founders of any of their rivals, who also had strong years – it cemented the investment firm’s ascendancy. Its rise was powered by an intimate understanding of debt, a crucial advantage at a time when all the big buyout firms believe that the opportunity for future growth is in the provision of debt.

“We traverse downturns,” says Mr Black, who pocketed $546.3m. “Since Apollo was founded in 1990, we have been through four downturns and 40 per cent of all of our money has been invested in down cycles, when everyone else shut down.”

Apollo executives say that if you buy debt at 70 cents on the dollar, you have more chances of being lucky than if you buy at 100 cents. But that does not mean the debt won’t go to 40 cents. You cannot buy so much that you go out of business. It can be very difficult to manage the process…

Financial Bigs Face Off in the Ring at Caesars

A heavyweight fight could soon break out over Caesars Entertainment as the controlling shareholders of the casino company, private-equity giants Apollo Global Management and TPG, square off in the ring against Caesars bondholders. The purse: some $19 billion in debt.

Two bondholder groups have sent letters in the past few weeks to Caesars (ticker: CZR), arguing that a wholly owned subsidiary, Caesars Entertainment Operating Co., is hopelessly indebted and that various asset sales and transfers from CEOC to other Caesars entities in the past year be reversed.

The reversal request first came in a letter last month from a law firm representing a group of CEOC’s second-lien bondholders, stating that the operating company, which is burning through about $1 billion in cash a year, is “insolvent” and that the asset transfers, mainly involving hotel-casinos, amount to a “piecemeal liquidation” done for “inadequate compensation.” The deals, they claim, are “voidable under applicable law.”…

 

A Hedge Fund Manager versus A Country of 36 million Population

Paul Singer Will Make Argentina Pay

Most bondholders from the last Argentine crisis, in 2001, agreed to accept about a third of what they were owed and move on when the country renegotiated its debt and traded new bonds for the old ones. Singer, whose Elliott Management oversees $24.8 billion, wanted more. He went all the way to the U.S. Supreme Court to make sure bondholders who compromised can’t get paid until he does, and his victory there in June meant the country would default unless it surrendered to him. Argentina said its hands were tied, and it simply couldn’t sweeten Singer’s deal. It defaulted.

For a debt negotiation, the July meetings were almost cinematic. On the other side of the table, facing the hedge funds, was Argentina’s economy minister, Axel Kicillof, known for his pointy sideburns and scholarship on Marxism, who was born two years after Singer graduated from Harvard Law School in 1969. Kicillof, whomBuzzFeed called “gorgeous” this year, explained in a press conference after the talks failed that he wouldn’t be extorted into a deal with a vulture. Other officials have called Singer’s fund “scum.”

Singer, according to interviews with his colleagues, characterizes the case as a fight against charlatans who refuse to play by the market’s rules. He’s owed, he has the right to be paid, and for that he’s the bad guy? He can hardly believe it. “When he sees an opportunity, he’ll seize it,” says Ralph DellaCamera, who worked for Singer from 1986 to 1999, becoming his head trader. “I love it when he wins, because it just validates who he is as a person. He’s a fighter. He’s not going to give up. And he’s not a villain: He’s a hard-nosed businessman, that’s it, and he sticks up for what he thinks is right. More people should do that.”

Ackman’s S.E.C. Filing on Bid for Botox Maker Allergan

William A. Ackman has made billions on a reputation for being the smartest guy in the room. Sometimes, it turns out, even the smartest guy can be wrong.

The activist investor, who runs the $13 billion hedge fund Pershing Square Capital Management, has been one of the loudest proponents of Valeant’s $53 billion hostile bid for Allergan,teaming up with Valeant to pursue a deal. But a major presentation supporting his case contains an error.

The mistake is in a deck of slides filed with the Securities and Exchange Commission on April 23, the day Mr. Ackman and Valeant publicly announced their interest in Allergan.

In the section “understanding Valeant’s financials,” Pershing Square outlines why standard accounting methods called GAAP – Generally Acceptable Accounting Principles – do not capture Valeant’s true “economic performance.” But Pershing Square uses the wrong numbers. (Instead of GAAP numbers, the firm uses adjusted non-GAAP figures.)

Source: NYT

Green Mountain Coffee: Bear versus Bull

The bear case thesis from Greenlight Capital

From 3Q2013 letter from GC

3 Reasons Green Mountain Coffee Roasters Could Prove Short-Sellers Wrong in 2014

Keurig Green Mountain: Time To Double Up

Asia Large Hedge Funds Seek Regional Growth in Micron, Apple

Asia’s large hedge funds are turning to companies outside the region to deliver better returns on the billions of dollars they have raised.

Azentus Capital Management Ltd., with about $800 million in assets, generated more than a third of its 17 percent return last year outside Asia, said a person with knowledge of the performance. Tybourne Capital Management (HK) Ltd. reported $848.8 million worth of U.S.-listed securities at the end of March and Myriad Asset Management Ltd. disclosed $476.9 million, according to their 13F filings with the U.S. Securities and Exchange Commission.

“Previously, you generally saw Asian funds having only an Asian mandate,” said Matt Pecot, Asia-Pacific head of prime services at Credit Suisse Group AG (CSGN) in Hong Kong. “Nowadays, more funds launched within the region have expanded that to take advantage of the insights that they have gathered in Asia and put a portion of that money to work in the U.S. or Europe.”

Funds that have raised at least $1 billion after 2009 are turning to global companies that benefit from Asia’s growing consumer and production power, and which are more frequently traded, according Credit Suisse and Bank of America Corp.’s Merrill Lynch unit. They also are stepping outside their home base after the MSCI Asia-Pacific Index generated an annualized return in the three years to April only about a fourth of the MSCI World Index’s.

-Bloomberg

A closer look at hedge-fund titan Barry Rosenstein

It really is an incredibly large amount of money, which has been created during a relatively short period of time. Amazing in any sense.

Why Is SkyBridge Capital Successful?

SkyBridge Capital’s Partner and Senior Portfolio Manager, Troy Gayeski, sat down with Benzinga to discuss the hedge fund-of-fund’s profound success in recent years.

The  SkyBridge Alternatives conference (SALT) took place in Las Vegas earlier in May.

SkyBridge outperformed the HFRI hedge fund index for the last seven years and this year is no exception. Returning just shy of four percent year-to-date, SkyBridge is still leading the way, outperforming the hedge fund index’s 0.38 percent gain. More to read.

 

Jana Partners’ Rosenstein

Despite working in finance for 30 years and amassing a princely fortune, Barry Rosenstein has always been an outsider on Wall Street. After graduating from Lehigh University and Wharton in the early 1980s, he had a hard time getting a job, ending up as an associate in the investment-banking unit at Merrill Lynch, which at the time didn’t have the same cachet as Salomon Brothers, Morgan Stanley, or Goldman Sachs. Even at Merrill, the Bruce Springsteen fan from West Orange, N.J., didn’t feel like he belonged: A supervisor told him he’d have to stop wearing ventless suits, because that “was not Merrill Lynch’s style” — which was more Brooks Brothers.

It wasn’t just a matter of fashion. Rosenstein was drawn to the aggressive, high stakes world of corporate raiders then making headlines. He got a job interview with Asher Edelman — whose firm was becoming famous for launching hostile takeover bids — by phoning Edelman after his secretary had left for the day. Edelman soon hired him.

The $13 Billion Mystery Angels

For many years, a Los Angeles psychoanalyst to the stars named Milton Wexler led the fight against Huntington’s disease, a rare and fatal congenital illness. His Hereditary Disease Foundation didn’t have much money, so he attracted scientists to his cause by inviting them to parties where they could mingle with his celebrity friends.

 

Getting Lucky, Howard Marks, Jack Dorsey, Daft Punk

Facebook has just announced to buy Oculus VR, maker of the virtual reality headsets at $2 billion.

Getting Lucky by Howard Marks (born 1946) citing Ed Smith and Jack Dorsey (1976)

In Defence of Luck by Ed Smith

“Success is never accidental,” Twitter founder Jack Dorsey recently tweeted. No accidents, just planning; no luck, only strategy; no randomness, but perfect logic.

It is a tempting executive summary for a seductive speech or article. If there are no accidents, then winners, obviously, are seen in an even better light. Denying the existence of luck appeals to a fundamental human urge: to understand, and ultimately control, everything in our path. Hence the popularity of the statement “You make your own luck.”

But it isn’t true. One problem is linguistic. “Making your own luck” is self-contradictory. The definition of luck is something outside your control. So if you are “making your own luck,” whatever you’re doing intentionally clearly does not fall into the category of luck.

Dorsey’s tweet, however, does encapsulate conventional wisdom. Observe carefully how he describes success, not because it will teach you how to succeed, but to discern the prejudices of our society.

Attacking luck has never been more fashionable. No matter how flimsy the science behind the theory, popularized by author Malcolm Gladwell, that success must follow from 10,000 hours of dedicated practice, it has hardened into folklore.

This is especially true within sport. Look at the effort to underplay the most important of all lucky strokes: the luck of good genes. They are being written out of the script. Talent (another term for genetic good fortune) has almost become a dirty word, replaced by nouns with a clear moral dimension—guts, determination, sacrifice. The denigration of innate ability reached its peak in the baffling backlash against record-breaking swimmer Michael Phelps during the London Olympic Games. Critics invoked the bizarre logic that Phelps’ physical talents give him an unfair advantage. (His double-jointed ankles and huge feet create a “flipper” effect.) Tyler Clary, his own teammate, expressed a common view in a sharp sentence: “The fact that he doesn’t have to work as hard to get that done, it’s a real shame.”

However absurd, this is how we are told to view winning, in sport and in life. Success must be earned by an effort of willpower, preferably in a triumph over adversity. Natural talent conflicts with the consoling fantasy that we live in a meritocracy where hard work always pays off in the end. But it doesn’t. We simply never hear about the thousands of would-be athletes (or businesspeople, or musicians, or inventors) who put in their 10,000 hours but lack the talent to make significant progress.

Luck also has a moral dimension. Michael Young, the sociologist who coined the term “meritocracy,” described the danger of thinking that success must be deserved just because it has happened: “If meritocrats believe, as more and more of them are encouraged to, that their advancement comes from their own merits . . . they can be insufferably smug.” It is a mistake to think that luck is a primitive, backward-looking concept. In fact, recognizing luck as a factor in success is inherently civilizing.

It can be difficult to accept that we are all, to some degree, victims and beneficiaries of circumstance, but we are. Our understanding of evolution shows that success relies on the interaction of chance mutation and natural selection. The point here is that we cannot say the successful evolution of an organism is caused by 60 percent chance mutation and 40 percent selection. They do not “mix”; they interact to produce something quite new. Chance is a crucial ingredient that goes into an end product that may be unrecognizable from its constituent parts.

I would make the same argument about an individual life. We are misled by histories of great men and women in which it’s implied that each planned his or her ascent meticulously, homing in on success like a soldier finding a flag in an army training exercise.

The origins of success are usually much more subtle and complex. Successful people, by being open to opportunity and exposing themselves to chance, take new directions that prove more fruitful than anyone could have predicted. We change in many ways as we grow. A missed opportunity represents the failure to evolve into a different, better person.

Believing in luck does not imply fatalism, as many people mistakenly believe. But it does demand openness—and humility.

What about effort, skill and planning? All necessary, of course—but never sufficient.

Getting Lucky by Howard Marks

I happened to turn to an article entitled “In Defence of Luck” by Ed Smith. It’s been in my Oaktree bag ever since.

That’s all it took to get my juices flowing. I — along with Smith — believe a great many things contribute to success. Some are our own doing, while many others are beyond our control.

Demographic Luck

Did You Do It All Yourself?

Did I Do It All Myself?

Luck in Investing

Where Is It Easier to Get Lucky?

Luck and Efficiency

Are Markets Efficient? Is the Hypothesis Relevant?

My History with Inefficiency

The Durability of Inefficiency

The Current State of Market Efficiency

The Most Important Thing by Howard Marks