Sunday, 23 October 2016
Last updated 2 days ago
May 27 2014 | 7:55am ET
In its first incarnation, Remy Trafelet's Trafelet Capital Management was a $5.8 billion hedge fund with double-digit annualized returns. Then came the 2008 financial crisis and everything changed. Trafelet chose not to gate and much of the money (especially that from bank prop-trading desks) vanished.
Flash forward to 2014 and Trafelet has retooled the business, brought in Highbridge Capital vet George Brokaw as a partner and re-opened to outside capital as Trafalet Brokaw & Co. To find out more, FINalternatives Senior Reporter Mary Campbell spoke recently with Trafelet.
What lessons did you learn from the financial crisis?
The biggest one is you've got to make sure your investor base is aligned with your time horizon and your return objectives.
I read that you have spent the five years since you closed Trafelet Capital Management to outside capital 'simplifying' your business—what does that mean? And what is the difference between Trafelet Capital Management and Trafelet Brokaw & Co.?
From 1999 through 2006 we compounded our Delta Fund at 24% net when the market was essentially flat. During that time our assets ballooned and I was spending my time managing people and managing the business instead of picking stocks. A huge amount of our capital came from the banks' balance sheets—Merrill, Citi, Deutsche Bank—and that money wasn't from their client platforms, it was directly from their prop. desks, and so, after the financial crisis in 2008, it disappeared immediately.
I also decided that I wasn't going to put up gates. I just didn't think that was the right thing to do, it wasn't the deal we had with investors, and so we didn't put up gates and...if money wanted to come out, it did, and it certainly did, especially all that bank money,...and when that happened I decided,...'I need to restructure this whole thing.'
We kept some outside money—some people that had been invested with us for a long time—and I said, 'I'm going to simplify the business, get it back to where it was when I first started,' which was just focusing on stock picking and doing what I do best, and right-sizing it, and re-scaling it. The last chapter of that was also bringing on a senior partner to assist with running the business so all the burden didn't fall on my shoulders and I could then focus on just picking stocks and investing. So, George Brokaw joined. I manage the portfolio and am the chief investment officer and George is responsible for the operations—staffing, firm culture, risk management and everything else. And that was the last step for us to say, 'Okay, now we're ready for the first time in many years to—selectively—open to outside investors again, actually to take new money.'
Has your investment strategy changed?
It's exactly what it was when I first started: real, basic, boring, old-fashioned, Peter Lynch-style stock-picking. I like to characterize the companies that we buy as companies you wished you owned as your family business. I always like to say 'complexity is the enemy of valuation.' The companies we own are real, simple, basic, boring businesses and I can explain to you in a sentence or two, but each one of them, we think we are owning for less than half of its true value and we expect those positions to double over a two or three-year period. We're real selective—we see thousands of companies just to pick the few that are in the portfolio.
Where are you currently seeing opportunity?
The Tribune Company is one of our positions right now and it's a very big company that no one understands because they think they own the Chicago Tribune and the Chicago Cubs. Well, they don't own the Chicago Cubs anymore and it's not really a publishing business but it's an $8 billion company that doesn't have any coverage on Wall Street. It's just coming out of bankruptcy, it's misunderstood, you've got a new management team, the stock's at $80, we think it's worth $130 to $140. This summer they'll spin off their publishing business—which is only worth a billion or two—but their broadcast business is extremely valuable and we think you get their cable assets for free. But no one's looking at this, you can't call up Morgan Stanley and get a research report on it because there's no coverage...By the second half of this year, they'll be listed on one of the major exchanges. Right now it trades pink sheet but it trades millions of dollars a day but it's just not listed yet…once you understand what they own you see that it's massively mispriced.
Another company that we own that I was just visiting in St. Louis last week is a company called World Point Terminals which no one knows. It's an oil storage MLP but over the next three years their distribution will double—it's currently trading at a 6% yield. Just by executing the plan they have in place and doing nothing else, the distribution will double in the next three years and we expect the stock to do exactly the same.
We also own a Canadian gas company called Painted Pony Petroleum which is trading at 50% of its net asset value, and that asset value is way understated and it's trading at half of that level and accelerating its drilling program and it has a 100% success rate on its wells.
Another one, Cedar Fair, is really, really interesting because it's an amusement park [Master Limited Partnership]. In 1985, when legislation went through for the MLPs, a handful of companies were grandfathered as non-energy MLPs. This one's fascinating, because, who's going to cover it? It's basically a $3 billion company, they've restructured the balance sheet, they've got a great new management team in from Disney, it falls below the radar screen because nobody really understands it and knows where to cover it—as an MLP? As an amusement park? But it has amazing assets, huge free cashflow—we think the free cashflow in a couple of years is going to grow to $4 per unit—and it's got unbelievable pricing power, they're just starting to understand it, just starting to take up pricing. There's a huge opportunity here we think it's just really a great investment.
What do you look for on the short side?
[W]e look for accounting issues, declining return on capital, or just real misunderstood situations, [it takes] a lot of forensic accounting work. We're real specific on shorts, and look to make money on both sides.
Really, [I am] getting back to doing what we were doing when I started this, which was allowing me to focus on getting out there, investing and picking stocks. And after 14 years of running the fund, we've turned a dollar into $6, net, and we expect to do that for the next 14 years.