Distressed Debt Investing Interviews Simon Davies

It gives me great pleasure to introduce Simon Davies, Managing Director of the Restructuring and Reorganization Group at Blackstone in London.

Mr. Davies’ restructuring transactions have included AES Drax, Basis Capital, Boxclever, Carron Energy, Convenience Food Systems, Cox Insurance, Eggborough, Esprit Telecom, Eurotunnel, Galvex, Golden Key, Jarvis, Klöckner Pentaplast, Lisheen Mine, Luxfer, Mauser, MyTravel, Northern Rock, Petroplus, Pressac, Treofan and Wheelabrator.

Before joining Blackstone in 2007, Mr. Davies was responsible for structuring and corporate development at SVG Capital, structuring and raising funds for the private equity industry. Prior to that, he was an Assistant Director within the European Special Situations Group at Close Brothers Corporate Finance in London. He is co-editor of the Economist Outlook section of The Corporate Rescue Journal and a regular contributor to the journal. Mr. Davies began his training as a lawyer at Linklaters and spent seven years in the legal profession working on a range of restructuring, acquisition finance and LBO transactions.

Simon will be speaking at the upcoming European Investing in Distressed Debt Forum, a conference we are encouraging all readers to attend. Remember, there are still a few free spots left for the buy side (contact anastasia.guha@iqpc.co.uk and mention you are a Distressed Debt Investing reader).

Enjoy the interview!

To start off with, could you please give the readers a quick introduction?

Yes, sure. I work on the restructuring advisory side of Blackstone as a managing director in Europe. Based in London, we provide corporate finance advice to companies, to their creditors and other stakeholders in situations of financial stress and distress. We tend to deal across the board of effectively capital structure advice, providing solutions to companies' balance sheets when they need some form of corporate change event.

We know the structured finance market, especially CLOs led to significant leveraging of a number of companies in Europe. Does Europe have the same issues as the ‘maturity wall’ in the United States? If so, how do you expect that to affect the restructuring business in the next few years?

That's a very interesting question. When we went through what was a very credit expansionary phase, I guess, in the early and mid-2000s, the availability of finance was a global phenomenon, not just a US phenomenon, and so yes, in Europe we do have the same form of maturity wall through what I would call the teenage years of the 2000s. It's been referred to as a shark's fin. If you look at the shape of it on a chart, it very much resembles a shark's fin at the moment, although it is being dealt with from time to time. The maturity wall is across the leverage loan space, the infrastructure loan space and the property loan space. Slightly different shapes in terms of where it is at its peak, but what is happening at the moment in the next few years is that there's refinancing currently ongoing, and especially at the moment in the high-yield capital markets, which have become very open for business through periods of this year.

Although the bankers of the world have talked about windows of opportunity, the volatility in the markets is still there. And what we have, effectively, is periods of time when there is excessively busy activity in the high-yield markets versus quieter periods. May of this year was a very good example of a quieter period. People, I think, got a little bit jittery again. The net result of that is that there will be a lower refinancing risk when we get to the maturity wall, 2014-2016 is kind of where we’ll see peak activity.

But what you do have at the moment, obviously, is adverse selection. So what's going on is that the better companies are finding themselves capable of refinancing their maturity issues, and those that are less well in terms of a credit rating are effectively finding themselves with difficulties. So the way in which that's likely to affect the restructuring business from a leverage loan perspective is that we expect there to be a steady stream of new business, steady but not massively busy.

If we look at the world as being flat to slightly down in the developed world for a period of time, the type of things we're getting from the leverage loan side is some second-time offenders and possibly third-time offenders, old covenant reset deals, and candidates that were part of the big ‘kick the can down the road’ experience that occurred in 2008 or late 2008 and through the period of 2009. Plus there will be some new offenders. Despite the fact that I think prospects have stabilised, business pipelines remain with a lack of visibility and so what we have, I think, is going to be some new offenders coming through.

From the property side, the CMBS market has lagged the restructuring cycle quite significantly. The CMBS, it's a securitisation vehicle, it's designed not to be unwound and not to fall apart. And it does create some complexity in the property markets. You've got loan maturities, but you also have CMBS structures which have been bolted on top of that, creating complexity. And that, I think, is going to be busy for restructuring and also a complicated arena in that you will find that you've got people who are unaccustomed to distress sitting in the capital structure, and it will make it more difficult to get deals done.

We know the European restructuring process can sometimes be challenging to investors given the various legal regimes across the continent. Do you foresee a move to better standardise the bankruptcy process in Europe? Will that open the market to more willing capital, if that happens?

I think it's unlikely that there'll be more standardisation, and why do I think that? If we look back at history through difficult phases following financial crisis, most of the steps lead towards disjointed behaviour rather than joined-up behaviour, and an awful lot of what goes on is that people talk very nicely about finding global solutions and then national pride takes hold and we end up with thoughts in the press around currency wars, and people trying to competitively devalue their currencies in order to make their economies more competitive on a relative basis. But what you end up with is protectionism and an inward looking point of view and perspective.

I think that probably talks against standardisation of bankruptcy regimes. However, what we are seeing is people seeking to provide more streamlined processes in different jurisdictions. What has not been popular, I think, in certain areas of Europe is the whole debate around centre of main interest (COMI) shifting, in order to take advantage of a different bankruptcy regime within Europe. And given the insolvency regulations and how that governs insolvency processes from an overarching perspective above the national legal frameworks that are in place, that has obviously led to the reports of the insolvency brothel being the UK with its prepacked administration process having been used on a number of occasions. And what you've seen is countries trying to help streamline their own bankruptcy processes to allow for a fast - rack process to prevent the business distress that attaches to a company being in an insolvent situation for a period of time. That's been seen most recently in France, where they are now looking to develop and put a track record in place for a streamlined safeguard process.

I think the second part of your question was: will that open up avenues for more willing capital? I think the capital is there. I think the opportunity is more difficult to take advantage of at the moment in that there aren't quite as many sellers as people had hoped there would be of loan assets in distress and/or lending opportunities to companies that are in a certain amount of business distress. The equity markets have supported public companies to an extent through their rights offerings and there has been some new lending done, but what we have found is a general unwillingness for companies that have borrowed too much money to seek and be successful in seeking outside capital, in that the people who are currently invested in their capital structure either find it a better ideal for them to do the deals themselves, or they will effectively resist change, which became the whole ‘kicking the can down the road’ problem.

And what we saw, I think, for the last couple of years, which is still fairly prevalent, is that if a business is not strictly just running out of money, but it does have financial distress attached to it, people attach less attention to that, and they have bigger problems to have to deal with, so it goes to the back of the queue.

The distressed debt market is definitely a crowded one in the United States. Is that the case in the UK and Europe? Can you talk about some of the important differences between the two markets?

Yes, sure. The market is not quite as crowded in Europe. Like any form of a capital market, we seem to have followed, rather than led, and so the distressed debt market is no different in that the hedge fund community has largely grown up and matured at an earlier stage in the US than in Europe and a lot of the participants in Europe are part of a larger US umbrella group. But it is a very different investing environment.

In the US, you have a wonderful track record, a tried and tested method for fundamental restructuring, using Chapter 11 bankruptcy. Its track record, the process that it drives, the fact that it's in court, people get good visibility on what is going to happen and when it's going to happen, it gives people certainty as to the process and likely outcome and the things they're going to have to prepare and the way in which they will be able to deal or not deal with the stress as the case may be. It is a very debtor-friendly regime, but it is fundamentally a very

good way for businesses to restructure.

In Europe there's no equivalent in almost every jurisdiction, so you have, within the EU, 27 different regimes. And the most important differences that that, I guess, brings along are within all those different regimes, many of them are in their infancy. There are very few that have quite as good a track record or are as well-developed as the US Chapter 11 process. Chapter 11 has been around for quite a long time. Safeguard is a fairly recent phenomenon and the first high profile one, I think, was Eurotunnel, which was still only a handful of years ago.

And the second important difference, I think, is that it creates process risk for an investor. And that process risk becomes a far more important part of the valuation debate and the value debate when you're looking to make an investment. What you need to do, I think, in Europe, is very different to the US. There's a lot of forensic analysis around process risk in the advance of making that investment decision. There's greater risk in the type of jurisdiction you're in and how that affects that bankruptcy process should it be required, the ability to lend to a company in distress, and the likely investment duration, how long you may have to be an investor, whether you're in part of the debt capital structure or not of a particular business.

And so the differences very much revolve around a lack of track record to process and the risk that that then creates for the investor.

We know you have participated in a number of very high-profile restructurings over the past few years. We would like to know which has been the most interesting to you? The most challenging? And why?

As restructuring goes, no two deals are the same. But interesting tends to come out of complexity and it being a little different. And I think I could probably answer the two parts, interesting and challenging, just with one transaction, and that was the restructuring of Northern Rock.

Northern Rock had, I think, probably a number of fascinating pieces to it. Obviously there was the drama that is created by a run on the bank, pictures in the press and probably more stories in newspapers than I have ever seen on any single deal that I've worked on. But people standing outside branches of Northern Rock talking about trying to get their money back. And then, obviously, the first forced government intervention.

And this came, obviously, at a time before the whole of Europe had had to guarantee its banking system in one fashion or another, and the scandal attached to the government treating Northern Rock with a different brush than that with which it painted the other banks was phenomenally complicated for them, in that the European Union had not reduced its criteria around giving state aid to companies in times of financial and systemic distress. So there was a far greater risk that actually the European Union was going to come in and try to outlaw what was going on, together with the whole government intervention, together with the fact, I think, the most important thing… and the most interesting thing about Northern Rock is that everybody could relate to it, because everyone's got a bank account. And so it touched the lives of every single person who lives in the UK. Not because they had a Northern Rock bank account, but because they were interested in something that was effectively an early indicator for the market activity to come in restructurings, and they got a perspective on what happens when things go wrong. But no, Northern Rock is definitely the most recent, most interesting, most challenging one for us.

What is your outlook for the restructuring and reorganisation market over the next few years? Do sovereign issues begin to spill into the outlook for private enterprises and their access to capital?

A difficult one to answer, because the pipeline lacks visibility at the moment. However, having said that, deals do keep coming out of the woodwork, and we're not quiet here. We are actually quite busy. What we've seen recently, I think, have been some fairly esoteric types of activity.

There's still a structured finance fallout going on, so people who have disputes in relation to structured deals that were put together, sometimes just between two parties, sometimes as a package deal basis. And across the structured finance market, I think there will continue to be activity. People will seek to exit the restructurings that they've already executed, so structured investment vehicles have restructured, but people haven't exited their investment. They've restructured it in order to create a stable position and then to choose when to exit. But the things that are coming down the structured finance pipeline, I think, are bilateral deals where people have got large exposures to each other in an argument, and the mortgage-backed securities market on a commercial basis, so the CMBS market. We think they'll be very active areas.

As we move through 11 into 12 and 13, I think that the restructuring market will continue to provide its fair share of leveraged loan workouts and infrastructure loan workouts, and then you will come to, obviously, the restructuring wall, the refinancing wall that we have coming in 13, 14, and then a little bit in 15 as well. That, I think, paints a fairly rosy picture from, I guess,

a non-sovereign perspective.

From a sovereign perspective, I think there will actually be sovereign activity to come, and that's not just around countries going bust, but every country has got the word austerity in its budget now, especially across southern Europe and we do in the UK. And one of the things that that will require, as well as the raising of taxes and the reduction of the size of the public sectors in order to bring budget deficits down, it's going to be the sale of part of the state's assets, whatever's left.

I think the Greeks have been very forthcoming in terms of publicising exactly what they're looking to privatise. And that list is fairly long and will need to be put together into packages that are valuable to investors. And there'll need to be a story told and advice given on how best to do that.

Equally, just looking at the second half of the question, you have the sovereign issues spilling into private enterprises, I think there is a risk that it does that, and there are a number of different fallout potentials from the sovereign issues that are being felt in Greece and also in Ireland and Portugal, and to an extent, in Spain and Italy, and then across the world, to an extent.

But if you look at the extreme cases, as a sovereign gets downgraded, it has knock-on effects in that obviously, if we look at what happened in Ireland, for instance. The Irish turned round, some couple of years ago now, and guaranteed all of the deposits in all of their bank accounts. Now while Ireland is still a favourably rated nation for the purposes of credit quality, that guarantee is worth something. But what happens when that guarantee is worth less, because the credit rating of Ireland is dropping, is that actually people attach less value to that guarantee and you may find, whether it's in the financial institution space or in the corporate space, government backing doesn't really count for that much anymore. And there are likely to be issues that do come out on a corporate basis and a financial institution basis from a continuing sovereign issue thing.

DDI: Thanks, Simon. You will be speaking at the IQPC European Investing in Distressed Debt Forum in October. Can you give us a preview of what you will be discussing?

S Davies: Certainly. I will be helping to, I guess, give direction to a panel, talking about the response of the banks and other lenders to financial crisis. That will cover a number of different points, in particular the way in which banks have either recognised or not recognised loss when assets have gone south, crisis management of those banks and institutions. Their new capital requirements, the impact potentially, of BASEL III on those capital requirements and whether that is a good tool for helping create confidence in the sustainability and stability of financial institutions, and the structural position of banks and other institutional funds that do general lending within the markets. We'll also talk a little bit about incentive structures and potential improvements that could be made to those.

One of the things, I think, that's interesting is that incentive structures have been somewhat skewed to the outside, and in downside scenarios as we found, in the last two or three years, they have created some slightly odd behavioural patterns, which have been difficult to deal with when doing restructurings. I'll talk a little bit about that in more detail at the forum.

What we'll also talk a little bit about is recovery, the recovery phase. So there are two aspects, I think, that are interesting there. One is lending volumes in the recovery of lending volumes and there has been an awful lot of press written about that, which will be interesting to discuss. But also the response of institutions to change in regulation. Change, usually, is met with resistance, whether it's somebody's own wage packet or the ability of an institution to do business on a regulated or unregulated basis. And hopefully the discussion there will be interesting also.

Thank you for your time today Simon

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Michael Tennenbaum's Interview on Distressed Debt

In an interview on Bloomberg News, Michael Tennenbaum, founder of Tennenbaum Capital Partners, presented his thoughts on the current state of the distressed debt market. (Interview video embedded below). In addition, Bloomberg held it's Dealmaker's Summit, which I will also report on later today / tomorrow (lots of fantastic speakers)

Here are some of my thoughts / biggest take-aways from the interview:

• Talks about the 1.2 trillion of debt coming due over the next five years (200 billion due in the next two years). With so much of that in lower rated credits, thinks default cycle will pick up - something I am very much in agreement on.
• Distressed debt for control is complex and thus less competition and thus better entry valuation points - something Seth Klarman has discussed repeatedly as it related to distressed debt
• Points out that Tennenbaum is a "rescuer, not a shark." Tennenbaum historically has been very active in the DIP space - a space that is getting very crowded right now.
• B rated issued default at a 15% cumulative rate over 3 years. Lots of B rated issue now and last year. More opportunities coming down the pipe.
• Interviewer correctly notes that the overall credit market's gain is really not the best thing for distressed debt investors - Not exactly right: A healthy credit market means easier exit facility financings and generally higher valuations on exits if that sort of thing is the way you will play a particular case (see: Six Flags).
• Tennenbaum notes that middle market issuers are having issues coming to market. What about all the funds whose sole purpose is to do that sort of thing? Highbridge for instance has a fund whose main purpose is lending to middle market issuers. That being said - that has been a GREAT business to be in the last year.
• Outlook for economy: Poor - no real drivers. Muddle along as John Mauldin would say.

Overall great interview. I have worked alongside and across the table from the guys at Tennenbaum Capital - incredibly smart group of people. Will try to post more on them in the future.

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Interview with Greenstone Value Opportunity Fund Part 2

Here is the second part of the interview from yesterday. For more information on Greenstone, contact Chris White (chris [at] greenstonefund [dot] com).

In managing a book, how do you hedge? What are your thoughts on shorting?

We don’t hold ourselves out as short guys, and Greenstone is long-biased from a standpoint of individual holdings in the portfolio. However we view it as necessary to hedge out the portfolio. Our view is that if we’re going to do it, we’re looking to generate Alpha. We look at individual shorts, as well as broad-based hedging through market or sector ETFs. We really only started shorting in April 2009. Our shorts lost us only 4% in face of a 60%+ broad-market rally, so maybe we should hold ourselves out as short guys. It felt a lot more painful at the time, and to us it’s somewhat of a miserable effort. For example, there are 2-3 shorts we know far better than any name we should from a fundamental perspective, but the market loves the story, so ultimately it does not matter how well we know the story and the stocks continue to move higher. Ultimately we’d like to try and put forth the same amount of patience we show our longs. It can be hard to not to get emotional about stocks that are over-hyped and fooling the market when you’re a deep value investor. We try not to short individual companies on valuation multiples alone, hoping to find something with a relatively near-term catalyst, like a patent roll-off, one off sales, a new entrant to the market, questionable accounting; essentially something in addition to just valuation alone. A lot of times we find what we think are good short candidates when evaluating the competition during our due diligence process on the long side. This often leads to something akin to a pair’s trade, where we are long the cheapest issuer in a group, and short the priciest issuer. In addition to individual shorts, we use sector and broad market ETFs to hedge the broad-market exposure of the portfolio, particularly when the technicals tell us it is prudent to do so. We use sector ETFs if we are over-exposed to certain sectors, such as energy, and broad-market ETFs like SPY or TNA to simply reduce the gross long exposure of the portfolio as a whole. We have also found the leveraged ETFs to be particularly interesting, as their structure inevitably dictates that they destroy their NAVs over time. Because of leverage, it seems to us they are constantly forced to buy high and sell low in order to maintain the proper leverage ratios. Therefore, we constantly monitor the market for the new issuance of these securities to try and take advantage of them and add the right exposure for the portfolio. As an example, if we wanted to short small caps, we might short TNA (3X small caps). That way, we have two ways we can win on the trade: 1) if small caps decline, and 2) if the NAV of the fund is eroded over time due the required rebalancing of its portfolio.

In your opinion, why do assets get mispriced?

In our opinion, emotions are the most defining reason why assets become mispriced, and the most common emotions that impact markets are fear and greed. Fear is an amazingly powerful thing, and it can work both ways. Losing is one of the most painful feelings we can describe, and the fear of losing one's hard earned money can make people do uncharacteristically stupid things. Like sell at the bottom of the market, just when the talking heads on TV are panicking the most and valuations have become the most interesting for long-term investors. Greed, or the “fear of missing out” can work the other way, though, and cause investors to move too much with the crowd, have an unhealthy herd mentality, and help fuel asset bubbles to dangerously high levels. It is amazing to us how quickly investor sentiment can shift from euphoria one moment, to a depressed outlook with nothing but trouble ahead. These emotions cause people to lose the ability to accurately define changes in news, earnings, or whatever in either favorable or unfavorable directions.

We try and filter out the nonsense from people like TV commentators, and essentially just invest in valuations of tangible assets and cash flows, knowing that at some point the market will want to court us at the dance again. If we couple good business judgment with an ability to insulate our thoughts and behavior from the super contagious emotions that swirl about the market place, we think we can be successful. We tend to use sentiment readings as contrary indicators, becoming more bullish when others are scared and vice versa. We actually think one of our key strengths is not getting carried away in any direction because we’re naturally very skeptical individuals. There have been economic bubbles or asset class bubbles since the beginning of time; markets overshoot and then over-correct, but ultimately that is what provides the mispricing opportunities.

If you could have lunch with anyone - alive or dead, who would it be and why?

Buffett, because he is legend. But unfortunately it’s gotten too overpriced to have lunch with him. We’d just take a DQ cheeseburger…shoot we’d even drive to Omaha, and pay!

If you were to peg one valuation technique you really rely on - what would it be? And why?

We track 400 companies across different market capitalizations and industries in a proprietary universe of companies that we feel have at least a chance to be a “deep value.” Underlying each company is a unique spreadsheet where the company’s financials are massaged by us to adjust for one-time events, seasonality, cyclicality, and so on. All of the underlying company-specific spreadsheets flow into a master valuation sheet, using real-time pricing data, that sorts the universe based on what we call a reward-risk ratio. This is a calculation of the multiple of the potential upside from current market if it reaches fair value relative to the potential downside from current market in a worst case scenario. All this model really does is stop us from spinning our wheels looking at companies when we should be focusing elsewhere. Because the universe we follow is very diverse, it also alerts us to flows in and out of certain industries and capitalizations. The other thing about the model is that sometimes companies get cheap for days, months, or just a few minutes. If it’s just a few minutes, it can be harder for us to react if we haven’t done the work…you win some you lose some…but if we stick to our process and discipline we’ll make it work more often than not. From there the valuation technique goes down another tier to EV/EBITDA and Market Cap/Free Cash Flow. We use an adjusted annualized number of the most recent quarter’s EBITDA or FCF, and we rarely if ever rely on forward estimates. What we are looking for are companies that are trading at 5X or less of these two multiples, and the process helps us focus us on the stocks that are the cheapest. Once we're alerted, then the fundamental hard work begins.

How do you generate ideas?

As I mentioned previously, we track a proprietary universe of around 400 individual companies in a real-time valuation model. The goal is to have the right 400 companies in this universe. If there are too many companies, it becomes too much work to accurately track, and the quality of the process is eroded. If there are not enough names in the model, then the breadth and scope of the process is not sufficient to produce enough ideas and give us a feel for where money is flowing. So a big part of what we do every day is make decisions on what companies need to be added to the model, and which ones need to be removed. For every new idea we get, we try and remove a company that we have concluded is a broken story, a value trap, will never get cheap enough, has an unfixable balance sheet, etc.

We use a variety of methods to try and identify new opportunities. We are members of and track high-value websites, such as the value investors club and the distressed investors club. We obviously have a number of like-minded friends and buy-side associates that we exchange information and ideas with. We do a lot of screening with services such as Capital IQ, and we try to read everything we can get our hands on in order to stay informed. Because we are trying to identify companies that are flying under the radar and trading at deep value multiples, we rarely find new ideas at sell-side conferences, where sponsorship already exists. At the end of the day, we think it is about having an open mind towards new opportunities, and more importantly constantly expanding our network of people, places and websites that share our investment approach.

We noticed some distressed debt ideas in your top holdings and commentary. Is that a matter of style or are you seeing interesting opportunities in the distressed space?

It is both a function of style and the opportunities we saw last year. Obviously, from a deep value investor’s perspective, the opportunity to invest in something based on an analysis of liquidation value relative to tangible assets can be very compelling. The economic slowdown and financial crisis also produced a lot of names to look at. However, we aren’t actually seeing as many attractive opportunities in the distressed space right now as we would like. We are probably seeing more post emerging opportunities right now. But that’s today. There was a tremendous amount of high yield debt issued in the 2005-2008 period, with a lot of that coming due in the near future. A lot of this debt was taken on in the thought of continued growth and with too rosey of an outlook going forward With choppy markets ahead, the slowdown in business fundamentals from 2005-’08, and a slow growth environment for the foreseeable future, distressed investing should more than hold it’s own going forward.

We saw where Pimco recently published a piece about dollar percentage default rates increasing for mid cap companies. While corporate America has done a tremendous job in curtailing capex spending throughout the recent crisis, we doubt this can continue for too long without impacting their underlying businesses, and the point from the PIMCo piece is that mid and small cap companies are more constrained to take further capex out of their businesses. Banks are now also recovering to the extent that they will actually call on companies that violate loan covenants. For instance, last year we had a crude tanker investment, and the company was asked the questions “are you breaking any loan covenants, are you hearing from your lenders?” Their response was that “the banks don’t call us, we have not heard from them in over a year.” With NAVs off 50% in a year, the banks didn’t want to create another run on assets, and end up owning boats.

We like the distressed space because quite often more information is available to us when a company is in chapter 11. The monthly operating results requirement, as well as the ability to monitor the items filed on the court docket, make it seem that the information flow is better than what would otherwise show up in the K’s and Q's. Obviously, there are other nuances that create risk: who the judge is, can the creditors wear down the equity holders, does the debtor have access to capital markets, who are the financial advisors, how much will be eaten up in fees, etc. But we think for people willing to spend the time and do the work, the variables can be broken down and this creates opportunity.

Talk about one or two ideas your find particularly compelling. Why are they mispriced? Where is the market wrong?

Tronox Inc. (TRXAQ and TRXBQ)

I should probably first say that we own both the debt and the equity in Tronox. However, given the industry bottoming after a 2 ½ year trough market in TiO2, the restocking of inventories, and recent price increases, we think Tronox’s MORs will improve going into the seasonally strong Q2 and Q3. Therefore, there probably is greater upside/downside for the equity right now than at any time in this process.

The reason we think the market is wrong about this company is the bankruptcy process risk and disclosure. We recently sent a letter to the Judge in the case regarding Tronox’s unfulfilled obligation to file periodic results of the operations of its Non-Debtor subsidiaries, as required under §2015.3(a) of the Federal Rules of Bankruptcy Procedure. There are 18 wholly owned non-debtor subs, and an undivided 50% interest in the assets of four non-debtor entities comprising a joint venture in Australia. It really seems to us that the debtors have dragged their feet exceptionally well on this issue, as we’ve seen no operational disclosure for these entities since the case started 19 months ago. It would be very interesting to see where cash is accruing on the balance sheets of some of these non-debtor subsidiaries.

Even in spite of this game of “hide the ball” on behalf of the debtor, if we annualize the most recent April MOR, we get $175mm in EBITDA, $58mm in free cash flow, and working capital north of $550mm. In Huntsman’s stalking horse bid from last year, they only requested $300mm in working capital; one would assume that number was aggressive given that they were not bidding against anyone else. Just applying a 5X multiple on EBITDA, which we don’t think is aggressive, and adding the $250mm in excess working capital, we get a $1.125bn enterprise value. After subtracting liabilities of $436mm, post petition debt of $423mm, and environmental obligations of $122mm, you get roughly $3.42 in potential equity value. This analysis doesn’t give any value to the non-debtor subsidiaries or their Australian joint venture, and it still yields upside potential of 5-7X current market price.

There is an informative blog on Tronox http://tronoxequity.blogspot.com/

Hawaiian Holdings (HA)

Hawaiian Holdings is the parent of Hawaiian Airlines, which I mentioned earlier. The company is the a beneficiary of the bankruptcy process; not only has it emerged unencumbered, in fact it has net cash of close to $100mm, which is unheard of the in the airline industry. The company has very sound management, and a sound strategy going forward in accessing emerging international markets. With airlines, the big three things to consider are labor costs, fuel costs, and leverage. Their labor negations are complete, not hanging over them anymore, and Mark Dunkerley just resigned his contract. Their fuel is hedged roughly 41% for the remainder of 2010, and they’re unlevered. From a multiple perspective, annualizing last year’s quarterly EBITDA yields approximately $130 million. Based on this earnings power, the company is trading today at roughly 2.1X EV/EBITDA.

The other wild card that investors don’t probably fully understand, or don’t care about because of the market cap, is the recent Haenda approval and the opening up of discretionary recreational visas from China and other Asian countries to the United States. The company recently won approval for a direct route between Haenda, which is a preferred airport out of Tokyo, and Honolulu. South Korea also just relaxed their visa stance, and it will be interesting to see how this models for Hawaiian. Basically, they’re an unlevered player in a consolidating industry that has access to key Asian markets. I would note that the company’s term A and B loans are due late this year, and early next, but we are not concerned about their ability to find attractively priced replacement facilities.

Thank you to the Greenstone team for such an informative interview! We wish you the best of luck in your capital allocating endeavors...

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Exclusive Interview: Greenstone Value Opportunity Fund

A few months ago, I received in my inbox the 1Q 2010 letter for the Greenstone Value Opportunity Fund. Not only were their returns spectacular but also their largest position at the time was Tronox, a company we did a distressed debt research piece on earlier in the year. Needless to say, with their candor, their value investing mindset, and their ability to see the forest through the trees in a number of highly complicated situations, I was incredibly impressed. I reached out to founders Chris White and Tim Stobaugh, and asked them a number of questions in the interview below. I was split the interview into two parts, and will post the second part later in the week. Enjoy!

Of the prominent investors (Seth Klarman, WEB, Graham, etc) out there, who would you say your styles most mirror? And why?

We tend to think about other investors as being in a variety of different categories, and we try to glean from them opportunities or ideas in those areas where we think they are the strongest. Mark Faber or Jim Grant, for example, are not necessarily known for being very good stock pickers, but they make incredible calls time and time again from a broad macro perspective. Obviously a Seth Klaram has a go anywhere, anytime style, it’s just that he’s a large relevant investor with a superb track record; we like to think we mirror him in some ways from the perspective of liking tangible assets and free cash flow, but we realize any comparison at this point is more than a bit premature. Outside of David Einhorn, who we think is phenomenal, we actually think some of our own limited partners are the best investors we know. Michael Scholten of Clear Harbor Asset Management is the best ‘common sense’ value manager we know, and Brad Radoff of Fondren Capital has an amazing ability to get up to speed on an idea; he’s quicker than anyone we know, with a diverse style and breadth of knowledge that is truly impressive. In addition to these two, who are LP’s, we are proud of our limited partner base, and have a lot of talent there that can provide immeasurable advice. We try to take note of what Jerome Simon and Keith Cockrum of Lonestar Capital Management are up to. Julian Robertson has influenced our industry more than any investor, so we always try to keep tabs when he offers perspective on the news of the day (we might also point out that he’s the inaugural winner of the Friend of New Zealand Tall Poppy Award).

At the end of the day, we’re a young, small friends and family hedge fund, and we can definitely play in ideas where others face too much liquidity risk and/or don’t have the ability to put a relevant amount of AUM to work. But, we’re also not afraid to invest in large caps when we think their capitalizations represent the best risk/reward. We really just try to learn from everyone, and try not to put ourselves into a box; if asset values and FCF’s are telling us to go to a particular sector, then that’s what we do. In addition to continually learning from our mistakes, we let our deep value philosophy, with a focus on underlying free cash flows and tangible assets, and investment process dictate what we do.

You run a fairly concentrated book. Talk about your thinking behind diversification and running a fund.

We try to have about 80% of our long portfolio structured in what we consider our classic (deep) value investments. We try to run a concentrated book of between 15-30 investments because we want positions to be significant from a return standpoint to the portfolio; the game is hard enough that if we pick winners, we want them to be meaningful. These core positions are generally sized in the 3-6% range in terms of AUM. The other 20% of the long portfolio is comprised of special situations, where maybe the valuation doesn’t meet our hard and fast criteria, but they have the potential to provide outsized returns (i.e. 3-10X returns). These positions are generally sized in the 0.5-1.5% range in terms of AUM, but we consider it relevant to take a position because they can prove meaningful to the portfolio due to the implied leverage in investment. This level of concentration can go against us too, and we fully expect to have losing positions. While the portfolio might take a more significant hit when a core position declines relative to someone running a book of 100 names, we try to be brutal when deciding on whether to stay with a holding. Our bottom-up, rigorous due diligence process allows us to be highly familiar with the underlying issuers, especially the core names, so when positions move either way we feel we can make informed decisions regarding the portfolio.

We are definitely conscious about diversification and the hedging we need to employ in the portfolio. As an example, from an industry perspective we try not to have exposure of greater than 16-18% of AUM. While we have approached these levels several times in the past, primarily through appreciation, our disciplined approach required that we scale back these positions as they moved higher. We also sometimes look for “interesting” ways to hedge certain positions. For example, as our oil-related holdings started climbing last year, we thought a pullback was certainly possible. So, we hedged our exposure to oil with long positions in regional airlines like Republic Airways (RJET) and Hawaiian Holdings (HA), which were trading at valuations of less than 4X EBITDA and FCF. Not only did we pick up what we thought were great value investments, there was an obvious hedge if oil prices declined. We also put a huge premium on liquidity. Tim previously managed a fund that was comprised of highly illiquid investments, and he took some great lessons from that experience. Typically, 80% of our holdings are NYSE or NASDAQ listed companies and we could trade out of our positions in a day or two. This also gives us comfort when owning such a relatively concentrated portfolio.

In your opinion, what is the hardest aspect of running a hedge fund?

Time. Because we are a small fund, and there are just the two of us, there are many times when it does not seem there is enough time in the day. It’s not just about running a fund and generating returns, it’s about building a business, and all the things that go on outside of just pure investing. Whether it’s taking advantage of a 10-minute 8% correction window, returning a call to a limited partner, or just having enough hours in the day to keep everything in balance outside of running a hedge fund, there are personal sacrifices to be made. We work in close proximity on a trading desk environment where there are no fancy titles or big offices; there is little time for personal phone calls, and it’s about being productive when we’re in the office. We also try and think about every decision as if we were a much larger fund, whether that’s how we set up our offshore fund, who we chose as third party service providers, or how we communicate with our limited partners. All of this requires that Tim and I wear multiple hats every day, including fund manager, compliance officer, capital raiser, risk manager, and investor relations. The other hard part is ignoring all the ‘noise’ we hear every day on the likes of CNBC. It is hard sometimes to avoid all the noise and panic around you, and have the confidence to wade into the waters and take a position when the process tells us it is time. When we are pressed for time, our processes tends to bail us out. We have quantifiable metrics for some things, i.e. do we make a certain amount of phone calls every day, are we increasing our LP base every quarter, etc. With regard to investing, we definitely rely on our process to tell us when the valuations make sense. We think the other very important part is in communicating with your LP base. If you constantly communicate your ideas and philosophy, and reach out to them every month or two, then when the tough times occur they’re more likely to stick with you, because they understand the process better. Buffett used to quote something like he wanted LP’s to “measure us, as we measure ourselves.” We agree with this and think it’s more important than ever to have the right LP base.

Talk a little bit about your background. How did the two of you come together to launch Greenstone?

Tim has worked his entire career in the financial services industry. He spent over 11 years on the sell-side at a boutique investment bank helping raise capital for small and micro-cap public companies. During that time, he helped raise over $300 million in almost 50 different transactions. The great thing about being at a single-office boutique was the amazing breadth of experience he received while there. At some point during his tenure, he was an analyst, investment banker, institutional salesman, trader, compliance officer, and head bottle washer. More recently, prior to joining me to launch Greenstone, Tim was with a buy-side hedge fund with around $75 million in assets. Again here, the breadth of experience included all aspects of running a small fund: portfolio management, trading, CFO, investor relations, etc. In addition to the operational expertise that he brings to the table, he has essentially spent the last 15 years or so analyzing capital structures, negotiating deals with management, and investing and trading micro, small and medium-cap stocks. I was born and raised in New Zealand, and started investing as a 16 year old after reading my first Warren Buffett book. It was from that point on I knew I would be an investor in public markets. It was my dream to come to the United States, and work on Wall Street. Originally I thought Wall Street was the place to be, until I took a job offer in Dallas, and spent 7 years on the buy and sell side, investing and raising money for public companies. The story of how I actually got from New Zealand to Dallas is humorous to some. . When I arrived stateside I had a total of $400 on me, so I negotiated to buy a car and a mattress for $175. I still remember driving that Mazda 323 down the road with a mattress strapped to the roof and no air conditioning. I eventually sold that car two years later for more than $175. I still remember those lean times, and it keeps me motivated.

Our careers eventually overlapped for about 2 years at the small investment bank I mentioned earlier, and we became great friends. Not only did we become friends, but we spent a great deal of time, both during our tenure together and after Tim left to move over to the buy-side, discussing investment outlooks, philosophy, trading styles, etc. We came to realize that we shared two things in common: similar personalities and similar investment styles. We are both highly competitive, brutally honest people who are motivated to succeed. We know we can trust each other to do the right thing, and you may as well not go into business with someone if there isn’t 100% trust. There will be ups and downs, times of pressure, and you have to know that your partner is there completely there for you. It’s also about humility and intellectual honesty. As we constantly reevaluate our positions, say when a position moves against us, we ask ourselves: Are we early, or are we wrong? Is this conviction or pigheadedness? We are not afraid to say we made a mistake.

What has been one of your biggest investment mistakes of the past? Biggest investment success?

Blockbuster (BBI) is a story we spent a lot of time on, and felt very comfortable with regarding our knowledge base and the valuation. We traded the common equity and exited successfully, but we bought a position in the unsecured debt post refinancing of their senior facility. Late in 2009 we walked out of a meeting with senior management thinking we should sell the bonds, but we noticed an insatiable desire in the market for high yield, with investors chasing yield to unsustainable levels. We thought we could game the market and hold onto the bonds, selling the position before they announced their Q4 earnings in March 2010. Of course, the company pre-announced poor results, and the bonds declined 50% in a week. I think we learned that once you lose confidence in a position and determine you’re a seller, you need to get out and not try to game the market. We constantly kick ourselves for our losses, more often than not it seems on our shorts, or it’s a timing issue where we’re wrong for an unbearable amount of time. We truly believe you learn more from your mistakes than from your winners. They’re extremely painful, and it’s a feeling only people managing their own money, along with friends and family dollars, can truly relate to.

As far as investment successes, we think entering the Trust preferred securities of the major money center banks in late 2009/ early 2010 was a successful trade. Entering the auto bailout mess was another interesting time for us, with the Hayes Lemmerz (HAYZQ) bankruptcy, and Exide Technologies (XIDE) providing valuations that gave us comfort. Entering the airline sector in late 2009 when oil was increasing was hard to do, but the valuations told us we needed to be there. From a pure percentage return standpoint we have almost a 100 point gain on our Tronox Bonds, representing a return of close to 300%. This was definitely the first time we’ve earned over 100 points on a bond, and while it’s probably not our best investment ever, to earn 100 points on a bond is a rare event…for us anyway. The hard part about the bankruptcy process is being able to have enough information to take a position when no one else wants too. The timing of the return opportunity is critical. As with all our investing, and particularly with these we have mentioned, we try to first and foremost define the downside potential. For example, before taking a position in Tronox we did a tremendous amount of work on the environmental liabilities, talking to the EPA, lawyers, Superfund employees, doing analysis of past EPA and Superfund settlements versus the original claims, etc. After all these discussions we formed a probability analysis of what we thought the potential environmental liability would be (our work showed a 20-28% eventual loss). It was understanding the liabilities early on that provided the comfort for us to take a position. The other fundamental analysis on TiO2 recovery, industry processes/dynamics, inventories, pricing, etc was easier… the wildcard was the environmental liabilities. With the wildcard essentially defined and off the table, the process became easier for us to get comfortable with, and we even eventually took an equity position as well. Whether you are talking about the preferred securities of the money center banks during the financial crisis, the automotive suppliers during the bailout, the airlines during a recession, or a Tronox during bankruptcy, our best investments have been when the panic has been the highest, the blood in the streets has been excessive, and panic-selling has been the norm. These are events we look for to trust our process to find good buying opportunities.

When allocating capital, must discussion in the past few years has been on value investor’s transition to start taking a look at the larger/macro picture. If anything, how does the general economy and macro trends play into your investing style and how you run the fund?

That’s a very interesting question and it certainly involves more work than in living memory, but we try not to over think each and every position. We focus on tangible assets and free cash flow. Our limited partner investors don’t come to us to invest in Coca-Cola; they come to us to invest in deep value, distressed companies that very few people are looking at. So, something we have to remind ourselves is that by the time we’re interested from the multiples we look at, the issuer typically already has significant downside protection built into the valuation. But before taking a position we take into account the technicals of the market and the underlying company because black box trading has become so significant.

Having backgrounds in economics, we do tend to have broad-based themes when investing, in addition to simply monitoring the market for mispriced securities. For example, we think China and India are going to be among the largest drivers going forward due to their GDP growth potential and the fact they make up 40% of the world population. When you consider that the current per capita consumption of these countries is now at very low levels but growing, as well as the future industrialization of these countries and the development of a middle class, we tend to look at their import needs in terms of certain commodities (coal, oil, gas, iron ore), and the mode in which they will receive those commodities (tanker and dry bulk). We think China will be by far the bigger factor in the equation than ever before, and prices will ultimately move more on Chinese demand than in the US. Having said that, we would never try to trade commodities; instead, we would attempt to find issuers with significant commodity exposure at very attractive deep value multiples.

We also think the power shift from Wall Street to Washington is something to keep an eye on. We feel Washington is somewhat broken because of the influence of special interest groups, and the political process requires Washington to remain beholden to these entities. The scary part is that fiscal responsibility ultimately only comes about by being forced to take action. For example, New Zealand lived in fiscal denial for decades, and then in 1984 was forced to go cold turkey from a fiscal and monetary standpoint. It was a painful transitional of ten to fifteen years, but there were plenty of opportunities to pick up assets when no one else wanted them. If we don’t have some sort of fiscal responsibility from the Obama administration, the 2008/200909 credit crisis will be a small issue compared to the day that the US cannot print anymore money, or there is no buyer for US government debt. For these reasons, we’re partial to countries like Australia and Canada, who are commodity-rich, with stable monetary policy, friendly corporate tax policies, and in close proximity to Asian countries with insatiable desires for their primary products. So, I’d say we definitely more than ever take into account a certain amount of governmental control, future interpretations of the law, and general macroeconomic policy analysis. Whereas macro/political used to make up around 10-15% of your decision making, it’ probably double that today. The recent banning of existing drilling in the GOM by the Obama administration was pretty fascinating, and we think some interesting legal precedents could come out of that action.

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Pershing Square 2nd Quarter 2009 Letter

Thanks to Jay at MarketFolly for posting this.

Pershing Square Q2 Letter

Some quick points an analysis, from my perspective:

• I actually saw Bill Ackman speak last year and was thoroughly impressed with the work he did with FSA - a bond insurer. Interestingly, we were already short FSA at the time. Strong analysis and presentation.
• I analyzed EMCsometime in June, and unfortunately, missed the opportunity. Error of not pulling the trigger.
• McDonald's is probably quite cheap here. 13x earnings for that sort of business makes no sense to me - especially when the general market is trading around 20+x forward earnings. They have not participated in the rally as the opposite of the Walmart effect has been occuring in the stock market.

GGP gets its own paragraph. I just don't know with this one and am not thoroughly convinced. My analysis is still coming up with 50-60ish on the Rouse bonds (discounted back two years at 20%...i.e basically where it is trading today), and it has been that way for nearly a year now. Maybe I am suffering from some kind of anchoring mechanism. I have seen all the sell-side models out there: At a 9% cap rate, and call it $850M on NOI, then add in some love for land and JV value you get $10-$11B value for Rouse less $7.4B of secured debt leaves a recovery for the Rouse bonds well in excess of par.

Do I think the 9% cap rate is correct? That is a broad statement. I think some malls could go for 7% and other malls could go for 15%. I would say it is close to correct. Do I think the $850M of NOI is correct? Frankly, I think it is lower. I also think that ascribing a billion dollars to the ancillary assets only makes sense if someone will actually buy them at that level. Also - And this is more a theoretical question: But are CRE lenders just going to extend the maturity on the mall loans? Won't some of them want more security / rate to compensate them? Some of the GGP and Rouse malls were financed at a 3-4% cap rate. These lenders are significantly underwater. In a number of stressed CRE's situations this year, borrowers have added collateral and upped rate to make lenders happy. How does that factor into the equation?

Here is the Pershing Square GGP Presentation. It is well thought out. I suggest everyone interested read.

GGP Presentation 5.27.2009

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A Hypothetical Distressed Debt Interview - Questions Continued...

In the first hypothetical distressed debt interview, we tackled a number of questions the authors of Graham and Doddsville's posed to Stephen Moyer. What follows is the remainder of the interview, with my answers to the questions posed. Enjoy!

How do you think about the margin of safety on a distressed investment?

In my opinion, margin of safety is the safe return of principal under even the most dire of circumstances / events / conclusions to the investment thesis. Unfortunately, in the distressed investing process, one can never really predict with 100% accuracy what a judge will do. You can get a good sense based on their previous decisions and the rule of law, but the wild-card that is the judge can really alter recoveries.

That being said, Ben Graham really cared about return of capital (principal with respect to bonds) versus return on capital. This is where an investor has to fully understand the structure and covenants of a particular investment to get comfortable. How many ways can you be primed and by how much? How loose is the permitted indebtedness definition? What murky ways can an acquirer get around the change of control / poison put? Where are the carve-outs for additional liens? All these questions, and many more, are essential in understand how likely it is you will get capital back. Almost always, as second nature now I guess, the first thing I do when looking at a potential investment is draw out the corporate structure, how much debt and cash flow is at each entity, what security is granted to what instrument, and how much debt can be layered on through either "loose" covenants and permitted indebtedness.

I generally will not invest in a security if the chance or risk of permanent capital loss is anything more than diminimus. Yes, there are cooky variables (as mentioned prior, judge opinions), that are nearly impossible to handicap. And in cases like that, I may not even play the game. Maybe I am more risk averse, but I want to be around to see who finishes the race. I want to bet big when the deck is stacked in my favor. I might have to wait around for a lot of pitches, but when things like HCA's bank debt trades in the low 70s, yielding 15+%...you just have to take big swings, because you might not ever see that pitch again.

Intense litigation seems to be a major theme of this cycle as well. Will this have any impact on returns from distressed investments?

Given the way creditors have been diced up in this past credit boom, meaning a vanilla corporate structure of say first lien and subordinated bonds turned into first lien ABL, first lien Term Loan B, second lien Term loan, senior uns, senior subs, HoldCo Piks, etc, I think it is inevitable for litigation to rear its ugly head in big ways. There are so many more stakeholders. And each of those stakeholders are answering to an investor group. If traditional recovery metrics imply that you are getting 0 back on your principal, why wouldn't you litigate? Docs were so sloppily written in 2003-2005 before second lien and inter creditor agreements became more standardized. Lien perfection has really been a hot topic recently which is astounding to me.

In terms of impact on returns, I would have to say its going to benefit the junior creditor. If you assume that 5% of all litigation are successful, the sheer financial leverage at certain borrowers could boost recoveries 3 or 4 or 5 fold for the subordinated tranches. Might as well swing for the fences if I am getting jammed with a zero / warrant recovery.

The increased competition you reference is perhaps a reflection of the size of the opportunity in this distressed cycle. How do you envision the near-term growth and success of the distressed fund industry?

There was an interview with Dan Loeb where he said the total high yield / levered loan market was $1 trillion dollars and the entire non-agency mbs / cmbs market was $1.5 trillion dollars. Taking just the corporate side now, assume default rates continue at around the 10% clip. We are talking about $100B of new distressed supply (notional). Now granted some securities trade for 5 cents on the dollar and others trade for 160 cents on the dollar (W.R. Grace bank debt), so it's hard to pinpoint how many capital dollars can be put to work. It is a lot though.

In addition, I believe opportunities exist as you move into smaller and smaller enterprise values. If a debtor has call it $20M of debt outstanding, I doubt some of the bigger boys play as the investment will not move the needle. Further, the seller of this paper, many times regional / super regional banks can be forced sellers further deviating prices from their intrinsic value.

But if I were to set up my fund today, I would not dictate size constraints in the OM. There have been incredibly profitable situations when the EV of the debtor has been spectacular (see: Enron). The buyers of Rouse bonds (in the 40s) have seen a large windfall and EVERYONE knew that situation well. If you told me, that $1 trillion dollars was to come into the distressed market to soak up $100B of supply, yes all boats will rise with the tide, but I promise you the market will be anything but efficient.

Are there any specific strategies that will return more than others or garner more attention from potential capital?

If I knew that, I'd be living on a beach in the South Pacific, drinking Jose' and making trades from my blackberry. But if I had to handicap it, I would say that performing first lien bank debt will see the weaker return simply given how tight the short end is, and how fast the run-up has been. Select special first-lien situations (bank debt in re-org, close to re-org) should still see nice returns with adequate principal protection. RMBS and CMBS, are not my forte and thus I have nothing meaningful to add (and if you are an expert, and want to contribute to the blog, please email me). Whole loan mortgages are probably pretty interesting. Bonds of complex issuers (CIT, AIG) are a real wild-card and need lots of work, but could be very compelling in certain situations. Every one in the world I know is playing the short end of the curve, hence maybe their are real opportunities further out. Markets are probably decently close to fair value, but that never stopped me from finding very attractive investments. Markets can be flat for a very long time, and opportunistic and hungry investors, like myself, will still generate excess returns.

How do you approach the search process for generating investment ideas?

I use the function way too much on Bloomberg. This shows the list of all bonds yielding over 10%. As mentioned in earlier posts, I get about 4000 Bloomberg messages a day with broker and dealer runs. I talk to people on the buy side regularly during the day. I am starting a distressed debt investor club.

What I find interesting about the high yield / distressed / levered loan market is that it is very repetitive in the sense that many times borrowers will forever be branded with the sub BBB- high yield notation. Hence, the more situations the study, the more useful you will be when the same issuer stumbles along the lines. That being said, constantly learning about new companies and industries is crucial to succeed in this business. Furthermore, learning the rule of law, the way bankruptcy proceedings are shaking out in court, the various stakeholders and their motivations, is also imperative to succeed.

DIP (Debtor in Possession) financing has made a slow re-entry into the markets. What has to happen before DIP loans become readily available to firms filing Chapter 11?

I get a three emails a day asking to talk about DIP financing. I am going to write a very comprehensive review in the coming weeks as I think it is a fantastic part of the market to play if you know what you are doing. So I'll leave that answer for then.

Aside from your book what would you consider as required reading for today’s distressed value investor?

Distressed-Debt-Investing.com of course. In addition, I would read and keep up to speed on as many dockets as possible. I would try to connect with as many advisory firms as possible and try to get their pitch books to learn up on situations. I would read my distressed debt recommended book list. I would read as many client bulletins put out by law firms like Latham which are invaluable learning tools (I will aggregate these one day and put them up as links).

Finally, if you were a young analyst graduating from business school today, what would you look for in a firm when recruiting?

Besides having locked up capital, which in my opinion, is the holy grail of investing, I would look for a shop that has a fairly broad mandate. You do not want to be limited to your investment choices because that is not the way capital is meant to flow. Small or big...it doesn't really matter unless pedigree is a major concern for you. I would say non-formulaic investment process (i.e. you could buy an asset with 3 minutes of work if it was compelling enough), but I know and appreciate the merits to the slow and steady approach. Finally, you want to work for a portfolio manager you can learn from and who will challenge you to become a better analyst.

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