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Hedge Fund Lowdown: More Valeant Trouble

You’re drunk Mike, go home.

I know it was you .jpg

The love affair between Valeant’s Mike Pearson and Bill Ackman has gone from 60 to 0 in no time. If the CEO of a company help contribute to a multi-billion dollar paper loss for your fund, I’m sure you wouldn’t want to be friends anymore either. In any case, the tensions started even before things went terribly wrong. Ackman was always out of touch from what was actually going on at the company.

Pearson has said that his relationships with Ackman is over. The only hope now is that with a board seat and Pearson on the way out, he’ll have even more access to the company. But hey, that hasn’t worked out so well for ValueAct, who’s had a board seat for much of its holding period. And with Ackman on the board, his ability to sell down the stake becomes increasingly tough.

P.S. Let’s not forget Ackman previous boardroom shenanigans. J.C. Penney proved to be a disaster, one that Ackman was in for too long. Taking a board seat in early 2011, getting Ron Johnson from Apple in as CEO, and then things unraveled. Ackman left the board in 2013 with a near $500 million loss.

The best of Bill Ackman’s 2015 letter.

“I have always believed that experience is best defined as making mistakes and learning from them. I have made many investment mistakes over the last nearly 25 years managing investments, but the overall result has been quite satisfactory. I believe that this is principally because we have used errors of judgment, execution, or analysis as important opportunities for study, learning, and introspection. We intend to do so here.

Now that we have begun to stabilize our investment in Valeant, we will begin to consider the significant lessons that we can learn from this experience. One important lesson from the past is that while we normally use our active investment approach to create value in a new situation, it can also serve in a defensive role, when a business we own encounters severe challenges. The decline in the market value of Valeant coupled with the underperformance of a number of our other investments since the summer has been compounded by the impact of the leverage from the bond issuance we completed in June of last year. Leverage amplifies both negative and positive returns.”

Why CEOs hate activists.

It’s not because they’re annoying or have a short-term mindset, but rather, because they get CEOs fired. Nobody likes losing their jobs. And it’s not just getting fired that CEOs are worried about, there’s also pay cuts and reputational risk. Activist targets naturally have higher CEO turnover. In the 24 months after an activist shows up, the CEO turnover is higher by close to six percentage points compared to other companies.

But what about that reputation. If we use CEO positions on outside boards as a yardstick, it’s pretty obvious that getting attacked by an activist does damage to your social status. In the half decade after an activist intervention, the CEOs that keep their jobs are on fewer outside boards. Now this could also be because they’re purposely limiting outside distractions after getting taken to task - either way, the scare tactic is effective. And the CEOs that does get ousted are on fewer boards than the typical outgoing CEO.

Commodities are meant to be cheap.

Commodities are hot again in the hedge fund circle. Notably, oil. Two new commodity funds have already launched in the first couple months - only five were launched in 2015, with 17 closures. Kimura Capital is funding commodity transportation and Westbrook Asset is betting on small-oil companies.

"We decided this was a once-in-a-career entry point. A lot of investors are starting to realise that the current oil price is not sustainable and we have to move higher,” Jean-Louis Le Mee - partner at Westbeck Capital. Northlander Commodity Advisors are getting 3-4 calls a week, versus just 1-2 a month in the latter part of 2015. How you brave the commodity world with a potential implosion in China looming is beyond me.

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