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Greenlight Capital starts new positions in 3Q 2013

Part 6
Greenlight Capital starts new positions in 3Q 2013 (Part 6 of 7)

Why Einhorn sold Greenlight Capital’s position in Oaktree Capital

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Greenlight Capital is a hedge fund founded by David Einhorn and former co-President Jeffrey A. Keswin. Greenlight invests primarily in publicly traded North American corporate debt offerings and equities. Founded in 1996, the $5.6 billion Greenlight Capital also manages a fund of funds and a private equity fund through its affiliates, Greenlight Masters and Greenlight Private Equity Partners. It also operates Greenlight Capital Re, a property and casualty reinsurer.

In this seven-part series, we’ll go through some of the main positions Greenlight Capital LP traded this past quarter.

The fund bought new positions in Intrexon Corp. (XON) and Tempur Sealy International (TPX) in 3Q 2013. It added to its positions in WPX Energy Inc. (WPX), Oil States International Inc. (OIS), and Spirit Aerosystems (SPR). It sold its positions in Oaktree Capital Group LLC (OAK) and State Bank Financial Corp. (STBZ).

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

Why sell Oaktree Capital Group LLC (OAK)?

Einhorn sold off a 1.5% position (as of Greeenlight’s 2Q 2013 portfolio) in Oaktree Capital that was initially bought in 2Q 2012. In his letter to investors, Einhorn said the fund generated a 28% IRR on its two-year position in Oaktree Capital Group (OAK), a publicly listed asset manager. It sold because the shares began to better reflect the value of OAK’s existing asset base as well as its future asset-gathering and incentive fee generating prospects.

The company reported $1.16 earnings per share (or EPS) for the quarter. Adjusted net income (ANI) rose $21.9 million, to $179.6 million in 3Q 2013 from $157.7 million in 3Q 2012, on a $57.0 million increase in total segment revenues. The 19% growth in revenues, to $361.6 million from $304.6 million, was attributable to a 107% gain in incentive income. It said gross capital raised reached $3.7 billion for the third quarter, bringing gross capital raised for the first nine months of 2013 to $8.4 billion.

Distributable earnings per Class A unit grew 30% for the third quarter, to $0.91, and 86% for the first nine months of 2013, to $4.51, as compared with the corresponding prior-year periods, on strong incentive income and investment income proceeds.

The company said on its earnings call that it capitalized on rising markets in a favorable realization environment within its incentive-creating funds. It said 3Q 2013 saw a continuation of the recovery in the U.S. economy and financial markets. Credit markets benefited from the U.S. Federal Reserve decision to delay tapering its bond buying program with U.S. high yield bonds finishing the quarter with a total return of 2.2%. Its closed-end funds generated an aggregate gross return of 3.4% for the third quarter, bringing the return for the last 12 months to 20%. It said strong risk-adjusted investment performance across its platform continues to drive fund raising success in the third quarter. It said its investment opportunities remain strongest in Europe and in real estate globally.

The company recently formed a joint venture with China Cinda Asset Management Co. Ltd. to jointly invest in distressed assets in China and to cooperate with respect to distressed assets investments in markets outside China.

Oaktree is a leading global investment management firm focused on alternative markets, with $79.8 billion in assets under management as of September 30, 2013. The firm emphasizes an opportunistic, value-oriented, and risk-controlled approach to investments in distressed debt, corporate debt (including high yield debt and senior loans), control investing, convertible securities, real estate, and listed equities. Headquartered in Los Angeles, the firm has over 750 employees and offices in 15 cities worldwide.

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Greenlight has generated about a 20% annualized return for investors. According to HedgeFundLetters.com, Greenlight Capital is a long/short value-oriented fund. The firm’s investment approach is to analyze the economic value of a company and determine the alignment of interest between management and investors. It employs a bottom-up approach, emphasizing fundamental analysis, aiming to achieve high absolute rates of return while minimizing the risk of capital loss.

David Einhorn graduated summa cum laude from Cornell University with a BA in Government from the College of Arts and Sciences in 1991. Einhorn is a major contributor and board member of The Michael J. Fox Foundation. He is also on the board of the Robin Hood Foundation and a contributor to numerous charities in the New York area. He has authored the book Fooling Some of the People All of the Time.

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