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  • Letter To Bruce Berkowitz

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    This letter discusses concerns about the size of Fairholme Capital Management fund reaching $10 billion and the constraints that large size places on investment performance. It notes that Bruce Berkowitz must consider whether to keep the fund open to new investors or close it, as size was becoming a concern prior to recent market events. For the fund to remain open, it must be clear that current investors' returns will not suffer and that reasonably expected future returns will equal or exceed what could be achieved if the fund closed to new investors. International expansion, private business investments, or offsetting contributions with distributions may provide compelling reasons to remain open otherwise it would be difficult to argue.

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    Letter to Bruce Berkowitz

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    This letter discusses concerns about the size of Fairholme Capital Management fund reaching $10 billion and the constraints that large size places on investment performance. It notes that Bruce Berkowitz must consider whether to keep the fund open to new investors or close it, as size was becoming a concern prior to recent market events. For the fund to remain open, it must be clear that current investors' returns will not suffer and that reasonably expected future returns will equal or exceed what could be achieved if the fund closed to new investors. International expansion, private business investments, or offsetting contributions with distributions may provide compelling reasons to remain open otherwise it would be difficult to argue.

    Copyright:

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    832 views1 page

    Letter To Bruce Berkowitz

    Uploaded by

    mattpauls
    This letter discusses concerns about the size of Fairholme Capital Management fund reaching $10 billion and the constraints that large size places on investment performance. It notes that Bruce Berkowitz must consider whether to keep the fund open to new investors or close it, as size was becoming a concern prior to recent market events. For the fund to remain open, it must be clear that current investors' returns will not suffer and that reasonably expected future returns will equal or exceed what could be achieved if the fund closed to new investors. International expansion, private business investments, or offsetting contributions with distributions may provide compelling reasons to remain open otherwise it would be difficult to argue.

    Copyright:

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    Bruce Berkowitz

    Fairholme Capital Management, L.L.C.


    1001 Brickell Bay Drive, Suite 3112
    Miami, Florida 33131
    305-358-3000

    April 27, 2010

    Dear Bruce,

    Naturally, I applaud your temperament over the last two years.

    The below discussion will not at all be new and I am without doubt that you will certainly recog-
    nize the issues of my concern. That said, you are yet to completely address the issue of size.

    Insofar as my calculations are accurate, $10 billion is the point at which size really begins to con-
    strain performance, the consequence of a rapidly decreasing universe of investments. With respect
    to Fairholme, you must be thinking whether it makes sense to keep the fund open or otherwise to
    close it to new investors.

    If to keep the fund open, there must be clear evidence that in doing so, current investors will not
    suffer as a consequence. That is, the rate and duration of compounding returns that you can rea-
    sonably expect to earn while open to new investors must either be equal to or exceed the reasona-
    bly expected returns of Fairholme as a fund closed to new investors. Prior to the asininities of the
    last two years, size was an increasing concern, however the ensuing fiasco provided conditions
    which made incremental (external) capital attractive to all Fairholme investors. You did address the
    question of size during a conference call last year, and I believe you were completely correct in
    your response, brief as it was. However, these conditions are not what they were a few months ago
    and I dont know that a compelling argument can currently be made in favor of keeping the fund
    open-unless you are expanding your operations to international markets, you intend to employ
    future capital in the purchase of private businesses, or contributions are offset by distributions-
    redemptions, but even under these circumstances it would be a difficult argument.

    Sincerely,

    Matthew C. Pauls

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