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April 8, 2011
First
Quarter
2011
Investor
Letter
Set forth below are our results through March 31
st
, 2011 and a brief discussion of selectedpositions that impacted the portfolio during the quarter.Third Point Offshore FundLtd. S&P 500 CS Event Driven
*
2011 First Quarter 8.6% 5.9% 3.3%Annualized Return SinceInception 19.0% 5.8% 9.9%
*CS Event Driven data reflects returns through February, 2011
The top winners for the quarter were CVR Energy, Technicolor, Williams Cos, NXPSemiconductor NV, and a short position in the Subprime ABX Index. The top losers for thequarter were Inmarsat PLC, Wells Fargo & Co, Accuride Corp, Short A and CIT Group.Gross exposure at January 1
st
was 141%, with the long/short equity book at 53% net.Gross exposure at March 31
st
was 137%, with the long/short equity book at 45% net. Peak gross exposure was 146% on February 17
th
, and lowest gross exposure was 123% onMarch 11
th
. The highest net exposure in the long/short equity book was 66% on February18
th
, and the lowest net exposure in the long/short equity book was 35% on March 10
th
.The allocations to our performing, distressed and mortgage credit strategies were virtuallyunchanged during the First Quarter.Firm assets under management at March 31
st
, 2011 were $6.2 billion.
Select
Portfolio
Positions
At our annual Investor Day in January, we told you that we were enthusiastic about equitiesin a market poised for a wave of corporate transactional activity on a scale not seen since2007. A combination of factors including record high levels of cash on corporate balancesheets, highly incentivized LBO firms, the return of cheap debt financing, and anemic topline growth is conspiring to make this an ideal period for the kind of special situation
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equity opportunities that are a core part of our strategy. The First Quarter of 2011presented a plethora of spin‐outs and merger investment opportunities in the US andEurope, and select examples of those in which the funds participated are described below.
Spin
Outs
Beginning in the Fourth Quarter of 2010, we started focusing on transactional activity inthe energy sector, specifically spin‐outs of embedded business units. Many of thesetransactions include use of an MLP structure, which confers tax advantages for investorsand therefore leads to higher multiples for the entity following the spin. These investmentsare based on the classic event‐driven recipe of unlocking shareholder value throughrestructuring, as opposed to directional bets on energy prices.Our current portfolio has six of these energy infrastructure spin‐out positions, with anoverall concentration of ~12%. Below are highlights of three of these positions. Whileeach of the below has its own unique elements and specific catalysts, the basic blueprintsare similar.
Williams
The Williams Companies is a diversified energy company with two primary segments:energy exploration and pipelines. It had long been seen as an attractive candidate for aspin‐off restructuring. In 2005, the Company had spun out a portion of its pipelinebusiness into a publicly traded MLP (Williams Partners LP – WPZ) but had never movedseriously to split the two businesses completely. However, in the Fourth Quarter of 2010,two important “tells” suggested to us that the situation had changed. First, the Company’slong time CEO, who had been opposed to pursuing a spin‐out, announced his retirement.Second, in November the Company announced the acquisition of some attractive acreage inthe Bakken Shale, an acquisition that we believed was at least partly motivated by a desireto improve the standalone investment appeal of its E&P business segment. We investedaround this time, and were rewarded in February when the Company announced it wouldsplit the Company via an initial IPO of the E&P business (selling 19% of that business to thepublic) in the second half of 2011 and then execute a full spin of the remaining 81% toshareholders in early 2012.Since our initial investment, prospects for the company and its valuation have continued toimprove due to factors including: 1) the recent IPO of Kinder Morgan, a similarly positionedcompany, which highlighted the value of General Partnership (GP) interests in MLPs, 2)continued execution by the WMB management team on additional midstream investments,and 3) improved liquefied natural gas prices due to strong chemical demand and higher oil
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prices. We believe that the shares remain significantly undervalued and have added to theposition.
El
Paso
El Paso is also a diversified energy company with the same two primary segments: energyexploration and production and pipelines. We purchased the position early in the First Quarter of 2011 on the thesis that it would follow the same playbook as Williams, and weregratified when management announced in mid‐February that they were open to exploringa spin‐out of the segments to enhance the value of the company and would closely watchthe performance of peers pursuing such strategies. We believe that the company’s sharesare currently significantly undervalued because: 1) disaggregating the affiliated pipelinecompany is complex since the company has a portion of some of its units in an MLPstructure, 2) analysts are overlooking the value of the GP interest, which, while small today,should see a significant increase in value as the MLP should grow dramatically over thenext 3‐5 years, 3) the company has several major pipeline products ramping up over thenext year, which we believe will substantially increase EBITDA, and 4) while many analystsconduct “sum of the parts” analysis, we believe they are flawed because those that primarily follow the pipeline business dramatically undervalue the E&P side of thebusiness, and those that primarily follow the E&P side undervalue the pipeline business.We see 40‐60% upside from the levels where we initiated our position.
CVR
Energy
CVR Energy has two assets: an oil refinery and a nitrogen fertilizer plant, both located inCoffeyville, Kansas. Each of these assets is benefiting from huge structural tailwinds, andthe Company is pursuing a spin‐out of the fertilizer business that will, consistent with thetheme described above, highlight the value of these assets. We originally purchased CVR inNovember 2010 on the belief that the Company would be an ideal spin‐out candidate,added to the position in a February secondary offering, and subsequently have purchasedadditional shares in the market.CVR filed an S‐1 for the IPO of its fertilizer business in late March. Based on comparablevaluations, CVR’s geographically advantaged assets, and the strong outlook for nitrogenfertilizer, we believe the Company will receive a robust valuation for these assets at thetime of the IPO. Additionally, CVR is pursuing an MLP structure for this offering, which webelieve will result in the fertilizer plant trading at a very high valuation due to investors’desire for yield in today’s low interest rate environment.
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