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S&P 500 CS Event Driven* 2011 First Quarter Annualized Return Since Inception 8.6% 19.0% 5.9% 5.8% 3.3% 9.9%
*CS Event Driven data reflects returns through February, 2011
The top winners for the quarter were CVR Energy, Technicolor, Williams Cos, NXP Semiconductor NV, and a short position in the Subprime ABX Index. The top losers for the quarter were Inmarsat PLC, Wells Fargo & Co, Accuride Corp, Short A and CIT Group. Gross exposure at January 1st was 141%, with the long/short equity book at 53% net. Gross exposure at March 31st was 137%, with the long/short equity book at 45% net. Peak gross exposure was 146% on February 17th, and lowest gross exposure was 123% on March 11th. The highest net exposure in the long/short equity book was 66% on February 18th, and the lowest net exposure in the long/short equity book was 35% on March 10th. The allocations to our performing, distressed and mortgage credit strategies were virtually unchanged during the First Quarter. Firm assets under management at March 31st, 2011 were $6.2 billion. Select Portfolio Positions At our annual Investor Day in January, we told you that we were enthusiastic about equities in a market poised for a wave of corporate transactional activity on a scale not seen since 2007. A combination of factors including record high levels of cash on corporate balance sheets, highly incentivized LBO firms, the return of cheap debt financing, and anemic top line growth is conspiring to make this an ideal period for the kind of special situation
equity opportunities that are a core part of our strategy. The First Quarter of 2011 presented a plethora of spin‐outs and merger investment opportunities in the US and Europe, and select examples of those in which the funds participated are described below. SpinOuts Beginning in the Fourth Quarter of 2010, we started focusing on transactional activity in the energy sector, specifically spin‐outs of embedded business units. Many of these transactions include use of an MLP structure, which confers tax advantages for investors and therefore leads to higher multiples for the entity following the spin. These investments are based on the classic event‐driven recipe of unlocking shareholder value through restructuring, as opposed to directional bets on energy prices. Our current portfolio has six of these energy infrastructure spin‐out positions, with an overall concentration of ~12%. Below are highlights of three of these positions. While each of the below has its own unique elements and specific catalysts, the basic blueprints are 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 a spin‐off restructuring. In 2005, the Company had spun out a portion of its pipeline business into a publicly traded MLP (Williams Partners LP – WPZ) but had never moved seriously 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’s long 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 in the Bakken Shale, an acquisition that we believed was at least partly motivated by a desire to improve the standalone investment appeal of its E&P business segment. We invested around this time, and were rewarded in February when the Company announced it would split the Company via an initial IPO of the E&P business (selling 19% of that business to the public) in the second half of 2011 and then execute a full spin of the remaining 81% to shareholders in early 2012. Since our initial investment, prospects for the company and its valuation have continued to improve due to factors including: 1) the recent IPO of Kinder Morgan, a similarly positioned company, 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
prices. We believe that the shares remain significantly undervalued and have added to the position. El Paso El Paso is also a diversified energy company with the same two primary segments: energy exploration 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 were gratified when management announced in mid‐February that they were open to exploring a spin‐out of the segments to enhance the value of the company and would closely watch the performance of peers pursuing such strategies. We believe that the company’s shares are currently significantly undervalued because: 1) disaggregating the affiliated pipeline company is complex since the company has a portion of some of its units in an MLP structure, 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 the next 3‐5 years, 3) the company has several major pipeline products ramping up over the next year, which we believe will substantially increase EBITDA, and 4) while many analysts conduct “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 the business, 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 in Coffeyville, Kansas. Each of these assets is benefiting from huge structural tailwinds, and the Company is pursuing a spin‐out of the fertilizer business that will, consistent with the theme described above, highlight the value of these assets. We originally purchased CVR in November 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 purchased additional shares in the market. CVR filed an S‐1 for the IPO of its fertilizer business in late March. Based on comparable valuations, CVR’s geographically advantaged assets, and the strong outlook for nitrogen fertilizer, we believe the Company will receive a robust valuation for these assets at the time of the IPO. Additionally, CVR is pursuing an MLP structure for this offering, which we believe 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.
The outlook for CVR’s refining business is likewise strong. The facility recently underwent an extensive upgrading process and is ideally located to take advantage of the oil supply/demand imbalance in the Cushing market. In short, increased supply of oil is flowing into Cushing, and there is presently inadequate take‐away capacity in this market. The result has been that WTI oil prices are at a large discount to oil delivered at other locations, creating the prospect of windfall profits for refineries in this region, as the competition in other regions must source higher‐cost oil. We think that this imbalance should persist for at least the next twelve‐to‐eighteen months (and quite possibly much longer). As a result, we are very constructive on mid‐continent refineries. Further, netting the value of the fertilizer spin, we believe we are creating the CVR refinery operation at a 50% discount to the mid‐continent comparables. Mortgages: ABX Since mid‐2010 we have been buying seasoned subprime mezzanine bonds (from 2004‐06 vintages), purchasing them at levels of ~$0.30‐$0.40 on the dollar. Our average bond that fits this theme has about 25% of enhancement and is about 17% thick, meaning that the attach/detach would be 25‐42% (25% + 17%) from these levels. In an interesting “pair” trade, we are shorting an index – specifically the ABX 06‐1 A’s – that we think is trading too rich (especially versus our cash bonds), highlighting our approach to exploiting pockets of value inside the $3 trillion US CMBS and RMBS markets. Each tranche of the ABX references 20 bonds. Of the 20 bonds making up the 06‐01 A’s, 4 bonds have already been written off, leaving 16 bonds. Of these 16, 3 are currently being written down and will be worth nothing, and we expect 5 others will be written down shortly. Of the remaining 8 bonds, we expect that 5 of them may get some principal back, but they are lower in the capital structure and more risky than the bonds we are currently long, and the last 3 will ultimately default but the timing of this default is unclear. The ABX presently trades at 26.5, setting up a very interesting relative value proposition versus our subprime mezzanine bond position referred to above. We think there is a good possibility that the funds will make money on both the long and short positions. Important Announcement Regarding Future Subscriptions Assets under management currently stand at approximately $6.7 Billion. Asset growth over the past two years has been a result of both investor subscription flows and appreciation of the portfolio. Periodically over the past sixteen years, the funds have closed to new subscriptions, and we believe we have reached a point when it is once again
prudent to close the funds to new relationships effective June 1st. We will continue to closely monitor our AUM levels and will provide appropriate notice should this position change. Personnel Update We are pleased to announce four additions to our research team: Munib Islam, who was an analyst and portfolio manager here from 2004‐2008, is rejoining Third Point as Head of Equities Research and will sit on our Risk Committee. Munib spent the past three years at Highbridge Capital, where he was a Managing Director and PM of Highbridge’s European Value Equities fund. Before coming to Third Point, he worked as an Associate at Oak Hill Capital and at Lazard LLC. Munib received a BA in Economics magna cum laude from Dartmouth College and an MBA from the Graduate School of Business at Stanford University. Mandeep Manku will continue in his role as Head of European Equities. David Bell has joined Third Point’s Asset Backed Securities team to focus on our mortgage and other ABS investments. Prior to joining Third Point, David was at Morgan Stanley where he traded both mortgage and non‐mortgage securities. He received a B.S. in Finance from NYU Stern. Marshall Bush has joined our Technology, Media and Telecom (TMT) team. Marshall has extensive hedge‐fund experience, including at SAC capital and its affiliate Altair Capital, and most recently at Exis Capital. He was also a Vice President and Portfolio Manager at JPMorgan, where he managed technology investments on their proprietary trading desk. Marshall graduated from Dartmouth College with an A.B. in English. Paulo Passoni will join Third Point in May to focus on investments in Latin America. Paulo most recently spent five years at Eton Park. Previously, he was an Analyst in the Mergers and Acquisitions Group of Morgan Stanley in Sao Paulo, Brazil. Paulo was raised in Brazil, and attended Fundacao Getulio Vargas University. He received an MBA from Harvard Business School as a Baker Scholar, and also holds an MPA from Harvard’s John F. Kennedy School of Government. Additionally, as we announced at the annual Investor Meeting in January, Jim Carruthers and Ian Wallace have been promoted to the newly created position of Partner. The creation of these positions is reflective of their success in their senior investing roles. Congratulations Ian and Jim for these well‐deserved promotions.
Thank you for your continued loyalty and partnership. Sincerely, Third Point LLC
_____________________ The performance data presented represents that of Third Point Offshore Master Fund L.P. All P&L or performance results are based on the net asset value of fee‐paying investors only and are presented net of management fees, brokerage commissions, administrative expenses, and accrued performance allocation, if any, and include the reinvestment of all dividends, interest, and capital gains. The performance above represents fund‐level returns, and is not an estimate of any specific investor’s actual performance, which may be materially different from such performance depending on numerous factors. All performance results are estimates and should not be regarded as final until audited financial statements are issued. Exposure data represents that of Third Point Offshore Master Fund L.P. While the performances of the Funds have been compared here with the performance of a well‐known and widely recognized index, the index has not been selected to represent an appropriate benchmark for the Funds whose holdings, performance and volatility may differ significantly from the securities that comprise the index. Investors cannot invest directly in an index (although one can invest in an index fund designed to closely track such index). Past performance is not necessarily indicative of future results. All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. All investments involve risk including the loss of principal. This transmission is confidential and may not be redistributed without the express written consent of Third Point LLC and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential offering memorandum. Information provided herein, or otherwise provided with respect to a potential investment in the Funds, may constitute non‐public information regarding Third Point Offshore Investors Limited, a feeder fund listed on the London Stock Exchange, and accordingly dealing or trading in the shares of that fund on the basis of such information may violate securities laws in the United Kingdom and elsewhere. _____________________
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