Yet Another Value Podcast - James Elbaor is investing in Dan Loeb at a Discount $TPOU

Episode Date: June 17, 2021

James Elbaor, founder and CIO of Marlton Capital, discusses his investment thesis for Third Point Investors (TPOU; trades in London). TPOU is a closed-end investment company that invests into Third Point, Dan Loeb's hedge fund. TPOU consistently trades at a discount to NAV, and James thinks the combination of Third Point's investing prowess and TPOU's innovative buyback/tender mechanism creates a unique opportunity to generate attractive returns.James' Twitter: https://twitter.com/jameselbaorAsset Value's May 26, 2021 activist letter to TPOU: https://www.assetvalueinvestors.com/content/uploads/2021/05/AVI-Open-Letter-to-TPIL-Vote-Co_2.pdfChapters0:00 Intro1:30 TPOU Overview3:55 Why invest in TPOU instead of Third Point directly?7:00 Third Point's return profile, past and forward looking14:20 TPOU's discount and unique tender mechanism17:30 Laying out a base case IRR to a potential March 31, 2024 tender27:30 Pushback #1: Doesn't this deserve a discount given the fee structure?34:25 Pushbuck #2: The corporate governance issues raised by Asset Value's letter43:30 TPOU tax consequences for U.S. investors45:05 Final thoughts on TPOU50:00 Quick hit on Third Point / Vivendi / PSTH / UMG

All right. Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm happy to have James Elbar. James is the founder and CIO of Marlton Capital. James, how's it going? Good. Good to talk again, Andrew. Hey, it's good to having you on here. Appreciate you coming on. And let me just roll right into starting the podcast the way to every podcast. That's by pitching you, my guest. You and I actually first started chatting. We've got a couple mutual friends. Which one of the mutual friends introduced us is a little bit of a debate. But I started chatting a few weeks ago about my current obsession, Persian taunting, P-S-T-H. And, you know, I thought I had that story nailed down. I was like, nobody else knows what's going on. And then you and I talked. And I was like, oh, my gosh, James' work on this. He has filled in some dots. He's talked to some people I hadn't even thought to talk to.

I was just really impressed by your overview of the story. And then you started talking to me about some other names, including the name we're going to talk about today. And I was like, I just need to have James on as a guest. So I think all the listeners and viewers are going to appreciate real quickly how much you know the story and how much work you've done. So I've enjoyed talking to you, excited to have you on the podcast. And that pitch out the way, let's turn to the company we're going to talk about.

It trades in London. The company is Third Point Investors Limited. The ticker is TPOU. So I'll flip it over to you, James. Why is TPOU so interesting? Great. Thanks, Andrew. This has been fun.

Thanks for the kind intro. that is so very, very kind of you. I'm so glad to be talking with you and everybody else who's listening. All right. So for those that don't know, third point investors limited TPUU trades in London to closed an investment company registered and incorporated in Guernsey that's managed by Dan Loeb. Specifically, third point, the hedge fund is the investment manager of the fund. So what I think is actually pretty important to just highlight right off the bat is that the fact that some people often compare this to our mutual interest in Persian square holdings or Persian Square Tontai, but specifically Persian Square holdings. And I think it's important

to mention that TPUU mandate and structure is really different. Okay. So just to get in the weeds here for a bit, although I know everybody wants to get in the weeds, TPUU is a feeder into a master fund. Okay. So the company TPOU, which you or I would be investing in, invest all of its assets into third point offshore, whereas Persian Square Holdings makes direct on-bound sheet investments into underlying securities. That's to say TPUU is a limited partner in a larger fund, which is third point offshore. So your investment is man is governed by an LPA or a limited partnership agree then. So that's that's first. Then you're talking, getting structure out of the way, I think what's going on here? So I'd like to, if you're open to it, kind of talk about a few things.

First, fund underlying performance and then talking more around the discount and the control measures and the really cool, wonky stuff that's happening there. I think that would be perfect. And if I could flip in two questions and you can answer them in your spiel, I guess the two things we've talked a little bit, and I'm sure most listeners know, but if we can just hit on, you know, kind of who third point is and what their track record is at some point. And then you mentioned how this is, you know, Persian Holdings, PSH, which you and I have, you and I are interested in, that actually has assets and invests into stocks directly, whereas TPUU, as you said, it invests into the fund.

Since it trades at a discount and we'll talk about the discount, I do wonder if you could address kind of a silly question and say, hey, why would someone choose to invest in third point directly versus TPOU or vice versa. And you can address those at any point, and I'll come back to them if you don't hit them in your thing. Yeah. So I think that's a great question. And high level, many people just cannot access the third point in general. So right now, the third point minimum that is stated actually throughout the LPA, which is part of the third point investment, right, because the company is invested in third point. The minimum investment at third point, right now is 10 million. And I believe it's soft closed. But putting the whether or not it's soft

closed or not aside, we know that unless you're going to invest a minimum of $10 million, you can't invest directly into the fund. And why is that important? Well, it's important because you would be investing directly into the fund at net asset value and then were you to redeem per the liquidity terms, you would be redeeming at the ending net asset value. There's no discount in between. Since we're shareholders in a company that is then investing into third point, their nav will move like the funds net asset value. So as the fund performs, net asset value will move up and or down, commasurer with performance. And then we can sell our stake in that company. And by selling our stake in that company, you have whatever people want to buy that at.

and most people want to buy it at a discount. So it's really common that these trade at discounts, and I think, you know, Andrew, I'm curious with your thoughts on this, but I've always underwritten these investments as if you enter at a discount, you're going to exit at some type of a discount. The thesis that this is going to close to zero or trade at a premium, I just don't think is really going to happen as much as I think Dan Loeb is an investment genius. I just don't see how this closes out. Anything will totally close the discount to absolutely zero.

I just don't underwrite it in that way. But there are a lot of interesting mechanations involved in really cool financial engineering happening at the company level that will help close and be really accretive to investors. No, I think that's perfect. The two things I'd add there is, I agree with you. If you're buying something at a discount, even if you think the manager doesn't deserve it. You kind of don't baking it in the discount closing at all when you invest. But you do maybe bake in if the investors align with you, he can do things to attack

that discount or to grow nav by buying that shares at a discount. And then two, the only other thing with third point, and I'm sure we'll talk about how they're increasing their mandate for private investments at some point. But you could see a scenario where, you know, third point and all these guys have made some buzzy early stage VC investments. If they did it, you know, if they bought Stripe at $500 million and strike grew to be $100 billion. Yes, Nav would explode. But I could see a scenario where there's, it trades at a premium to NAF because people are excited to get at a private that they're the only way to play at some point. Right. So I think the natural question, right, that people have or say at least the feedback

that I've gotten, no offense to Dan Loeb if he is listening, but people have said, why third point? You know, aren't they huge? Aren't they annualizing at some low number? So let's take a step back and think first about performance. So since inception in 1996, third point offshore is annualized at 15.1%. You compare that to 9.3% on the S&P 500, and that's a 9.3% total return. So it's dividends reinvested. So you've already, so you, bar none, I think you can't make the argument that Dan's not a great capital allocator. He is. But let's zoom in and kind of say, all right, well, what's happened over the last five years? your investment period isn't 25 years plus. So if you go back to May 2016, you're looking at

annualized performance of 12.8 or 13%. Okay. Much larger funds, not to name others, but funds with $40 billion of assets under management, are annualizing like 9.2. So I already think that you can see that Dan can manage a large asset base effectively, even at $17 billion, and still throw up double-digit numbers. So what's interesting taking this forward is why are we talking about performance is I really believe that performance is going to dramatically improve, and people are going to be really excited about what the next three years or the next five years of annualized performance looks like. And when we dig into the numbers, I mean, There's a couple reasons why that I'll highlight.

So first, Dan is significantly more involved in the investment underwriting, starting in May of 2020 than he was before. It's not to say that he never was really involved. It's that he shared the co-investment seat with Mnib Islam, who had worked at third point for 16 years. This guy started there as an intern at Stanford Business School. He's left, and that has left Dan fully involved. charge as full CIO, his hand is right on the rudder there. You're getting pure Dan Loeb capital allocation, which I think is really exciting. And not just do you see that from what's happened

at management, you can see it in the risk reports. Okay. So the risk report that we have going back from July of 2017, shows the fund running 145% gross, 88% net, with 8.5% in this other bucket, which would be private investments in global macro investments as well. And in that year of July 2017, the year-to-day performance was about 11.7%. And just to July 2017, you chose that because that's when Dan was kind of sharing the co-CIO responsibilities. Exactly. Exactly. So now let's take a look at what's happening in May 2021. They publish the risk reports on the website. The website's a great resource for investors that are interested in investing. But looking at the risk report in May 2021, you're looking at a fund that's running now 200% gross, 118% net, and 12% in this other bucket, which would be private investments. And the year to date return is, roughly 15%. And as you alluded to already, the fund is now offering this really interesting tender offer. It's going to happen three years from now. We'll talk about that. But in order to

offer this tender offer, what the company, which we would be invested in, third point limited, has done, because they've agreed to increase the private investment exposure to 20%. So we already know that this 12.3% other that's already up from 8.5 is going to go to 20. And I think that that's really exciting because then that begs the question, well, what are the private investments? All right. Let's just pick a handful of them. Sentinel 1. He invested at $73 million valuation. It's still privately held. We know it's worth significantly more than that. We've got an investment in Epic Games. We now have an investment that's going to close this week per media in Block 5. which is really exciting.

Zach Prince's CEO there is incredible. Really excited about that. And then one can just look at the big wins that they've had. Big wins in Upstart and SoFi. Third Point initially invested in Upstart at $145 million valuation. It's currently a $9.2 billion market cap. And he didn't put much money to work. So just think about this.

You're talking about a multi-billion dollar fund investing as a minority investor in $145 million valuation. Think about all the growth that you've seen there. her. And I mean, that's not even to mention like the tax defer the tax deference by just letting that compound. And I correct me if wrong. I think Upstart is the obviously it was a small initial investment. I think it's the firm's largest holding right now. It's growing so much. We're talking about it's not a grand slam. It's one of those Warren Buffett. It's a grand slam that scores a hundred runs type hits. Yes. And the great thing, again, I think I wear my heart, I wear my heart on

my sleeve on this investment. I just really love this investment. I love the transparency that Third Point and Dan are giving investors here. There was a third point investor call for third point limited investors. If you own one share, you can join these calls where Dan talks about the investment in Upstart and how if the investment in Upstart was essentially utilized all value of the firm. So the firm not only invested in Upstart, they also underwrote loans at Upstart, they also helped with the IPO at Upstart, advised the IPO there. He's really using the whole whale here, that is third point, to help grow these companies. I just think it's really exciting. It's a trend that you're seeing already with D1 Capital, Tiger Global, Maverick Capital is now

offering this. But what I think is exciting. for minority investors or smaller investors is you can get access to that type of an investment through third point offshore. And in addition, get access to this really cool financial engineering mechanization that's about to happen that's going to happen three years from now where you can really accrete serious value here. So I think there's two places I want to take the conversation. A, I want to talk about the, I want to talk about the really interesting.

hosting 2004-27 exchange mechanism that I think is a really quirky piece of this investment thesis and it's event-driven. It's all this type of stuff. And I also want to provide some pushback because I'm with you. I love these great managers, you know, Persian and third point are probably the highest level that trade offshore and their funds trade at a discount NAV and their funds are closed and I know tons of like institutional investors who would love to invest into their funds at NAV. And it's like, oh, I can just go buy 100 shares, get liquidity whenever I want, and buy it a 10% discount. I love that. But why don't we talk about the event mechanisms first, and then I'll provide some pushbacks to an idea that I admittedly very much like.

Got it. Great. So let's talk about a little bit about that discount, right, where the discount currently, as of today, the stock closed, we'll pull up my model here for everybody, stock closed at 2570. Yep. It's U.S. dollars. So that's a 16% discount to a stated NAB of 3057. Yep. All right. So you're saying that's 16% discount.

We go back. We looked at the average trailing discount over the last five years. And it's trailing because I think what people should know is you're not getting NAB every single day. You're getting NAB on a weekly basis. Yep. So when I'm calculating what the discount to NAB is, I'm using a trailing basis. So that discount's going to fluctuate every single day until you get the next NAV report, which will be that week.

And then we reset where we are. Do you see what I'm doing there? Oh, yeah, yeah, yeah. Okay. I just want to be clear so everybody knows how I'm calculating it. So the average trailing discount for the last five years has been about 20%, 19.6%. Let's take out COVID, which is March, when everything went haywire. and you're looking at an average of 18%.

And we think probably 15% is probably the fair value of where the discount should be. But put that aside, we can put some parameters here. Over the last five years, you're looking X the craziness in 2020. You're looking at a minimum of a negative 10% discount to a maximum of negative 27, which is kind of the band that we're in. All right. So putting that aside, should we talk about the cool exchange offer? Yeah, yeah. Let's do it. All right. So you have a pretty cool exchange offer where you've got two tender offers for 25% of NAF at a discount of negative 2%.

If the six months periods ending March 24 and then 2027 respectively, the average discount to NAV is greater than negative 10 and negative 7 respectively. So let's just talk about the first tender offer, if you mind, which is in the next three years, two, really two and two-thirds, March 24. All right. So what this means is come March 2024, end of March 24, if the average discount to NAV is greater than 10% third point

will tender for 25% of shares at negative 2% of NAF I think that is super exciting in and of itself and if you want maybe you tell me Andrew

we can walk through kind of the sensitivity analysis and talk about what an IRR looks like yeah why not let's go for it okay so the way I've done my math here is we're looking, let's enter today, 25, 70, a share, right? Nav is at 3057, so it's negative 16% discounts nap. All right. So what do we think performance is going to look like over the next three years? Let's take what the average has been. So the average has been 12.8. I'm not trying to

make a macro call here, but who knows, you know, with what just happened today, with rates, you know, if we have another 2015 and we have this rate temper tantrum and equity returns are low, let's just say, all right, we're going to do what the average has been 12.8%. Which, by the way, doesn't even include the accretion of the share bybacks. So just saying fund NAV X the accretive nature of the buybacks, you're looking at 12.8%. So that means if NAV grows 12.8% annualized, then by March 2024, we have a NAV estimate of $41.91. If you put a discount of negative 15% on that, all right, that puts the price at 3550. let's say that everybody, everybody participates in the tender offer.

So everybody then gets cut back to their pro rata, which would be 25% that they can tender at max. You're looking then at an IRR of 14%. So let me just make sure I summed up the thought right, right? Right now we're buying at 2570, a little bit over a 15% discount to NAF. what you're saying is, hey, if third point can continue to compound in, let's call it just the low teens, continue to compound nav at the low teens, and we're not factoring in any accretion from buying shares at a discount to, you know, boost up NAB. If they can continue to do that, the shares kind of traded a similar discount. And at the end of this, you're able to tender a quarter of your shares into this at a 2% discounts on AB, which is the structure that they put in place. If they do that, your IR is going to come out to about 11% is the math that you just watch. me through. 14%. 14%. I dropped off 3%. I was actually wondering my head. I was like, didn't NAV compounded 12 or 13% of that? Okay. 14. And let me take this one step further. I don't want to interrupt you, but I want to tell you

something else. Let's look at performance in 2020. Okay, performance at 2020. The hedge fund, okay, the hedge fund, third point offshore, returned 20.5% net of fees. Nev grew 23 0.8% because he was buying back overall basically $50 million worth of stock at a 24% discount to net net asset value. Let's look at 2021. Go ahead. Oh, I was just going to, and correct me if I'm wrong. I mean, obviously that performance in 2020 was great, but I think the more impressive part is I believe his drawdown was much, much smaller in March of, in kind of the, the big pieces of the pandemic. Oh, yeah. I mean, he wasn't he wasn't like others. who just totally missed it.

He had a drawdown, but he didn't have a market drawdown. And he rebounded quite quickly. But like, let's look at 2021 so far. Nav fund. So let's look at the fund first. The fund is up 14.8%. Net asset value is up 16%. Because something that we didn't even talk about is that they're conducting a three-year

share buyback program right now. It's a $200 million, three-year share-bu back, buyback program. So far, you know, last year, they repurchased 3.6 million shares at a total value of 59 million at an average discount to nap of 24. This year, this year, they're on track to buying back $100 million worth of shares. So that's going to be two to three percent of accretion for free. And just so everybody knows, this is about an $850 or $900 million market cap vehicle. So when you're saying they bought 60 million shares back last year, that is a, it's, you know, more than 5% of shares outstanding. So this is not a token buyback. That is a moderately aggressive buyback. Yeah, it's a significant buyback. There's one other piece of the story that I wanted to ask you about there. So at the end of this, assuming that in March 2024, assuming shares are still trading a discount of more than 10%, they're going to tender for 25% in that. And one of the things you said in there that I thought was extremely conservative is you said, Let's just assume we tender all of them and we only get 25% because everybody tenders all their shares.

And I think that's probably too aggressive. And you can tell me if I'm wrong because Dan Loeb and third point, I believe combined own about 15% of the stock here. So you would have to assume they probably don't tender and probably there are some other shareholders who don't tender too. But if just those you don't tender, you're going to get more than 25% of your shares accepted. Let me point out one other thing that's a bit that's a bit nuanced and kind of just not say that it's stupid. But I would ask anybody that's even us, okay, so we own shares, it's sitting in our interactive brokers account. The annual meeting is in July. Nowhere have I been prompted by interactive brokers or actually other brokers that I've asked to even vote on this annual meeting.

I'm going to have to call up IB or actually call up the share registrar, which is share Claire, and log in my vote, which is obviously in favor of this tender mechanism. But what that indicates to me is I actually agree with this. you, I don't think that everybody's necessarily going to tender or even realize that the tender's happening. So if you change the math just a little bit, let's say we tender 35% of our shares. Well, then the IRA you're looking at a 16%. That's a 16% IRA on a fund just to be clear that's only going to annualize at 13%. And the remainder and the stuff. And the stuff, is still trading at a 15% discount.

So even if you go to, let's say, a 10% discount to net asset value, well, now you're looking at a 17% IRA. Now stuff gets to look crazy interesting. And there will be maybe a March 2027 retender. And we haven't factored in anything. And you can't factor in anything, right? But there's always the possibility. Like if he's doing a lot of these privates and his recent history showed, I'm a lot of

I think he's at least good at these privates. And if one of them hits, I mean, it could add a pretty significant amount to a pretty significant amount to the share price. So yeah, well, that's why I love these things, right? Pershing, Perjian, third point, a couple others. You get access to the best investment minds out there and you get access to them at a discount. And if they can continue to compound nav, it's going to work.

And that discount just gives them extra ways to compound nap. Is there anything else on the event side you want to talk about? Because I do want to provide some push guys. because there are pushbacks. I do you think there are risks here? Yeah, and I would love to hear here and address those. What is to say? I mean, anybody can do a sensitivity table.

I think the sensitivity math just shows if the discount's lower, the juice is even better. And even if the discount decreases to, let's say, like, 18%, you're still looking at a double-digit IRR. Granted, the double-digit IRA is much lower. You're looking more like 12%. Right? And I think that that's that's fair to argue as well. The only other event that's actually pretty cool is they're offering this even new mechanism, which happened yesterday, which is to say, look, if you're a large institutional investor with $10 million worth of notional shares, trading right now to 15% discount to NAF, will allow you to invest directly. we'll do an exchange program. So it's not a buyback. It's not really accretive to investors,

but it's an exchange program where you can just directly invest into the fund at a negative 7% discount to NAV, which is hugely accretive for investors that are trading at that level. You're trading off liquidity, right? So now you're subject to the fund liquidity, which has a quarterly investor level gate. There's other considerations to think about. But I think what's cool about that is it takes, it gives the option for the, large institutional investors that might be concerned about this tender offer or about this tender offer or want liquidity sooner, here's a solution for those investors to get those investors out and get those investors happy and leave the other investors that want to stay and also creates more

buying, creates more pressure, right, where those investors aren't selling huge chunks of stock and big discounts that can keep the discount pervasive. But again, I've always under written these is you enter negative 15, you're going to exit at negative 15. And what's, what is the accretion of the buyback program and or any tender offers that they're doing? And I think the, I think the big takeaway and what got me really excited about this is this tender offer is really well thought through. I give like major kudos to the team at third point and then also the board at third point offshore for coming up with a mechanism that I think really incentivizes people to be a long-term investor over three years. And if you're a fund investor like we are or others that

are listening, well, now your carry is being, at least so far, as being treated as long-term capital gains because it's a three-year holding period. I think there's a lot of really cool stuff that's going on here. But all right, fire away, back, pushback. I'm ready. But let's start with the simplest one, right? And this trades, this is a pretty softball first question, but this trades at a 15% discount an app. And, you know, I guess my first thing, would be, hey, that probably makes a little bit sense, right? Like, the management fee is 1.25% per year. Incentive fee is 20% of NAV. You know, most things with that type of fee structure, you know, I go back to Pershing Square or just close in funds in general in the U.S. are going to

trade at a discounted nav because those fee structures are, it's a lot of fees. Dan Lowe's probably worth it, but it's a lot of fees. You can't really easily break that, get out of that contract if the manager goes crazy and just tries to suck all the value for himself. So that would probably be my first pushback. Yeah. And I don't disagree. I think that anybody that gets in this, huh? And I say this all the time because I hear people say, oh, you're getting, you're missing

the forest, not you, Andrew, but others, I think, are missing the forest for the trees. If they think, oh, I'm getting into third point at a negative 15% discount to NAV, huh? And this is going to go to zero, huh, to basically at par, huh? I think that that's wrong. And people need to know, look, where are these ranges? Okay, this is traded as low as you know, negative 27, even as low as negative 43 in March. So you really kind of had to stomach some of this. But it's very similar to a multiple, right?

It's no different than a multiple. If you're saying you're buying something at seven times EBITDA, you should probably assume that you're going to exit at seven times EBITDA and or the multiple is going to expand or contract during that time. The discount's the same. One thing that I think that I didn't even highlight, but is really important. Again, it's really wonky. It's really nuanced. Let's talk about performance, right, and the high water mark. So if Third Point has a drawdown and you invest into the fund, and by the end of the year, because that's when these high water marks are struck, he is underwater, you have a what's called a modified high watermark where Dan is going to have

to do over 100% not only make up your loss, but then some before he takes an incentive fee. So actually what you could see is even greater outperformance because you're getting the management for free, net of the management fee. And the management fee is almost getting covered by the fact that you have a share buyback program. That's highly, so it's a really one. donkey thing to talk about, about getting in below the high water mark, but you can. And I would say if you see this vehicle trading underwater, meaning net asset value on a year-over-year basis,

is, and when you say year-over-year, you've got to look at, you know, December 31st, the previous year, is trading, you know, in September, October, November, negative 5, negative 10%. I'm backing up the truck, because now I know that next year, her might perform. Dan's going to have to work hard and or in that quarter, Dan's really incentivized and the team there is really incentivized to really get performance up, huh, so that he's not below his high watermark. Is third point the fund, are they paid, are their management fee for TPUU? Is it on their NAV or is it the NAV for the fund they're invested in, right? Because if it's on NAV for the fund, then Dan doesn't get the credit for the buyback, which is good for us.

But if it's on the publicly traded vehicle, Dan gets credit for the buyback, which may be incentivizing to go after the buyback harder, but probably makes it a little bit easier to get that incentive fee. Does that make sense? Yes. That's a great question. I believe it's at the fund level because we're an investor in the fund. So third point offshore is an investment in is a limited partner in third point, essentially. So it's whatever their fund investment is. And that brings up another, again, like you got to read the footnotes here as to what this stuff is talking about, but they're suggesting taking on debt to do gearing, essentially a credit, a credit facility. And the idea of the

credit facility is to facilitate the share buyback, because what they're doing now is they're redeeming from third point on a quarterly basis, taking the cash that they've redeemed. You can see this in the annual port and buying back shares, which makes a lot of sense when third point the fund is, let's say, doing less, performing less than the net, the discount to NAF. That makes a lot of sense. You're trading at a 30% discount, even if third point's putting up 15 or 20% annualized with no risk, it's actually better to go buy back shares, even though both are great investments. A hundred percent. Yes, you just hit the nail on the head. What they're suggesting now, though, is instead of doing that, they'll take out a debt facility and they'll use debt,

which is actually going to be even cooler in my perspective, because that's going to juice returns even more. So that's just saying, okay, great, now we're not even going to redeem our share, our certain amount every single quarter to go ahead and buy back shares. We're going to take on debt, which then is just going to juice the returns. It's going to, it's basically going to juice the volatility. So that's all to say if you're underwriting this based on, the previous historical performance of 12.8% annualized. I think just look at the risk report. He's taking on more leverage. The fund is thinking about taking on more leverage. Basically, the standard deviation is going to increase. So the range of outcomes will increase. And I just think

they're going to be positively skewed. You know, I think a lot of investing is pattern recognition. I think it's building your conviction in things you like and pattern recognition. And this reminds me so much of, to bring everything back to one of our favorites, Persian Holdings, PSH, the London trade. You know, in 2017 or 2018, you get a bad couple of years. Valiant was bad, a couple other bad investments. And the fund, let's say the high watermark for PSH was 30 and it was trading at 20 and NAB was probably 25. And I remember looking at this and I wish I had swung so much harder because I was like, hey, PSH is levered. So if he does better again, they had some debt at the PSH level, you'll make a lot more money because they're levered. B, he buys back shares,

so you take advantage of that. And C, everybody says, oh, it's a full expense load. You've got to pay the incentive fees. I was like, guys, high watermarks 30. We're buying at 20. Like, it's got to go up 50% before the incentive fees even are a concern to me. Like, yeah, I'll worry about it then. But if I'm up 50%, I'm going to be pretty happy either way. So it just really rhymes with that. Yeah. Let me provide a more fulsome pushback. So asset value, a couple weeks ago sent a letter. I'll be sure it's included in the show notes for anybody who wants to read it. And, you know, I've been following third point out the corner of my eye, but I really started brushing up on this when you said it. And I was very surprised by some of the

stuff in Asset Values Letter, you know, in particular, and I do find this sometimes where you've got an activist and then they've got a controlled vehicle and they kind of, hey, you know, corporate government's good for everyone else, but I don't like it so much. But some of the stuff and Asset Value's Letter were pretty eyebrow raising. You know, he mentioned how the company put out a transcript of their annual meeting, and they actually cut off the last five or ten minutes so that people couldn't hear what Dan Loeb said. They said, you know, quote from massive value, given Mr. Loeb's demonstrably unveiled contempt for shareholder rights, I think Loeb talked over the TPOU's chairman, and Loeb said, hey, look, I know everybody's fresh here by the

discount, but most of you bought out a bigger discount. The funds performed well, and yet it's trading for a smaller discount than when you bought it at it. So kind of shut up and be happy, is basically what he was saying. And I was very surprised by that. And, you know, again, this is going to be a controlled vehicle. Maybe somebody could come in, buy up 50% and go real access on it, but I don't think that's going to happen. So I was just surprised by the level of contempt for minority investors and it raised a big red flag there. So how do you think about kind of the allegations asset value throughout there? Yeah. So I spoke with asset value a few days ago. And just kind of just we just talked through both of our thesis as to how we think about about the belt. I appreciate the letter that was put out. because I think all views should be respected. I was on the call. I don't remember it.

I don't remember Dan saying things like that. However, to be fair, I don't remember a lot of over an hour long call. And so to try and decide what was cut off and what wasn't, I just don't know. So let's say I trust what asset value says happened at the end of the call. But I don't remember that. Outside of that, let's assume that it's true. I think both points, both sides have good positions, and both are worth noting. So on the asset value side, look, all the fund does trade at a discount and F, it does.

That's a fact. And things need to be done to control that, to control that discount from getting out of control. To Dan's point, though, part of the focus really for Dan, and using Dan's time on a call is Dan is the manager of the fund. So Dan doesn't run the vehicle, which is conducting buybacks or tender offers. Dan is just the investment manager that is running the fund of which you're invested in. And the focus on the questions and the use of time for Dan really should be, I think, around performance, which is, I think, the point that he was trying to raise when I was reading the asset value letter.

her conversely to that yeah anybody who gets in this needs to understand it's a control vehicle there is some shareholder entrenchment um that that skews towards third point and so you have to trust in that and know that going in think the other thing to note that is only a drawback i mean it's a difference but it's a drawback and i think people should just kind of take a step back and view it this way third point offshore is a product it's a vehicle it's a product offering by third point for investors, which is different than Persian Square Holdings, which I view as Bill's holding company. The hedge fund is less of Bill's view at work. He's already said it multiple times. And I find Bill to be very transparent as well, which is why I'm invested in that as well.

So this is Persian Square Holdings is his vehicle. Third point, I don't want to put words in third point's mouth or Dan's mouth, but my. My personal viewpoint is this is a product, and the investment manager is really Dan's focus, which is a lot of different products spread over a handful of different funds. All funds basically track the master fund except for a credit offering that they offer, which is significantly smaller. Everything really tracks the original third point LP fund, including the offshore fund that is in this.

But I think of this publicly listed vehicle as a product offering of third. third point. So if you were to ask me what happens 10 years from now, I would say I'm almost less certain that this vehicle even is around 10 years from now and you actually see this completely closed as a discount to NAB where it goes to zero because they just retire the vehicle in some way. So I guess what happened there is. Yeah. So kind of like, you know, this thing goes through March 20 March 2024 they do a tender for 25% of their shares March 2027 they do a tender for another 25% of their shares and then after that they kind of look around you know assuming it's kind of base case and everything happens they look around

and say oh well now third point owns 40% of the shares outstanding this is a 400 million dollar vehicle you know yeah it's done well but why are we even bothering to have this with the headache of this let's just liquidate this thing and people can invest in it directly is kind of what you would think happened to be fair because I think somebody should at least push back on me on this. Look, given the offer the third point just did for the exchange at negative seven, even if you get to that point post-March 2027 and third point and it's really the fun because remember the company, it's not the fun, I want to be clear, TPUU is independently governed.

It has its own board, decides that they don't want to have the fund anymore. her doesn't necessarily mean that they're going to give an offer for people at you know net huh they might give an offer for people of negative seven just like they before so you know you can't always just underwrite this as saying oh i'm going to get into negative 15 and then they're going to close the fund and i'm going to get nav like you might not you the offer might be you could see scenarios that are that are i don't want to use the word shareholder unfriendly because negative seven is better than negative 15 right now but would not make shareholders particularly happy given the corporate governance setup that it is right now. But again, I think the third point has been very shareholder friendly, given what we've just

seen, a really great offer for people that have $10 million plus worth of notional investment to invest directly into the fund, a share buyback program, and now two tender offers that are really designed for long-term shareholders to stick with the fund. And then also you'll manage the discount to now. If Third Point has that exchange offer that you've mentioned. So not the March 2024 tender, but the exchange offer where if you own 10 million shares of Third Point offshore, you can switch them into Third Point, the fund, actual fund investment, at a seven or seven and a half percent discount, right? So right now Third Point trades at 15 percent discount.

Let's say I searched in my couch cushions and I came up with $10 million, bought $10 million of share. is a third point at a 15% discount, flipped them into third point, the hedge fund at a 7.5%. So I went from 15% discount to a 7.5% discount. Who captured that other 7.5% discount? Is that accretive to the other TPU shareholders? Is third point the master, the fund as a whole capturing? I'm just trying to think through who captures that. Who captures? I think it's just lost value, right? Because it's not a share buyback. It's just a tender and it's an exchange ratio. So they're just saying, okay, you know, like, let's think about this, right? So I have $10 million.

It's trading at a 15% discount to NAV. I'm buying it at negative or negative 16% discount to NAV. What third point is saying is we will take 93 cents on the dollar of NAV, huh? And that's going to be your investment. So your investment into third point will be 93 cents. Now, you've captured value because you went from negative 15 to 93, but that remaining seven, I think, just disappear. I think it might go to a third point, the fund. I think it might go to all their LPs because I'm guessing what happens is you're exchanging one share of TPOU at a 15% discount.

I'm not sure. I'll have to think about that. But I was just wondering, because there is some value loss there. And it's one of those classic, like, wordplay things. You remember, like the waitress gives you $30 or something? I'm just wondering where that 7.5% is going. Yeah, it goes, you're right. There must be, there needs to be, there is some academic function as to where it goes

because it doesn't totally just disappear, right? It's not lost energy. Let me ask you two more quick questions and I'll let you wrap it up. You're, you're in the U.S., I'm in the U.S. This is a London domiciled, London domiciled fund, TPOU. Any tax issues you're aware of with investing into this? Is it a PFCC? Yeah, you have to essentially email IR where you will get treatment as if it's K1.

Okay, cool. You'll see, and then they'll tell you what your per share portion of taxes are. And then you make that election to get treated in that way. But my experience has been that third point has been fairly tax efficient, but it is not, let's say, like other funds that are law. super long biased and have extremely long holding periods where they were significantly more tax advantageous than, let's say, third point. But I, but from my experience from last year and the year before, our taxes were negligible. But that's actually something that could, that can be looked up. And TPUU, how do they account for like, so I guess it's, I guess this kind of falls into the

tax question, but upstart, you know, there, there are cost bases in that, which is one of their largest position now. The cost phase is pretty much zero. When they report any V, I don't think they have any holdback for a tax liability for upstart or anything. So that's just going to flow through through the K-1 at some point when they sell it. Yeah, that would. That would just flow through. That's my understanding. Last question on third point for me, and then I'll let you wrap it up. They've got a couple big swings right now. I think their largest positions are Disney, PGE, the Chapter 22 bankrupt California utility, Upstart. They've done some stuff with Intel, maybe one or two others I'm missing.

Are there anything in their portfolio that you're particularly bullish on? Are you just more bullish on, hey, this is Dan Loeb vehicle at a discount. He's going to find a way to make money. You know, I'm hesitant to say this is Dan Loeb at a discount. He's going to find a way to make money because, again, I caution everybody. when you enter at a discount, you're assuming that you're going to exit a discount. What I'm excited about is this is Dan Loeb, the capital allocator, her allocating capital, not just at the fund level where he's allocating balance sheet making investments,

running the investment committee by himself as the sole chief investment officer. You have that portion of it, but you also have a real, what I really believe is a very shareholder friendly, tender offer mechanism to control the discount. This discount, I find it like anything, if it expands too too much, it should contract because you have this tender offer mechanism that's kind of put into place. But you can assume that you enter at negative 15, negative 16, you exit negative 15, negative 16, and you're still making money. So I don't think it's like necessarily getting Dan at a discount as much as you're getting Dan capital allocator or her plus a great exit opportunity, like an exit ramp through the tender

offer three years from now. So, you know, for me, as I'm looking for investments, and I think of this more as an event-driven investment because there's an event, it's defined. Three years from now, you will be able to tender under this set of circumstances. And that's a simple, it's a simple algebraic exercise of just saying, okay, what's my scenario analysis look like, huh? And I read the proxy. I'll need to go through it again. I guess this is my last question.

I should have asked it earlier because it's pretty important. Once shareholders vote to approve this tender offer mechanism, it's binding to the company, right? If they are trading at more than a 10% NAV discount for the couple months leading up to March, 2004, they have to execute this 25% tender after, right? Yeah, my reading, my reading of the annual meaning proxy was that this is a binding resolution. That's how I read it too. But, you know, sometimes the first time you're just reading the gist and I hadn't like brought out my lawyer pencil or anything. Yeah. And the other thing I'll add, you know, what I like about this, I'm not saying third point doesn't run concentrated, but they run what I kind of call semi-concentrated

where, you know, the bets are in the five to seven and a half percent range. And there's So whereas like Pershing, which we've talked about a lot, PSH, that runs nine positions, right? And each position is 10 or 15% of the portfolio. So when I looked at Pershing, if you didn't love, let's say their bet on Valiant, right? Valiant was like 20% of the fund. If you didn't like their bet on Valiant, even if they traded a 25% discount, you might not be able to invest in PSH because you were like, hey, I think Valiant is a house of cards. I can't invest in this because if Valiant goes down 50%, cool. My whole discount just shrunk away.

So one thing I like about Third Point for this event specific is, yes, Dan's good. You get access to him. But even if you don't like the Disney investment for some reason, right? Disney can go down 30% and it doesn't kill you here. So I kind of like that semi-diversification. Yeah. Again, no offense to the third point team, right? It's a $17 billion under management.

It's a lot of assets to deploy. I'd like that much assets to deploy. So at I. You can, and maybe someday I will. But you can use, let's say, use the S&P 500 as a proxy. So if you're thinking like where are returns going to look, use the S&P 500 as a proxy and then apply their net. Again, they're running at 120% net.

And so with the, so what? The S&P's like up roughly 10% on the year. And I think last time I looked where are we at? Oh, no surprise. The funds up about 15%. Like that kind of makes sense, right? where when you think about it as to what they're in, Disney, other components of the S&P 500, with a little bit of leverage.

Yep. So, you know, if you think that that's how I kind of underwrite this. I think of this is more, okay, great. I've got Dan Loeb as capital allocator at the helm, allocating my capital, and I've got this really cool event that's going to happen three years from now that I think probably rightfully so people aren't paying attention to because it's three years out. But as it comes closer, people will really start to pay attention to and say, oh, wait, I have this really interesting offer that is sitting, that is coming closer and closer and closer. And then, again, it's another very simple IRA calculation.

Well, what happens if I tender at minimum, 25%. It could be more, depending on who's going to tender or not. Well, James, let me give you the last words. If there's anything else you wanted to talk about here. I just saw a bunch of people on Twitter asking. about the universal deal and then you know you go ahead i'll let you give the thoughts because you're you're the guess i want you to give the thoughts i'm going to give my thought but i actually really want to know what your thought is because you have a much more nuanced yeah yeah and just who

everyone knows uh third point press reports came out i believe this week maybe late last week they've taken over the past but once a substantial position in vvendi and the reason we mentioned universal Vovendi owns universal. Vovendi is voting on a deal to spin-off universal next week. If that vote goes through, then Vivendi will almost certainly sell 10% of universal to Pershing Square Tanting to bring everything back to Pershing. And people are wondering, is Dan Loeb and third point going to try to strike down the Vovendi Pershing UMG deal? So go ahead. Yeah, so I haven't spoken to Persian, rather sorry, third point I are about it yet. And I don't plan to, or even ask any of the team members there, not that they would tell me one way or the other.

I think what you just said, if you're asking my personal view, is the devil's in the details. You had mentioned, she's accurate to the reporting. They had been building the stake for months and are now the largest shareholder. Well, months means longer than the announcement of Ackman and Perkins Square, Tontan. So I don't think what I think people are alluding to is that third point's jumping in here and wants to vote against the deal. I don't know. I mean, obviously, Ardison doesn't like it. Bluebell doesn't like it.

They voice their opinions. Third point has not publicly voiced an opinion yet. But what I think is important to note is whatever, whether they like the deal or they don't, the point is that they like Vivendi enough that they've been building this pre-Ackman, which is what I think is interesting to that. What do you think, Andrew? No, look, I agree with everything you say. My rule of thumb for activism is you look at what the press releases are telling you, right? And Vivendi, we are four days before the vote, and Vivendi is not sending out urgent, hey, don't forget to vote things.

So I think they've got a pretty good handle on the count. And, you know, if you're an activist, you don't start trying to derail a vote two days before the meeting, right? You try to start derailing it before the record date because you want people who agree with you to buy and to vote for this. So the fact that third point, it broke that a week before the vote that they had a share in Vivendi, I mean, maybe they don't like the way UMG is getting spun out. Maybe they do. I don't know.

But I would be 98% sure in the Vivendi UMG deals going through. And maybe third point votes against it. Maybe it doesn't, but they're not running a campaign against it. So, yeah, I just, I think it's kind of, it's nice that that Third Point sees value in Vivendi. I agree with them. I think there's tax and control issues. And maybe Third Point can solve them. They've got a history of doing so, but I would be really shocked if the UMG deal didn't kind of go through as is.

And I can tell you, you know, I've written about a ton, but the reason that there's a vacuum on the PSTH side is because they love the UMG asset. And it doesn't behoove them to go out until the vote's done and say, hey, we think we're getting to set a great price. So I think they'll get done next week. Totally, totally agree with everything we just said. I think the read is spot on. Cool. James, anything else you want to talk about or anything before we're up? this up? No, thanks for having me. And I hope it was valuable for everybody that was listening.

This is a lot of fun. I hope to do it again. It was great. You know, I think there have been, just to give every, I love all my podcast children equally, right? But I think there have been sexier investments. But in terms of risk, reward, this might be the best pitch that we've had on the podcast. Just so, look, my buddy Jeremy Raper has pitched some absolute home runs. We can go back and look at it instead of this stuff, but just in terms of buying a discount with this interesting exchange mechanism. So I appreciate you coming on the podcast. I appreciate you bring this situation to my attention. And I'm looking forward to having you on for another one. Anyone who wants to find James, I'll put his Twitter handle in here. I'll be sure to link to

those activist letters on Third Point that I chat about in the show notes. But find James on Twitter. Follow him. James. Appreciate you coming on and we'll have to chat soon. Thanks, Andrew. It was great.