Graham & Doddsville An investment newsletter from the students of Columbia Business School

Inside this issue: Issue XXXII Winter 2018 The 27th Annual Omega Advisors, Inc. Graham & Dodd At the end of 1991, following 25 years of service, Lee retired Breakfast P. 3 from his positions as a General Partner of Goldman, Sachs & Leon Cooperman, Co. and as Chairman and Chief Executive Officer of Goldman Sachs Asset Management to organize and launch an investment CFA ’67 P. 4 management business, Omega Advisors, Inc. David Poppe CC ’86 & John Harris P. 12 At Goldman Sachs, Lee spent 15 years as a Partner and one Leon year (1990-1991) as of-counsel to the Management Committee. Student Pitches P. 21 Cooperman, In 1989, he became Chairman and Chief Executive Officer of C.T. Fitzpatrick, CFA ’67 Goldman Sachs Asset Management and Chief Investment Officer of the firm’s equity product line, managing the GS CFA P. 27 Capital Growth Fund, an open-end mutual fund, for one-and-a-half years. Prior to Seth Fischer P. 35 (Continued on page 4)

Editors: Ruane, Cunniff & Goldfarb Abheek Bhattacharya MBA 2018 David Poppe joined Ruane, Cunniff & Goldfarb in 1999 after a 12-year career in Matthew Mann, CFA journalism. Mr. Poppe graduated with a MBA 2018 BA from Columbia University in 1986.

Adam Schloss, CFA John Harris joined Ruane, Cunniff & MBA 2018 Goldfarb in August 2003. Prior to joining David Poppe John Harris the firm, he spent two years as an analyst Ryder Cleary CC ’86 MBA 2019 at Kohlberg, Kravis, Roberts & Co. (KKR), a private equity firm based in New York Gregory Roberson, Esq. and San Francisco. Before joining KKR, he served as an analyst in the investment MBA 2019 banking division at Goldman, Sachs & Co. Mr. Harris graduated with an AB from

David Zheng (Continued on page 12) MBA 2019 Oasis Vulcan Value Management Partners Visit us at: Company www.grahamanddodd.com Rolf Heitmeyer www.csima.info C.T. Fitzpatrick Seth Fischer is the founded Vulcan founder and Chief Value Partners in Investment Officer of 2007 to manage Seth Fischer Oasis Management C.T. his personal Company, an Fitzpatrick, CFA capital. Since international investment manager inception, all four headquartered in Hong Kong. Oasis was strategies have peer rankings in the top founded by Mr. Fischer in 2002 following a 4% of value managers in their respective successful seven-year career at

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Page 2 Welcome to Graham & Doddsville

We are pleased to bring you the speaking with David Poppe Finally, we continue to bring 32nd edition of Graham & CC ’86 and John Harris of you pitches from current stu- Doddsville. This student-led Ruane, Cunniff, & Goldfarb, dents at CBS. CSIMA’s Invest- investment publication of Co- heirs to the legacy of Bill Ru- ment Ideas Club helps train lumbia Business School (CBS) is ane—one of the superinvestors CBS students, providing them co-sponsored by the Heilbrunn of Graham and Doddsville the opportunity to practice Center for Graham & Dodd whom Warren Buffett touted crafting and delivering invest- Investing and the Columbia Stu- in 1984. They describe their ment pitches. dent Investment Management maturations as investors, dis- Association (CSIMA). Since our cuss portfolio concentration, In this issue, we feature finalists Fall 2017 issue, the Heilbrunn and pitch two of their favorite from the NYU Credit Pitch Meredith Trivedi, the Center hosted the 27th annual stock ideas. Competition, Columbia Busi- Heilbrunn Center Director. “Graham & Dodd Breakfast.” ness School’s CSIMA Stock Meredith skillfully leads the C.T. Fitzpatrick, CFA of Pitch Challenge, and the MBA Center, cultivating strong In this issue, we were fortunate Vulcan Value Partners sits Women in Investing (WIN) relationships with some of to conduct four interviews with down with us, opining on his Conference organized by the the world’s most experi- investors who provide a variety evolution from a strict value Cornell SC Johnson College of enced value investors, and of frameworks. From scuttlebutt investor to his current empha- Business. creating numerous learning research, tactical strategies, sis on sustainable margin of opportunities for students euphoria, and sustainable margin safety. He talks about building The three finalist ideas from interested in value invest- of safety, we discuss broader partnerships with employees our classmates include: A.J. ing. The classes sponsored industry issues. Each investor and investors. C.T., as he is Denham ’19, Kevin Brenes ’19, by the Heilbrunn Center has a strong passion for studying known, keeps an MVP list of and Gili Bergman ’19—Staples are among the most heavily the history of markets and for high-quality businesses that he (SPLS) 8.5 2025 Long; Ishaan demanded and highly rated continuous personal evolution. would love to own and steps in Bhatia ’19, Ryan Darrohn ’19, classes at Columbia Busi- when the time is right. and Victoria Gu ’19—First ness School. Leon Cooperman, CFA ’67, Data (FDC) Long; and Aditi the founder, Chairman, and Seth Fischer, the founder and Bhatia ’19, Lisa Chen ’19, Victo- CEO of Omega Advisers, Inc, CIO of Hong Kong-based ria Gu ’19, and Aleksandrina discusses his battle with the Oasis Capital Management, Ivanova ’19—FleetCor Tech- SEC, passive management, and discusses his early education in nologies (FLT) Long. his relationships with other in- global arbitrage as well as his vestment managers. He shares recent forays into activism in As always, we thank our inter- details about what is important Asian companies. He explains viewees for contributing their to him outside of investing, per- how he mixes tactical and time and insights not only to sonified by a song written about fundamental approaches to us, but to the investment com- him from a charitable group he investing, why frauds in China munity as a whole, and we is passionate about. aren’t like frauds in the West, thank you for reading. and why, for an activist, this Professor Bruce Greenwald, We also have the privilege of time is different in Japan. the Faculty Co-Director of - G&Dsville Editors the Heilbrunn Center. The Center sponsors the Value Investing Program, a rigor- ous academic curriculum for particularly committed stu- dents that is taught by some of the industry’s best practi- tioners.

Bruce Greenwald and Mario Gabelli ’67 David Abrams and Bruce Greenwald at prior to the keynote address and the 27th the 27th Annual Graham & Dodd Annual Graham & Dodd Breakfast Breakfast VolumePage I, Issue 3 2 Page 3 Columbia Business School Events: 27th Annual Graham & Dodd Breakfast

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The keynote topic was the future of value investing—heavy stuff CBS Professor and Co-Director of the Heilbrunn Center Bruce for breakfast conversation Greenwald, keynote speaker

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Attendees of the 27th Annual Graham and Dodd Breakfast Columbia Business School Dean Glenn Hubbard

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William von Mueffling ’95, President and Chief Investment Officer, A riveted crowd listens attentively to Professor Greenwald Cantillon Capital Management, addresses the crowd reassure them that value investing is here to stay Page 4 Omega Advisors, Inc. (Continued from page 1) those appointments, Lee American Jewish Doddsville spoke with you, it spent 22 years in the Committee (AJC) Wall was the fall of 2011. What has Investment Research Street Human Relations surprised you the most since Department as Partner-in- Award, the 2006 Seton then? charge, Co-Chairman of Hall Humanitarian of the the Investment Policy Year Award, the 2009 Boys LC: I would say at Omega we Committee and Chairman & Girls Clubs of Newark have been on the right side of of the Stock Selection Award for Caring, and the the market. Our basic view is Committee. For nine 2009 UJA-Federation of that every recession leads to consecutive years, he was New York’s Wall Street the next economic recovery, voted the #1 portfolio and Financial Services and every recovery ultimately strategist in Institutional Division Lifetime leads to the next recession. It Investor Magazine’s annual Achievement Award. In was predictable to come out of Leon “All-America Research 2013, Lee was inducted the 2008 recession. I believe in Cooperman, Team” survey. into Alpha Magazine’s the symmetry of cycles, so the Hedge Fund Hall of Fame length and duration of an CFA ’67 As a designated Chartered and was honored by the upcycle probably bears some Financial Analyst, Lee is a AJC at their 50th relation to the length and senior member and past anniversary with the duration of the downcycle. We President of the New York Herbert H. Lehman Award had the most severe recession, Society of Security for his professional so having a longer—not Analysts. He is Chairman achievements, necessarily stronger, but Emeritus of the Saint philanthropic efforts, and longer—recovery than average Barnabas Development longstanding support for would probably make some Foundation, a member of AJC. In 2014, Columbia sense to me. the Board of Overseers of Business School awarded the Columbia University Lee its Distinguished But the growth of passive Graduate School of Leadership in Business management is greater than I Business, a member of the Award, and Bloomberg would have predicted six or Board of Directors of the Markets named him to its seven years ago. I understand Damon Runyon Cancer fourth annual “50 Most what’s behind it, but it’s Research Foundation, a Influential” list (one of only something I would have member of the Investment ten money managers thought would have passed by Committee of the New globally to be so honored, now. I look at it as being Jersey Performing Arts selected “based on what transitory. There’s a role for Center, and they’re doing now, rather passive management, but I Board Chairman of Green than past achievements”). don’t think Warren Buffett got Spaces, a committee He was inducted into the to where he is using an index organized to rebuild 13 Horatio Alger Association fund. The same goes for Mario parks in Newark, NJ. in April 2015. Lee and his Gabelli, myself, and others Lee received his MBA wife, Toby, have two sons who have been successful in from Columbia Business and three grandchildren. money management. I’m School and his committed to active undergraduate degree Graham & Doddsville management. from Hunter College. He (G&D): What is it about stock is a recipient of Roger picking that excites you? Some time ago, I went to a Williams University’s seminar entitled “Closing the Honorary Doctor of Leon Cooperman (LC): It’s Gap,” looking at income Finance; a recipient of a hunt. To be successful, you disparity and how to deal with Hunter College’s must love what you do. It is it. A futurist who spoke at the Honorary Doctor of both my vocation and my conference said that in his Humane Letters; an avocation (as well as a means opinion, the biggest problem inductee into Hunter of supplementing my income). facing the economy is that 45% College’s Hall of Fame; of all jobs are going to be and a recipient of the 2003 G&D: The last time Graham & replaced by automation, with (Continued on page 5) Page 5 Omega Advisors, Inc.

no alternative for those dissatisfied. A lot of people say, “Well, if I’m not going to displaced workers. I thought who went into hedge funds beat the index, why do I want about it, and perhaps our had no idea what they were to pay you some variation of industry’s “automation” is doing. In 2008, the S&P was two-and-twenty? I want my passive management. down 35% or 36%. The money back.” Then they go average hedge fund was down into index products where Passive turnover averages 16%, but people said, “Hell. I they don’t have any idea what about 3% a year; active didn't know you could lose they’re buying. turnover, about 30%. If money. I thought it was a everything goes passive, that question of how much money It will take a bear market to implies a huge reduction in I’m going to make. Well, give end such behavior. Until liquidity and in the pool of me back my money.” A lot of there’s a bear market, my available commissions. Passive hedge fund managers either guess is this thing will play out. management commands a five gated capital by not giving back But you must be patient. It basis-point fee. So that’s a huge the money on time, or retired creates a challenge for the reduction in the pool of money because they didn’t want to hedge fund industry because if available to active money work with a high-water mark you’re an absolute-return guy managers. in a one-way market, you can “Look, all of us underperform. Plus, you have But everything in the world is an asset base that’s very cyclical. I show people an experience setbacks in transitory. It’s hard to be an article titled “Hard Times investor if you have to Come to Hedge Funds” and life. How you handle constantly look over your everybody thinks it’s shoulder at looming contemporary. The article was the setbacks leads to redemptions. written by one of the most future success.” distinguished writers of Fortune G&D: So we need a bear magazine, Carol Loomis, in and only for a management fee. market to slow down the 1970. At the time, the largest move to passive? hedge fund was under $50 In 2008, if I told you we were million. The second largest was about to begin the longest, LC: That’s my view, but I A.W. Jones at $30 million. The most impressive bull market in could be wrong. Just like in entire industry was under a history, you’d probably have 2008, hedge fund performance billion dollars. me locked up. People blamed was below expectations—it the government. They blamed was down less than half of the Here we are in 2017 and the the insurance companies. They S&P, yet people were industry is $3 trillion. And blamed the bankers. Nobody dissatisfied. Now they’re going there are many hedge funds blames the individuals for not into indexes because the that run tens of billions of doing a good job managing indexes are outperforming dollars. The golden period for their own financial affairs. It’s active management. When hedge funds was 2000 to 2007. as if they have no they lose money, they’ll have Why? They were responsibility. the same attitude they had in outperforming the indexes and 2008. They’ll want to get out. conventional managers. CNBC In 2008, the people that stayed And believe me, there’s no brought them a tremendous in hedge funds elected to be in liquidity in the market to amount of publicity. Money an absolute-return, not relative absorb these ETFs. It’s going to was pouring in, and they -return, vehicle. If you’re be a blood bath. The S&P will became cocktail-party talk. running a hedge fund and be down more than 100 points “I'm with Omega.” “I'm with you’re less than fully invested, in one day. Glenview.” “I'm with Third then you’re shooting for Point.” “I'm with Jana.” absolute rather than relative Then suddenly, the 2008 cycle returns, and you can’t keep up G&D: Your analogy suggests hits, and even though hedge with a bull market. the move to passive is more funds lived up to their cyclical than secular. expectations, people were People become dissatisfied and (Continued on page 6) Page 6 Omega Advisors, Inc.

LC: Everything is cyclical. It’s under the terms of our for up to six years to get a just a question of when. In settlement, I can’t comment on college degree. I give them the 1987, with portfolio insurance, the specific facts of the case or opportunity to do well. My investors thought they could on the merits or strength of objective is to help level the insure their portfolio and get our defenses. We settled playing field by creating out. It was exposed as being because doing so saved us equality of opportunity; Attendees of the 27th bogus. In 1972, the new big what were projected to be whether the outcomes are Annual Graham & Dodd thing was the Nifty Fifty. J.P. enormous legal costs, and a equal is up to the student, but I Breakfast speak with Pro- Morgan and U.S. Trust had this substantial diversion of time want to give them the chance fessor Michael Mauboussin philosophy of not caring what and attention over possibly to soar. Have you seen the they paid for a business so long years more of legal wrangling, movie Hidden Figures? I paid as it grew at above-average had we gone to trial. I am still $10,000 to rent out a venue rates. IBM, Merck, Xerox, conflicted over that decision, and invite all the kids in my Avon, and those kinds of but it’s water under the bridge. program to come and see it. companies traded at 70x earnings. I will say, however, that the The money doesn’t matter to entire experience has left me me—I’ve given all my money In 1973, OPEC increased the with a highly jaundiced view of away to charity. I’ve given away price of oil tenfold. We saw a our federal regulatory system, $200 million to the less huge escalation of inflation, and which I think is in desperate fortunate in the last five years. the market collapsed. It took need of remediation. Given the stocks over a decade to vast resources of the federal I give money to an organization recover. Some of them never government and the prospect called “Songs of Love,” which recovered. Avon’s today a $3 of potentially ruinous legal has roughly 10,000 volunteer stock; it used to be a $70 costs (and collateral damage) songwriters who write stock. My philosophy is: invest that confront any defendant, it customized songs for in any stock or bond at the is little wonder that so many terminally or seriously ill right price. Their philosophy opt to throw in the towel and children. They use uplifting was: only the right stock at any settle, rather than risk the songs to motivate the kids. price. To me, price is the key. I vagaries and expense of The group learns about the am willing to buy anything as extended litigation. On the kids’ parents, the names of long as management is not positive side, at least my their dogs, their favorite crooked. I am looking for reputation remains intact. To actors, their favorite singers— above-average yield, above- many money managers, I’m things that relate to the child, average asset value, or something of a folk hero. Cold and then compose a song mispriced growth. I think that comfort! around those themes. About a over time, buying stocks at 50- year ago, I drove out to 60x earnings is not going to G&D: What about some of Queens, where the pan out. your philanthropic activities? organization is based, and I was so impressed with what they G&D: Can you tell us more LC: I’m busy changing the lives were doing that, on the spot, I about your entanglement with of kids. My signature initiative, wrote a check for $1 million. the SEC? Cooperman College Scholars, They were so blown away that is in the process of sending unbeknownst to me, they LC: All I’ll say here is that we 500 needy, deserving Essex started doing their homework settled the case for a fraction County, New Jersey, kids to and wrote a song about me. of the government’s initial college. The average lifetime Here, take a look [lyrics at the financial ask (less than $5 earnings of a college graduate end of interview]. million), with no industry are over $1 million more than suspension or bar, no officer- those of a non-college Not too long ago, I reached and-director suspension or graduate. We take 70 kids a out to someone who was bar, and no admission of year and we’re a few years into struggling. I like to do that— wrongdoing, on terms that this, so I have 250 kids in the help those who are going permit me to continue running program right now. I give each through tough times. I said, my business. Beyond that, of them up to $10,000 a year “Look, all of us experience (Continued on page 7) Page 7 Omega Advisors, Inc.

setbacks in life. How you expertise in some area of the LC: You try to be handle the setbacks market, but you can’t use it. If dispassionate, but there are no determines future success.” you’re really a skilled money- formulas. There are going to maker, you don’t want to be errors. A few years back, I G&D: Can you talk about work at Goldman or Morgan got hooked on an oil company. your idea-generation process? Stanley. You want to work at a I had three energy analysts in Third Point, a Glenview, an 2014; not one of them got it LC: When I hire somebody on Omega, or a Pershing Square. right. There were very few the investment side of my If you’re a money-maker, you people in 2014 who foresaw business, we agree upon the come to my firm. the collapse in the price of oil. area that that analyst will cover. Every six months, I look G&D: To what extent does G&D: Many esteemed at the opportunity that the management figure into your investors have struggled lately. analyst has presented and how decision-making process about What’s going on? he or she penetrated that a business? opportunity. I also do a lot of LC: Speaking broadly, in the reading on my own, and I have LC: It’s a factor. Ben Graham last five or six years, almost no a lot of friends in the business in The Intelligent Investor said one has been right about the and know who’s careful and that you evaluate management stock market. We’ve had an does their homework. I may, teams twice, once through the unbelievable bull market. Carl for example, say to my numbers and once face-to-face. Icahn returned money in 2008 financials analyst, XYZ Financial By the numbers, I mean because he didn’t like what he was recommended by this looking at returns on capital, saw. Seth Klarman has now bright guy, so maybe we growth rate, market position, given back money. He’s been should look at it. If my gross margins, and so on. negative for three or four financials guy likes it, we’ll buy years. it and I’ll share the position “You want to get rich with him; if he doesn’t like it, Look at Pershing Square, for we won’t buy it. It’s quietly. I don’t go on instance. As you know, every fundamentally a bottoms-up spring, the Friday night before approach to stock-picking, with CNBC trying to talk a Berkshire Hathaway’s annual a top-down macroeconomic stock up.” meeting, Columbia Business overlay. School hosts a dinner. Three When measuring the quality of years or so ago, I was a guest G&D: Is there a danger that management face-to-face, you speaker at that dinner. There getting ideas in this manner make your own judgment on were 200 people in the leads to groupthink? how they respond to questions audience, including Ackman. I and what their integrity is like. gave my presentation, and then LC: I look for merit and someone in the audience asked individual ideas. An analyst G&D: When you’re getting about my thoughts on recommends a stock, and we close to management while Herbalife. I said, “I’m not try to separate the wheat from researching companies, what involved, but I have an the chaff. To me, Wall Street is are the dangers? opinion.” I knew that Ackman a distribution machine; I don’t was in the audience, and I said, rely upon Wall Street. LC: Management might lie to “I know Bill Ackman. He’s a you, or see things through very bright guy, he’s very The most rewarding part of rose-colored glasses, or you, generous, I have respect for my career at Goldman was as a major shareholder, might him. But anybody who gets up finding stocks that I thought get too close, and become in front of 500 people telling made sense and having the reluctant to disappoint them he’s short 20% of the market prove me right. But management by selling. market cap of a company is after Eliot Spitzer, all the firms allowing his arrogance to get in prevented their analysts from G&D: How do you control all front of his intellect.” The buying stocks. They’re telling of that? danger is you can get squeezed you to spend a lifetime building on that short. Bob Wilson, a (Continued on page 8) Page 8 Omega Advisors, Inc.

very famous short-seller, working on ADP, that they had conditions. famously said that nobody ever serious issues and he wanted gets rich publicizing their to meet with the board, but Activism, generally, is a late- shorts. You want to get rich that the committee window cycle phenomenon. Hedge quietly. I don’t go on CNBC closed in eight days and he funds are having trouble trying to talk a stock up. wasn’t ready. He wanted an making money so they’re going extension on the window. I after governance. In some That’s why George Soros, told him there’s no way the cases, they’re right; in other myself, and a bunch of people company could or should give cases, they get it wrong. went after Ackman on his him an extension. latest activist idea, ADP. ADP G&D: Do you feel that your is one of the greatest success His whole argument was investment style has changed stories in American industry. spurious. He was looking at at all over the last 50 years? You don’t go after a company the margin differential versus like that in a proxy fight. You Paychex. But they’re in a LC: No. I’ve been managing meet with them and you tell different business. Paychex my firm like I’d manage my them what your views are. competes in the down market, own money. Let me explain Ackman is looking for visibility, for small companies. ADP is a the way I run the firm. I split and he’s dead wrong in his high-touch service, so they our incentive fee in thirds. I approach. Ackman tried to tell have a tremendous return on give a third of it to the idea ADP—a company that’s gone equity. Bill is a great guy and generator, I give a third to the from $10 million in market cap I’m friendly with him, but he non-revenue generating folks. to $60 billion—that they didn’t obviously has a flaw. They don’t make investing know how to run their decisions but they’re important business. It’s preposterous. He G&D: Are you a shareholder in running the business. Finally, should have sat down with of ADP or on the board? I keep a third. them to explain his views, but he chose instead to go public LC: I was on the board for 20 When an analyst makes a and ask for board seats. years, and I chaired the audit recommendation, it must be committee for 18 years. When written up with a price target ADP went public in 1961, with I retired from the board, I gave and the downside risk. If we a market cap of maybe $10 all my stock away to charity. buy the stock, it’s because million. Take the market cap of What I said on CNBC was the we’ve accepted the upside- ADP today and add in the stock should triple; I should downside equation. If the stock market cap of CDK, the donate cash and hold the falls to the downside level, the automobile dealership business stock. I’m not debating the analyst becomes secondary to they spun out, and the merits of Bill’s arguments. the decision. I have a combined market value is What I’m saying is this committee that helps evaluate about $60 billion. $10 million company’s performance is so if we should hold on, double to $60 billion is a compound outstanding they deserve down, or sell it. rate of return of 17% a year different treatment. The for 50 years. The company company is open to meet with G&D: What led to the earns 40% return on equity their shareholders; they are decision to create this against the S&P 500’s 16%, open to constructive committee? with a debt-free balance sheet suggestions. I guess it didn’t versus the S&P’s 40% debt-to- serve his purpose to meet with LC: Analysts get paralyzed capital. ADP is trading at a management privately to when their recommendations multiple of 27x-30x earnings. present his views. are down. They don’t want to I’m not addressing the merits see their stocks sold out of the of a bargain here, I’m just I meet with management teams portfolio. You need people talking about the business. all the time. For certain that are long-term thinkers companies, activism is justified. because short-term greed will Ackman called me up, asking They can overpay, they can jeopardize the firm, while the for assistance. He said that he perform poorly, or they can be long-term guys will not. had spent the last six months slow to adjust to new (Continued on page 9) Page 9 Omega Advisors, Inc.

G&D: Do you find analysts get interest rates. Using 17x our more important than being in clouded when they are on fire? S&P 500 earnings estimate for the right stock. We look at next year of $138, that’s about stocks versus bonds, and when LC: My technology guy looks 2385. That doesn’t include any we look at bonds, we look at like a genius because of FANG. benefit from the tax package. government bonds, corporate I look like an idiot because I’ve The tax package could add as bonds, high yield bonds, etc. bought most of the much as $10 to S&P 500 We’re looking for what I call recommendations, but not as earnings. the straw hat in the winter. much as he wanted me to. My Nobody is buying straw hats in job is to figure out what’s As John Templeton said, bull the winter when they’re cheap. going to work, and what’s not markets are born in pessimism, We’re trying to find what is going to work. But I have a grow in skepticism, mature in mispriced. I have eight or nine value orientation. optimism, and end in euphoria. credit people. They’ve done There are very few signs of extremely well over the last G&D: When you look at the euphoria in this market. five years. market today, what stands out? Optimism is high. Everybody believes the market is higher in Third is undervalued stocks on LC: There’s an expression on six months and in 12 months, the long side. Fourth is Wall Street: In bull markets, but I don’t see euphoria. overvalued stocks on the short who needs analysts; in bear side. We’ve never been markets, who needs stocks? G&D: What does euphoria particularly productive at this We first have to understand mean? How would you know it at Omega for some reason. the market outlook. I believe if you saw it? the market is adequately Fifth and finally, macro bets. priced. I think we’re heading to LC: Look at 1987. The 10- We will risk about 2% of our a normalization. We have been year bond was yielding 9% and capital trying to make a 4% to living through a very strange the S&P trading at 27x 5% return. These are not period. earnings. You can see it in how necessarily correlated to stocks act—the character of equities, but they can be A year or so ago, Switzerland leadership and valuation. profitable. If the dollar-yen raised 50-year money at There’s some euphoria in the exchange rate goes from 108 negative interest rates. A guy market. Maybe Tesla or to 120, you can make some who owns a home in Denmark Amazon. money. We could buy or sell will get a check every month oil. It’s just another because he has a negative G&D: You’ve been known to opportunity to make money or interest rate on his mortgage. take macro bets and invest in lose money. It’s crazy, right? It makes no different areas of the capital sense. structure. How do you think G&D: How do you, schooled about your overall strategy? in the Graham and Dodd way I think we’re heading now to a of fundamental analysis, get normal level. What’s LC: We try to make money at comfortable with those macro normalization? In the U.S., it’s Omega in five ways. bets? about 50 bps of growth in the labor force and 150 bps of First is market direction. We LC: You’ve got to rely on the labor productivity. Let’s keep in mind that stocks are team. But sometimes you assume 2% inflation. That’s 4% high-risk assets and short-term know nothing. My worst year nominal growth. The Fed funds bonds are low-risk assets. We was in 2014. I had three energy rate will be around 2% and spend a lot of time trying to guys, we had no major position we’ll be there soon. The 10- determine where the market is in energy. Not one of them year bond will be at about 4%, going because that determines said sell or go short. Energy and will take three to four your exposure to the markets. prices collapsed. Macro is years to get there. In that difficult because there’s no world, a multiple of about 17x Second is asset allocation. equity capital market line, so if seems fair. It’s high relative to Every study I’ve seen indicates you don’t know what you’re history but low relative to being in the right asset class is doing, you could be separated (Continued on page 10) Page 10 Omega Advisors, Inc.

from your capital very quickly. looking at a minimum $2.5 compensation. People see That’s why I only allow us to billion market cap. Julian Robertson, Ray Dalio, risk 2% of our capital. My best and George Soros on the year, 1993, I was up over 70%. G&D: Do you have different covers of magazines; people I made 20% in equities, which strategies for the taxable and want to emulate them. They was twice the S&P. I made 50% non-taxable portfolios? want to go for the gold. It’s in bonds. You want to field as natural instinct. many plays as you can in the LC: No, but I don’t buy hope of finding opportunities anything in our long-term It used to be that if you that work for the fund. followed the most popular industry among the graduating But you raise a good point. It is “You need people that Harvard Business School class, very painful losing money in an are long-term thinkers you’d find that the industry area where you’re not the was in the process of peaking. captain of the ship. It’s easier because the short- Whether it was management to lose money when you know consulting, investment banking, exactly why you’re losing term greed will international trade, or hedge money. In equities, I know funds. Maybe venture capital where I went wrong. It’s part jeopardize the firm, will be peaking soon. of the delegation of responsibility. You just can’t while the long-term It is the worst time, in my celebrate the profits only. guys will not.” opinion, for private equity You’ve got to be willing to because one of the big accept the risks. capital gains strategy that I windfalls for the private equity don’t intend to hold for at guys was the exit multiple Macro has had a rough few least a year. If I get lucky and being so much higher than the years because of low volatility buy something that goes up entry multiple as interest rates and interest rates. A lot of the quicker than I expected, I use declined. Who wants to bet on macro guys are losing assets options to hedge it out to age lower interest rates over the big time. Money goes where it to a one-year position. next five years? The odds are money is treated best. interest rates will be materially G&D: Besides the trend to higher, which will suppress Everyone started off 2017 passive, what else do you make valuation. bulled up about the dollar of the current environment for versus the euro, and look what hedge funds? Secondly, we’re nine years into happened. When everyone is a business recovery. Economic on one side of something, LC: I saw an article recently setback is overdue. The idea of there’s probably something that in the last decade, the buying something, levering up, wrong. Bloomberg has an number of publicly traded and then having three or four exhibit on next year’s outlook. companies has gone down by years of economic growth to Nobody’s bearish. 50%. In the same period, the de-lever sounds like a suspect number of hedge funds has bet. Private equity is also a Over time, one change we’ve quintupled. We have many much more discovered had to be conscious of is more people looking at half the phenomenon now. increasing the size of company universe. It’s a much companies we look at, given more competitive situation. G&D: Has this brutal our size. You don’t want to competition in the hedge fund have hundreds of positions. If If you had a choice between world changed what you do you start out with average managing money at a mutual day-to-day? position sizes of 3% and have fund for a 1% management fee $4 billion in assets, that’s $120 or working for some Master of LC: There are 10,000 hedge million in each name. If you the Universe for two-and- funds that are asking for some multiply that by 20 because twenty, most people would variation of two-and-twenty. you don’t want to own more rather be at the hedge fund Your client will pay a premium than 5% of a company, you’re because of the greater fee if you supply premium (Continued on page 11) Page 11 Omega Advisors, Inc.

performance. The average Second, William Ward’s max hedge fund is underperforming philosophy is something all To the arts and education the S&P and people are young people should think Leon Cooperman, hope you unhappy. You can’t rest on about. Before you think, listen. and Toby can your laurels, you can’t sit back. Before you write, think. Before See the difference that you’re This business requires that you spend, earn. Before you makin’ you’re constantly on your feet. invest, investigate. Before you As you say… When the markets are low, pray, forgive. Before you quit, you’re supposed to figure it try. Before you retire, save. Do what you love out and be heavily exposed to Before you die, give. Love what you do the upside. When the markets Never retire are high, you should be G&D: Thank you so much for Stay inspired hedged. I get up at 5:15am your time. Do what you love every morning and am in my Love what you do office at 6:30am with the Day and night newspaper. It’s total “Do What You Love, Love Keep feedin’ that fire engagement. What You Do” - A Song for There’s one secret to success, Leon Cooperman from the it’s true In 1900, Andrew Carnegie said Songs of Love Foundation Gotta do what you love… the most important thing is to And love what you do surround yourself with people You started out in the Bronx smarter than yourself and fairly Went to Hunter College Words by Alex Forbes share the loot. Some people Met the lovely Toby Music and vocals by John Beltzer feel threatened by strong Both had a hunger for colleagues. I say no; I’m knowledge benefiting from strong colleagues. This is what you Columbia, Goldman, and should aim for. Omega You did better than the best I tell people, no matter how Leon Cooperman, you’re like much money you have, the one Superman luxury you cannot afford is Let’s follow in your footsteps! arrogance. Be nice to people. I As you say… have seen guys play nice to people above them but be Do what you love nasty towards people below Love what you do them. It’s just uncalled for. Just Never retire be nice to everybody, and it’ll Stay inspired come back to benefit you. For Do what you love example, when I retired from Love what you do Goldman Sachs, I agreed to Day and night become a consultant to the Keep feedin’ that fire firm to help with client There’s one secret to success, retention, and they ended up it’s true being a big investor in my fund. Gotta do what you love… And love what you do G&D: Any advice for students trying to make it in finance? Toby taught in schools While you started your work LC: First, do what you love to routine do. If you have a passion for it, You both raised Wayne and you’ll be successful. When I’m Michael looking to hire somebody, I Such a wonderful family look for a desire, in addition to talent. Now you’re generous to the Page 12 Ruane, Cunniff & Goldfarb

Harvard College in 1999, traded publicly, of which there DP: I really felt that you could Magna Cum Laude and Phi were many. In the Roaring 20s, have an informational Beta Kappa. those were the original roll-up advantage around vehicles, the 1920s version of understanding the culture of a Graham & Doddsville 1960s conglomerates. A lot of business and the way that (G&D): Can you both tell us them went bankrupt, and when people make decisions. If you about your background and they did, many of them had big can align yourself with how you came to be at Ruane? capital losses inside of them. management teams who make So if you were smart, you good decisions, you’re going to David Poppe (DP): I’ve been would buy one and then invest have a better result over time. at Ruane for 18 years. I went through it and use the capital On top of that, you just have David Poppe to Columbia for college and losses to offset your taxes. to be a bit of a cheapskate. CC ’86 went to work in the They bought the Pittsburgh newspaper business afterwards Railroad, and turned it into a G&D: Was there a moment in and loved it. I was a financial publicly traded investment your journalism career when journalist for 12 years, and as company called Pittway. The you realized how an time went by, I really became way they thought about investment analyst could get convinced of the idea that you investing was the way we think that information edge? could have an informational about investing. They tried to advantage and could find good businesses run by DP: I came to appreciate understand a company by good people, pay reasonable investing partly by watching understanding its people. prices for them, and work with short sellers as a reporter for them for a long time. the Miami Herald in Florida. I Ruane is a heavy due-diligence saw that you could really shop—we adopt a journalistic My dad ran the family business identify bad actors and make method of gathering after my grandfather, so good decisions if you just “scuttlebutt” research, and we investing was all I heard about weeded those actors out from try to understand the culture growing up—and it fascinated your pool of potential of a company as well as its me. I knew this was what I investment ideas. numbers. In 1999, they wanted to do, but back in recruited me to join the firm. those days it was not very easy And as you start to weed out It was a perfect fit and I’ve to get a job at a firm like ours the bad actors, you also realize been here ever since. right out of college, so I who the good actors are. I worked on Wall Street for a have found it true over 30 John Harris (JH): Investing is few years. years that if you align yourself what I wanted to do ever since with people who consistently I can remember. It was the When I came to Ruane for an make good decisions, you dinner-table conversation in interview, I spent about four would do well. As Warren our house growing up. hours with Bob Goldfarb. I got Buffett says: If you had to leave a sense for the place pretty a million dollars with My grandfather and great-uncle quickly, and the minute I got a somebody for five years, would had a consumer products feel for this place, I was you trust this person to be a business that made home hooked. If you like doing what fiduciary of your investment? permanents for women that we do – if you’re curious That’s really the bigger they sold to Gillette in the about businesses, question we are trying to 1940s. They were quirky understanding businesses and answer in our diligence. entrepreneur types, and they trying to unpack the unsolvable didn’t like working for big puzzle that is the stock market The numbers eventually play companies, so they left – this is paradise. out from there. At Ruane, Gillette. we’re trying to distinguish G&D: David, how have you good people from really good At the time, if you were a ended up marrying your people. A lot of times, capital Graham and Dodd-style journalism background with allocation is the measuring investor, the thing to do was investing? stick. Are the decisions to find bankrupt railroad and consistently good? And if they utility company shells that (Continued on page 13) Page 13 Ruane, Cunniff & Goldfarb

are, you’re generally going to, JH: In the absolute simplest DP: I would say that this is as over time, end up with a good terms, over a long span of disruptive a period in the U.S. result. history, stocks in the U.S. have economy as most of us have returned about 9% per year ever seen, so rules of thumb G&D: When you conduct nominal, give or take. So that’s are probably less valuable your due diligence, is there a our cost of capital, and we today than they were 30 years way you quantify your findings? want to beat it by a significant ago. Warren Buffett has said, For instance, how would your margin. We try to take a guess, “I’m not going to invest in assessment of management and it’s nothing more than a technology because it’s too enable you to decide whether guess. We don’t try to be hard to look out five years and John Harris to pay 15x earnings for the precise about it and build eight know what’s going to happen.” business rather than 20x? -page models, because I think there’s a false precision in that. But now technology is JH: The quantitative side of We just try to make a rough disrupting so many other what we do is easy, to be guess at what we think the industries that you have to honest with you. You don’t understand it. You’ve got to have to have much more than “I have found it true think about owning businesses a sixth-grade mathematics based on an Internet model, education to spot a potentially over 30 years that if for instance. I don’t think it’s interesting investment an effective rule of thumb any proposition. The real trick is, is you align yourself with longer to say “I’ll just be an it as good as it looks? That’s people who make investor who doesn’t focus on the hard part. technology and disruption,” consistently good because disruption has come My experience is that the to every corner of the closer you look, the more risks decisions, you would economy. come into focus. It’s very rare that the deeper you dig into a do well.” G&D: A lot of these new business, the better you like it. Internet businesses are asset- It’s usually the other way cash flows of the business will light. Does that make a around. So I would say the be from now until Kingdom traditional value-investing qualitative side of what we do Come, and then discount that heuristic such as return on consumes 95% of our time back to the present. We try to invested capital less meaningful, because that’s the hard part. adjust for the fact that it’s an because these asset-light inherently uncertain exercise. businesses don’t require as Predicting the future is difficult. much invested capital? You have to look into this G&D: What are the heuristics opaque haze and form a point that you’ve developed to help JH: I don’t think it’s one way of view about what’s going to you predict the future? or another. I think there are happen. And I would say most asset-light businesses that are of the mistakes that are made JH: I think rules of thumb can tough to figure out, and there in our business are when be helpful when they help you are asset-light businesses that people look at numbers and allocate your time more are easier to figure out. All naively extrapolate the past efficiently and focus your else equal, we would always into the future. Inflection thinking. But they can also be rather own a business that points happen. If you aren’t dangerous, so we try to avoid doesn’t have to put any money able to peer around those making judgments based on in to get the money out. That’s corners every once in a while, simple heuristics, because a wonderful proposition. typically you won’t bat at a usually the world is more high enough average to make it nuanced than that. It gets back But that’s not to say that the work in this business. to the same concept we were fewer the assets a business talking about before, where employs, the better it is. G&D: How do you think you can get in trouble just Sometimes it’s good to have to about multiples and discount blindly assuming the future will spend a lot to make a lot, rates? look like the past. because that means it’s hard to (Continued on page 14) Page 14 Ruane, Cunniff & Goldfarb

copy. So, I don’t know that we I think we have always been it off. So first off, it’s a model necessarily prefer one or the thought of as value investors, that seemed unique and other. but if you go back and read interesting. our letters from previous What we prefer is the wide decades, our analysts were Second, it’s only halfway built moat over the narrow moat. always looking for companies out across the U.S., so there’s Sometimes asset-light that can grow. I think that’s the an opportunity to maybe businesses have really wide same today too. We are double the store base over a moats and sometimes they always looking for healthy period of time. Third, it don’t. Google, economically, is businesses that are in an early appears that the stores are a far superior business to stage of their lifespan and have profitable in every market that Amazon, just in terms of its good growth in front of them, they’re in. It is a replicable, economic efficiency. But that because that’s really where scalable model. Fourth, when doesn’t mean the moat is any you can make a big return. we bought in, CarMax was wider, because to recreate the trading at 15 times earnings at infrastructure that Jeff Bezos I think a lot of value investors, a time when the U.S. market has built over the last 15 years not just us, have evolved over was trading at 17 or 18 times. would require an astronomical the last 50 years to a little bit sum of money. That’s a very more like Phil Fisher or So the math isn’t that hard. hard business to copy. Google Charlie Munger, who focus on You’ve got a chance to double is also a very hard business to the highest-quality businesses the store base. You’ve got a copy, not so much because it that you can buy for a business that’s growing—same would cost you a lot, but for reasonable price as opposed to store sales are growing at other reasons. strictly looking for cheap healthy rates—mostly with stocks. I think we’ve been middle-class and upper-middle G&D: How have Ruane and consistent over time, but class good quality credit the Sequoia Fund evolved over clearly there’s been a bit of an buyers. And no one else has the years? evolution. There was a time in been able to copy the model. the late 1990s when we were And then you layer over that DP: First, I think 30% Berkshire Hathaway, 20% the incredible diligence that philosophically the ideas Progressive, and probably 10 one of our analysts conducted, underpinning the fund are the or 12% Fifth Third Bank. At we ended up feeling very same as they were 40 years our size today that level of confident in the management ago. I don’t think we’ve concentration doesn’t make team, very confident in their deviated far, but I think there’s sense, but three stocks could ability to harness technology in been some evolution. The fund be 30% of the portfolio. case the business does move was smaller in the 1980s, and to more of an Internet sales Bill Ruane was very G&D: As value investors model. And so we hold that comfortable with a 10-stock who’ve made the transition to company at a 5% weight, which portfolio. Nowadays, we think paying for quality or growth, is a pretty good weight for an a 20-stock portfolio is more how exactly do you define a initial position at a fund the realistic for us. But we still “reasonable” price? Can you size of Sequoia. want to be concentrated in put a cap on how much you’re our best ideas. Insights are willing to pay? JH: I also dislike the idea that very hard to come by in our there’s a fundamental business, and when we have an DP: I’ll use a straightforward distinction between value actionable insight we want to example, CarMax, which we investing, growth investing, and own the stock in a big way. So bought in 2016. CarMax has a growth-at-a-reasonable-price we’re very comfortable with very unique business model. investing. It’s all the same the top eight or 10 positions Four or five different quality mathematical equation, right? being 50 or 60% of our assets companies have tried to copy Every business is worth under management. I think this model of selling used cars something. And ideally you’d that’s been consistent for with a more transparent like to buy for some discount almost 50 years now. buying experience, and they to intrinsic value. really haven’t been able to pull (Continued on page 15) Page 15 Ruane, Cunniff & Goldfarb

I think one reason you can has changed. Can you talk year. Having these people on make money with businesses about that? our Investment Committee in that grow rapidly is that the the room when we make the future value of those DP: Well, we’ve made a lot of final decision struck us as a businesses tends to be a little changes over the last two very good idea. harder to estimate, because years. Our CEO Bob Goldfarb more of the value is far into retired, and we were fortunate G&D: What are some of your the future than businesses with that we had a bench in place favorite stock ideas right now? a small P/E that are earning a that was ready to take on John, you mentioned Google large percentage of their more responsibility. (GOOG) and its asset-light market cap in the here and model earlier. now. And, I think for I’m biased, but I think over the psychological reasons, the past 20 years we have built JH: We’ve owned Google market typically tends to maybe the deepest and the since maybe 2010. And we underestimate the rate and best research team around. recently bought more, and it’s duration of growth for We have a really strong bench. now maybe 10% of Sequoia businesses that can grow We had a bunch of people Fund. rapidly. “I don’t think it’s an That’s because we like to So typically, the errors in compare businesses we own estimating intrinsic value tend effective rule of thumb with each other. And we to be toward the downside in owned a couple of other those cases. That is, you end any longer to say ‘I’ll businesses that we sold this up in situations where you year that are relatively mature thought you were buying it for just be an investor that grow organically in line half of what it was worth, but with the economy and trade really you bought it for 10% of who doesn’t focus on for maybe 23-24 times what it was worth. And that’s technology and earnings in a market that when you really do well. seems to value stability, disruption’ because business quality and liquidity. The distribution of potential outcomes tends to be disruption has come We felt that we could sell narrower for a more mature, those businesses and buy slower-growing business to every corner of the Google instead—a better where more of the cash flow is business growing at a much coming in now. That’s not to economy.” more rapid rate, with superior say that there’s anything wrong economics, for a P/E that with owning those types of whom we hired in their mid- probably isn’t all that different businesses, and we own them. 20s and now they’re 40 years from the ones that we were old and absolutely ready for selling. I think one of the unique more responsibility. features of our portfolios over Google is one of the best time has been that they’re We approached the leadership businesses the world has ever eclectic. One of our partners change as an opportunity to created. It’s a phenomenal likes to say that we have two make Ruane more of a true franchise. It’s a little bit difficult hands. We don’t just play with partnership, with a structure with Google to peer into the one hand. But I think the that’s a little flatter, with a future and have a great handle reason you can do better with little bit more democracy on what the rate of growth businesses that grow is around decision-making. And I will be going forward. That’s because the right side of the realize people don’t like the partly because they don’t have distribution is wider and more word “committee,” but we total control over their pricing interesting. really had a core of very strong since at the end of the day, it’s analysts, very good decision- an auction mechanism that G&D: The leadership at Ruane makers, and we don’t need to prices the product. Also it’s make that many decisions in a difficult to have a handle on (Continued on page 16) Page 16 Ruane, Cunniff & Goldfarb

what the pattern of usage will don’t necessarily know any G&D: Do you think Google be in the future. There are more than the next guy. could be the Standard Oil of many variables that factor into the 21st century? Its size and that. But that doesn’t mean there’s reach are already inviting lots not an advantage in doing your of regulatory scrutiny. Right now, Google is growing own work and doing incredibly 20% a year, and we have been intensive primary research. JH: Yes, that’s probably the surprised about the durability There is an advantage to biggest risk that you face as a of the growth rate, especially gathering your own Google investor. Standard Oil, at that size. It’s remarkable information and making AT&T, take your pick for the that not only is it growing that decisions based on facts that analogy. AT&T was one of the fast in absolute terms, but in a you have gathered yourself. world’s great companies, and lot of cases, it’s accelerating Investing is more of an there are obvious similarities even in relatively mature emotional than intellectual between the AT&T of a few geographies where you exercise, and it becomes very generations ago and Google wouldn’t expect it to. We hard to stay on an even keel today. don’t think that things will and to make rational, unbiased continue the way they’re going judgements if you’re making DP: AT&T was a great now. The nice thing is that the them based on someone else’s company, because it charged business could slow down information. me a dollar a minute to call my dramatically and it would still parents when I was in college. grow over the next five years So if my buddy at hedge fund Thirty years ago, it was at a significantly faster rate XYZ tells me that such and crushing the consumer. than the companies we sold to such company is a great fund the purchase. investment, or if you go to any G&D: That’s an ominous of these conferences where parallel. Like AT&T’s forced G&D: How do you think someone really smart comes breakup, what if 10 years later about securing an up and makes a bold case on Congress decrees YouTube informational advantage with a whatever company, it may has to be a separate company company as large and well- seem compelling at first. So from the search engine, and so known as Google? you think, “Maybe I’ll go out on? and buy it.” Then the stock JH: Informational advantage goes down 40% and you get JH: There are different layers can mean a lot of different nervous. How much time did to the risk here. One is things. Fifteen or 20 years ago, that really smart guy who monetary penalties. We don’t we were relatively unique in made the original pitch spend worry so much about that, our commitment to thinking about this issue that is because Google is an incredibly “scuttlebutt” research. And I pressuring the stock? You well-funded company. I think do think there were cases don’t know, because you didn’t that they can afford to pay where we just knew more do your own work. penalties. about a business than other people did. There were other When you’re lost in the fog, I think behavioral remedies are people that did the kind of you tend to make bad the bigger concern here. And work we did – that sort of decisions because you’re the one that we watch the “feet on the street” research – scared. That’s why to me, you closest is how the Android OS but not anywhere near as don’t necessarily have to know comes pre-installed with many as there are now. And as more than the next guy to Google products, or the you guys know, there are lots have an informational gateways to those products. If of independent services that advantage. But you are most that link were to break, it have grown up over the last certainly at an informational wouldn’t be a good thing. decade that will allow you to disadvantage if you haven’t Although, it’s possible that outsource that function. With made the effort to gather Google has achieved escape something like Google, and I enough information to make velocity at this point and would say most of the an informed decision. become so popular that even if companies in the portfolio, we it was forced to change its (Continued on page 17) Page 17 Ruane, Cunniff & Goldfarb

behavior, the change might growth in the future, other somebody to disrupt it in a have less impact today than it than that we do think this is a major way. would have had a few years business that ought to grow ago. faster than the economy for a G&D: Any other favorite ideas long period of time. So we paid in the portfolio? Microsoft reached a similar a price that only assumes that point when they attracted legal Google grows at a GDP-type DP: Credit Acceptance Corp. and regulatory attention, and growth rate, maybe a little (CACC) is a classic Ruane kind were forced to unbundle some more. I think we paid a price of stock. It’s a quirky business, of their products. However, if that doesn’t require you to and not especially well you look back, Internet make bold predictions about understood. This company is Explorer—which was at the the future of the business, just the lender of last resort for center of that scrutiny—has modest ones. people who want to buy cars lost a lot of market share in but are having real difficulty the browser market not DP: The easiest way to figure with their credit. So a lot of because Microsoft was forced out if something is really good the loans are going to be made to change its practices but and really works is whether its on the buy-here-pay-here type because, I think, competitors competitors can copy it. We of car lots—where the car just came up with a better owned an industrial distributor dealer is also the financier— version of that product. called Fastenal for 17 years— and not a typical dealership. people tried to copy it and The customer has a credit G&D: In that vein, how do couldn’t. I think Google has problem, and is buying a you think about competition $6,000 or $8,000 car that they from, say, Facebook or “I also dislike the idea need to get to work, and they Amazon? Eric Schmidt has said can’t otherwise get a loan. that, after Google, Amazon is that there’s a the next biggest search engine Credit Acceptance has a U.S. consumers use. fundamental program where it will advance distinction between the dealer a portion of the JH: Amazon is already there. It sales price of the car—but not is a huge advertising and value investing [and] the whole—and then the product discovery platform, dealer and CACC are both on and it wasn’t started yesterday. growth investing…. the hook. So it’s a model based Facebook is already a gigantic on alignment with the dealer. advertising medium that Every business is worth Both the dealer and CACC are attracts eyeballs for huge very incentivized to collect the periods of time every day. And something. And ideally full balance of the loan, and to they weren’t created you’d like to buy for sell the car at the proper price yesterday. Google is already where you have a chance to living with this competition and some discount to collect the loan instead of still growing at remarkable exploiting a customer who is rates. intrinsic value.” poor.

Also, by no means is our similarly proven itself in the Meanwhile, consumers who position predicated on the idea marketplace, precisely because couldn’t get a loan anywhere that Google is going to there have been other search else get a chance to rebuild continue growing 20% a year engines that haven’t stuck. their credit record if they’re for the next five years. I able to pay the loan off, even if certainly would not want to The Google search engine they’re paying rich terms to take the over on that bet. Our works better. It’s better for access that credit. Around 60% guess is that the business is the consumer. And at this of people end up paying the going to grow in the future, point, it’s so powerful and so loan off. I think it is a benefit to but the point is that we didn’t widely used globally, it would the consumer. And for the want to be forced to have an be very, very hard for 40% or so that ultimately end opinion about the rate of up defaulting on the loan, (Continued on page 18) Page 18 Ruane, Cunniff & Goldfarb

Credit Acceptance is very of capital flooding into the challenged circumstances is effective at repossessing the space. And it will do better in even harder. car and then reselling it. the next couple of years if money exits subprime and And collecting money from It’s a niche product that you more people struggle to find CACC’s borrowers is very need for a particular credit. hard, because car loans are not consumer. On a buy-here-pay- really a secured lending here car lot, Credit Thanks to some of these business. There is collateral Acceptance will account for misunderstandings, CACC was there, but repossession is not 5% to 10% of the loans. And very cheap. We bought it at 10 a major feature of the business because CACC doesn’t times earnings, with a model. advance the full price of the management team that’s very car, it doesn’t have the same good and very aligned with the So CACC is a collections leverage as a typical subprime shareholders. It feels like a business. Collections lender who is advancing the full great investment to us. businesses are tough. The price of the car, and it doesn't more history and the more have the same risk profile. G&D: Can you explain why data you have on the Over time, the returns on the other five competitors borrower, the better. Lending capital have been very high who tried to replicate CACC’s against this office building is a compared to any other model weren’t able to? It relatively easy lending business. subprime lenders, because the seems all you have to do is You’re lending to people who capital at risk is lower. make sure the dealer has some in a lot of cases don’t need the skin in the game. money, and you have a It’s a terrific model. Four or fantastic piece of collateral five other reputable, smart DP: How much you advance that’s readily saleable. companies have tried to copy to the dealer is important. it over time and haven’t been One thing that’s really neat And it’s easy to get your hands able to do it. On top of that, I about Credit Acceptance is on this building. It’s not on still think Credit Acceptance they have a ton of discipline. If wheels. has got a relatively low market they can’t get the right terms share, even among the they’ll do only two loans to the G&D: Why are dealers willing subprime or sub-subprime dealer a year. They will walk to work with CACC? They’d customer base. away from business. Credit ideally prefer no skin in the Acceptance over time has game, and be advanced the full We also like that the been very disciplined about loan, no? management team is heavily what it will pay and about invested in the company and adhering to its economic DP: Because the dealer can owns a chunk of the stock. model. In contrast, I think then service a broader The CEO has been in place for everybody else who gets into customer base and do more 16 years and is only 51 years the business runs into business. So instead of turning old. And the founder still owns problems. To get market a sub-subprime customer a lot of the stock. share, they advance too much down, he can sell another car against the car, they take on with the help of CACC. And CACC gets lumped in with the more risk. dealers are in the business of stocks of other subprime selling more cars. And if the lenders, which have been Secondly, Credit Acceptance is dealer does it right, he can beaten up recently for good very good at repossessing the make more money. reason as the value of used car to get the collateral back. cars decline and as those And other people haven’t been And as John just said it lenders’ experience with loans as good at that either. perfectly, CACC has a tough worsens. But Credit business. You have to do Acceptance is actually a little JH: Loaning money is hard. things sometimes that are bit counter-cyclical to the rest Loaning money in a leveraged adversarial with customers. of the subprime industry. It way is harder. Loaning money Yet one of the things that was does poorly when there’s a lot to people in economically so impressive to me is that this (Continued on page 19) Page 19 Ruane, Cunniff & Goldfarb

company has been on the 100 G&D: Is there still a sizeable DP: He has sold down his best places to work list for addressable market of new stake. The founder owns a years. It has a good culture. It dealers they can be involved large percentage of the has a good employee with, and hence grow? company and sold some stock environment. last year, interestingly not at a DP: There are parts of the great price. He sold a big It’s easy to be in one of the country, such as suburban chunk last year, and that’s 100 best places to work in Detroit and generally the around the time we bought America when you’re Google, Midwest, where they’ve got CACC actually. and you’ve got an amazing very good penetration. But business with smart people and there are other parts of the The founder selling gave us a a tremendous model. It’s not country where they’re not little bit of pause, because we as easy to be one of the 100 nearly as big as they could have great respect for him. But best places to work in America be—California, some of the he had an overwhelming when you’re dealing with Sun Belt states. I think there’s portion of his net worth in the people who are in distressed a lot of opportunity to grow. business, had owned it for situations. I think they’ve built many years, and is no longer a really good culture in a really involved in the day-to-day hard business. “Credit Acceptance management. He made the decision to hold a little bit less. G&D: A quick glance at the has a program where financials shows that CACC The CEO who is there now is now makes 30% ROE, but it will advance the in his early 50s, also owns a lot before the Great Recession dealer a portion of the of stock, and I think has an they were usually making 20% incentive plan that rewards ROE. Is it possible they’ve over sales price of the him based on stock -earned the last few years performance over 10 years, because of the Fed’s easy car...and then the which is the kind of thing that money, which has kept down aligns with us very well. So I their cost of capital and also dealer and CACC are still feel that we’ve got heavy boosted their loan volume? ownership by the management. both on the hook. So The board of directors also DP: That’s a good it’s a model based on owns a lot of stock. There are observation. I think after the a couple of good investors on Great Recession, a lot of alignment with the the board. lenders fell out of subprime, and there was a period of dealer.” G&D: What about the politics probably two or three years of subprime auto lending? The where they had much less JH: More generally, I don’t Obama administration was competition. So their returns think we wanted to have a particularly aggressive against boomed. point of view on what exactly such lenders. the sustainable ROE of this Now, over the last couple of business is. We felt that the DP: There is regulatory risk years, a lot of money has price we paid for it assumed there, and we’ve thought flooded back into subprime. So that the business never grew about it a lot. Government CACC has actually cut back on again. does tend to look at high the amount of loans they do interest-rate loans and the way per dealer—because there’s DP: At 10 times earnings, subprime consumers are much more capital available for certainly. It’s not as if we paid treated. The good news is these dealers—and they’ve a stretch multiple. CACC has a very serious tried to grow instead by being compliance culture—and as I involved with more dealers. So G&D: Hasn’t the chairman- mentioned, it is often listed as I’m not sure we’re in an founder sold down his stake? one of the 100 best places to artificially inflated environment work. at this point. (Continued on page 20) Page 20 Ruane, Cunniff & Goldfarb

Keep in mind that this thanks. Do you have any advice comes, hire people who are consumer would not have for MBA students looking at a smarter and better than you. If access to an automobile if not career in investment you do that, your life is going for a business like CACC. management? to be so much more They perform a role in society. successful. If they weren’t there, think of JH: This is a learning business. the number of consumers who Try to work with people who And if you’re trying to break wouldn’t be able to drive a car. are good teachers in an into stock-picking, the other environment where you can cliché that’s true is the stock G&D: You assume that learn a lot. The fanciest name market can stay irrational government will be rational. on the door is not always the longer than you can stay right answer to that question. solvent. So you’ve got to be DP: Yes. You assume the humble. It’s not an easy government will be rational It’s the same in your career as business. You can be right at and realize that this is a high- it is with college. I talk to everything you do, and the risk customer, therefore you young people and they seem to stock can still go 20% the need to have a high ROE constantly think that if they other way. Humility takes you model to serve that customer. don’t go to any one of these a long way. And if CACC is not there, five colleges, life is over. That who would be there? In the they must get this credential G&D: Thank you for your case of Credit Acceptance, you or all the doors will be closed time. could make an argument that to them. The truth is that’s just 60% or so of the consumers not how the world works. You do pay off the loans and have the motor inside of you rebuild their credit record. So that you’ve got. It’s up to you there’s a benefit to a person to put the fuel into it and get who wouldn’t otherwise be the most out of it. able to drive a car. Where you go to college, the G&D: What’s the interest rate name of the first firm you on these loans? work at is not going to determine where you end up. DP: I’m sure that they’re You determine it. You pushing whatever state limits determine how much you get are on the interest rate. out of whatever God gave Perhaps 20% to 24%. you—and the way to get the most out of it is to work really G&D: You’re referring to the hard and do what you love, usury limits states set. Though because it’s hard to work couldn’t a lender always get really hard if you don’t do around the usury limits by what you love. And then work inflating the price of the car? with really good people in an environment where you can DP: Again, I think they have a learn, that will help you get the compliance-conscious culture. most out of what you’ve got. Part of the deal that they make with the dealers is that the DP: The best advice I think dealer needs to have some I’ve ever heard anybody give is alignment and some incentive Charlie Munger’s bit about to do the right thing. I think aligning yourself with people they do a good job obeying the who are better than you are. law and caring about Marry someone who’s better compliance. than you are. Work for somebody who you really G&D: That was fascinating, respect and admire. If the day Page 21

Staples 8.5 2025 (CUSIP: 03939PAA2) - Long

1st Place - 2017 NYU Credit Pitch Competition

A.J. Denham, CPA Kevin Brenes Gili Bergman [email protected] [email protected] [email protected]

Recommendation We are long Staples 8.5 2025 Senior Unsecured notes which are trading at 91.7 with a YTM of 10.3%. The mar- ket has overreacted to the announce- ment of Amazon Business Prime on October 24th, dropping the newly A.J. Denham, CPA ’19 issued bonds from 96 to a low of 85 A.J. is a first-year MBA student in a two week period. We believe the bonds offer a compelling investment due to 1) extremely stable cash at CBS. Previously, A.J. worked in private equity at the Florida flows with 70% of revenue on 3-5 years contract basis with 92-97% customer retention rates, 2) strong barri- Mezzanine Fund then as a ers to entry against Amazon, and 3) market overreaction to Amazon Business Prime. Manager in Strategic Planning at Verizon in the U.S. Business Description Staples is a B2B distributor of office products. The company is the 5th largest e-commerce merchant in the

U.S. Staples was acquired by private equity firm Sycamore Partners on September 12, 2017, and issued $1.0bn in 8.5% Sr. Unsecured Notes maturing 2025 to finance the transaction alongside a Sr. Secured $2.9bn Term Loan and $1.6bn in new Equity. The issuer is Staples North American Delivery (NAD), a B2B office supply distributor. Staples NAD operates three business segments: Staples Business Advantage, which targets enter- prise customers on a 3-5 year contract basis (70% of revenue), Quill.com, and Staples.com, which targets small businesses and individuals (collectively 30% of revenue). Sycamore spun off the retail store operations into a separate entity with its own separately financed capital structure with no cross obligations.

Investment Thesis 1) Sticky customer base with extremely stable cash flows Staples has extremely stable cash flows with a high fixed charge coverage ratio. 3-year customer retention rates are 97% for enterprise customers and 92% for middle market customers. These customers comprise 70% of sales, creating strong revenue protection for the entire company. Kevin Brenes ’19 Kevin is a first-year MBA Staples Business Advantage revenues are extremely sticky. We have modeled a downside scenario with as- student at CBS. Previously, sumptions of contracts renewing every 3 years and retention rates declining by 3% per year for the next 5 Kevin worked at Banco Gen- years. These inputs only produce a ~2% revenue decline per year. Because of its stable revenue and approxi- eral as an analyst in Panama City, Panama. He covered Latin mately 10% projected EBITDA margins, Staples generates strong free cash flow that covers its fixed charges by American corporate bonds and over 2.0x. Bringing the FCCR to parity would require assumptions of 50% customer retention rates, a 5% Panamanian equities. gross margin contraction, and a 17% revenue decline – unrealistic given Staples’ history and barriers to entry

in the industry.

Gili Bergman ’19 Gili is a first-year MBA student at CBS. Previously, Gili worked at Harel Insurance & Finance as a buy-side analyst in Tel Aviv, 2) Strong barriers to entry and protection against Amazon Israel. He covered both equity The B2B office supply business has strong barriers to entry, protecting it from new entrants like Amazon. The and fixed income global mar- kets. market is used to thinking of Amazon as a nimble competitor disrupting old industries. However, in this case Amazon is the company faced with legacy issues prohibiting it from adapting quickly. In the legal opinion from the antitrust proceedings blocking the merger of Staples and Office Depot in May 2016, the Federal Trade Commission provides 8 reasons as to why Amazon is not a viable B2B office supply competitor. Customer calls with corporate sourcing personnel confirm the FTC’s story. We highlight what we believe are the major Page 22

Staples 8.5 2025 (CUSIP: 03939PAA2) - Long (Continued from previous page)

• Desktop Delivery: Staples has a dedicated sales team and delivery fleet that work with office managers on delivery times and place- ment. Staples consolidates orders, delivers, stocks, and installs merchandise at specific times in specific locations within a building – for example, directly walking into a customer’s office and installing ink in the printer. By contrast, Amazon sends separate packages for each order (85% of Amazon Business deliveries are not consolidated by address) and delivers only to customer’s door or mail room. Corporate clients confirmed the high demand Staples’ approach to enhanced customer service without which it becomes much more difficult to win request for proposals (RFP). • Customer Service: Staples assigns each enterprise customer a dedicated sales representative to provide support for personalized orders and logistics. Staples currently employs 3,500 sales representatives and is planning to add 1,000 more. Amazon does not have a dedicated office supply sales force and has no experience with the RFP process. This is a critical support factor; individual corporate sourcing agents have little to no experience planning corporate-wide office supply needs. • Fixed Pricing: Enterprise customers require fixed pricing on a contract basis. Amazon is unable to provide fixed pricing because over 50% of its office supplies are sourced from third-party vendors over which Amazon has no control. Amazon’s existing business model conflicts with current business practices in the B2B office supply industry, and it will be tough for Amazon to change this core competency. • Switching Costs: Switching costs such as process integration and retraining personnel are a real consideration for corporate cus- tomers. Office supplies are also such a small part of the overall corporate cost structure that there isn’t as much pressure to cut costs, and any gains are unlikely to outweigh the pain from switching vendors. Corporate inertia will delay any effort Amazon makes to enter the enterprise market.

3) Market overreaction to introduction of Prime membership for Amazon Business customers On October 24, 2017, Amazon Business introduced Prime membership for its customers. Staples Sr. Unsecured notes fell 5% on the an- nouncement. The announcement of Prime membership should not be confused with Amazon entering the marketplace. Amazon has been competing in the office supply industry for 15 years and has yet to make significant inroads into the B2B office supply business. The only new benefit of Prime membership is free two-day delivery. However, Staples already offers free next-day delivery covering 95% of the U.S., with 85% of orders already delivered next-day. Additionally, the FTC noted that Staples , inclusive of corporate discounts, actually has lower prices than Amazon. The market has overreacted to a non-event and has created a compelling opportunity.

Capital Structure Staples debt consists of two issuances: a $2.7B Senior Secured Term Loan at L + 400bps due in 2024, and this $1B 8.5% 2025 Senior Un- secured. There are no near-term maturities and the Term Loan amortizes at 4% a year, reducing total debt over time. Staples also has access to a $1.2B undrawn revolver at L + 150bps for liquidity support if necessary. While rated B-, 3.6x EBITDA/fixed charge coverage and under 3.7x total leverage resemble a B+/BB- profile and will support a rating upgrade with continued strong financial performance.

Key Risks and Mitigants 1) Amazon acquires Office Depot/OfficeMax: The most effective way for Amazon to enter the B2B office supply market is to ac- quire Office Depot and run it as a separate business unit, which could increase price competition. However, even in the event of an acqui- sition, it’s unlikely Amazon would drive prices too low or sell below cost for fear of antitrust action.

2) Sycamore sells assets and/or distributes cash: Sycamore has a poor reputation among creditors due to harmful actions in prior deals. In our model, we assume Sycamore will distribute any of the company’s excess cash and liquid assets in order to enhance its re- turns, which requires accepting the risk of further assets sales which might erode credit support. This risk is mitigated, however, by the over 2.0x fixed charge coverage ratio, stable cash flows, and $1.2 billion revolver. You are not buying these bonds for the balance sheet, you are buying them for the coverage. Page 23

FleetCor Technologies (NYSE: FLT) - Long 1st Place - 2017 Women In Investing (WIN) Conference

Aditi Bhatia Lisa Chen Victoria Gu Aleksandrina Ivanova [email protected] [email protected] [email protected] [email protected]

Recommendation We recommend a long on FleetCor Technologies Aditi Bhatia ’19 (FLT) with an end of 2019 Aditi is a first-year MBA stu- dent at CBS. Previously, she price target of $279.46, worked as a Senior Associate offering 80% upside from at Temasek Holdings and as an September 2017’s price of Investment Banking Analyst at $155.00 and an IRR of 34% Credit Suisse. over a two-year holding

period. We believe that FleetCor has 1) an attractive business model with strong network effects yielding an industry-leading ROIC, 2) the ability to grow revenue ~15% per annum over the next 5 years by capturing opportunities domestically and abroad, and 3) an attractive buy-in opportunity due to misplaced market pessi- mism.

Business Description FleetCor is headquartered in Norcross, Georgia, and its products are used in 53 countries around the world, with its primary geographies in the US, Brazil and the UK. FLT provides workplace productivity enhancement products primarily related to fuel, lodging, and employee benefit payments, telematics services, and fleet maintenance management. Fleet card solutions (>60% of revenues) allow fleet owners to control employee Lisa Chen ’19 spending, generate fuel savings and improve free cash flow. Further, by joining a fuel card network, gas stations Lisa is a first-year MBA student benefit from increased vehicle traffic. The company’s core products are primarily sold to businesses, retailers, at CBS. Previously, she worked major oil companies and marketers and government entities. in Strategy and Business Devel- opment at BlackRock in New Investment Thesis York. 1) Attractive business model with strong network effects yields leading ROIC The industry is characterized by high barriers to entry because the two interdependent factors for success include scale and network acceptance, which is challenging for a new entrant to build. The business model is characterized by highly recurring and diversified revenues with high customer retention, resulting from a strong value proposition to customers. FLT and its closest competitor operate in a duopoly market following significant consolidation, and there are no near-term threats from smaller players in the market. Between the two players, FLT has consistently had a higher ROIC, cleaner balance sheet, and a great execution track rec- ord.

2) FLT can grow revenue ~15% per annum over the next 5 years by capturing opportunities do- mestically and abroad Victoria Gu ’19 We identify attractive market growth opportunities in its two key markets: fuel card market estimated to grow at 19% CAGR over the next 5 years driven by increasing market penetration, and corporate payments Victoria is a first-year MBA market estimated to grow at 8% p.a. Using a blended market growth rate across different business segments, student at CBS. Previously, she worked as an Investment we believe FLT can achieve a ~15% growth rate p.a. over the next 5 years. Banking Analyst and Associate at J.P. Morgan in the US and Europe covering the TMT sector.

Aleksandrina Ivanova ’19 3) Market pessimism is misplaced, creating a cheap and attractive buy-in opportunity Citron published a short interest report in April 2017 accusing FLT of unsustainable fee practices from late Aleksandrina is a first-year fees and predatory billing practices that were driving away customers and large accounts (Chevron). The re- MBA student at CBS. Previous- ly, she worked as an Equity port was timed with FLT’s ComData IT conversion issue that caused billing inaccuracies and delayed customer Research Associate at Survey- service to 30K accounts, leading to a significant uptick in customer attrition and precluded new sales. Since or Capital. Before that, she then, the issue has been resolved and attrition has stabilized. Noise around billing practices has also quieted, spent 3 years working as a with stock prices recovering since 2Q17. Upon inspection of FLT business practices, we see consistent above High Yield Associate at Fidelity. Page 24

FleetCor Technologies (FLT) - Long (Continued from previous page)

90% retention rates, lower than WEX revenue contribution from late fees, and historically low complaints, with the exception of a spike due to the IT conversion issue. We anticipate the NTM multiple to re-rate to historical levels after FLT proves consistent new customer wins and unaffected retention rates for the next few quarters.

Valuation We are valuing the company assuming a two-year holding period. In our base case, we assume the multiple would re-rate to competitor WEX’s current level. In our bull case, we assume the multiple would re-rate to FLT’s level prior to the publishing of the Citron report and IT conversion issues. In our bear case, we assume the multiple would not re-rate. Taking into consideration all potential outcomes, we arrive at a FY19 target price of $279.46, which implies a 34% IRR. We also used a DCF as a sanity check to our valuation methods. Based on current market conditions and comparable beta to WEX, our DCF analysis yields similar price ranges to a multiple-based approach.

Implied Return: Breakdown of price appreciation:

NTM P/E multiple evolution: FLT is currently trading at a discount to WEX and its own 5-year avg. NTM P/E

Key Risks and Mitigants 1) Electric vehicle adoption in the truck industry: New vehicles have a long runway to prove economic viability. Furthermore, charging and production infrastructure needs to be improved. 2) Exposure to gas prices: FLT’s pricing model incorporates a natural hedge against a drop in fuel prices. Through actual diversification, the company only has 10% exposure to absolute fuel and 11% exposure to fuel spreads. 3) Shifts in fuel card outsourcing trends toward in-house solutions: ~60% of US gas stations are independently owned, making in- house solutions difficult. Furthermore, FLT’s consistent 90%+ retention rate proves strong value proposition to customers that will help continue increasing win rates. 4) Improved fuel efficiency: Economic growth along with a rise in the number of vehicles will offset the impact of improving fuel effi- ciency or new regulations. 5) Threat of consolidation of fleets and small gas stations: This would act as a tailwind, as the value proposition is stronger for larger-sized gas stations and fleets.

Catalysts 1) Analyst day in 2018 and a new Head of Investor Relations should provide for better management disclosure and correct the market’s misperceptions. 2) Proven strong customer retention in the coming quarters to counteract Citron’s allegations.

CBS first-year students Jade Hu ’19 ([email protected]) and Ashley Allen ’19 ([email protected]) also participated in the presenta- tion of the FLT idea at the WIN conference in November 2017. Page 25

First Data Corporation (NYSE: FDC) - Long 3rd Place - 2017 CSIMA Stock Pitch Challenge

Ishaan Bhatia Ryan Darrohn Victoria Gu [email protected] [email protected] [email protected]

Recommendation We recommend a long Capitalization Other on First Data Corpora- Share price ($) $17.1 Short Interest 6.80% tion (FDC) with an end DSO (mm) 923.5 52-week low/high $13.01/$19.23 of 2020 price target of Market Cap ($mm) $15,819 $39, implying a 128% Less: Cash ($mm) (502) EV/EBITDA FY18E 11.3x absolute return and 30% Plus: Debt ($mm) 18,649 EV/EBITDA FY19E 11.9x Ishaan Bhatia ’19 IRR. We believe: 1) Plus: Minority Interest ($mm) 2,938 P/E FY18E 10.9x FDC is a winner in an Ishaan is a first-year MBA Enterprise Value ($mm) $36,904 P/E FY19E 9.9x student at CBS. Previously, he oligopolistic market with Leverage 6.3x FCF yield 8% worked as a Private Equity industry leading margins Analyst with Samara Capital in and cash flow, 2) short-term fears are overblown and FDC can grow revenue at 6-8% due to secular recovery, India and as an Investment Banking analyst at J.P. Morgan and 3) strong FCF generation will lead to rapid deleveraging and a multiple re-rating to P/E. in India and the UK. Business Description First Data Corporation is the largest merchant acquirer, merchant processor, issuer processor, and network

services provider in the world, with a global footprint on four continents. FDC was taken private by KKR in 2007 and recently went public in 2015. It has three segments: 1) Global Business Solutions (GBS) - POS mer- chant acquiring and processing, 2) Global Financial Solutions (GFS) - credit/private label processing, and 3) Network & Security Solutions (NSS) - EFT network solution (STAR), stored value network solutions, and debit card processing. 79% of FDC’s revenues are from North America, 14% are from EMEA, and the remain- der is split between Latin America and Asia.

Investment Thesis 1) Winner in an oligopolistic market with industry leading margins and cash flow FDC’s scale and distribution network are protected by high barriers to entry. Its large network allows FDC to continuously reinvest cash flow into expansion, driving customer stickiness and cross-selling opportunities. At 1.5x the scale of the closest competitor in merchant processing volume, FDC enjoys the highest EBITDA mar- Ryan Darrohn ’19 gins (37%) and FCF conversion percentages (92%) in the industry. Ryan is a first-year MBA stu- dent at CBS. Previously, he was an acquisitions officer and Captain in the U.S. Air Force. He graduated from the U.S. Air Force Academy with a degree in Business Administration.

2) Secular recovery and tailwinds spark growth Cash-to-card conversion, which is forecasted to grow at a CAGR of 6% for debit cards and 9% for credit cards through 2020, will continue to drive FDC’s top line and represents a tremendous white space oppor- tunity in key international markets where purchase penetration is low. Crucially for the GBS North America segment, lead flows suggest recovery in Joint Ventures while SMB attrition has started recovering, which will drive FDC’s recovery to continue to grow at 8-12% CAGR, while signature and PIN-less will grow-in line with wider industry GBS. Meanwhile, VisionPLUS will continue to grow GFS at a projected 8-12% CAGR.

Victoria Gu ’19

Victoria is a first-year MBA student at CBS. Previously, she worked as an Investment Banking Analyst and Associate at J.P. Morgan in the US and Europe covering the TMT sector.

Page 26

First Data Corporation (FDC) - Long (Continued from previous page)

3) Strong FCF generation leads to rapid de-leveraging and multiple re-rating We project FDC to have over $6B of cumulative FCF generation in the next four years (FY2019-FY2021), which will drive a Net Debt/ EBITDA reduction to less than 4x by FY2020. As debt repayments are accelerated, FDC will be looked at on a P/E multiple, rather than an EV/EBITDA multiple, by the exit horizon.

Valuation Our base case price target of $72 offers ~31% upside. In the base case, we assume: • Base Case: one-year forward P/E multiple of 18.5x, driving non-GAAP EPS of $2.25/share in FY2021. • Bear Case: one-year forward P/E multiple of 13x, driving non-GAAP EPS of $1.26/share in FY2021. • Bull Case: one-year forward P/E multiple of 22.1x, driving non-GAAP EPS of $2.57/share in FY 2021.

Using weights of 50% for the base and 25% for the bull and bear, our implied share price in FY2020 is $39.10, representing upside of 128% and an IRR of 30%.

Key Risks and Mitigants 1) Disintermediation: International and domestic scale and network are critical to becoming the leading merchant acquirer and proces- sor. For First Data, near to medium term disintermediation risk is extremely low. 2) Pricing pressure: High switching costs and a lengthy onboarding process should favor FDC’s scale. 3) Leverage: Superior FCF generation through top-line growth, margin improve- ment, and low CAPEX profile allows significant deleveraging. 4) KKR controlling ownership: KKR provides operational improvement opportunities such as business development through its portfolio. Page 27 Vulcan Value Partners (Continued from page 1) categories. Prior to majored in finance and of fun, but the main reason I founding Vulcan Value minored in English. As my went back to school was to Partners, C.T. worked as a coursework evolved and as I transition my career. In 1990, principal and portfolio had exposure to more things, I I started with Southeastern manager at Southeastern discovered that I was Asset Management in Asset Management. passionate about investing. Memphis, also known as During his 17-year tenure, Longleaf Partners. I was very the team at Southeastern While I was in school in the fortunate there had been some Asset Management early 1980s, coursework changes in the senior achieved double digit emphasized efficient markets, management of that company. C.T. returns well ahead of CAPM, and all those things. It left a hole, allowing some Fitzpatrick, CFA inflation and was ranked in Conceptually, a lot of it made younger guys, including myself, top 5% of money managers sense but some of it didn’t. It to take on a lot of over five, ten, and twenty was counter to how my dad responsibility quickly. I became year periods according to actually did things in the real a partner in the company Callan and Associates. world. I started challenging my pretty early on. professors and I got pushback. C.T. earned his MBA in It just didn’t feel right. Of I started as a generalist. We Finance from the Owen course, you want to were finding things in the real Graduate School of regurgitate it for the test, but estate area that were really Management at Vanderbilt then do you really agree with cheap and interesting. We University. He also has a it? increasingly gravitated to it BS in Corporate Finance simply because there was from the University of I read Graham and Dodd’s more opportunity there. Long Alabama. Security Analysis just to try to story short, we started a real understand, “Okay, what’s the estate effort, and I was very Graham & Doddsville other side of this?” It really fortunate to be tapped to lead (G&D): Could you tell us appealed to me and struck a that effort. I went from being a about how you got started in nerve. By the time I graduated, generalist to a real estate the industry? I wanted to be a value expert. Then, in the early investor. It was the mid-80s 2000s, we shut that program C.T. Fitzpatrick (CTF): I and Wall Street was booming. I down because basically we was a weird kid. I was reading had some opportunities on the rode cap rates down from 12% the Wall Street Journal when I money management side, but I to 8% and thought the bargains was 14 years old. My father also had an opportunity to had dried up. Obviously we got was my mentor. He was an work here in New York in out too early. I became a entrepreneur and I was just investment banking. generalist again. At that point, curious about what he was we had moved into doing. It became an intellectual G&D: What was that job? international and global. That curiosity. My dad was a value was really fun. investor but he didn’t know it. CTF: I worked at Merrill He didn’t call himself a value Lynch capital markets. I met Then, in early 2007, I decided investor. He did a lot of things my wife. She was a trader at it was time for me to move on. in real estate and he would try what now is Credit Suisse First I’d been there for 17 years. I to buy properties at a discount Boston, which was First think anyone who’s passionate to replacement value. He’d be Boston at the time. It was a about what they do, and looking for things that had fat great experience but I was only strives to continuously cap rates, things like that. on the edge of what I wanted improve, will keep their core to do. I was an agent, not a principles but continue to Since I knew I wanted to go principal. refine them over time. I began into business, I did not have to feel very strongly about the patience to pursue liberal I went back to graduate school some things that I wanted to arts, so I went straight into at Vanderbilt’s Owen School of do in my own personal corporate finance at the Management and had a great evolution. University of Alabama. I experience there. It was a lot (Continued on page 28) Page 28 Vulcan Value Partners

I left Southeastern to start assets, and the asset values value. They all became Vulcan Value Partners in order dropped just a little bit, the discounted, but we bought the to put these principles into equity value could evaporate companies that had inherently practice. I had a wonderful because of the financial stable values. experience there and I’ll be leverage on the balance sheet. forever grateful for being part You could buy J.P. Morgan at a My evolution as an investor of Southeastern. I wouldn’t be discount to tangible book and was that it's not enough to buy here today if I had not been believe you had a margin of a company that is statistically there first. safety, but the margin of safety cheap at a point in time. It has would be ephemeral because to have what we call at Vulcan G&D: Is there a particular the company’s value is Value Partners a sustainable philosophy or framework that inherently unstable. margin of safety. they use? That is an example of a G&D: In addition to CTF: When I was there my company that, in fact, the old sustainable margin of safety, initial emphasis was just on C.T. would have said, “Oh, my what other things are critical valuation. The cheaper, the gosh! I can buy J.P. Morgan at parts of your investment better. There were other parts half of tangible book. You philosophy? to the analysis, of course, but the energy went to finding “My evolution as an CTF: Time horizon is really discounted companies. The important. It can be a huge bigger the discount, the more investor was that it's competitive advantage if you’re interesting, and that’s the work not enough to buy a able and willing to use it. Our you focused on. minimum time horizon is five company that is years. Assume the equity As I evolved, I began to feel markets are shut down or that it was even more statistically cheap at a think about it like a private important to focus on business equity investor. If we would quality, specifically value point in time. It has to not be willing to have capital stability. This concept gets tied up for five years, it doesn’t back to what attracted me to have what we call at qualify for investment. value investing in the first Vulcan Value Partners a place: the idea that you could With that rule, we discard take on less risk and earn sustainable margin of probably 90% of the companies excess returns. That absolutely that are publicly traded. A lot turns the Efficient Markets safety.” of them get cheap from time Hypothesis and CAPM on its to time but we have no head, but it is what Graham know, this is great!” or, interest in them because they and Dodd were talking about, “Maybe we should buy Bear don’t meet that test. If we’re and what Warren Buffett and Stearns too or maybe we going to have a five-year time Charlie Munger continue to should buy Lehman Brothers. horizon and base our talk about. We can buy them at a discount investment decisions on that to book.” But, we didn’t do time horizon, we have to For example, look at J.P. any of that at Vulcan. invest in companies whose Morgan during the financial value is stable over that time crisis. It was a really well- Instead, we were buying horizon. Very few companies managed company but its companies like MasterCard fit that criteria, but the ones balance sheet was so leveraged that were caught up in the that do, again, provide what that it was impossible to figure taint of being a financial we call sustainable margin of out what its equity was worth services-oriented company but safety. with any accuracy. The it had net cash on its balance company’s assets are opaque sheet. Unlike all the others When I started, I was discount and difficult to value with that I mentioned, it generated first and then the rest later. precision. Even if you were a huge free cash flow coupon Today, at Vulcan, we are value able to accurately value the and had an inherently stable stability first. We don’t care if (Continued on page 29) Page 29 Vulcan Value Partners

it’s discounted or not. Of that aren’t cheap yet? high are your returns on course, we want to buy capital? How stable are your companies at a discount, but CTF: That’s a great question. margins? How strong is your when we start, we don’t look It gets to how we’re wired. balance sheet? We look at all for cheap stocks. We look for I’ve heard Mr. Buffett speak of it, free cash flow being the companies with inherently very eloquently about this. most important. stable values. Those companies There are different types and we follow. Most of them are different stripes of value We spend a lot of time overvalued most of the time investors. When he wrote the qualitatively trying to but when they become essay The Superinvestors of understand what’s driving the discounted, we’ve already Graham-and-Doddsville, he numbers and the qualitative done the work. We’re up to mentioned there are different aspects of the business. Is the speed on them. We follow people who do it in different business getting better or them just like we own them. ways. There’s not, I think, one worse? Our analysis is correct way to do it but quantitative but I think our real Often there is an event: it there’s probably one way value add is on the qualitative could be a macro event, it that’s correct for each of us to side. We spend an awful lot of could be something specific to do it. It gets back to staying time debating those qualitative the industry, or it could just be within our circle of issues. volatility. We haven’t had competence. much of that lately but it does G&D: In the past you’ve happen every now and then G&D: You mentioned your mentioned energy companies and you have a chance to buy shift towards value stability. and commodity risk. Are there these businesses at a discount. Were there some investments any other sectors that you’re that pushed you in that saying, just by the dynamics of You have a history of your direction? that business model and that values. You’ve updated them. sector, we're not playing in When you watch that over and CTF: On average, our returns that area? over again, it gives you a lot of were really good but it confidence to buy a company. bothered me more to lose CTF: Anybody who doesn’t You might not have owned it money than I enjoyed making control their own destiny, for 10 years, but you might money. What attracted me to which is most people. You have been following it for 10 value investing in the first place mentioned energy. There are years and its value has is a margin of safety, taking on less than a half a handful of compounded steadily. It gives less risk. companies in that area that you a lot of confidence provide value-added services because you’re not scrambling Using a baseball analogy, you that we like, but we don’t like to get up to speed. If you’re don’t improve your average by most of the industry. trying to get up to speed at the just hitting more home runs. If last minute, the seller is going you can eliminate your There are some really well- to know a lot more than you strikeouts, you can really managed industrial companies. are as the buyer, but we’ve improve your results. It’s not One we’ve owned for a long been following these so much about what you do; time that’s been really companies forever. it’s what you don’t do. successful for us is Parker Hannifin. They’re a leader in We make mistakes but I think G&D: When you’re thinking motion control products and our dual emphasis on quality about the value stability, you they have a substantial and discount is what really seem to focus on free cash aerospace business as well, differentiates Vulcan. That is flow. Is that correct? where they are in programs what we do differently than a like the 787 which have a very lot of practitioners in the CTF: Yes. From a quantitative long life. We like companies industry. point of view, free cash flow is where the equity duration is really important to value long and the cash flow is very G&D: How do you motivate stability. That’s a quantitative stable. your analysts to look at things metric. There are others: How (Continued on page 30) Page 30 Vulcan Value Partners

Then there are other industrial G&D: You have a couple thoughtfully and create a companies that are just making hundred names on that list, foundation that can propel you commoditized products. right? forward, that is a one-time They’re typically price takers asset but it’s depleted over and they are heavily leveraged. CTF: We have roughly 500. time. It’s gone. You only get it They’re in a very weak Our analysts are rewarded for once. We spent a lot of time position. Anybody can do what finding new names to add to when we were setting up the they do. Those are just cigar the MVP list, but they’re company to make sure that we butts. They get cheap, but we doubly rewarded for taking set up a culture and a Professor Tano Santos don’t care. We don't want to names off. No one is rewarded compensation system that speaks with Mario Gabelli waste our time with them, for how many names they reinforces the execution of ’67 at the 27th Annual even if they are cheap, because follow in the portfolio. You our investment philosophy. Graham & Dodd Breakfast they do not have inherently just happen to be the person stable values. who is following the name at G&D: How do you look for the moment it became these new MVP companies? G&D: Could you buy one of discounted. These names on those cigar butts at such a the MVP list have been CTF: We read a lot. We get a discount that you are updated by numerous analysts lot of ideas from following the effectively agnostic to the companies we own. We spend commodity price risk? “We don’t screen. a lot of time talking to the companies we own. I can’t give CTF: Absolutely. You could, We’re looking for great you all the secret sauce, but and I used to do things like we’ve spent a lot of time that but don’t do them businesses….A lot of talking to very accomplished anymore. You have to be people. We never ask about disciplined. We still like the businesses that we own earnings. We talk about long- discount. But liking a discount currently, I have owned term issues impacting the didn’t make it go away. business. We talk about what’s three or four times over going on currently. We talk There are things we look at, about the things that really we go, “Oh, my gosh. You the course of my career. matter. The companies we talk know, this is just so tempting,” to really appreciate that. but don’t do it. We don’t. That makes up what we G&D: You’ve owned Oracle G&D: You mentioned call our MVP list: for a while, and it’s your spending some time on the companies we follow largest holding. Why? quantitative but a lot of time on the qualitative. How do you that we would buy if CTF: We became believers in go about valuing those the shift from on-premise qualitative metrics for they become computing to cloud computing companies and kicking the tires a long time ago. Go back a before you invest? discounted.” few years before the cloud grew rapidly. Oracle and SAP CTF: We don’t screen. We’re over many years. Nobody even dominate the on-premise looking for great businesses. remembers whose idea it was. software markets, specifically There’s a lot of accumulated It’s great because we’re now the enterprise computing knowledge. A lot of businesses working objectively with a software market. SAP is that we own currently, I have culture that reinforces our stronger in applications and owned three or four times investment process. We’re not ERP and Oracle are stronger in over the course of my career. at odds with each other. databases, but Oracle has That makes up what we call plenty of ERP products and our MVP list: companies we Most new businesses fail. You SAP has its own database. SAP follow that we would buy if have a lot of things going licenses the Oracle database they become discounted. against you but when you can for most of their stuff. set up initial conditions (Continued on page 31) Page 31 Vulcan Value Partners

It’s like Coke and Pepsi. might be using one of the margins. Earnings growing well Neither one of them is going products in the cloud and one over 100% in that part of the to knock the other out. They of the products on-premise. business. fiercely compete with each You’ll never know. That’s other, but they respect each really easy to say and The on-premise business is other. They bad mouth each incredibly hard to do. basically going from growing at other but at the end of the a mid-single-digit rate to day, neither one of them is SAP kept focusing on on- basically growing at zero. The going away. It’s very logical. premise. They’re more of a cloud business is now at a $6 Both companies have pricing European company and more billion run rate. With that kind power and their products are of their clients are based in of run rate, it’s now growing really sticky. Renewal rates are Europe. The Europeans are around 40-50% instead of 70% north of 90%. They’re in a generally more skeptical about or 80% on that much bigger sweet spot if you look at cloud than the Americans. The base. You couldn’t see it in the where the economy is adoption’s been a lot faster in GAAP numbers but we saw it growing. the U.S. There are some in all of the new bookings. business reasons for it, too, Growth was in line with the There’s more and more but Oracle is in a much strategy that they explained to demand for their products. stronger competitive position us. We weren’t the only ones Everybody talks about the than they have ever been who heard it, but you could explosion of data, and that because of their investment in see it in the figures that drives demand for their the cloud. ultimately drive the GAAP products. They both have had numbers. a wonderful business for a It cost them in terms of really long time. They’re both earnings. They’ve been You can go read old sell-side MVP companies. converting their client base to reports that were negative on cloud. It has impacted their Oracle because its earnings Roughly five years ago, Oracle revenue growth because growth had stalled. Now their made an announcement that you’ve had decelerating growth earnings are beginning to they were moving toward the in on-premise. They have had accelerate and the reports are cloud. SAP at the time said heavy R&D investments and getting more favorable. they were staying with on- costs going up faster than Oracle’s stock price is premise and not really revenues. Their earnings after beginning to go up but the investing much in the cloud. growing steadily for decades growth was there two years Oracle spent a ton of money starting dipping. ago if you looked at what’s to make all of their on-premise under the hood and not at the products fully compatible in G&D: When was that? When GAAP numbers. The GAAP the cloud and integrated with did they start dipping? numbers are a lagging indicator the on-premise offerings. to what’s actually happening in CTF: They started dipping the business. When you say you’re in the about two years ago, sort of cloud, what does that mean? flatlining about two years ago Oracle’s growing at double Oracle is in the cloud in a and then just a slight decline. digit rates again. We think much more integrated way Part of it was FX, but I’m they’re going to grow at than SAP is. Oracle invested talking about down mid-single double-digit rates for a really aggressively to be able to offer digits. Not a big deal at all. long time. Ultimately, is it the cloud across their entire going to be a 10-year transition product suite, a complete At the same time, while the on or a 20-year transition? If it’s solution. With Oracle, you can -premise is slowing down, the 10 years, they’ll grow faster be 100% in the cloud, you can cloud business is exploding. I’m sooner, but if it’s 20 years, remain 100% on-premise, or a value investor. We have a you’ll just have longer you can be hybrid and never really hard time modeling duration. They’ll grow slower know the difference. When growth rates like this but this but it’ll last longer. They will you’re sitting at your desk and was 70-80% annual revenue settle back down to a mid- you pull up the database, you growth with expanding single digit kind of revenue (Continued on page 32) Page 32 Vulcan Value Partners

growth again but in the mean investment phase. Now we’re opportunity when others were time they’re going to grow at on the other side of it. As five- focused more on near-term an accelerated rate. SAP trades year investors, we’re happy to EPS? at a significant premium to wait. Other investors are not. Oracle because they have They want to see near-term CTF: It does happen from continued to enjoy their earnings acceleration. time to time. It’s really ironic earnings growth over the because it’s what many say shorter term. They haven’t G&D: Can you talk a little bit they want companies to do, made these investments, but about barriers for entering the but then the companies get in that’s going to catch up with cloud? Can’t others enter as trouble for it. United them. well? Technologies is doing it right now with Pratt & Whitney. Again, at the right price, we’d CTF: Oracle has made Honeywell did it a few years own SAP. SAP’s strategy is not extensive investments not only ago. FedEx did it a long time flawed. It’s just a different to rewrite all of their code so ago when they started building strategy, but in terms of what’s that it can be deployed in the their international operations. going to happen, SAP’s growth cloud, on-premise, or hybrid, Quaker Oats did it when they is going to slow relative to but also in the infrastructure were investing heavily in Latin Oracle’s and it trades at a needed to deliver such America. It can create great premium. I think Oracle is an services. We do recognize that opportunities for long-term example of us exploiting our investors. five-year time horizon. We “We give Oracle’s look at that and say, “Okay, G&D: How do you evaluate we’ve got two years of flat-ish management team management? Is that just going earnings.” Meanwhile, they’re back and checking the track generating $13 billion of free points because they record of how they’ve cash flow, 80% of which has performed as stewards of been put into share re- do what everybody capital in the past or is it more purchases because they know says you’re supposed by talking with them about the their stock is cheap. landscape they’re facing? to do. They’re willing While we’re waiting for this CTF: You have to do both. I transition to occur and to sacrifice short-term think that studying somebody’s earnings growth to accelerate history is really, really again, our value is stable results to strengthen important. We made an because of the robust free cash investment in Time Warner flow and stable margins. They the company over the seven years ago. That was a quit growing for a while but long term.” company that was not on our we’re still getting a free cash MVP list because of mis- flow coupon, and they are cloud-only competitors exist in management exemplified by using that to repurchase shares the application layer, such as the AOL-Time Warner at a discount. Workday and Salesforce, and merger. Because of that, there there are infrastructure-only was finally a shakeup on the Our view is that we were paid competitors, such as AWS. board. People that we didn’t to wait while this transition However, no one competes like started to leave the board, occurred. We give Oracle’s effectively throughout the and people we did like started management team points stack with Oracle in both on- to join the board. Jeffrey because they do what premise and in the cloud. Bewkes became CEO, and we everybody says you’re were paying attention. supposed to do. They’re willing G&D: Are there any other to sacrifice short-term results examples where your The company was not on the to strengthen the company institutional knowledge from MVP list because of this big, over the long term. Now having followed these black mark on management we’re in the payoff phase but companies on the MVP list but it could be a potential add. we had to ride through the helped you spot a multi-year When Bewkes became CEO (Continued on page 33) Page 33 Vulcan Value Partners

and we saw this change in the look like?” During the financial CTF: We’re not always right. board composition, we started crisis, we had large Sometimes we sell something watching more closely what he investments in DirecTV and and the company remains was doing. He started Comcast, and we ended up competitively entrenched. reversing all the crazy stuff owning Time Warner Cable Frankly, with the distributors, they’d done. They started when it was spun out. Those it’s come back full circle. The doing a lot of shareholder- businesses were great video business is not that friendly things like spinning out businesses when we owned important to them anymore Time Warner Cable and them and their bottom-line compared to what it used to started buying back the stock financial results still looked be, but every time you’re when it was cheap. fantastic when we sold them. streaming Netflix or Amazon But from a qualitative point of Prime, it’s going through their We kept listening to view, we had started to worry pipes. They win anyway. They conference calls, and we kept about cord cutting. have really become ISPs more watching, and we finally put it so than video providers. back on the MVP list. Luckily We started talking to the for us this happened right younger analysts that we had I’m not saying that they qualify before the 2011 U.S. debt- hired. All of a sudden, I’m again, but who knows? Five ceiling debacle. First, we hiring people and they’re years from now, we might own decided it met our quality saying, “I’ve never paid for Comcast again. I don't know, criteria, including management. cable or satellite in my life and but things evolve and they You can have a great business I’m never going to.” The more change. We don't always know like Time Warner, but if you work we did qualitatively, we about the timing and how fast don’t have good management, said, “You know what? Power it’s going to happen. it doesn’t work. That was the is shifting from the content missing piece. It then became distributors to the content As value investors, we don’t discounted, and we bought it. owners.” About the time we have to play. It’s all about We just recently exited the bought Time Warner, we were managing risk. We might be position. getting out of DirecTV, wrong, but if we're wrong and Comcast and Time Warner things continue to go well, G&D: You mentioned the Cable because we believed we’ll just allocate capital quality criteria for Time that the content owners were somewhere else where we Warner. Can you define it? getting a stronger hand. We think things are also going to believed the distributors’ go well. We don't have to take CTF: Our definition of quality competitive position was those risks. is value stability. How stable is beginning to erode, but you your value? Things that lend couldn’t see it in the numbers G&D: Taking a long-term themselves to value stability yet. approach as opposed to more are production of free cash of an activist approach, I would flow, stable margins, and Now, look at today. Cord imagine you definitely need buy strong balance sheets. cutting's rampant. We saw that in from your clients on this You could argue that most of six years ago from a qualitative type of strategy. How do you our companies have very point of view. The qualitative communicate the type of inefficient balance sheets. analysis is even more investor you’re looking for and Because of their free cash flow important than the quantitative how do you best have that production, they could have a analysis because quantitative is conversation? lot more financial leverage than always a lagging indicator. By they do. Most of our the time you see it in the CTF: That’s a great question. companies have net cash and numbers, it's often too late. We truly view our clients as their balance sheets can be partners. We chose the word used as a weapon. G&D: So you recognize the partners and put that in our qualitative thing that triggers name very deliberately. We You then go and say, “Okay, you to think, “Okay, there’s a view the companies that we that’s great but that’s the past. shift here that hasn’t turned up invest in as partners. We want What’s the future going to in the numbers yet.” them to treat us as partners. If (Continued on page 34) Page 34 Vulcan Value Partners

they don’t feel that way about great. Most of our clients are think about careers in this us, that's a big red flag. We institutional. They invest in industry long term? look for the intersection, if you multiple asset classes, partner will, of a partnership between with multiple managers around CTF: I’m going to quote the the management teams with the world, and have lots of interview you did in your Fall whom we invest, ourselves, options. We tell them to issue with Howard Marks. I and our clients. One of the reduce their exposure to us thought his advice was things I’m really proud about at and put their capital outstanding. Do what you love. Vulcan is everyone at Vulcan is somewhere else where there I’m the happiest guy in the required to invest in public world. Every day, I do what I equities exclusively through “With the [content] love. I’m more blessed than I Vulcan. You can’t work at deserve to be. I have been Vulcan and invest anywhere distributors, it’s come happily married for many, else. many years. I have healthy kids, back full circle. The everything’s great. But during I think that really aligns our my working hours, I don’t interests with our clients. It video business is not think, “Okay, got to go and get doesn’t make us smarter than that important to through work so I can start anyone else, but it does keep enjoying my life.” I look everybody focused and it them anymore com- forward to going to work. I get weighs heavily when someone bored on vacations pretty in a research meeting feels pared to what it used quickly. It’s such a blessing to strongly about something. I enjoy my work that much. My know that their net worth is to be, but every time advice to everyone is to find riding on it. something that you love. You’ll you’re streaming Net- become so much more Our clients share our time flix or Amazon Prime, successful at something if you horizon. They share our ability love doing it. to differentiate between value it’s going through their and price. We have fantastic I’m sure you have all heard of clients. We tell them that pipes. They win any- Malcom Gladwell’s book investing with us can be very Outliers, and maybe you have uncomfortable. There are way.” read it. It discusses the going to be periods of time principle that if you do when we’re doing things that are better risk adjusted something you enjoy doing, are very uncomfortable in the returns. We want the kind of you’re going to do more of it, short run. If you are not willing client where we can have that and the repetition makes you or able to go through that dialogue. Then, there'll be a better. That’s my biggest discomfort, don’t hire us. day when we'll say, “Now, the advice. In terms of value You’ll be unhappy with us. We opportunity set is rich. I fully investing or anything else, you want client partners that can expect to get that money back must be passionate. provide stable capital for us. and a whole lot more.” 2008 was a great example of that G&D: Thank you, C.T. Thank There’ll be a time when we're happening. you for sharing your thoughts going to say, “Give us money. and time with us. The opportunity set is rich.” I One of our competitive really think they will because advantages is our group of we’ve told them it's not a great clients. We closed to outside opportunity set right now. If investors in 2015. Our clients you have better places to provide us with very stable allocate your capital, we capital, and that is a huge encourage you to do that. If advantage for us. you have another manager who’s got some great things G&D: What advice would you for another asset class, that’s have to students just as we Page 35 Oasis Management Company (Continued from page 1) Highbridge Capital to get coffee for the team—my these days. But, at the time, Management, where he first opportunity to showcase there were more managed the firm’s Asia my work was an FX arbitrage opportunities than there was investment portfolio. Prior opportunity in Venezuela. It hedge fund capital in places like to joining Highbridge in was an onshore-offshore arb Italy. January 1995, Mr. Fischer of converting ADRs. served in the Israel And then we got involved in Defense Forces. Mr. Highbridge co-founder Henry the Japanese convertible bond Fischer graduated from Swieca ’83 was extraordinarily market. That was then the Yeshiva University, New generous towards me. I was largest CB market in the York, in 1993 with a working with Alex Jackson ’91 world, because Japanese Seth Fischer Bachelor of Arts in at the time—and he suggested companies were issuing so Political Science. He is a I present the Venezuela idea to much CB paper. And this Board Member of the Henry. I did, and Henry said, reflected a regulatory quirk of Karen Leung Foundation, a “Great. Here’s half a million Japan. Insurance companies, Board Member of Carmel dollars, why don’t you give it a who were among the biggest School in Hong Kong, and try?” allocators of capital, had limits Vice Chairman of the Ohel on how much equity in other Leah Synagogue That was still a lot of money corporations they could own. Management Committee back then, but we gave it a try So corporations would issue in Hong Kong. and it worked. I stopped what are essentially surrogate getting coffee and started bonds as equity–securities that Oasis manages a looking for more stood in the eyes of the combination of strategies opportunities. We then did regulators as bonds but that that focus on investing, some cash extraction trades in offered equity-like trading, and arbitrage Italy, where interest rates participation. And they issued across global capital were really high. them cheap. There was just so markets with an emphasis much supply of paper that it on Asia, taking an G&D: What’s a cash was shockingly cheap. opportunistic approach in extraction trade? multiple strategies and Then I started getting involved asset classes. It invests in SF: This may seem alien to with everything else. There long and short current MBA students, but was a wide variety of arbitrage opportunities across once upon a time the world opportunities in Malaysia, markets and capital had both high interest rates Indonesia, and the Asian structures, and and opportunities for pure Tigers. Soon, the 1997-98 investments are selected arbitrage. And cash extraction Asian crisis occurred, and I for their optimal risk- is literally buying a warrant, learned about risk adjusted return profiles. shorting the underlying stock management and how to deal The firm’s investment and receiving interest on your with problems quickly. approach combines short sale proceeds. At the fundamental value analysis time, rates in Italy were about G&D: You started off in the with sensitivity to changing 12%, so high that you could business finding arb market environments. actually make money for free. opportunities, but Oasis is a lot more than arbitrage today. Graham & Doddsville G&D: And this would be very How would you characterize (G&D): How did you get your hard to do in today’s near-zero Oasis’s strategies? start in investing? environment? SF: As I say to my traders, Seth Fischer (SF): My first SF: Yes, this is impossible to and to my investors, “We’re professional job in finance was do at zero. Plus, the world is trying to make a buck, and not at Highbridge. Besides getting much more efficient and lose one.” And we have three coffee for the traders on the there’s much more capital, so idea buckets: We are trying to team —and, in fact, when I this opportunity would be do it faster than everyone else, started out, I was running out arbitraged away in 30 seconds know it better than everyone (Continued on page 36) Page 36 Oasis Management Company

else, or question the very They are different types of might work on something for premise of the story. “Do It muscles. And you’re paid for a three or six months and you Faster” is what we call our different ability. I think acting decide to kill it. Tactical business and the faster in trading means you’re others are part of our getting paid for mostly risk I’ve made mistakes killing ideas Strategic business. tolerance, and to some extent that I shouldn’t have killed. the ability to quickly source an And maybe we proceeded with A lot of the ideas I described idea or a block of securities ideas that I should have killed just now fall into the rubric of when an event occurs. It may along the way. But it’s much “Do it Faster.” At other times, also mean you’ve thought nicer to make these decisions we have done good research, about these events before—or when you aren’t immediately and we just know what’s going have seen some version of this pressured to put risk on, and on with a company or situation generate some profit in the that others don’t. When I left “We are trying to do it short term. We can slow Highbridge and started Oasis, a down and do our Strategic lot of our P&L came from faster than everyone work diligently. continuing to do it faster or knowing things better. else, know it better Plus, our Tactical business gives us access to a lot of Then we also started than everyone else, or pieces of information that we questioning everything, in what would otherwise miss. is now our third bucket. On question the very the long side, we started premise of the story.” G&D: What kind of questioning Japanese gaming information? company Nintendo many years story—and can act quickly this ago. Why doesn’t Nintendo time around. SF: A lot of ideas in the use its IP for mobile? This Strategic bucket come from became a big case of G&D: Is there any benefit to observations made from the shareholder activism for us, combining the Tactical with the Tactical side. For instance, why where we kept nudging Strategic? Can one help the is a company continuously Nintendo into this direction. other, for instance? issuing capital? We learn a lot about a company or its That’s an example where the SF: I like both businesses, promoter who is doing a lot of future doesn’t necessarily maybe because on Day One, I deals or trading a lot of reflect the past, and where we was the only guy doing all this securities. We also generally have to think differently from stuff. For the first two years at know of incoming supply or the herd. In our Strategic Highbridge, I worked by offerings in a market that may business in general, the great myself. I developed both affect the price of a particular returns come from being very muscles, and I am going to security, which does affect our different. continue to use both muscles, timing for our investment. even though I’m spending a lot G&D: Is it possible for the more time on my slow-twitch Could we have figured that out same analyst to both “do it muscles these days. without being in the Tactical faster” and “know it better,” business? In some cases, yes. possess both trading instincts The Tactical business is a But in other cases, we and the fundamental-analysis consistent revenue stream. wouldn’t even be paying chops? That’s helpful when the attention to that space if it Strategic business has longer weren’t for our Tactical work. SF: I think you’re right that holding periods, some of they are generally different them—like our engagement Thanks to the Tactical bucket, muscles. They are fast versus ideas—much longer. Strategic we end up making more slow muscles. That’s why we sometimes involves long connections, meeting more have four analysts in our engagements with companies, people. On any given day, Tactical team, and about eight and some of it is work that there are three to seven in our Strategic Team. doesn’t return anything. You companies coming through our (Continued on page 37) Page 37 Oasis Management Company

office. There’s a lot more idea or validity of contracts is the forest, you’d see the inside was sourcing. And we know more norm. In the West, we see cut out. about the IPOs, secondary sophisticated accounting offerings and private frauds, but not as many Sino-Forest ended up being a placements in the region as a physical frauds. In China, there fraud from so many points of result. are outright physical frauds— view. That business model where the business just didn’t make any sense, because We traded a stock recently doesn’t exist. Despite the fact it seemed the customers were where we remembered that that you have all the financial paying the company’s suppliers, somebody had been sitting on statements, and auditors and and the company could say it a related convertible bond for lawyers have signed off, a was not touching any cash. a very long period of time. The substantial part of the business That helped them manage the underlying stock has gone up is just not there. That takes a accounting part of the fraud— in value a lot, so all of the lot of on-the-ground work to the auditors couldn’t see any sudden the CB looks cheap. So know better, but also a healthy cash going in or out. But tell we said: Why don’t we just call degree of cynicism. me this: What business reports this guy and see if we can EBITDA margins around 60% source the stock block or buy G&D: Can you elaborate on and doesn’t touch cash? the CB from him? “In the West, we see That was a case where you G&D: How would your could ask big existential Tactical prowess work in sophisticated questions. You could work markets that are getting faster down the chain, and cover by the day and that rely accounting frauds, but every part of the business. increasingly on algorithms? not as many physical Who are the customers, who Could no algorithm have gone are the suppliers, do these through the CB holder list and frauds. In China, there people exist, where are these convinced that guy to sell? assets, do they actually own are outright physical the forest? SF: No algorithm is yet making automated phone calls to frauds—where the There is a similar, more recent holders and convincing them case—another physical fraud in to sell. There is still value to business just doesn’t this part of the world that getting on the phone. As they exist.” involves sandalwood trees. say in “Glengarry Glen Ross,” There is misrepresentation on you should always be closing a almost every single account. sale. You have to convince the these physical frauds? It’s fund manager who holds a intriguing that this is something If you are an alternative-asset security that this is a good a sophisticated New York- manager or a family office who time to sell. At least for based investor, used to has bought into the idea of securities that aren’t that Western norms, may miss buying a forest or securities in liquid, the business is still about when looking at Asia. companies linked to forest, be relationships. very careful. Yes, on one hand, SF: Perhaps the easiest it could be a great long-term, G&D: As for your other example to talk about is Sino- uncorrelated investment— business line, what does it Forest Corporation, the because yes, the world still mean to you to know a Canada-listed Chinese timber needs wood. business better than others in company where the trees the market? were simply not there. They Yet the problem is that didn’t own the trees. In the forestry is a 20-year or so SF: In China, for instance, this one property that they took investment, and it matters how may often mean being skeptical investors to see, if you drove the companies value these from the get-go—and not around, you’d see a massive assets. In this case, the being complacent enough to forest. But if you hired a company misrepresented how think that Western rule of law helicopter to fly over the fast its trees grow, how much (Continued on page 38) Page 38 Oasis Management Company

yield they get in sandalwood know to steer clear of such realize it’s really a long-term oil out of it, the survivability physical frauds in Asia? relationship with you. rate of the trees, the price that they sell it at, the size of the SF: Uncovering physical frauds G&D: To get around this demand from customers. requires real work, which principal-agent problem, does means going to visit sites not Oasis do all that work itself? David Greenspan ’00 speaks G&D: Ha, so what were they on a company-sponsored trip. Or do you rely on partners? with attendees of the 27th not misrepresenting? There are countless stories of Annual Graham & Dodd people going to factories in SF: Both. I have internal staff Breakfast SF: The fact that they had China a day before the performing 80% of this trees? The larger picture is roadshow and seeing a diligence. Yes, it’s labor- that these trees are very hard different name on the door. intensive and time-consuming, to grow. The company said When they show up on the and sometimes you are that these trees had very high roadshow, on the other hand, working on a project for three survivability—but we got the there’s a whole Potemkin months and you’re wrong. But individual plantation numbers, village out there. the good news is that it’s not and survivability was much physically difficult. You can lower than their claims. They So first, go check it out. There send somebody who doesn’t tried to claim that they cut the are no repercussions for going have a PhD. Most anyone trees earlier and had a better to see the assets without diligent can stand outside of a yield than ever before. All the telling the company you are factory, count cars, and click claims were overstatements. going to see it. Second, visit pictures. the customers, without being Most importantly, customers, pre-announced. Third, visit the What you do need is that who are often in China, were suppliers. Fourth, in China, pull healthy degree of cynicism. either made up or had stopped up the local-government filings And it’s very helpful if you have being customers—and the (that are separate from what is some business experience. If company failed to disclose that. filed to the stock exchange) you’ve never gotten your The price these customers and read the publicly disclosed hands dirty growing up, you were paying has dropped by taxes. Do those numbers make might not know what a 50%. The company sold some sense? business looks like. And I don’t plantations to the CEO, who mean knowing what a business borrowed the money from the The point being, this stuff is looks like on an annual report. company to buy those assets. hard if you are trying to look I mean having a sense of when Now, the CEO has defaulted in at a hundred different money changes hands, when a paying even the interest on the companies. So a lot of people company pays taxes. loan. outsource the work. This is harsh to say, but there are It’s important to also protect The company has finally turned certain on-the-ground against our biases. For around to sue him. A few investigation firms that have a instance, on the short side, I months ago, this whole thing short time horizon and think don’t like our analysts meeting blows up. He resigns, says he’s they are doing you a favor the management. While it’s going to try to buy the because you are sitting in New very helpful sometimes to hear company, and whispers rumors York or Chicago and need the company’s answer for what that he’s going to do it with a their help. You are trying to you don’t know, it’s human big private-equity firm. Which get to a “Yes” on your nature to believe people. Some is unlikely, because that PE firm investment. But they are trying of these companies may be owns another sandalwood oil to please you because you’re frauds but, not surprisingly, plantation that they are trying the customer. So they’ll do half they have good salespeople. to sell. And nothing has come or three-quarters of the work of that “rumor.” and still give you an OK. Even our most cynical internal analysts, when they meet G&D: Wow. What does a So you either need to find management, end up believing Western investor need to people who are going to go management. We can have the extra mile, or people who other people ask the company (Continued on page 39) Page 39 Oasis Management Company

questions but I don’t want the decades doesn’t have to shareholdings, and a focus on primary analysts to meet the continue. We call that return on equity. company in those situations. “protect”. In the case of PanaHome G&D: You mentioned your A campaign we have in that Corp., a listed subsidiary of activist stance with Nintendo. bucket right now is Protect Panasonic, we had a company Can you tell us more about Alpine with 89%+ of its market cap in your activism? (www.protectalpine.com). cash with zero leverage. Ex- cash, the business was trading SF: Our activism has a couple Japanese stock valuations are at one and a half times of different buckets, too. It extraordinarily low. If you earnings. It was extraordinarily could be a white-space cheap but possessed good long opportunity—something the “In the one property -term revenue streams—and company is just not engaged in not in tobacco or a heavily that we think it should be. We that they took regulated industry with call that “a better business.” systematic problems. Nintendo is a phenomenal case investors to see, if you from this bucket. It was a drove around, you’d G&D: What does PanaHome classic value investment, do? trading at just a 20% premium see a massive forest. to its cash when we got in. SF: It builds steel structured That is, cash was roughly 80% But if you hired a houses in Japan. It has a fair bit of its market value. of Southeast Asian expansion helicopter to fly over potential, they have a land Essentially, the pitch book bank that they can use, and Nintendo puts out at IR the forest, you’d see they have cash to use to buy meetings today is the pitch the inside was cut additional land. book I gave them in 2013. My pitch was about going mobile out.” Now, they had never used that and monetizing IP with new cash, because that cash theme parks as well as media. think about valuations on EV/ happened to be parked with its Today, cash is at 15% to 20% EBITDA as opposed to price/ parent Panasonic. Why? For of market cap, and as the earnings, or if you think about cash-management purposes, company has taken steps in them on a P/E ex-cash basis, they told us. Well, I’m also this direction, the stock is up Japan is very cheap. And that’s holding my five-year-old’s 4x. because Japan has much lower lemonade money—literally. leverage, lower ROEs and But he’s five. When they’re 13 A current campaign we have in lower profit margins. years of age, they want to hold this bucket is called A Better their own money. This Pasona Over the last 30 years or so, company has been listed as an (www.abetterpasona.com), Japan Inc. has gone to excess entity for 40 years. I think it’s where we’re involved with the cash with no leverage. That about time it grew up. Japanese staffing firm Pasona. situation is changing as the Bank of Japan’s monetary Why is its cash held by its The second bucket is imagining stimulus tries to bring leverage parent? Because the parent that the future could be back into the equation. It’s gets to pay out only five basis different from the past. In prudent in a deflationary points and hold all its Japan, I got encouraged on this environment to have no subsidiaries’ cash and use it. So front by Prime Minister Shinzo leverage but if you are trying the market completely Abe’s new corporate to have inflation, it’s actually discounts PanaHome’s cash governance and stewardship prudent to be levered. On top because it thinks the company codes about four years ago. of that, the government has is never going to get to see it. This meant that the corporate pushed for shareholder You can read all the sell-side abuse of minority shareholders payouts, independent directors reports and nobody uses the that has gone on in Japan for on boards, unwinding cross- cash in their valuation. (Continued on page 40) Page 40 Oasis Management Company

So I thought it was time to say metrics for the takeover. I letter to PanaHome back in to PanaHome, “You should get thought this was ridiculous, 2011 when they had taken your cash back. You should and I wasn’t going to stand for over two other listed not only get your cash back, it. We bought more stock, and Panasonic subsidiaries and you should use your cash for ended up owning 9.9% of the done the same exact thing. growth. Invest with a positive company. I set up a website They had revised earnings six IRR.” I went to them in March called months earlier, and the stocks 2016 and said so. They said, www.protectpanahome.com to went down 20%. Then they “Great, we’ll think about it.” used the historical price average, and on the day of the They never got back to me, so “We are not coming announcement of the takeover, six months later, I wrote them to Japan saying, ‘This they revised back earnings to a formal letter. Three weeks what they originally were. after I sent them the letter, is the way it should be. they set up a committee to I remember that we were privatize the company— Let me tell you how to protesting at the time because basically, to get rid of pesky we were shareholders of those guys like me. do business.’ We are two listed subs. But I decided not to really take the fight to Then they go ahead and using the Japanese them at the time, because I privatize at a very small government’s own didn’t think we would have premium to the current stock enough shareholder support. price. And they bias every part initiatives. After all, of the valuation process. The This time, it was different. The comparable companies they list this is Abe’s third Japanese government was for market multiples are not behind us, so we launched a really their competitors. The arrow of structural full-scale battle. A few months DCF suddenly has them using later, PanaHome announced a all that cash in the next three reform.” revised tender offer, which years. They show zero growth was 20% higher. I still think the and negative cash flow in the spread the word—something price is too low. We have sued DCF, so the imputed market that had been done before by for appraisal rights, a process value ends up very low. activists in the U.S., but not in in Japanese law where a Japan. shareholder can sell the shares They revised down earnings on back to the company, if he November 1, 2016, which The comparable companies objects to a transaction, at a caused the stock to fall, then they used were not their only fair value that a court has to announced the privatization on true nationwide competitors, determine. December 20. And guess what Sekisui House and Daiwa they used to calculate the House. Instead, they chose G&D: Activists have tried historical average stock price small, money-losing and illiquid knocking on Japan Inc. doors over which they would pay a companies as comps to further before. Is this time different premium? They used the three depress the “fair” takeover entirely because of the -month average, the 44-day price. Yet, we have tapes from government push? average, and the 30-day more than 10 PanaHome sales average—so they massively agents referring to only Sekisui SF: Yes, this time is different weighted the exercise to the House and Daiwa House as because of the government. 44-day mark, right after the their main competitors. And press coverage is in our time they revised their Naturally, Sekisui House and favor. During the PanaHome earnings. Daiwa House trade at more debate, the Nikkei—Japan’s than double the multiple of largest business paper—had a Then in April they revised up PanaHome. cover story on justice for earnings, leaving no doubt that PanaHome’s minority they had revised down in We don’t have to take this shareholders. November just to bias the anymore. I actually wrote a (Continued on page 41) Page 41 Oasis Management Company

We are not coming to Japan management, but now couldn’t as his official successor still saying, “This is the way it justify voting so. unofficially answers to him. should be. Let me tell you how to do business.” We are using Now, thanks to new One could say this is a cultural the Japanese government’s developments in Japan’s matter, and reflects Japan’s own initiatives. After all, this is corporate governance rules, respect for its elders. But the Abe’s third arrow of structural companies in Japan have to problem is that the reform. reveal how each individual shareholders, the company’s shareholder voted. So there employees and even some of There have been other is gradual progress. We’ll be the board members don’t changes in Japan too. The back soon with the company. know about this guy. They Tokyo Stock Exchange set up a And they know it. don’t know that he’s still new JPX 400 index, where pulling the strings. ROE is the key metric for G&D: If the driving force is inclusion. And the political, what happens if Abe G&D: The proxy never Government Pension loses an election? disclosed these advisors? Investment Fund, which manages $1.3 trillion—trillion SF: There is a risk. But we SF: No. But the good thing with a “t”—now invests trying think Abe is stable and going to about Japan is its strong legal to match the JPX 400. The continue in power. And the framework, so you have the whole government, including two leading candidates of the power of the courts. We the alphabet soup of regulators Liberal Democratic Party— would sue to get this and associations, is massively Abe’s party, which has been in information and win eventually behind this corporate- power for the overwhelming once we get the information, governance initiative. majority of Japan’s postwar but that’s after six months to a history—both embrace these year of fighting. Now, In particular, cross- ideas. What’s more, most thankfully, it’s going to be a shareholdings are getting people in Japan think the part of policy in Japan. much, much weaker. This was corporate-governance train the problem when fund has already left the station. The G&D: Oasis has recently manager Warren Lichtenstein only question is about the taken an activist stake in in the early 2000s was taking speed of acceleration. Chinese industrial gas maker an activist approach in Japan: a Yingde Gases. Are China or company’s web of cross- U.S. investors or international other parts of Asia new fronts shareholdings ensured that the investors may get very excited for you? management had enough about the recent corporate- friends on the register to vote governance initiatives, SF: We are interested in the in its favor. Now, minority expecting quick change, but activism space in general, shareholders have real voting the reality of life is that such especially in line with power. reform is slow. It’s slow improvements in corporate everywhere. And Oasis is in it governance. It’s an increasing We put forth a proxy in for the long haul. trend across Asia in general. another company in March. Korea, for instance, is We lost. But note that One of the most recent amazing—there was a whole abstentions went up initiatives out there is that election in 2017 based on dramatically during the proxy Japanese companies now have change in corporate vote. The new trick for the to disclose their hidden governance after the vice other shareholders was not to advisors. These are often ex- chairman of Samsung went to vote against us but just to CEOs of Japan Inc.—a 75-year- jail on bribery allegations. abstain. So management may old, say, who’s still hanging There are stewardship code have beaten us in the vote, but around, who still goes to the changes coming to Hong Kong the numbers were a lot tighter. office, still has a company car, and Singapore as well. And it is The people who abstained and still gets paid 80% of his occurring in some ways in were people who typically salary. The CEO he appointed mainland China, though China would have voted for the is a different beast entirely. (Continued on page 42) Page 42 Oasis Management Company

We’re also involved with crook. We are speaking in To make an Asian investor Premier Foods in London. different languages. invest in the U.S., perhaps you That’s another place where have to get rid of a lot of scar cultural norms and In Japan, you want to appeal to tissue that you built up in Asia shareholder activism are much what is right. The arguments of not trusting anything. Maybe more conservative than in the one could make are that you waste too much time U.S. abusing the process is wrong. because you just don’t want to Child abuse, like Panasonic trust anything. Or maybe it Premier Foods had a takeover abusing its subsidiary makes you a great investor proposal rejected by the PanaHome, is wrong. Not because you so diligently check board—and we thought it was making Japan as productive as everything. poorly rejected. The stock it can be is a poor choice. plunged and we established a Misleading shareholders is bad. G&D: Do you expect the sizeable position. We own traits that allow Oasis to be 8.9% of the company today. “You have to learn successful today in Asia will be We put a colleague of mine on materially different from the board. And hopefully we’ll about the bad actions whatever is required to be get a transaction done. of people. It’s successful there 15 years later?

The U.K. is an example of a important also to SF: Yes, remaining nimble and place that has white-space changing our strategies as the opportunity because of the understand where capital markets grow will gentleman’s club way of doing continue to be a key to our business. There has been some countries rule by law, success. The great news is that activism, though not like the Asian markets are still U.S., which has been picked rather than under the developing. I imagine Asia will over and where activists have look a lot more like the West been extraordinarily successful. law.” where there is a more established rule of law. G&D: What advice would you Thinking about how to have a give U.S. investors about business that is taking risks and Japan will look more like the approaching activism in Japan, growing in a well-mannered Western world if Shinzo Abe compared to how they way, without being too is successful in 15-20 years’ approach it in the West? aggressive, is good. So this is all time. Companies’ balance about what’s right and wrong. sheets will look more like the SF: There is a very different It’s about adhering to the West, and that should be an style. You have to remember Corporate Governance Code, upside for markets. that you’re not just appealing or dismissing it. to pure economics. Most prominently, there could G&D: What lessons from Asia be a massive development of There are great business- can investors apply when capital markets in China. school studies on how looking at other parts of the There, we have to get out of bargaining is different in world? the current gambling different cultures. In some mentality—trading volumes in cultures, it’s acceptable for bid- SF: There are physical frauds. mainland Chinese markets are asks to be 50% wide. In other The ability to enforce unbelievably huge. cultures, it’s only acceptable to contracts in important parts of go 5-10% wide. It’s a big Asia is very hard, and it’s The key here is rule of law. collision when two people of important to not take rule of Without legal enforcement, different cultures bargain this law for granted. You have to trading is easy but value way. One person asks for learn about the bad actions of investing is very hard. $10,000 when the bid is people. It’s important also to $1,000. But the other person understand where countries G&D: Any advice to MBA thinks that asking for 20% rule by law, rather than under students who are interested in more already means you are a the law. the world of investment (Continued on page 43) Page 43 Oasis Management Company

management?

SF: First, don’t only sit behind a desk. Second, just because something is the way it is doesn’t mean that’s the way it has to be. If the way of the future is simply the way of the past, then a computer can do it better than you. Think about what your brain does that an algorithm can’t.

G&D: That’s great advice. Thank you. Get Involved:

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Contact Us: [email protected] Graham & Doddsville Editors 2017-2018 [email protected] [email protected] Abheek Bhattacharya ’18

Abheek is a second-year MBA student and a member of the Heilbrunn Center’s Value Investing Program. He spent part of this school year interning at Firefly Value Partners, and worked for Davis Selected Advisers last summer. He’s done stints previously with Indus Capital and Hound Partners. Prior to Columbia, he wrote for the Wall Street Journal in Hong Kong, most recently for its flagship Heard on the Street investment column. He studied philosophy at Yale Universi- ty. He can be reached at [email protected].

Matthew Mann, CFA ’18

Matthew is a second-year MBA student and a member of Columbia Business School’s Private Equity Fellows Program. During the summer, he worked in the Investment Banking Division at Goldman Sachs & Co. LLC. Prior to Columbia, he was a Portfolio Manager at ClearArc Capital, Inc. focused on foreign currency and emerging market debt. Matthew studied finance at Grand Valley State Uni- versity. He is a CFA Charterholder and a 2018 McGowan Fellow. He can be reached at [email protected].

Adam Schloss, CFA ’18

Adam is a second-year MBA student and a member of the Heilbrunn Center’s Value Investing Program. During the summer, he worked for the Intrinsic Value Team at UBS. Prior to Columbia, he worked for T. Rowe Price and Lincoln In- ternational. Adam graduated from the University of Illinois at Urbana-Champaign with a BS in Finance. He is also a CFA Charterholder. He can be reached at [email protected].