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P M MAY/10 CONTENTS. CANADA’S BUSINESS VOICE

6 Feedback Editor Terence Corcoran 9 Editor’s Letter Deputy Editor Cooper Langford Contributing Editors Mark Anderson (Ottawa), Dan Bortolotti, Paul Brent, 11 Jamie Golombek, John Greenwood, Andy Holloway, FIRST BUSINESS. Brian Hutchinson (Vancouver), Sanam Islam, George Koch 11 Mover. 3G Capital rethinks the (Calgary), Dana Lacey, David Leach (Victoria), Kevin fund. 13 At A Glance. Glob- Libin (Calgary), Ken Mark, Jared Mitchell, Karin Mizgala Big Fish. (Vancouver), Joanna Pachner, A.J. Sull (Vancouver) al debt: Who owes what? =@E8E:@8CGFJKD8>8Q@E< A maritime technology comes Art ashore and wins . 14 Innovator. Art Director Lina McPhee Ostara makes water treatment Assistant Art Director Brianna Freitag cleaner and cheaper. Infographic Contributing Artists Solo dancers: The loonie vs. Andrew Barr, Kevin Hewitt, Frances Juriansz, Will Lew, Kagan GDP. 15 My Word. Why native McLeod, Darcy Muenchrath, Sandy Nicholson, Jonathon Rivait, reserves need private property Graham Roumieu, Nick Westover, Daniel Wood

FINANCIAL POST MAGAZINE (EDITORIAL) 34 1450 Don Mills Road, Suite 300 FAMILY FINANCE. Toronto, Ontario M3B 3R5 34 Family File. Jacques and Phone: 416-383-2300 Fax: 416-386-2836 Marie fear Jacques will lose his E-mail: [email protected] job before retirement. Do they Customer service: 1-800-668-7678 have enough to manage? 37 www.financialpost.com/magazine Boomer vs Junior. Two t ac t ic s NATIONAL POST MAGAZINES for charitable giving. 39 Invest- Publisher Gordon Fisher ing. Watch those benchmark Editor-in-Chief Douglas Kelly comparisons pitched by finan- cial products salesmen. They Vice-President, Advertising don’t always add up. Mark Spencer 416-386-2898 National Account Managers Geoffrey Austin 416-386-2608 40 Enzo Loschiavo 416-386-2691 SMALL BUSINESS. Giulio Fazzolari 416-386-2770 40 Profile. Elaine Shannon Director, Online Advertising Sales, National Post Yuri Machado 416-442-2053 and Kimberly Eagles thought Western Canada Sales Manager they had everything figured Alvin Chow 604-742-8899 out when they launched their Eastern Canada Advertising company. They had another Sales Inquiries 514-849-9987 think coming. 41 Tax Clinic New York Account Manager New rules for stock options. Dicomm Media Sales 646-536-7206 Research Analyst Ann Sullivan 416-442-5607 On the Case. 43 The founder Vice-President, Operations Santina Zito of a year-old company receives Executive Assistant, VP Operations a sudden buy-out offer. Should Lori Linquist-Brown he take it? Director of Production Josie Novello Production Artists Yasmine Dang, Jamie Lynch, 46 Business Mix Stefania Ragogna, Peter Zukowski Victoria gin — a boutique dis- FINANCIAL POST MAGAZINE tillate — takes you back to the (ADVERTISING) great days of the Empire. 1450 Don Mills Road, Suite 100 Toronto, Ontario M3B 3R5 Phone: 416-383-2300 Fax: 416-442-2949 E-mail: [email protected]

Financial Post Magazine is published 11 times a year by The National Post Co., 1450 Don Mills Road, Suite 300, Toronto, Ontario M3B 3R5 416-383-2300 Contents copyright. Financial Post Magazine is included with subscriptions to National Post in Canada. The next issue will be published on June 1, 2010. PUBLICATIONS MAIL REGISTRATION NUMBER 40069573 RETURN UNDELIVERABLE CANADIAN ADDRESSES TO: FINANCIAL POST MAGAZINE 1450 DON MILLS ROAD, SUITE 300, TORONTO, ONTARIO M3B 3R5 E-MAIL:

PHOTOGRAPHY/ILLUSTRATION BY (TOP TO BOTTOM) ALANNA CAVANAGH; VIKTOR PIVOVAROV; PHILIP DYKES [email protected]

MAY 2010 FPM5

00504FPM003-5504FPM003-5 5 44/15/10/15/10 12:37:1712:37:17 PMPM My Word. Infographic. Innovator. At A Glance. Street Talk. Mover. FIRST BUSINESS.

3G Capital Management’s Pavel Begun (left) and Cory Bailey BY DAVID PETT Mr. Nice Guys Pavel Begun and Cory Bailey are building a kinder, gentler type of

HEDGE FUNDS ARE usually pretty easy to spot. They are con- Those numbers may not impress investors who pine for the trary by definition. Even though hedging should reduce the risk of glory days earlier this decade, when hedge funds used outsized an investment, hedge funds use riskier investment strategies, such strategies to generate outsized returns. But with markets still as -selling or trading on margin, to make big scores. In 2008, bruised by the crash — and investor appetite for risk more re- they were also the funds run by money managers who cowered in strained than ever — even modest double-digit returns look ap- fear as the market collapse fuelled record redemptions. pealing. And in producing them, Begun and Bailey may be helping Then there are hedge funds like 3G Capital Management LLC, to define a different form a hedge fund — one that’s trades off run by managing partners Pavel Begun and Cory Bailey. They extremes for security and careful risk management. weren’t as spooked by the meltdown. In fact, they embraced it as “From day one, our objective was to use common sense to gen- a buying opportunity. And while investor panic was making other- erate high returns while assuming below-average risk,” Begun says wise healthy companies look bad, 3G’s performance was looking from his downtown Toronto office. In fact, that philosophy is so pretty nice. From the start of 2008, 3G has earned a 23.2% return deeply ingrained, Begun and Bailey try to avoid the term “hedge from its relatively conservative plays, which compares nicely to its fund,” preferring to label their business a private-investment 14.5% annual average since it began in 2004. partnership. Fair enough. The main points of comparison are on

MAY 2010 FPM11

00504FPM011-12504FPM011-12 1111 44/14/10/14/10 5:04:035:04:03 PMPM the surface. Like other hedge funds, 3G Warren Buffett and Benjamin Graham, Street Talk Capital Management requires a high the creator of value investing. For ex- minimum investment — $250,000 — and ample, the company owns a significant Green check-up investors are charged management and holding in Wells Fargo, the well-known Trends emerging on clean-economy front performance fees. Typically, hedge funds U.S. bank that was hit hard during the charge a “2 and 20” fee, meaning a 2% crisis despite its strong fundamentals. THIS MONTH, TWO TAKES ON annual management fee and 20% of any Similarly, 3G is bullish on Bingraee Co. GREEN THEMES. FIRST UP, A REAL- profits. 3G uses a similar model, but with Ltd., a South Korean dairy producer that ITY CHECK ON CARBON EMISSIONS lower costs. It charges 1.5% as well as a has “zero debt, great margins, great man- — AND THE INVESTMENT OPPOR- 20% incentive fee — but only if its port- agement and is really cheap.” TUNITIES THESE EFFORTS MAY PRO- folio returns more than 8%. Because 3G looks to hold its invest- VIDE. NEXT, BRACE YOURSELF FOR But the similarities end there. While ments for three to five years, the firm A BOOM IN HYBRID CARS traditional hedge funds will head off avoids using borrowed funds and short- to pursue exotic investment strategies, ing stock, the hallmark trade among > CARBON REALITIES How far do we 3G has been buckling down to busi- hedge funds. On average, the firm carries need to cut greenhouse-gas emissions to ness as a conservative money manager, a net cash position of about 14%. It also reach climate-change targets? More than albeit a souped-up one, using a strategy limits redemptions to once a year and we think, according to a recent report from originally envisioned by Begun almost a reports returns biannually, compared to UBS. The problem: rapid growth in India decade ago. most hedge funds that report and allow and China and their reliance on Begun, a native of Belarus who was redemptions on a monthly basis. coal-fi red electricity generation. educated in the U.S., met Bailey, a native “Last year, when people were worried According to UBS’s calculations, of Missouri, in September 2001 when about the world ending, we didn’t receive even if India and China maintain both were working at Fiduciary Asset one redemption request. In fact, we had their emissions at 2006 levels, Management LLC in St. Louis. “Neither some clients add to their investment,” the rest of the world will need to cut of us wanted to work for somebody else,” Bailey says. “This investor base allows emissions by 84% to meet the widely sug- Begun says. “Cory said he wanted to do us to focus on the long term and not on gested target of reducing emissions to half real estate and showed me the numbers. monthly numbers, which is the reason of 1990 levels by 2050. I wanted to get into the value investing we continue to outperform 99% of all Even if reduction targets look increasing- business, and showed him my numbers. mutual-fund money managers.” ly diffi cult to achieve, UBS notes that they Then Cory said, ‘To hell with real es- Despite 3G’s success, Begun doesn’t are creating investment opportunities in re- tate.’” 3G opened its doors three years expect other funds to start emulating its newable energy. Hybrid electric cars will be later and now boasts more than $50 mil- strategy or to try to move into its less a space to watch, as autos account for 16% risky niche. The primary of direct emissions. The UBS report also goal of many hedge funds is mentions Energias de Portugal, Iberdrola, “Last year, when people to always get bigger returns Vestas, and Applied Materials, noting that in the hopes of attracting they are the world’s largest hydro, solar and feared the world was ending, even bigger investments. wind-equipment technology companies. we didn’t receive redemption To do that, money manag- > MORE HYBRID HITS Evidence requests. Some clients added ers are under pressure to of steeper-than-expected bat- achieve short-term gains. If tery price declines may soon to their investments” they don’t, clients will walk push hybrid electric cars deep at their first opportunity. into the mainstream, Duestsche That, Begun and Bailey Banke writes in a recent report. Based on its lion worth of . believe, is ultimately a losing strategy, discussions with industry experts, Deutsche With offices in Toronto and St. Louis, especially when the market turns sour. says that the price of lithium-ion batter- Begun and Bailey have built a strong “Anytime you do well in times of crisis, ies will likely fall by 25% and 50% over the global-client base, managing capital in it gets noticed,” Begun says. “But if you next fi ve and 10 years, respectively. If these Canada, the U.S., as well as continental can regularly demonstrate that your projections bear out, that should lead to in- Europe and the United Kingdom. performance is superior to mutual fund creased sales as payback times on purchas- While not entirely unique among and hedge fund competition, it will at- es decreases. That’s the good news. Deust- their peers, 3G focuses on making picky tract assets.” In the end, they say, it’s sche also warns increasing competition may long-term conservative investments, not about consistent performance. Nothing raise concerns about the profi tability of bat- unlike more famous investors such as else matters. FP tery producers. — Jonathan Ratner

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