Tuesday, February 21, 2012

Has Texas Teachers Lost its Bridgewater Mind?

Christine Williamson of Pensions & Investments reports, $250 million Bridgewater stake sold to Texas Teachers:
The $109 billion Teacher Retirement System of Texas, Austin, has taken a non-voting equity stake in Bridgewater Associates LP, part of a 10-year plan by the manager to dilute the stake held by founder Raymond T. Dalio, president and co-chief investment officer.

Trustees on Feb. 16 approved a $250 million investment in privately held Bridgewater, for which the pension fund will receive a share of Bridgewater's profits through the ownership stake, according to a webcast.

The investment is Texas Teachers' first private investment in a money manager, according to a spokeswoman for the pension fund.

Texas Teachers is a Bridgewater client. A fund spokesman could not say the size of the fund's allocations to Bridgewater investment strategies.

Another Bridgewater institutional client has a stake in the firm, but Robert Prince, a Bridgewater co-CIO, would neither identify the client nor give the size of the investment.

During an executive session of the fund's Feb. 16 board meeting, Mr. Prince presented Bridgewater's proposal for Texas Teachers to take a stake in the company.

Bridgewater executives “very selectively” approached a small number of institutional clients about investing in the firm, he said in an interview.

Mr. Prince said negotiations with a third institutional client of the firm, which he said he could not name, are close to being completed. He added company officials are unlikely to seek additional clients as financiers.

Mr. Prince declined to say how much in total financing Bridgewater is seeking from its client-investors. He did say the money will form “a capital base for the company” that will be used primarily for technology and other capital investments and for liquidity purposes.

Mr. Dalio founded Bridgewater in 1975 “out of a two-bedroom apartment,” according to the firm's website. About four years ago, he began to gradually reduce his ownership stake and management responsibilities to concentrate more on “what he really loves — markets and managing money,” Mr. Prince said.

So far, Bridgewater has built up its management team and has been “evening out the company ownership” through an employee equity purchase program.

The goal of the transition plan is to “build a company that is employee owned and employee controlled,” Mr. Prince added.

20% sold

Mr. Prince declined to say how much Mr. Dalio still owns. But a letter to clients, sent on Feb. 17 and obtained by Pensions & Investments, said: “Mr. Dalio and his family trusts sold about 20% of their Bridgewater shares to key employees and the company” over the past several years.

In 2010, both Mr. Prince and Greg Jensen, a co-chief investment officer, invested “almost all (of) their net worth” in Bridgewater stock and made an “irrevocable commitment” to invest most of their earnings in more company stock, the letter said.

In 2011, the rest of Bridgewater's management committee and 12 other key employees made a similar commitment.

Mr. Dalio's stake in Bridgewater and that of his family trusts will be maintained between 10% and 20% of the firm's equity ownership at the end of the 10-year period, the letter said.

The Bridgewater investment “doesn't fit neatly into what we've done to date. It's exciting because it's unique,” Texas Teacher trustee Joe Colonnetta said during the board meeting that was webcast.

“This is a fabulous franchise, a fabulous opportunity,” said R. David Kelly, chairman of the fund's board of trustees. He added, however, that he didn't think the Bridgewater deal was an “appropriate investment for this organization at this time.”

Mr. Kelly was the sole dissenting vote on the motion.

Trustee Anita Smith Palmer said on the webcast that she had reservations about the Bridgewater investment because T. Britton Harris IV, Texas Teachers' CIO, briefly worked at the company.

She said she wondered if “there was something fishy and smelly there,” but efforts by staff and the fund's consultant, Hewitt EnnisKnupp, to make sure there was no conflict of interest satisfied her concerns.

Mr. Harris served as Bridgewater's CEO for five months in 2005 after leaving Verizon Investment Management Corp., where he had been president. He became CIO of The Texas fund in November 2006 (P&I, Nov. 22, 2006).

My take on this deal? I agree with David R. Kelly, the chairman of the board at Texas Teachers, Bridgewater is a "fabulous franchise" but this isn't an appropriate deal and it could potentially come back to haunt them (look at Paulson's Fund being sued over Sino-Forest losses).

And why the hell is Bridgewater "very selectively" approaching institutional clients to sell them an equity stake? I just don't buy Bob Prince's explanation that money will form “a capital base for the company” that will be used primarily for technology and other capital investments and for liquidity purposes.

Huh? Run that by me again? Bridgewater is the largest hedge fund in the world, collecting 2 & 20 on multi-billions and they need a $250M investment for technology, capital investments and (gulp!) liquidity purposes?!? No wonder more and more people think hedge funds are a joke.

I've met Ray Dalio and Bob Prince. I like them both and think Ray is truly one of the great alpha managers of our time. But when I invested in Brigewater, very few investors knew about them. They had come off a bad year and what I liked about them is they were obsessed about finding out where they went wrong and how they can improve. It was their detailed explanation of where they went wrong betting against the US dollar that convinced me to invest in them.

They still are obsessed with analyzing markets and despite their size, they continue to deliver outstanding results. But that streak can come to an abrupt end at any time and when I see deals like this one, it raises flags. If I was an investor, I'd be asking lots of tough questions on this deal, including the connection between Mr. Harris and Bridgewater (might be kosher but it "smells fishy") and I'd want full disclosure on which institution bought the other stake (investors have a right to know the deal terms).

Of course, Texas Teachers will get a cut of the profits and did a similar deal with Apollo but that was a separate account, not an equity stake. CalSTRS is looking into taking the same approach on separate accounts with some private equity funds. Other pension funds and sovereign wealth funds, including the Caisse and Singapore's GIC, are buying significant stakes in PE funds to bolster their operations. There are pros and cons to such deals, but Neil Petroff and Jim Leech of Ontario Teachers said they steer clear from using separate accounts in private equity and I haven't seen them buy an equity stake in any private fund (unless they seed it, in which case they demand a stake and negotiate terms).

When does it make sense to take an equity stake in a private fund? When a pension fund is seeding a fund, like APG is now doing with hedge funds. Why? Because they're taking a big risk putting up the seed capital, and that's why they negotiate fees down to 1 & 15 instead of 2 & 20 and demand an equity stake. That makes sense. The Texas Teachers deal? Not so smart, and in my opinion, not in the best interests of their beneficiaries. I think they really lost their mind on this one.

Below, more "Linsanity". Bloomberg's Jon Erlichman reports on New York Knicks point guard Jeremy Lin's training program developed by Sparta Performance Science. He speaks on Bloomberg Television's "Bloomberg West." Think I will coin a new term, "hedgesanity".

No comments:

Post a Comment