The Baupost Group posted its best results in eight years in 2021.
According to a reliable source, the eclectic, value-driven hedge fund headed by Seth Klarman generated gains in the low double digits last year. This was the firm’s best performance since 2013, when it finished up around 15 percent.
Baupost declined to comment.
In Klarman’s year-end letter, obtained by Institutional Investor, the 64-year-old CEO told clients that the firm has “always taken an idiosyncratic approach to investing, and finding opportunity well off the beaten path was a primary driver of capital deployment in 2021.” According to an earlier letter, Baupost is a value-oriented firm that seeks out undervalued investments with catalysts that can help them realize full value. It favors what it deems to be ignored or very complex assets, mostly in distressed debt, commercial real estate, mortgages, and equities. The firm often holds a healthy chunk of its assets in cash, so while Baupost will rarely top the hedge fund performance charts, its investors no doubt sleep very soundly.
In the 2021 year-end letter, Baupost said that one opportunity it found last year was in commercial real estate. Klarman said that the sector had experienced capital shortfalls due to the pandemic and the subsequent lower occupancy levels, limited leasing activity, and construction delays.
“These funding gaps have allowed us to inject fresh capital into real estate projects that are temporarily struggling but still economically attractive over the long run,” Klarman said. In January 2021, for example, Baupost made a $380 million loan against high-end condominiums in the Central Park Tower development in New York City, which the firm believes to be “very well-covered.” The letter also noted that Baupost’s real estate group closed on three other lending opportunities last year, one of which was a mezzanine loan to an Austin, Texas, condominium project.
“We have also identified — and [have] either closed on or are likely to fund — opportunities to build lab space, cold storage, and data centers,” Klarman added. Altogether, real estate investments represented about 11 percent of the portfolio at the end of the year, according to the letter, while private equities accounted for another 13 percent of the portfolio’s year-end assets.
Baupost deployed $1.6 billion of fresh capital to private equity investments last year, and the firm said that it expects to fund another $1.2 billion of deal flow in the pipeline in 2022. Deals last year included Europe’s largest consumer gardening supplier, Compo, which was sold by a distressed Chinese seller; a chain of veterinary surgical hospitals; and a group of orthodontia and pediatric dental practices.
In addition, private credit–like investments accounted for 3.5 percent of the portfolio at the end of 2021, according to the firm. Klarman said that Baupost has found “[myriad] inefficiencies in the bespoke private credit and preferred stock markets.” These include “companies seeking to secure growth capital without immediately diluting their equity or giving up control, as well as other proprietary sourced financing opportunities,” he added. Altogether, according to the letter, Baupost plunked down more than $1.2 billion in gross capital in this area last year, “with $1 billion of future transactions in the pipeline.”
Public equities, meanwhile, accounted for 43 percent of assets at year-end. Last year, Baupost initiated an investment “in the less well-known share class of a top-quality large-cap growth stock at a very sizable discount to the regular shares,” Klarman teased, without naming the company. He predicted that events of the next several years will reduce or eliminate this discount.
“Finding value in 2021, as is often the case, involved a combination of factors: knowing where to look, moving quickly, operating with a flexible investment mandate, having the ability to take the long view, and possessing the legal and negotiating skills to structure investments to meet the particular requirements of a counterparty,” Klarman explained. He also stressed in the letter that investing in markets characterized by both pandemic-related dislocations and mega trends — including political uncertainty, government intervention in the economy and markets, climate change, and technological disruption — “drive opportunity-creation that is often fast-moving and requires flexible capital and agility.”
