| Joseph (Jody) LaNasa III, Serengeti Asset Management |
Joseph (Jody) LaNasa III, founder and managing partner of Serengeti Asset Management, keeps around his office, located in Manhattan’s NoHo neighborhood, some striking photos of leopards in the wild. He hasn’t actually been to the Serengeti Plain, but he’s been on safaris in South Africa and Zambia, and he has a special admiration for leopards. “They hunt by themselves at nighttime,” says LaNasa. “When they kill their prey, they climb up a tree so that no one can steal it from them. That’s kind of how I think of our investing.” What LaNasa means is that the portfolio managers at Serengeti, a $1.7 billion multistrategy fund, hide their positions until they’ve accumulated the shares they want. Then they let the market know. This kind of stealth hunting is not unusual in hedge funds, but for LaNasa, as an investor in what he calls misunderstood equity and credit, it’s an important tactic to go public with those misunderstood assets — companies or credit instruments that the markets have overlooked or written off — and hope other investors will discover them. That includes small-cap Argentinean companies that he thinks will grow after Argentina’s 2015 presidential election, as well as companies that have emerged from bankruptcy that the market hasn’t recognized as a solid core growing reviving from the ruins, such as the Eastman Kodak Co. and the Tribune Media Co.
In the past month, however, LaNasa has found some ripe pickings in credit assets that promise equitylike returns.
“For the first time in five years, we’re seeing a lot of interest in the credit market,” says LaNasa. What seems to be happening, he says, is a derisking or resetting of return expectations that started when the U.S. District Court for the District of Columbia on September 30 threw out hedge fund lawsuits claiming the government wasn’t entitled to all of the profits from Fannie Mae and Freddie Mac. Although investors began to buy into the two government-owned mortgage finance companies last week, LaNasa has been able to capture some big bargains from the pain in the markets.
The Fannie and Freddie case, he says, resulted in a decision that forced a lot of event-driven credit funds to sell other assets to pay off their losses on Fannie and Freddie. LaNasa isn’t ready to name the bargain credit instruments he’s in the process of buying but says a couple of areas are of special interest. One is debt that has been affected by litigation involving make-whole provisions, which allow a borrower to prepay the remaining debt with the caveat that it has to make an additional, often significant payment based on the net present value of future debt payments. These, LaNasa says, are likely to earn midsingle digits if investors don’t win the litigation, and much higher, possibly in the low 20s, if investors do win.
LaNasa is also looking at credit in iron ore, coal and shipping. Those are sectors that Serengeti’s portfolio managers shorted in the past few years. But they’re now finding wide spreads in debt in these sectors.
This Thursday, LaNasa will name names. Not in these brand-new positions but in two out-of-favor assets that have made money for his fund in recent months and which he promises to reveal when he speaks at the first Canadian Sohn Conference in Toronto, in partnership with the Capitalize for Kids foundation (all proceeds from the conference will go to Toronto’s Hospital for Sick Children, a leading pediatric hospital affiliated with the University of Toronto).
One of those investments is likely to be a publicly traded private equity firm such as Apollo Global Management, Kohlberg Kravis Roberts & Co., and Fortress Investment Group. Such stocks make up Serengeti’s largest equity positions. “These are companies that have great brand names,” LaNasa says. “Cash dividend yields are 7 to 15 percent. Even if they never make another dollar on incentive fees, which is highly unlikely, just off management fees alone, they’re trading at seven to 12 times management fee earnings.” Yet, he says, the market has virtually ignored the sector.
Stay tuned. Serengeti remains on the hunt.