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Richard Perry For the longtime risk arbitrageur, the key to successful investing is correctly calculating the odds. Perry is, above all else, determined — a useful quality for an arbitrageur. In the early 1970s, as a senior at the elite Milton Academy, outside Boston, he worked part-time for the school’s CFO and helped manage money for a local real estate investment trust. At age 20 he landed a summer internship with Goldman, Sachs & Co. in New York thanks to legendary partner L. Jay Tenenbaum. He began working for the firm full-time after graduating from the University of Pennsylvania’s Wharton School with a degree in economics in 1977. Perry landed a spot on what would become one of the best breeding grounds for top hedge fund talent: the Goldman merger arbitrage desk, headed first by Tenenbaum, then by Robert Rubin. Perry was one of the initial hedge fund stars to be molded by Rubin and the Goldman culture of that time.
By the time Perry was 30, his life appeared to be set. He had made a name for himself at Goldman, helping to share his good fortune by recruiting and training others on the arbitrage desk. He was starting a family, and senior management beckoned. Then, in 1988, the year he was on track to make partner, Perry took a leap. He left Goldman and started his own firm in the offices of Bear Stearns Cos., using $1 million from his maternal uncle James (Jimmy) Cayne, who would go on to become Bear’s CEO.
“It is not about always being right; it’s about always thinking right. In this business we are going to make a lot of mistakes.” - Richard Perry Today, Perry Capital has roughly $11 billion in assets and is based on the 19th and 20th floors of the iconic General Motors Building, across from Central Park. But Perry’s path to success was not always clear. When Perry was ten years old, his family moved from Chicago to New York, and his parents later divorced. At Wharton he made ends meet working as an usher in a movie theater, ultimately becoming the manager. He knew that if Perry Capital failed, there was no fallback. Fortunately for Perry and his investors, Perry Capital never had a down year in the first two decades of its existence.
Perry, 59, has shown a remarkable ability to adapt to changing market opportunities. His portfolio comprises an eclectic mix of investments and styles: a controlling stake in fashion mecca Barneys New York, a friendly activist play on paper companies, a position in Argentinean debt and a bet on the privatization of mortgage giants Fannie Mae and Freddie Mac. For Perry an investment in a sovereign credit is little different from investing in the debt of a corporation; his skill lies in assessing the risk of the situation and weighing the likely outcomes.
In 2006, Perry was early to spot the approaching U.S. subprime mortgage crisis; the firm finished 2007 up 11.72 percent. Then, in 2008, Perry Capital stumbled after a short position in German car manufacturer Volkswagen went awry, contributing to a 28.23 percent loss that year. It was a rare miscalculation of the odds. Since then, however, Perry Capital has more than bounced back. Investors say the flagship Perry Partners fund returned 12.58 percent in 2012 and 20.88 percent in 2013. Annualized returns since inception are 12.59 percent, with less than half the volatility of the S&P 500 index and a correlation of just 0.49. Perry is an expert at calculating downside risk; the gamble he took in 1988 has proved his most lucrative yet.
Alpha: Did you always know you wanted to go into finance?
Perry: I knew I wanted to go into business, but until I interviewed with a representative from Penn, I didn’t know that Wharton offered an undergraduate program. The person from Penn looked at my resume and all the jobs I’d had prior, working for my school CFO, managing money for a firm, and he said, “Why not Wharton instead of Penn?”
How did you come to be hired by Goldman?
I was 18 years old and determined. L.J. [Tenenbaum] was a family friend. Whatever he asked me to do — move the car, go get a tennis ball; it really didn’t matter what it was — I got it done. And that later gave him the confidence that I would deliver. I was also getting an undergraduate degree at Wharton, which was not all that typical for Wall Street at the time, so he felt I had the academics as well.
What were some of the most important lessons you learned at Goldman Sachs?
I was hired by L.J., Gus Levy’s right-hand man, and he ran the arbitrage desk before Bob [Rubin]. Bob and L.J. hired and trained most of the people who went on to become the seniormost people at Goldman Sachs. They were willing to devote an enormous amount of time to it. You ask me what I learned from Goldman — recruiting and training are at the top of the list.
You and Bob Rubin became close.
I was lucky enough to start working for Bob in 1975. Already, he had been unofficially anointed as the future leader of Goldman Sachs. I developed a close personal relationship with him; I took care of his kids once in a while. When he started teaching at NYU — this was in the 1980s— I became his teaching assistant. He was very open; he let employees listen to his conversations. He had an office, but he didn’t use it. The people whose decision making was good ended up very close to Bob.
What constituted good decision making?
It’s about predicting the outcome of a situation — if you can weigh that probability correctly and you can make the right assumptions, that is extremely valuable.
So it’s more than just making the right investment?
You can be in the right place for two, three, four years. In the old days you could be in the right place for ten years. But the ability to know why something is right or why something is wrong — that is much more valuable. It is really about process. It is not about always being right; it’s about always thinking right. In this business we are going to make a lot of mistakes; we are going to get things wrong.
After you joined Goldman, weren’t you instrumental in hiring many of the key people who would go on to launch their own successful hedge funds — people like Daniel Och and Edward Lampert?
When you work at a place like Goldman Sachs, no one individual is responsible. The team we had in merger arbitrage was very focused on recruiting, and I helped recruit people like Frank Brosens, Eddie Lampert, Tom Steyer, Dan Och and Eric Mindich. This was an incredible group of people. Good guys. They have turned out to be very successful in what they have done.
Was it hard to leave Goldman?
It was really hard. It was 1988; I’m 33 years old. I spent my whole life thinking all I wanted to do is be a partner at Goldman Sachs. They tell me it is going to happen in 1988, but for it to happen I need to move to London and take on more of a management role. It would have taken me away from investing. I did a lot of thinking about “What is my life going to be like?” Was moving to London something I wanted to do? I had to make a decision, so I decided I wanted to focus on investing. With the support of my wife and family, including my uncle Jimmy Cayne, I chose to start Perry Capital. My uncle very much wanted me to leave Goldman. I think he and my wife were the only two people who thought it was a good idea.
What was your backup plan?
I never had one. If I failed, I believed it would be a disaster.
What would you say defines Perry’s investment approach?
We are completely opportunistic, investing in special situations across all asset classes and geographies. Since we don’t have a formal asset allocation policy, we can focus on the most attractive ideas in any strategy. We can take a complex situation and turn it into an understandable formula where we can calculate the odds. We have a very open dialogue and approach. Nobody has an office at Perry Capital, including me. That helps in our research and analysis because I can speak with the team quickly and literally see what they’re working on in real time. Our portfolio managers can come up to me, since we sit a couple of feet away from one another and discuss whether there is a big difference between our analysis of an individual situation and the market’s analysis of that situation. Our most difficult positions become the focus of most conversations.
How does an idea get into the investment portfolio?
Every week our investment team meets to discuss our existing portfolio and any new ideas that may come up. [CIO] Dave [Russekoff] manages our investment team and works closely with our six portfolio managers to vet an idea. Usually, a theme starts as a small position in our portfolio. If the position gets to be a meaningful size, I need to get on board. The largest positions, typically the most complex and difficult, are the ones I am very involved with.
What happened with subprime mortgages? Perry was one of the earliest hedge funds to make money shorting the subprime market.
We are good at doing things that people have not seen before. With subprime people were saying, “This is a huge position for you, but you’re not mortgage or structured-credit specialists, how can you be so sure?” We would explain our risk-reward analysis. At the time, the market believed that there would never be home price depreciation, so we bought CDS protection with only 2, 3 points of downside if the market tightened further. Ultimately, investing in asymmetric opportunities at the right price while properly assessing the downside is what we look for when allocating the portfolio. Our strength lies in being nimble. We believe that portfolio construction is critical — sizing high-conviction trades is key.
What went wrong with your investment in Volkswagen in 2008?
Our modeling, analysis and estimate on the size of the loss were wrong. We had a 2 percent position, and yet nearly one third of our losses in 2008 came from Volkswagen. We did not forecast that a European automotive company, during the bear market of 2008, would become the largest-market-cap company in the world. We just didn’t predict that the company value would go up by five times, and we were wrong.
How do you analyze an investment opportunity?
Every investment has two parts: quantitative and qualitative. It’s a bit easier to get the quantitative analysis down — looking at financial statements, reading the numbers and making sure they are accurate. The numbers tell a lot of the story. It’s the qualitative analysis that I think sets us apart. We strive to work with management teams to understand the dynamics of their business, what their company goals are, where we have an alignment of interest. And there are times when we see a path to value creation and discuss it with the management team. We have built up a lot of brand equity, and management teams are typically very receptive to our ideas. That said, it is critical to get both the qualitative and the quantitative parts right.
Do you often seek to change management?
For the most part, I want to have a management team that is already in place — a management team that is smart and has its interests aligned with us.
In a sense, what you’ve done is apply the same analysis you applied to corporations to other situations and markets. When you are investing in European sovereign debt, you don’t see Germany; you see Germany Inc., and German Chancellor Merkel is the CEO.
Exactly. And understanding Germany Inc. is an important part of understanding Europe Inc. And understanding that means understanding what Angela Merkel is going to do. If I know what Chancellor Merkel is going to do, then I can tell you what is going to happen in Europe.
How did you get comfortable investing in Europe after 2008?
The big question everyone was asking was, “Does Angela Merkel have some level of commitment to the euro zone?” There was a tremendous amount of uncertainty. There were two common beliefs at the time. One was that Germany would never take on the level of debt of the 1930s; the other was that they would want to avoid war [by keeping Europe unified]. The two were at odds with one another. Our feeling was that Germany would take on enough debt to preserve the euro zone.
Why did you buy Barneys?
We were originally in the bank debt that converted to equity in 2012. There was $250 million in bank debt, the seniormost part of a $900 million capital structure. My opinion was, even if Barneys was not profitable, the assets would be worth that; the balance sheet just needed to be cleaned up.
Retail is a notoriously difficult business to make money in. How have you been able to succeed with Barneys?
You need a combination of a left-brain and a right-brain person to run retail. Those people are few and far between. Just as we bought Barneys, a new management team came in, led by Mark Lee and Daniella Vitale. They are truly excellent. Having two people at the top, both with left- and right-brain capabilities, does not exist at most retailers. Mark and Daniella share the same vision I have — namely, that it’s important to enhance the shopping experience for both men and women. I think they have made the flagship stores a place that men and women can visit and appreciate together. We also focus on the numbers, though. Since we took over the company, Barneys has closed 40 percent of its stores and strongly improved its e-commerce business. Two thousand thirteen was a record year for Barneys; 2014 will be another record year.
