Senator Investment Group, the New York–based event-driven firm founded by York Capital Management veterans Douglas Silverman and Alexander Klabin, is one of the fastest-growing hedge fund firms in the business, according to firm documents.
The firm now manages $8.5 billion in the Senator Global Opportunity Master Fund and related funds, according to its year-end letter to clients, dated January 30 and obtained by Alpha. This is way up from $6.7 billion at the beginning of 2014 and more than double the $4 billion it had just two years ago, which at the time was not even enough to qualify for Alpha’s annual Hedge Fund 100 ranking of the largest hedge fund firms.
It isn’t recent performance that is spurring asset growth. The fund gained only between 7.6 percent and 8.2 percent in 2014, depending on the fund’s class and whether it was onshore or offshore. However, Senator — which says 30 percent of its capital is in its two-year lockup class — is probably benefiting from the fact that since its July 2008 inception, the fund has generated an 18.3 percent annualized net return, compared with just 9.9 percent for the S&P 500.
So who are the people behind Senator? Silverman and Klabin had worked together for four years at York, a multistrategy and event-driven firm.
Klabin specialized in private equity, value equity, distressed debt and special situation investments at York, according to his bio. He previously served as a distressed-debt research analyst at Monarch Alternative Capital and spent time at Quadrangle Group, a private investment firm that specializes in media and communications companies. He started his career at Goldman Sachs & Co. Before joining York, Silverman worked in the global leveraged finance group at Merrill Lynch. New York–based alternative investment firm Blackstone Group owns a minority stake in Senator, which it seeded.
Neither Klabin nor Silverman returned calls for comment.
In any case, Senator tells clients it has been doing especially well with its health care investments over the past few years. Health care, the firm’s largest sector allocation, kicked in 520 basis points — or more than 5 percentage points — to Senator’s performance on the long side.
Senator’s best-performing pick for the year was drug maker Actavis, which in November agreed to acquire Botox maker Allergan. Actavis was the firm’s largest holding at the end of the third and fourth quarters and its second-largest position at the end of June 2014.
“The healthcare sector has undergone tremendous consolidation over the past few years, as companies have sought to combat pricing pressure, enter new markets and product areas, streamline cost structures and exploit historically low interest rates,” Senator tells clients in its letter.
The hedge fund firm says this activity was most prevalent in the specialty pharmaceutical and drug distribution subsectors. It notes that drug companies like Actavis, Valeant Pharmaceuticals International and Shire pursued aggressive acquisition strategies, while distribution firms have “completely transformed.”
As a result of consolidations in both the specialty pharmaceutical and distribution businesses, the companies have experienced “an acceleration of revenue growth and profitability and experienced material stock-price appreciation,” Senator points out.
In the fourth quarter, however, Senator liquidated its stake in AbbVie, while in the third quarter it sold its stake in Valeant. In the drug distribution business, it has aggressively scaled back its stake in McKesson Corp.
Now Senator is making a big push into the medical technology sector, where it sees “a similar pattern of consolidation and stock-market outperformance.”
“We have found med-tech to be among the least attractive sub-sectors within healthcare over the past five years,” Senator tells clients, citing “mounting reimbursement and pricing pressure from commercial and government buyers.” Senator says the industry will also be hurt by consolidation among hospitals and physician groups, and “depressed healthcare utilization” resulting from the economic downturn.
However, as a result of these factors, the hedge fund firm says it saw a surge in consolidation in the group in 2014. Key deals involved Medtronic and Covidien; Zimmer Holdings and Biomet; and Becton, Dickinson & Co. and CareFusion Corp.
“Accordingly, we have devoted increased resources and capital to the medical technology industry,” Senator tells clients.
Indeed, in 2014 the firm says it bought shares of Medtronic, which remains a core position, and Zimmer. Senator says consolidation will “stem pricing pressure” at the same time that demand for medical products has improved.”
