Ricky Sandler’s New York-based Eminence Capital recently made a new private investment, joining the expanding ranks of hedge fund managers dipping into this illiquid market to boost returns.
In his second-quarter report sent to clients and obtained by Alpha, Sandler said that in July his firm led a Series C funding round for Whipclip, an online and mobile application platform for the legal sharing of short video clips of live television and music videos.
The investment cost the long-short funds about 80 basis points, or 0.8 percentage point — not a big part of the portfolio. “This investment has the right combination of big idea upside, preferred structure downside protection and management and board execution capabilities to meet a very high bar we place on deploying capital into private investments,” Sandler wrote in his second-quarter report.
The manager told clients that researching and analyzing private companies, especially technology companies, “is an increasingly important part of staying on top of new trends and significant developments, whether for potential new investments or to monitor portfolio positions.”
However, Sandler assured his investors that this strategy will not become a big part of the firm, which currently runs $6.4 billion — about $5 billion in its long-short funds and $1.4 billion in its long-only funds.
“To be clear, we do not expect investments in private companies to become a material part of our portfolio or a major focus of our research efforts over the near term,” Sandler said. “Generally, valuations of private companies in the technology world strike us as irrationally high and we would expect our bar to remain very high in this area.”
Sandler, who a number of years ago was a partner with Cobalt Capital Management’s Wayne Cooperman in a firm called Fusion Capital Management before they split to launch their own funds (Sandler founded Eminence in 1998), is perhaps best known for his high-profile activist campaign that ultimately led to the 2014 merger between clothing retailers the Men’s Wearhouse and Jos. A. Bank Clothiers for $1.8 billion after a protracted takeover battle.
Eminence Capital’s funds have been struggling so far this year.
Eminence Partners was up 0.1 percent in the second quarter and just 1.8 percent for the year, which is slightly worse than the average performance of a basket of indexes against which the firm measures itself.
Over the past three years, the fund has compounded at 12.9 percent, lagging each of the three benchmarks by 1.5 to 5 percentage points per year.
Eminence Partners Leveraged, which is similar to the flagship fund except each position size is multiplied by 1.5, was also up 0.1 percent in the second quarter and 2.7 percent for the first six months.
Eminence Partners Long was down 0.7 percent or 1.1 percent for the second quarter, depending on the share class, and down 3.5 percent or 3.3 percent for the first half of the year.
Sandler, who is generally very protective of any information regarding his firm or his funds, conceded in the report that so far this performance “is tracking a bit below our internal standards.”
He added that losses on a couple of larger positions more than offset gains on several smaller winners. “Our batting average is solid this year, but a lagging slugging percentage has constrained our results,” Sandler said.
Eminence’s top five performing longs in the first half were Men’s Wearhouse, Vivendi, Ctrip.com International, Altice and ASM International, which combined to contribute 4.1 percent in gains.
However, the top five losers cost the fund 5.1 percent. They were Fossil Group, Michael Kors Holdings, Darling Ingredients, Keurig Green Mountain and Autodesk.
Even so, Sandler still owns — and has added to — Fossil Group, which cost the fund 2 percentage points in the first half, Michael Kors and Autodesk.
He attributed Fossil’s failures to “significant earnings estimate downgrades including our own, at least over the near term,” adding, “we underestimated a slowdown in the watch category and in Michael Kors watches in particular.”
However, Sandler told clients he believes that over the long haul watches are an attractive growth category. “Fossil remains in a very strong position as a result of its breadth of license partners, dominant distribution footprint, strong design capabilities and significant investment in next-generation smart watches across all its brands,” he said.
Sandler also told clients that he recently boosted his position in Zynga, the online gaming company, which now ranks among Eminence’s top ten positions with about 4 percent of capital. He says the company is “undergoing a transformation within an industry that is experiencing significant growth.”
Sandler also increased his long exposure to financials in general from 4 percent to 10 percent of equity over the past few months. Most of this activity has taken place in what he called traditional financial service firms such as banks and insurance companies, citing “an improving industry backdrop coupled with some interesting company specific dynamics.”
Sandler is referring specifically to increasing his position in insurer American International Group, now Eminence’s No. 1 stock position. The firm owns 3 percent of the shares as well as long-dated call options, which add to exposure.
He also established new long positions in JPMorgan Chase & Co. and Webster Financial Corp., a Waterbury, Connecticut–based regional bank. “Webster is an above-average regional bank that happens to have a very exciting and growing health-care savings business within it,” Sandler said, adding that Webster is the No. 1 company in the health savings accounts (HSA) business.
Altogether, Eminence’s top ten positions at the end of the first half accounted for 45 percent of assets. They are a basket of auto dealer stocks, plus AIG, Vivendi, ASM International, GNC Holdings, Fossil Group, Zynga, TripAdvisor, Wolseley and Autodesk.
Sandler also told clients that he “managed gross exposure lower during the first half of the year.” However, in the past month he has been increasing gross exposure “moderately,” saying, “I believe stock specific fundamentals should once again move to the forefront in driving equity returns now that portfolios have been adjusted for the new currency, commodity and interest-rate realities.”
