| Daniel Loeb, chief executive officer of Third Point LLC, at the World Economic Forum in 2007 (Photo credit: Daniel Acker/Bloomberg News). |
When you think about Daniel Loeb and his hedge fund firm, Third Point, you generally think activist investing. This is not surprising, since Loeb is legendary for his acerbic, antagonistic letters to the management teams of his corporate targets, although he has become much more sedate in recent years. But the firm also employs a lesser-known strategy that has boosted the performance of its main hedge fund this year.
Third Point describes its strategy as event driven, but it is really more of a multistrategy firm, investing in equities, sovereign and corporate debt, structured credit, and risk arbitrage. Activism is not the firm’s main focus; these positions generally range between 0 percent and 25 percent of Third Point’s assets at their peak, depending on how you define the strategy. One strategy for which the firm is much less well-known is investing in private companies, which the firm has quietly done for 16 years.
In its third-quarter letter to investors, the firm devotes a fair amount of its discussion to how this strategy, Third Point Ventures, has played an important role this year in the performance of the Third Point Offshore Fund, which returned 5 percent in the third quarter and is up 7.2 percent for the year through November.
Third Point says 6 percent of its exposure is in private companies these days; the firm says it limits fund exposure to the strategy at 10 percent of net asset value (NAV).
Third Point Ventures was created in 2000 and focuses on technology, health care, and fintech. It relies solely on Third Point capital and does not take outside money.
Based in Menlo Park, California, TPV is headed up by Robert Schwartz, who has spent more than 25 years in private equity and technology company management. He currently serves as a director of nine companies, one of which is now publicly traded.
In its third-quarter letter, Third Point says TPV’s goal “is to produce superior risk-adjusted returns while adding perspective, ideas, and insights” to Third Point’s research efforts.
“We have found that being able to invest across the arc of a company’s life, from start-up through each stage of growth to pre-IPO funding rounds, has enhanced investor returns by exposing us to innovative new companies and thinkers,” Third Point states in its letter.
Altogether, TPV has made 41 investments. According to the firm, 14 generated positive returns by the time Third Point exited the investment, while 21 are currently active.
Of the 21, 12 are technology companies, six are health care investments, and three are fintech investments. The firm expects two of its larger investments to go public over the next 18 months.
Third Point says two of the companies in its private investments portfolio contributed to this year’s returns. They are Apigee Corp. and Akarna Therapeutics.
Apigee is an enterprise cloud computing company that Third Point Ventures initially invested in back in July 2008, when the company was called Sonoa Systems.
Over the years Third Point helped to rebrand the company, which developed a software platform for the fast-moving and rapidly growing digital economy.
TPV invested in seven different financing rounds. It also bought into the initial public offering when Apigee went public in April 2015. This September, Google announced plans to acquire Apigee for $625 million in cash. The deal closed on November 10. Third Point said in the letter, dated November 1, that once the deal closed, Third Point made 2.4 times its invested capital.
In the first quarter of 2015, Third Point was a founding investor in Akarna Therapeutics, which focuses on the treatment of nonalcoholic steatohepatitis (NASH), or fatty liver disease.
Third Point says it found the investment appealing in part because of Akarna’s large potential market. The firm notes that studies have found that NASH affects 2 percent to 5 percent of Americans. It is also an active area of business development for drugmakers, Third Point notes in the letter, with partnerships or acquisitions of companies that produce related drugs “occurring at attractive valuations.”
Sure enough, in August 2016, Allergan acquired Akarna for $50 million and undisclosed potential clinical, regulatory, and commercial milestone payments. Third Point says it made 3.1 times its initial investment.
“If Allergan successfully develops and commercializes the Akarna drug, the total return on our investment could be meaningfully larger,” Third Point adds.