|Shares Out. (in M):||37||P/E||N/A||5.9|
|Market Cap (in $M):||605||P/FCF||N/A||5.9|
|Net Debt (in $M):||0||EBIT||0||0|
"Many shall be restored that now are fallen and many shall fall that now are in honor." Horace
For most of my career, I have found myself most interested in the most hated areas of the market (see Antero Resources writeup!). At our shop, we like to make relatively long-term investments in people/businesses that are currently repulsive to most investors. I suspect a recommendation for Greenlight Re currently meets that criteria. The company has been written up on several occasions here on VIC, most recently by rickey824 in February 2013.
Normally, an investment in a reinsurance company would require some significant research on the quality of the insurance operation and its likely success over the years. I intend to skip that conversation in this writeup because I don't think it is a necessary part of the thesis (I feel the below average votes coming right now). If I recommended shares of GLRE at a price above book value, then I think the insurance discussion would be considerably more relevant. However, in this case, we can buy shares at a discount to book value (as I will demonstrate later), so the "going concern" value of the reinsurance business is less vital to our thesis. This is not to say we hope they run this off, but rather, we aren't paying for the ability to grow the insurance business.
Before I leave the topic of insurance, note that GLRE has produced an average combined ratio of 104 for the past five years (not NPE weighted, just average of the CRs). We think that is on the high side of future CRs just given the nature of 2017's catastrophe payouts. The important point is that while the CR is impossible to predict in any given year, we think it is likely to be in the historical average range over time. Another interesting characteristic of the reinsurance biz here is that NPE have grown north of 3% annually for the past 4 years (so this isn't a shrinking business, at least not yet).
Our investment thesis rests on the investment portfolio, which has had a miserable five-year run. We think David Einhorn is a terrific investor who does excellent work (work that I believe is among the best that I've seen throughout my career). His strategy has not been in fashion for the past five years. Since DME (Mr. Einhorn's firm) runs the entire investment portfolio of GLRE, the GLRE financials have been adversely impacted. Consider that in the past five years, the GLRE investment portfolio has achieved a total return of -1.6%, or -0.3% annually.
Prior to this stretch, Mr. Einhorn's track record was stellar (and still is, even including this rough 5-year stretch). We like the idea of exposing some of our capital to Mr. Einhorn's investment strategy given the current price of such an investment.
Let me explain with a little math. At year-end 2017, the GLRE portfolio managed by DME was $1.36 billion. Shareholder's equity was $831,324. Thus, a GLRE shareholder at book essentially gets 1.6x leverage on Greenlight Capital. Now, I know we could drill down further and adjust based on our expectation of CR (which we think is above 100), but precision is not the thesis here (though in my EPS estimates in the table above, I am assuming a 104/103 CR for the two earnings figures).
There is more bad news. Through February, the GLRE portfolio suffered a 10% loss so far in 2018. Using the year-end figure, that reduces book value by $136 million. For 2018, we are assuming that Greenlight's portfolio remains -10% (and thus the $4/share loss). That would leave book value at roughly $696M today, or ~$18.80 per share. A purchase of GLRE shares today is at a discount of 14% to marked book value.
Let's say that Mr. Einhorn is still a terrific investor (which we believe is the case) and that his strategy begins to bear fruit starting in 2019 (if it comes earlier, all the better). If we can assume an 8% return from Mr. Einhorn's portfolio, we assume that our return on equity would amount to ~12% given the leverage of investment assets to shareholder's equity (some is lost given the >100 CR assumption).
Put another way, an investment in GLRE allows an investor to buy a historically great hedge fund manager portfolio at a 14% discount to marked book value at a time when said manager has suffered through the worst five-year period of his career. If Mr. Einhorn can generate an 8% return for five years, we estimate book value would climb to approximately $33/share at the end of the holding period (keep in mind that GLRE is not a big taxpayer).
Given the likely risk profile of Mr. Einhorn's portfolio (102% long, 70% short) at the end of February, there is far less market risk than an index. Yet, the discount to book and the potential for book to grow at a healthy rate provide a very significant return oppportunity. If in 5 years, GLRE trades for book value, we estimate that the stock price would double from here (or ~15% annualized return). We like that expected return given the risk.
I started this writeup with the statement that we like to sift through ideas that are hated by others. Hedge funds certainly fit that profile, especially when they have results like those of Greenlight over the past five years. Clearly, our risk is that Mr. Einhorn underperforms so significantly that shareholder's equity declines significantly from here. We think that is a risk worth taking in a market we believe is otherwise quite overvalued.
A return of the long/short hedge fund strategy... it could return with a vengeance. GLRE is a call option on that return, with no expiration date.
|Entry||03/04/2018 01:13 PM|
I will push back on this because I think it's an interesting topic. I say all of this without an ounce of snark because like others, I have a great amount of respect for David and he's a good guy on top of it.
Greenlight has too much capital. David built his reputation and track record mostly on small cap stocks. Do we think it's a coincidence that since managing about $5 billion or more, Greenlight's returns have materially deteriorated? I don't think this point needs much elaboration.
"Out of favor" or just "wrong"? I think that anytime you're a go-anywhere investor, the answer is always "wrong." Specialists with narrow strategies can rightfully claim out of favor. If you run an MLP fund, yeah, there's only so much you can do. But a global go-anywhere equity and credit fund that can take very large positions?? Sorry, nope...there's no such thing as out of favor. It's a jockey bet. And this constant whining about value lagging growth is disingenuous. There are an awful lot of value investors out there who have killed it in the last decade. Maybe it's been the case that those investors have adapted better to things like FANG or something. I don't know the exact reason, but that's not even the point...the point is that this isn't a static business and things do evolve whether you like it or not. Maybe if someone didn't evolve in some way, that's their problem and not the market's.
This is anecdotal but I noticed a gravitation towards "hedge fundy" stocks. Levered companies with complicated financial structures and SOTP stories. CNX, Sunedison, Aercap, etc. It seems like "boring" companies have done a hell of a lot better.
What's with the shorting? Someone please correct me if I'm wrong, but I don't think Greenlight has a net exposure target, does it? Assuming no, why short so much if it hasn't worked well? Greenlight was famously short a ton of Lehman in 2008 and still managed to be down almost 20% for the year anyway. For some weird reason, shorting has this phonomenon where people seem to equate reputation with one or two high profile victories rather than overall performance.
The personal side of Greenlight isn't encouraging. David has more money than he could ever spend. He also got divorced which is generally a horrible sign imho. I hate making it personal since it's a bit uncomfortable, but I suppose from an allocator's perspective you kinda have to weigh these things. I also did not care for Greenlight's public plans for Apple and GM. I thought both were stupid and myopic and painted the hedge fund industry in a poor light.
Anyway, Greenlight Re hasn't done anything in the past decade. Not sure what's changed that will cause the next decade to be materially different. But I wish them success.
|Subject||Re: Re: Greenlight|
|Entry||03/04/2018 02:33 PM|
It's a subjective topic I realize. I don't think it has as much to do with the actual number of hedge funds that own it as it does the complexity and appeal to limited partners. Hedge funds have to tell stories to their investors to justify fees, and stories with hidden assets and unlocking value and all those buzzwords fit the bill pretty well. But I think it's hard to make a living with these kinds of investments, and in my experience they have a higher propensity to produce large losses. Sorry I can't define this very well, probably best to move on.
I have no idea about shorting, I just don't think it's created much if any value for Greenlight over the past decade and I'm surprised David hasn't reevaluated it. There is a sort of mental inflexibility about that that I'm uncomfortable with, generally speaking. Would it have been wrong for a long/short manager to have said in 2011, "You know what, I think you'd have to be insane to short anything right now. Stocks are insanely cheap."? But even when Greenlight's shorts did seem to work like in 2008 the fund still lost a lot of money, so what exactly is the point? I bet the book sales for his Allied Capital book were greater than his profits from shorting the stock. Again, the story always has a funny way of overshadowing the p/l when it comes to shorting...in that case literally.
You don't need to address the personal comments - I'm not asking you to - but that doesnt make my concerns any less valid.
|Subject||Re: Re: Greenlight|
|Entry||03/04/2018 02:47 PM|
Btw the tags have easily become my favorite part of VIC. It's not even close. I have also come to love seeing palpable, visceral FANG-envy.
|Subject||Re: Re: Re: Re: Greenlight|
|Entry||03/04/2018 03:20 PM|
Sorry man, wasn't trying to get you down. Probably best to retract my comment about hedge fundy-type stocks since it's so ambiguous. Good job with your shorts, honestly. If you can keep cranking out modest gains year after year, all the power to you. But that hasn't been the case with Greenlight. As for Greenlight's LP's, if they're fine with it, that's cool. David is transparent about it all so I have no qualms there...he's handled it the right way. But I don't think it's much solace compared to the returns.
Has Greenlight lost their ability to value companies? I think that's the wrong question to ask. You don't pay Greenlight to value companies correctly, this isn't Duff & Phelps brought in to mark a PE portfolio. You pay Greenlight to generate good returns, and I think there's been enough time to have told you the answer, unfortunately.
|Subject||Re: Re: Re: Re: Re: Greenlight|
|Entry||03/04/2018 03:51 PM|
Holland -- through year-end 2017, GL Cap has compounded 15.6% annualized SINCE 1996! You're right... that is enough time to tell if GL Cap can value companies (I have no idea what you mean with the Duff & Phelps comment -- investing is about valuing companies which eventually leads to results if you have skill). Our GLRE thesis is based on the idea that GL Cap can generate returns half their historical level over the next five years.
|Subject||Re: Re: Re: Cash Flow Underwriting|
|Entry||03/05/2018 10:31 PM|
One more quick point -- it's not 2 & 20 (you'll find that in the 10K). Fees are high though (1.5 and 10), I'll give you that.
|Subject||Re: Re: Re: Re: Re: Cash Flow Underwriting|
|Entry||03/26/2018 10:01 AM|
I don't think GLRE is pursuing cash flow underwriting as a strategy. It just turned out that way accidentally.
|Subject||Re: Re: Re: Re: Re: Cash Flow Underwriting|
|Entry||03/26/2018 01:22 PM|
David - that post #38 - was really helpful. Thanks.
|Subject||Re: Short pitch|
|Entry||05/30/2018 09:20 AM|
Very low quality, flawed analysis. Motivated by personal agenda.
|Subject||Re: Re: Short pitch|
|Entry||05/30/2018 09:45 AM|
What's the personal agenda? Any merits to his pitch?
|Subject||Re: Short pitch (not mine)|
|Entry||05/30/2018 10:25 AM|
I don't know the ins and outs but these vehicles have always been pitched as tax avoidance vehicles for the managers. That doesnt mean that they can't be real companies but it might mean incentives are not necessarily and properly aligned. They are also permament capital vehicles for the managers so the pressure to perform is not as stron which has some good and bad aspects. The ability to get hit with sudden insurance losses does not seem that compatible with Einhorn's farily volitile perfromance.
|Subject||Re: Re: Short pitch (not mine)|
|Entry||05/30/2018 11:11 AM|
There is an interesting paper written in 2010 by Taussig Capital about the merits of an asset manager lauching an offshore reinsurance vehicle. I am not familiar with the firm but they appear to be advisors to funds looking to launch such vehicles. The 2010 paper goes on for 50+ pages on the merits of the structure, mainly the tax benefits, non-callable leverage, permanent capital, and liquidity. It also specifically cites Berkshire, Greenlight Capital, and a few other similar firms and walks through the math of how they benefit/don't benefit from these advantages.
What is amusing looking back is that the author writes confidently about what a slam dunk GLRE is and how easy it is to see how great it will do because, essentially, reinsurance isn't that hard and Greenlight has mastered the investing process. And of course, since the start of 2010, GLRE is down 41% and the S&P 500 is up over 190%.
|Subject||Re: Re: Re: Short pitch|
|Entry||05/30/2018 03:30 PM|
-Sunesis is long AGO and disagrees with Einhorn's short thesis delivered at Sohn.