When Seth Klarman Was The King Of Iceland And Nearly The Ruler Of CanadaMark Melin
Baupost Group’s Seth Klarman is best known for his value investment strategy, as documented in the book “Margin of Safety.” But what the secretive fund manager is increasingly becoming known for is his penchant for hiding controversial investments through complex shell companies.
Klarman’s Baupost Group was at the center of controversy when last October The Intercept revealed a complex series of shell companies was used to purchase nearly $1 billion on Puerto Rican debt through COFINA bonds. To execute the transaction he set up a shell company, Decagon Holdings LLC, to purchase the distressed debt for pennies on the dollar.
Klarman found the investment at the center of a firestorm, labeled a “vulture” as the small island faced a humanitarian crisis in the wake of Hurricane Maria. Such vulture tactics get their name by buying the debt at a significant discount and then playing hardball with a sometimes disaster ravaged region to receive full payment at the expense of a suffering populace.
Years ago, ValueWalk extensively and nearly exclusivelty reported on Baupost’s attempt to build the largest quarry mine ever? exceeding the size of Niagrra Falls.
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Additionally, Baupost nearly caused the Government of Romania to be toppled over a massive gold mine there
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Baupost’s adventures in controversial distressed debt hasn’t been limited to Puerto Rico. Institutional Investor recently revealed Klarman and his team were involved in purchasing Icelandic debt in the wake of that small nation’s banking collapse in 2008. Three of the island’s largest banks — Glitnir, and Landsbanki — failed in October 2008 shortly after Lehman Brothers collapsed in the US. The difference was that the failed Icelandic banks were not bailed out by the government. Iceland’s economy quickly fell into recession as a result and Klarman found an opportunity to buy when blood was on the street, one of the first foreign buyers to do so.
The debt of Iceland’s biggest bank, Kaupthing, was snapped up for just 6.63% of face value, Glitnir debt sold for 3% and Landsbanki was sold for 1.25%, literally pennies on the dollar.
To execute the investment, Baupost created the Delaware-registered Thingvellir Fund and Thingvellir SARL, both based in Luxembourg, to purchase the debt. The funds were named after Thingvellir National Park, one of Iceland’s national treasures.
The stealth approach allowed him to enter and quickly exit the investment without much fanfare, netting a profit of $880 million, or a 51.3% return on investment. The investment helped Baupost post 20% returns in 2009 and 13.4% in 2010. Investors who held the bonds longer were subject to capital controls and had assets tied up for three additional years.
Baupost has used this obfuscation tactic on numerous occasions. Shortly after the 2008 crash, it created Walnut Place to hold bonds of Countrywide. The secret was kept until Theodore Mirvis, an attorney representing Bank of America in litigation on the matter, revealed in court that Baupost, “known as a distressed-debt or sometimes a vulture fund,” was the real investor.
Why would a thick-skinned hedge fund manager work so hard to disguise their investments? They don’t want other fund managers to know their positions, but there is a public relations concern that involves their sensitive endowment and foundation investors.
“Klarman has cultivated an image as a moral and principled person, which is appealing to those who are more socially responsible investors,” Stephen Lerner, a labor strategist and fellow at Georgetown University’s Kalmanovitz Initiative for Labor and the Working Poor, told Institutional Investor.
For an institutional investor operating a university endowment in a politically sensitive environment “it’s an issue,” Hans Humes, president and chief investment officer at Greylock Capital Management, told Institutional Investor. “Bigger investors are going to be more sensitive to headline risk. The media attention in these cases can be very anti-creditor.”
Klarman, for his part, was clear on the issue. “I don’t like to be attacked,” he was quoted as saying at the Robin Hood Investment conference. This is not just due to his personal feelings on the matter, but there is an important investor relations angle to consider as well.
Disclaimer: This content was not written or authorized by Mr. Klarman.