Hedgies look to capitalize on coronavirus pain à la Warren Buffett
Hedge fund billionaires like Nelson Peltz are looking to mimic Warren Buffett’s strategy of investing in distressed companies through preferred shares as the coronavirus wreaks havoc on the economy, The Post has learned.
Large financial firms like Peltz’s Trian Partners and Howard Marks’ Oaktree Capital Management have been scouring the globe for opportunities to plow large sums of money into companies hurt by shelter-in-place orders in exchange for stock that comes with big dividend payments and warrants to buy new stock at a cheaper rate, sources said.
Buffett, the head of Berkshire Hathaway, is famous for using preferred stock to make billions from companies in dire straits, including Goldman Sachs during the financial crisis. Berkshire’s $5 billion investment in Goldman in 2008, in exchange for stock that yielded a lofty dividend of 10 percent as well as warrants to buy new stock on the cheap, resulted in a $3.7 billion payday in 2011, just three years later.
“It won’t just be Buffett this time,” one well-known hedge fund manager told The Post. “I spoke to one CEO this week” about just such an investment, the on-the-prowl hedgie said.
Trian, an $11 billion hedge fund known for its activist investing, declined to comment. But Peltz has not previously invested in distressed companies in exchange for preferred shares, sources said.
Marks, of Oaktree, which manages $120 billion in assets, has done such deals before, including a $225 million investment in 2012 in nut seller Diamond Foods. In exchange, Oaktree landed preferred stock that paid a 12 percent dividend and warrants to buy 4.4 million shares at $10. Four years later, in 2016, Diamond was bought by salty snack maker Snyder’s-Lance for $40.46 a share.
Marks declined to comment on his strategy for investing in the coronavirus economy. “I never talk about tactics and strategies while the game’s afoot,” he told The Post.
Sources say other hedge funds, as well as private equity firms, have been on the prowl for Buffett-esque deals, including two weeks ago, when struggling cruise giant Carnival was in search of financing.
“They were running a process, and reached out to every big hedge fund,” said a source familiar with the process.
Carnival ended up tapping the public bond markets — thanks to a last-minute recovery in the stock market, which helped to reopen the door to public market financing.
The cruise operator last week priced a $4 billion bond offering at an 11.5 percent interest rate. If it had been forced to turn to a large hedge fund or private equity firm for a cash infusion, including preferred stock with warrants to buy more stock, it would have likely come at a higher cost to the company, industry experts said.
Preferred shares, especially when partnered with warrants to buy stock, offer the promise of such high returns because they also carry a lot of risk. The stock could fall, leaving investors with nothing but the dividend. And when a company files for bankruptcy, preferred shareholders, while above common stock holders, stand below debt holders in the payout line.
Even the “Oracle of Omaha” can get whacked.
Buffett’s Berkshire last April invested $10 billion in preferred stock with Occidental Petroleum for a dividend of 8 percent. Buffett also snagged warrants to buy up to 80 million Occidental shares at $62.50 a share.
At the time, Occidental was valued at $50 billion. With oil prices plummeting, it’s now valued at just $13 billion and its shares are trading at $13.83 a share — well below the price of Buffett’s warrants.