JEF - Jefferies Group

[jay21]

We invested a further $332.5 million in our Leucadia Asset Management platform, including a follow-on investment in Topwater Capital, a new investment with Mazama Capital Management and an initial investment in the Global Equity Events Opportunity Fund, which historically was part of Jefferies. At June 30, 2014, total capital invested in our asset management affiliates and associates was $461.5 million. Almost all of this represents seed capital invested in liquid securities managed by focused investment teams in which we have significant confidence. We expect a reasonable return on our invested capital and to earn an incremental return from our participation in the results of the related management companies.

 

http://seekingalpha.com/pr/10706945-leucadia-national-corporation-announces-second-quarter-2014-results

 

I've been thinking about this a bit, and I have to say I'm getting more and more uncomfortable with all these seed capital deals.  Obviously, distributing capital to different managers didn't work out too well last time, and I'm not so sure investing in the management firms mitigates the potential downside risks.

 

I'm also not too crazy about this "reasonable return" + "incremental return" business.  What exactly are their target returns here?

 

I don't know the specifics, but these are the type of deals I think make a ton of sense for LUK.  There is so much room to scale up the management cos of the funds.  I don't think they would invest in a company that they didn't think they could net 8+% on their investment after fees and a total of a 15% RoE.  It's also right in their core competency as a financial service company (which may result in synergies from trading etc.?). 

 

I don't think these asset management companies are BRK-type quality deals and there are risks, but the potential returns should more than compensate for additional risk.  And their sizing is small relative to BV.  These are also less risky than the Pershing Square deal if i recall the details correctly.

[dwy000]

Got to say I'm with TXLAW on this one.  I manage my assets.  I pick to put some in Leucadia - who is essentially a manager of assets.  They then put it into another manager of assets.  Who finally puts it in investments that earn a return (hopefully).  There are a lot of layers in there of fees and people who need to be paid.  I far prefer when they make direct investments - if I wanted to invest in a managed fund I don't need Leucadia to do it for me.  Where is the value add for LUK here? 

[txlaw]

 

I've been thinking about this a bit, and I have to say I'm getting more and more uncomfortable with all these seed capital deals.  Obviously, distributing capital to different managers didn't work out too well last time, and I'm not so sure investing in the management firms mitigates the potential downside risks.

 

I'm also not too crazy about this "reasonable return" + "incremental return" business.  What exactly are their target returns here?

 

If you looked at Leucadia as a concentrated bet on Jefferies and investment banking and then saw this as a continuation of those activities as opposed to with a lens towards the past how would you view this?

 

Actually, that's exactly how I'm increasingly viewing LUK. 

 

And that gives me pause because it means there is no longer any reason for me to own LUK.  I admired the LUK of old, but perhaps that is gone for good now that C&S are no longer together and Handler is running the show.

 

Nothing against Handler or Jefferies (I like much of what they're doing).  It's just that I already have plenty of exposure to the investment banking/merchant banking biz.   

[BG2008]

I think that the seeding model is very different than being a plain generic LP in a fund.  As long as Leucadia picks managers who generates a reasonable rate of return, i.e. 10%, the upside comes from the ability to gather assets and achieve an institutional investor base.  After X number of years, the ownership in the GP can generate revenue that is larger than the initial seed investment.  The seed investment also does not have to stay at the managers forever.  It can be pulled after a few years leaving behind an attractive annuity stream that can be held for the cashflow or monetized. 

 

Picking managers is a whole different conversation.

[topofeaturellc]

yeah - except picking managers to seed is insanely hard. Much much harder than picking managers to be an investor in which it self is very hard - especially at startup.

 

Even the best returning seeding funds have like one home run, one or two OK investments, and lots of strike outs.

 

Now granted - you only need one fund to hit. But its a VC biz, and like other VC funds, returns over time for the asset class are unlikely to be great.

[scorpioncapital]

I thought the idea of Leucadia merging with Jeffries was so that LUK could cherry pick the best real world investments discovered by Jeffries engagement with investment banking clients. It seems like a totally opposite angle for Jeffries or LUK to be going out and seeding capital to managers to find investments.

[topofeaturellc]

I'd be pretty bummed if I owned LUK to see my capital being used to seed a JEF prop desk.  Almost none of those spins have worked.

[scorpioncapital]

Perhaps their angle is we are not a bank holding company so we can do prop trading for advantage. Their argument was we did not take government money and can take more risk. The funny thing though is

a)  they have the lowest leverage ratios in the industry despite the un-regulated advantage and

b) is it an advantage to pile on the leverage more than your competitors  even if you can?

The fact that they don't makes it meaningless that they are not regulated for leverage and prop trading.

[topofeaturellc]

I think they are actually spinning the prop desk off balance sheet - that's how I parsed it.  So even that doesn't apply.

 

 

[BG2008]

Does anyone have a list of the deals that they've done in the last few years and how they have panned out?  It would be interesting to compile the list and try to calculate an all-in return for their seed capital.  If they have 2010, 2011, and 2010 seed vintages, we can probably figure out how the funds have performed and how AUM have ramped during that time.  Maybe, we will be surprised to learn that they're hitting 0.400 and it's actually really great ROI.  The upside could be in the future when the annuity stream grows larger as the funds go from $50mm to $1.0bn. 

[peter1234]

Does anyone have a list of the deals that they've done in the last few years and how they have panned out?  It would be interesting to compile the list and try to calculate an all-in return for their seed capital.  If they have 2010, 2011, and 2010 seed vintages, we can probably figure out how the funds have performed and how AUM have ramped during that time.  Maybe, we will be surprised to learn that they're hitting 0.400 and it's actually really great ROI.  The upside could be in the future when the annuity stream grows larger as the funds go from $50mm to $1.0bn.

 

This would be great data.

 

This seeding biz/asset gathering biz seems to be very cyclical, meaning you do very well in a rising market of your asset class.

 

Not sure what to make of it. This was a period of rising markets, so the more risk you took, the better your funds performed.

 

Going forward the environment might be different.

 

;)

[topofeaturellc]

of course the better the markets the worse your adverse selection issue.

[rogermunibond]

http://www.marketwatch.com/story/more-hedge-funds-lured-to-new-source-of-capital-2011-05-23

 

Interesting how Topwater funds HFs putting the managers in first loss position.

[BG2008]

There's a fairly robust discussion on VIC regarding first loss funding.  I personally would put it in the category of "won't touch with a 10 foot pole"

[topofeaturellc]

I struggle with how a value investing style would work with first loss.

 

It would seem like something for someone who wants to run a millennium type book, but can't get a gig at one of those places for some reason.

 

But from the LUK perspective, assuming Topwater has robust risk controls its pretty much a heads I win, tails I break even situation.

[rogermunibond]

Agreed in a really bad downturn that first loss position is easily wiped out. 

[Guest ajc]

 

Valuation of a LNG terminal play. Not Oregon, but still worth reading for the sake of comparison.

 

http://insuranceinvestor.wordpress.com/2014/08/12/riding-seth-klarmans-coat-tails-on-this-aussie-listed-lng-export-play/

 

 

 

[scorpioncapital]

I notice a pattern in LUKs recent investments in other jockeys. They invest in people who have been fined, sued, gone bankrupt, or have criminal controversy surrounding them. The market doesn't seem to like this strategy so far...

 

Kcg -  lost 400m on a trading glitch, almost went bankrupt. Jeffries invests.

 

Hrg - run by falcone, fined by sec and barred from hedge fund operations for using the fund as his piggy bank for paying personal taxes -  LUK invests as fund unwinds Hrg holding.

 

That coal guy in Australia - almost goes bankrupt, has to sell his horses to start a new mining venture. LUK involved.

 

Kumin - just gave him 400m. He worked for Cohen' sac advisors which had quite a few problems with the sec.

 

Trend - invest in beat up money men?

 

[Grenville]

Kumin - just gave him 400m. He worked for Cohen' sac advisors which had quite a few problems with the sec.

 

I didn't realized they finalized the deal with Kumin. Thanks for the heads up. Here's an article from the WSJ:

 

Ex-SAC Executive Kumin's Hedge-Fund Firm Gets Leucadia Investment

http://online.wsj.com/articles/ex-sac-executive-kumins-hedge-fund-firm-gets-leucadia-investment-1408309096

[Picasso]

I notice a pattern in LUKs recent investments in other jockeys. They invest in people who have been fined, sued, gone bankrupt, or have criminal controversy surrounding them. The market doesn't seem to like this strategy so far...

 

Kcg -  lost 400m on a trading glitch, almost went bankrupt. Jeffries invests.

 

Hrg - run by falcone, fined by sec and barred from hedge fund operations for using the fund as his piggy bank for paying personal taxes -  LUK invests as fund unwinds Hrg holding.

 

That coal guy in Australia - almost goes bankrupt, has to sell his horses to start a new mining venture. LUK involved.

 

Kumin - just gave him 400m. He worked for Cohen' sac advisors which had quite a few problems with the sec.

 

Trend - invest in beat up money men?

 

Probably been a trend for a while given the shoutout Ackman gave to Leucadia in his last shareholder letter.

[scorpioncapital]

Yeah, it's like value investing for people, sort of reminds me of moneyball by Michael Lewis. Let's just hope this strategy is based on the idea that you had good investors who were unlucky and down and out but with talent instead of investors who were good for a while cause they skirted with the law.

 

Hopefully someone can ask about this at the shareholder day coming up, as well as the weak stock performance in the last few years like in berkshire's operating manual about the 5 year rolling test.

[topofeaturellc]

I'm a huge believer in good process, good long-term numbers, bad short-term numbers - but that doesn't really seem like what they are doing. Most of these guys either didn't have numbers through more than one cycle and went out of business because they did something skeevy.

[jay21]

I notice a pattern in LUKs recent investments in other jockeys. They invest in people who have been fined, sued, gone bankrupt, or have criminal controversy surrounding them. The market doesn't seem to like this strategy so far...

 

Kcg -  lost 400m on a trading glitch, almost went bankrupt. Jeffries invests.

 

Hrg - run by falcone, fined by sec and barred from hedge fund operations for using the fund as his piggy bank for paying personal taxes -  LUK invests as fund unwinds Hrg holding.

 

That coal guy in Australia - almost goes bankrupt, has to sell his horses to start a new mining venture. LUK involved.

 

Kumin - just gave him 400m. He worked for Cohen' sac advisors which had quite a few problems with the sec.

 

Trend - invest in beat up money men?

 

I trust JEF's judgement more than my own on this one; same with Kumin.  They are in the financial services industry.  They should know the reputation and problems associated with KCG and Kumin extremely well.  I have no opinion on KCG and like what they did with Kumin.

 

HRG - I think they bought at a discount and created some value right away.  Seems like a good move and what I would expect out of the JEF/LUK combo.

 

No idea about the mining guy.

 

It seems like to me, since JEF took over they have gotten rid of some of the assets they do not like as much and started to deploy capital in opportunities they like better.  Now that the drag of legacy businesses is getting close to clear, I think we start seeing a decrease in their liquidity relative to BV, which hopefully will drive BV higher.

[Grenville]

It's official.

 

http://www.sec.gov/Archives/edgar/data/96223/000090951814000267/mm08-2114_8k.htm

 

On August 15, 2014, we and Solomon Kumin established Folger Hill Asset Management LLC (“Folger Hill”), which is expected to register as an investment adviser with the SEC and launch a multi-manager investment partnership.  Mr. Kumin will serve as Chief Executive Officer and a manager of Folger Hill, and Richard Handler and Brian Friedman, the Chief Executive Officer and President of Leucadia National Corporation, respectively, will serve as the other two members of the Board of Managers of Folger Hill.

 

We have committed to invest $400 million in Folger Hill's investment partnership conditioned upon, among other things, Folger Hill’s raising an additional at least $400 million in commitments from other investors.  The Folger Hill investment partnership is expected to begin investing in the first quarter of 2015.  We also committed to provide Folger Hill with a 3-year, $20 million revolving credit facility to fund its start-up and initial operating expenses.

 

Mr. Kumin is the former Chief Operating Officer of S.A.C. Capital Advisors, L.P. and has over 15 years' experience in the financial services industry.

[Grenville]

More details regarding the new venture with Folger Hill. Michael Handler, Richard Handler's brother, worked at SAC before running an internal hedge fund at Jefferies.

 

"Leucadia backs SAC alum fund despite previous internal scandal"

http://www.cnbc.com/id/101945416

 

The Jefferies Paragon Fund was co-managed with Contorinis by then-CEO Handler's brother Michael, who was never accused of wrongdoing. Michael Handler had been an SAC portfolio manager before joining Jefferies.