Description

 

Third Point Offshore Investment Fund

TPOU LN (US Dollar) / TPOG LN (Great British Pound) / TPOE LN ( Euro denominated)

 

I am recommending a purchase of Third Point Offshore Investment Fund (“Third Point Offshore”).  The fund trades in 3 different currencies (USD, GBP, EUR) with three unique tickers (TPOU.LN, TPOG.LN, TPOE.LN).  The total market capitalization of the three classes of stock is US$206 million.  Total NAV is about US$315 million.  Third Point Offshore is a closed end fund which invests all of its capital in the Third Point hedge fund.  Third Point is a hedge fund which is run by Dan Loeb, a well known activist investor.  Dan has an admirable long term track record (much of which can be read at www.thirdpointpublic.com), which rivals that of one of his friends and peers David Einhorn at Greenlight Capital. 

 

Third Point Master Fund Performance

 

Year	Third Point	S&P 500
2007	16.8%	8.8%
2006	14.4%	15.8%
2005	17.9%	4.9%
2004	29.1%	10.9%
2003	53.0%	28.7%
2002	(7.8%)	(22.1%)
2001	12.3%	(11.9%)
2000	17.4%	(9.1%)
1999	41.7%	21.8%
1998	8.9%	28.6%
1997	48.8%	33.3%
1996***	2.0%	(2.0%)
* Performance is net of all fees and expenses
** 2007 returns are from January 1 - May 31 2007
*** from December 1-December 31 1996
****  reprinted from Third Point website / materials

                                                

Greenlight vs. Third Point  Performance

 

 

Greenlight	3rd Point
1996	37.1%	2.0%
1997	58.2%	48.8%
1998	9.9%	8.9%
1999	39.7%	41.7%
2000	13.5%	17.4%
2001	31.6%	12.3%
2002	7.7%	(7.80%)
2003	37.0%	53.0%
2004	25.1%	29.1%
2005	13.3%	17.9%
2006	24.0%	14.4%
2007	9.1%	16.8%
YTD2008	(22.61%)	(29.50%)

 

 

Though they have different investment styles (activist/value versus value/short crusader), there is often significant overlap in their positions.  Their long term performance is also similar.

 

I had previously held a short position in Greenlight Capital Re and a long position in Third Point Offshore.  My thesis was that while their performance over the short term may not be correlated, they will be somewhat correlated and better correlated over the long term.  I shorted GLRE at a significant premium to book value (as it went into the Russell index) and bought Third Point Offshore at a sizable (smaller than the current) discount.  Because of the decline to NAV of GLRE, I have for the most part covered our short. 

 

In December of 2007 Third Point Offshore announced a repurchase of 5% of the outstanding shares “to assist in controlling the discount”.  Third Point Offshore completed the repurchase in May of 2008. 

 

Third Point Offshore Investors Limited (the "Company")  27 May 2008

 

  The Board  of  Directors  of  the  Company  announces  the  completion  of the purchases authorized  under its Share  Purchase Programme.  The  Share Purchase Programme was authorized by the  Board of Directors to assist  in   controlling the discount to net asset  value per share in relation to  the   Company's prevailing share  price.  It permits Third  Point Offshore,  Ltd   (the "Master Fund") to  undertake on-market share  repurchases   of up to  a   total of 5% of the  ordinary shares on issue in  the share capital of  the   Company, with the economic results of the Master Fund's holding  allocated   to the Company.

 

My thesis is very simple.  The discount at Third Point Offshore is too large to ignore.  While traditional avenues of causing the fund to open end are not available, the large size of the discount is too much to ignore.  Why would anyone remain an investor in the Third Point Hedge Fund when they can buy the same asset at a 50% discount?  A return to NAV would provide a 100% return (50% discount / 50% NAV) plus or minus any investment return and benefit of future potential share repurchases. 

 

The major risks are lack of liquidity in the shares, that you will not be able to open end the fund and will rely on the market to close the NAV discount gap, the fund to do so (via repurchases) and the performance of the Third Point hedge fund. 

 

As an investor in a closed end fund, you buy and sell at listed market prices.  These prices, like they do not currently or in the case of open end mutual funds, do not need to reflect an appropriate reality of what the fund’s Net Asset Value is.  Sometimes they do reflect the high fees that a Closed End Fund manager takes or that there are illquid underlying assets.  The discount can widen.  In this case the underlying assets are liquid, but not specifically “hedgeable” as in many other closed end funds (because of the high turnover of the fund). 

 

I would argue that a long term shareholder of Third Point’s hedge fund (or even Dan Loeb himself) would rather own Third Point Offshore Fund than have an investment in the hedge fund because of the large discount. 

The current 50% discount to NAV provides sufficient cushion relative to the liquidity risk of the investment. 

 

Though I don’t necessarily recommend it, should you be concerned with market risk you can “hedge” against the S&P 500 index or other broad market indexes.  While they may not provide significant short term correlation, I believe that over the long term Third Point will outperform the S&P 500. 

 

Third Point Offshore
NAV & Discounts
	6/30/2008		11/12/2008
NAME	Shares Outstanding	Market Cap US$	NAV	Bid	disc %	Ask	disc %	PX_LAST	disc %
THIRD POINT OFFSHORE - USD	36,279,748	$116,730,089	$6.84	$3.14	54.1%	$3.29	51.9%	$3.22	53.0%
THIRD POINT OFFSHORE - GBP	2,761,788	$1,292,029	GBP 676	GBP 303	55.2%	GBP 328	51.5%	GBP 316	53.3%
THIRD POINT OFFSHORE - EURO	7,258,788	$32,575,054	€ 6.630	€ 3.133	52.8%	€ 3.283	50.5%	€ 3.208	51.6%
		$150,597,172

 

Third Point Offshore information can be found at the following website: http://thirdpointpublic.com/default.asp?P=520288

 

 

 

Potential Catalysts:

 

Awareness of large discount by the investment community.

Third Point Offshore announces another buyback

Investors in Third Point Hedge Fund Redeem and replace with Third Point Offshore Fund at a discount.

 

Risks:

Management has an incentive to keep permanent capital outstanding because of the fee stream income

Continued losses at Third Point hedge fund

Discount widens on Third point Offshore shares

Stock market continues to go down

 

 

Disclaimer:

 

 The author of this posting and related persons or entities (“Author”) currently own the shares of Third Point Offshore Fund (“TPOU”) and may have short and long positions in securities of Greenlight Capital Re (“GLRE”).  The Author makes no representation that it will continue to hold positions in the securities of TPOU or GLRE.  In fact the Author is likely to buy or sell long or short securities of either issuer and makes no representation or undertaking that Author will inform Value Investors Club, the reader or anyone else prior to or after making such transactions.  Additionally, because the Author has these current positions the reader may assume that the Author is biased in favor of his investment view and may also be mistaken.  While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note.  The reader agrees to not invest based on this note and to perform his or her own due diligence and research before making an investment in securities of these issuers.  Reader agrees to hold Author harmless and hereby waives any causes of action against Author related to the above note.

Catalyst

Potential Catalysts:

Awareness of large discount by the investment community.

Third Point Offshore announces another buyback

Investors in Third Point Hedge Fund Redeem and replace with Third Point Offshore Fund at a discount.