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Columbia Business School AT THE VERY CENTER OF BUSINESS Graham & Doddsville An investment newsletter from the students of Columbia Business School Issue XXVII Spring 2016 Inside this issue: CSIMA Confer- ence & Pershing John Phelan of MSD Capital Square Challenge P. 3 John Phelan P. 4 Mr. Phelan is Co-Managing Partner of MSD and Co-Founder of the firm. Prior to forming MSD, he was a Principal from 1992 to 1997 Alex Magaro P. 14 at ESL Investments, a Greenwich, Connecticut based investment firm. At ESL, Mr. Phelan was responsible for ESL's Special Adam Wyden '10 P. 25 Situation Investments and helped grow the firm from $50 million Marc Cohodes P. 33 to over $2.0 billion in assets under management. Prior to ESL, Mr. Phelan was Vice President in charge of Acquisitions (Western Pershing Square Region) for the Zell-Merrill Lynch Real Estate Opportunity Funds. Challenge Ideas P. 44 John Phelan Mr. Phelan began his career at Goldman, Sachs & Co. where he (Continuo:Ian page 4) Editors: Brendan Dawson Alex Magaro Adam Wyden '10 MBA 2016 of Meritage of ADW Capital Scott DeBenedett Group MBA 2016 Anthony Philipp Alex Magaro is a Adam Wyden founded MBA 2016 Co-President of ADW Capital in January Meritage Group, a Adam Wyden 201 1 and acts as sole Brandon Cheong Alex Magaro fundamentally- portfolio manager to MBA 2017 oriented the Fund. The Fund is Eric Laidlow, CFA investment firm, managing focused on maintaining a concentrated approximately $10B primarily on portfolio of high-quality and high- MBA 2017 (Conenued 00 page (4) (Continued on page 25) Benjamin Ostrow MBA 2017 Marc Cohodes formerly of Rocker Partners/Copper River Visit ut>'t• Marc Cohodes is a former General Partner of Rocker Partners/ wwwcsimainfn Copper River from 1985-2009. He began his career at the Northern Trust Company in 1982 after graduating Babson HeilbrunnCenter College with a BS in Finance. He has been profiled in the books; for Graham&Dodrt Reckless Endangerment, Selling America Short ,The Most I CCCCC I NO Marc Cohodes Dangerous Trade. He was the subject of a Harvard Business School Case study on his efforts to expose Mortgage Fraud at Novastar. He resides in Cotati, California, where he runs Alder csima COLUMBIA STUDENT INVESTMENT Lane Farm. (Continued on page 33) MANAGEMENT ASSOCIATION EFTA00300965  Page 2 Welcome to Graham & Doddsville We are pleased to bring you the ment horizons across asset When we Inherited Graham & 27th edition of Graham & classes and the return potential Doddsville as editors last year. Doddsville. This student-led In- of businesses with durable we wanted to continue the vestment publication of Colum- competitive advantages. tradition of providing our read- bia Business School (CBS) is co- ership with high quality inter- sponsored by the Heilbrunn Adam Wyden '10 of ADW views and investment ideas. Center for Graham & Dodd Capital discusses the influence We sought to provide diversity Investing and the Columbia Stu- of an entrepreneurial spirit on of thought and experiences via dent Investment Management his firm and investment pro- our Interviews. We hope we Association (CSIMA). cess. Adam walks through past have lived up to those objec- ideas such as IDT and Investor tives. Meredith Trivedi, the In this issue, we were fortunate Restaurant Group (IRG.TO) as Heilbrunn Center Director. to speak with four investors well as current theses on Fer- We are honored and privileged Meredith skillfully leads the who offer a range of perspec- rari (RACE) and Fiat (BIT:FCA). to have continued the Graham Center. cultivating strong tives based on their unique paths & Doddsville legacy, and we relationships with some of to and careers in investing. Mark Cohodes shares his look forward to reading the the world's most experi- experiences from a lifetime of next generation of issues, enced value investors, and John Phelan of MSD Capital short-selling. He offers his per- helmed by three outstanding treating numerous learning discusses lessons learned over spective on the discipline and individuals in Brandon Cheong opportunities for students decades of investing with men- temperament required as well '17, Eric Laidlow '17. and Ben interested in value invest- tors such as Richard Rainwater, as the intellectual rewards of a Ostrow '17. We want to thank ing. The classes sponsored Sam Zell. Eddie Lampert. and career in short-selling. Marc Brandon. Eric, and Ben for by the Heilbrunn Center Michael Dell. John offers Insights discusses ideas such as Home their commitment and dedica- are among the most heavily into the development of MSD Capital Group (HCG) and tion to Graham & Doddsville demanded and highly rated Capital as well as his own devel- Tempur Sealy (TPX). over the last year. classes at Columbia Busi- opment as an investor and PM, ness School. while shedding light on challeng- This issue also highlights pho- As always. we thank our es he sees today in the invest- tos from the 19th annual interviewees for contributing ment management industry. CSIMA Conference as well as their time and insights not only the 9th annual Pershing Square to us, but also to the invest- Alex Magaro of Meritage Challenge. ment community as a whole. Group discusses his many expe- and we thank you for reading. riences. from running a business Lastly, we are proud to include as an owner-operator to invest- in this issue finalist pitches from - G&Dsville Editors ing in early stage companies, current students at CBS who which led him to co-manage competed in this year's Per- Meritage Group. Alex talks to shing Square Challenge. about long-term invest- Professor Bruce Greenwald. the Faculty Co-Director of the Heilbrunn Center. The Center sponsors the Value Investing Program. a rigor- ous academic curriculum for particularly committed stu- dents that is taught by some of the industry's best practi- tioners. I Icilbrunn( cnter Graham &Dodd . T— Howard Marks from Oaktree, pictured Columbia Business School students help here giving the keynote talk at the CSIMA at registration for the 19th Annual Conference in January 2016 CSIMA Conference csima ilWESTMENT MANAGOAINT ASS0CLATI0N EFTA00300966  Page 3 Columbia Business School Events: CSIMA Conference and Pershing Square Challenge Keith Meister of Corvex Management LP delivers his Howard Marks of Oaktree with Bruce Greenwald after keynote address at the 19th Annual CSIMA Conference their keynote interview at the 19th Annual CSIMA Conference 1st Place Finalists Joanna Vu '17, Melody LI '17, and Thais Paul Hilal '92 and Bill Ackman listen and Judge student Fernandes '16 pitch Alimentation Couche-Tard at the 9th pitches at the 9th Annual Pershing Square Challenge Annual Pershing Square Challenge Judges deliberate at the 9th Annual Pershing Square Bill Ackman and the winning team at the 9th Annual Challenge Pershing Square Challenge EFTA00300967  Page 4 John Phelan (Continued (ran page () worked as an Analyst in encouraged me to go find good second years at business the Investment Banking mentors. She said one of the school I worked for Richard Division. things about good mentors is Rainwater, and that's where I you can learn on someone met Eddie Lampert. Richard Mr. Phelan received his else's nickel. It's something you introduced me to Eddie. Of . from Harvard don't realize when you're those ten weeks that summer. Business School and younger. But it struck me at a I spent about three or four graduated cum laude with very early age to try to go find with Richard and the rest with distinction and Phi Beta people that were the best in Eddie. Kappa from Southern their particular businesses, and Methodist University with I think my mother pushed me : How did you connect a B.A. in Economics and towards that. with Richard? Political Science. Mr. Phelan also holds a In my real first job, I worked JP: I had been hoping to get John Phelan General Course degree with an uncle rehabbing back to Texas after business with an emphasis in apartments in New York. I was school and I wrote Richard a Economics and doing that during college. That letter. In that letter I told him I International Relations was an eye-opening experience would be willing to work for from the London School of that forced me to focus on free and one of my professors Economics. cash flow every minute of the at Southern Methodist day. It was a very tough University had suggested I Graham & Doddsville business and I was doing a contact him. I told him I just (Mb: To start off, talk number of different things. The wanted to learn from one of about your background and work ranged from running the the best and was willing to your path to investing, numbers to actually doing invest in myself. including mentors and construction work That influences along the way. teaches you a lot. I also Richard called me on a Friday learned I didn't want to break at like 4:00pm. He said "Hey John Phelan OP): My mother my back doing that for my John, this is Richard was a very big influence on my entire career. Rainwater." I thought it was development as an investor. one of my classmates playing a My father was a doctor and. I was fortunate enough to get a joke on me. I used a curse like most doctors job with Goldman Sachs. which word I shouldn't have and just unfortunately, not a very good was really the first big hung up the phone. A minute investor. My mother, on the company I worked for. At the later the phone rang again: "I other hand, came from a real time, Goldman was still a think we got disconnected." estate background and focused private partnership. I learned a thinking. "Oh my God, this very much on cash flow. My ton and I had a number of is Richard Rainwater. I cannot parents gave me a Disney great mentors at Goldman believe I just hung up on this stock certificate for a birthday Sachs. I worked with truly guy." I said,'. really sorry, present when I was five years exceptional people there. but my classmates have been old. That got me hooked—I playing jokes on each other, was fascinated by numbers and As great as my experience at and I thought you were one of seeing something trade every Goldman was, it did make me them." "Oh that's a pretty day. That's what got me into realize that I did not want a good one," he laughed—he stocks. career in investment banking. was very good about it. Instead of being the person I initially went into real estate, who is on call 24/7 to serve my I flew down to Fort Worth on where my mother taught me client I wanted to be the client. my own dime and met with quite a bit, including two I preferred being a principal as Richard. He said, "Meet with principles: make sure you can opposed to an advisor. I these different guys. You can always pay your bills and debt decided to attend business work with me for a bit and see service and the importance of school and was accepted into if one of them will take you as free cash flow for levered Harvard Business School. The well." I met with Eddie and a assets like real estate. She also summer between my first and couple of other guys who were (Cont'nued on page 5) EFTA00300968 Page 5 John Phelan with Richard at the time. I investment fund and was one our firm without leverage and didn't know a lot about risk of the few people who had have only been 100% invested arbitrage, but I knew they capital. It was a good time to once in our 18 year history. were analyzing stocks and that have capital. The RTC was the first quarter 2009. I was something I really wanted formed after a number of actually consider cash to be an to do. It was a tremendous S&L's failed, there were a lot asset class. learning experience. I really of distressed loans, the trading enjoyed working with Richard market for loans was just About nine months into the and Eddie that summer, and I starting to develop, and the job, Zell through his Zell- fell in love with the risk illiquidity was incredible. Chilmark fund started taking a arbitrage business. One of the Having capital at that time and hard look at Executive Life, things you have to be good at being a liquidity provider to which had a large junk bond in the risk arbitrage business is the banks was a unique and portfolio. I was asked to work valuation: you need to be able good place to be. on credits that had large real to understand your downside. estate components: RiteAid (RAD). Carson Pirie Scott. I graduated in 1990—not a "...my mother taught Charter Medical—any very good year to graduate company that had a big real from business school, as you me quite a bit, estate component to it. We can imagine. The markets were were trying to value both the bad, the RTC/bank crisis was including two real estate and going concern accelerating and most money value as that was what the managers were having a bad principles: make sure debt was secured by and the year. It was a rough year. Eddie real estate provided your said. "Listen, I don't know if you can always pay downside protection. We lost going to be in business much your bills and debt the Executive Life auction to less have a job for you. It's not Apollo. It was a fascinating clear. You should go find service and the experience and I really learned something." a lot. I remember looking at importance of free Charter Medical debt which IM Did you end up was secured by a large number working with Eddie? cash flow for levered of hospitals. I called Chase Manhattan and said. "Hey. we JP: I actually graduated assets like real estate. see you guys are the lead bank without a job. It was She also encouraged on this." They said, "We've got depressing because I didn't plenty of debt for sale. we can expect to be jobless. in debt, me to go find good sell you at 20-30 cents on the and living at home with my dollar." We came to the parents after graduating from mentors." conclusion we could've sold Harvard Business School. I four or five hospitals and knew I did not want to go back gotten all our money back at to banking, so I did not do If you go back and study the that price. That's how bad and that. Luckily a couple of the great investors throughout illiquid the market was. guys I had worked with at history—the Medicis, the Goldman in Chicago left the Morgans, the Rothschilds, and Understanding where you are firm to go work for Sam Zell. recently Buffett—these great in terms of seniority in the Bob Lurie had died and he was investors with terrific records capital structure and identifying really Sam's right-hand man— share a common trait: they the fulcrum security was they were partners. Sam hired were always in a position to be critical, so I started auditing a Randy Rowe, who was the liquidity providers. Each was bankruptcy class at University main person I worked with at willing to hold cash until of Chicago because I wanted Goldman in Chicago. Randy someone was in distress or to learn bankruptcy law. I was kind enough to offer me a under duress, and they could thought it was an important job. Sam had just raised his provide liquidity at very aspect of the work I was doing. second distressed real estate attractive prices. We have run I put together a business plan (Continued on page 6) EFTA00300969  Page 6 John Phelan on the side, while I was still Glenn Fuhrman. All those guys really great macro thinkers out working at Zell. I pitched Sam have been very influential for there. He's very good at on the idea of setting up a junk me. And they all have very looking at excesses and bond operation to buy the different approaches. They all thinking through the debt of distressed companies. go about things very implications of them before We had done a lot of work on differently, but I've tried to they happen, when they over 100 companies. Exec Life take nuggets from each one of happen, and then after. He's Pershing Square Challenge runners-up with Paul Hilal owned only pieces of the debt, them and incorporate what really adept at connecting the '92 (from left to right: so there was a big opportunity I've learned from each of them dots. He's a much more top- Chris Andreola '16. Bran- to make a lot of money. Sam into my thinking process. down guy than someone like don Cohen '16, Paul Hilal got up and slapped me on the Eddie. who also has a great '92. and Daniel Rudyak back and said. "You know nose for investments but is '17) what, congratulations. I wish "If you go back and more bottoms up. you a lot of luck—this is a fantastic idea. I think this is study the great I have a funny story with Sam. great." I asked, "Did I just get He spoke during my first year investors throughout fired?" He said. "No, you don't at the Goldman real estate have to leave. But you're going history—the Medicis, conference. He looked in the to leave. I already know it. This room and said. "I want all you is a great idea. I don't want to the Morgans, the to know that, within three do this because I want to own years. half of you will no longer and control companies.. not Rothschilds, and be working in this department. interested in owning pieces of There is going to be a major companies anymore. I actually recently Buffett— blow up." This was in the want to buy and control them. summer of 1987. He was dead these great investors But you've got a great idea and on the money. Sam is very I think you should go pursue with terrific records good that way. He's also a very it." smart deal structurer. He share a common trait understands leverage points I called Richard. but he had and knows how to negotiate also taken a run at Executive they were always in a very well particularly in Life and already had a team in complex situations. He's a house. So I called Eddie. I sat position to be liquidity consummate deal maker. down with Eddie and gave him providers. Each was my business plan and pitch. He When did you start said. "Well why don't you willing to hold cash thinking about launching your come on in and do it." I did own fund? Why did you that with Eddie and ended up until someone was in ultimately decide to join working with him a little over Michael Dell instead? seven years. I started off distress or under basically doing distressed, risk JP: In late 1997, I decided to arbitrage—all special situation- duress, and they could leave ESL. It was a personal type of investing. Then I got decision. My mother had provide liquidity at involved in the emerging passed away very markets debt crisis in 1994. I very attractive prices." unexpectedly. It was a very did quite a bit in that area with tough thing for me, and it was Eddie. That's how learned my especially difficult on my dad. I stripes. Could you talk more decided to take some time off. about working with Sam Zell been working like a I've been very fortunate to through the real estate cycle? machine with Eddie, those have really great mentors at How has he been able to avoid seven years were like dog Goldman. as well as Sam. mistakes and be opportunistic years. He was a demanding guy Eddie. and Michael Dell. whose when others can't? to work for but also a very private investment firm I now smart guy. I enjoyed it. and co-manage with my partner JP: I think Sam is one of the learned an incredible amount. (Continued on par 7) EFTA00300970 Page 7 John Phelan but I needed some balance and build. I walked him through my stopped me in my tracks and I I needed to help my father. business plan and he said, said. "Now that's an interesting After a few months. I started "That's interesting. El trying question. I didn't really think getting itchy trying to figure to hire a guy similar to Richard about that." He said. "MI like out what I was oing to do. At to do something like that for you to think about that." I met the same time, made a me. Would that be of interest with Michael a few more times. decent amount of money and to you?" I said. "No. probably At the end of the day it was didn't feel rushed to have to not. I've got some good trust on both of our parts, and do anything. investors and I am not sure I it worked. He's been a want another partner at this phenomenal partner. II make I decided I was going to write a time." He said. "I got it. okay the same decision again business plan for a multi- no problem." I said, "By the anytime. It's been a great strategy investment firm, way, happy to give you my partnership with him and similar to ESL. I met with a business plan. It might help you Glenn. number of different successful think through what you want investment people. Some of for your investment office." Michael was the one that them I knew. Some of them I introduced me to my partner, did not. I said. "I just want 30 Glenn Fuhrman. He was very minutes of your time, and I "I came away with good at matching us up. It was have just one simple question. a hard thing for me to do Tell me why you've been what I call the three because Michael was successful and how do you partnering me up with sustain it?" Richard as well as Cs, which is what I somebody I didn't know. David Bonderman were two of Although we both came from the people kind enough to thought were really the Goldman—and were there at indulge me. I basically keys to success in the the same time—we didn't interviewed different successful know each other. It became hedge fund and private equity investment business: very apparent when Glenn and managers. From those I first met that we had very interviews I came away with Capital, Connections, complementary skill sets which what I call the three Cs. which is really important to a is what I thought were really and Culture. These successful partnership. We the keys to success in the both came from the same investment business: Capital. were the driven I was Goldman mold: teamwork. Connections, and Culture. able to identify. hard work intelligent, humble and ethical behavior. It just These were the drivers I was They're probably worked. I think, to his credit. able to identify. They're Michael saw that it was going probably drivers in just about driven in just about to work and he knew. any business. I was out raising unbeknownst to us, that this my own fund and had raised a any business." was probably going to be decent amount of money. bigger than what we thought it While I was raising the fund was going to be when we first both Dan Stern and Richard I gave him my business plan. started. Glenn has been a Rainwater gave me a call and He called me about a week tremendous partner and friend said, "You should go meet with later and said. "You know. I and we owe this to Michael. Michael Dell." I said, "Michael's was reading through your an investor of Eddie's. I don't business plan, and I have a : Could you talk about know that I really want to do question for you. just the evolution of MSD as an that." Richard and Dan both puzzling on it. curious how investment firm as well as the said. "Just shut up and go do you're better off under the evolution of your role? it." three Cs by yourself than you are with me. I have capital. In JP: It definitely has evolved a I met with Michael and he pretty connected. And you get lot. I used to jokingly say that asked me what I was trying to to build the culture." That never be more than I S (ConCoved on page 8) EFTA00300971 Page 8 John Phelan people. Then when we got to have to do is focus on the there any hedge overlays we 20. and said, "There's no investment side. That's really should put on? What do we way we're going to more than what we've tried to create at see across our platform that is 30 people." Today we're 124 the firm today. I would say our concerning? We have a great people. Initially. when it was roles have evolved to more of vantage point because we get just the two of us. Glenn and I a chief risk officer/chief to see everything across the were involved in every investment officer. We firm. decision. The firm evolved by oversee the portfolios, we us working closely with our oversee the teams, but they're not as deep in the weeds as PMs before we really let them really running independent I was when we started. That's loose. Distinguishing a good businesses, and they're making partly due to the fact that we PM from a good analyst is not the decisions to buy and sell. If have highly capable people that easy. We were on top of there's something in there we who don't need my direct them in the beginning and over don't like we will have a call. oversight. We do still have time we established enough happy to pick up the phone very robust conversations confidence in them that we and say. "Walk me through around investments and could step back. We knew that this and tell me why we've got process. We focus a lot on our they were quite capable. They this position and what's there." process. I would say I probably didn't need the same sort of because we're trying to risk spend more time now on continued oversight, and we manage the firm, so we're kind culture building and on trying wanted them to focus on of a second layer of risk to develop the firm and our building the business just as we management to their own risk next generation of talent. In were. management. reality, for a firm to be successful you have to create We felt that creating these virtuous circles. We're diversification by strategy and very disciplined. We have a having people who were "It all depends on your good team. We have good focused on their individual culture. We have great businesses was the right way own DNA. Self- investors. We've been to build our overall business. If investing for the long term. All you look at why most awareness is a really this stuff has been built up over managers get frustrated in the time, and it's self-reinforcing. important quality to investment industry it's But you also have to adapt because, as you get bigger and have, as is humility." constantly. as you scale, you move from picking securities to running I look at the markets today the business. That can end up and I look at the sheer amount taking 30% - 40% of your time. Today we have ten strategies. of information that's thrown at Guys like us, who like to look We sit on the investment us. I look at all this algorithmic at stocks and companies. don't committees for our private trading and the impact that has like reviewing the HR policy. equity and real estate on the market. You better be the vacation policy. strategies. Any illiquid-type very aware of what's going on compensation system, etc. But investments need to go and how it's going to change those are all things you have to through an investment and what the implications are deal with: your interviewing committee process. We spend for you and your business. policy, your training policy, and a lot of time today on our Those are issues we talk about all those operational issues. investment research process a great deal. Today with all the regulation and how to improve it. How and compliance it can be a full do we improve our decision : One element of the time job in its own right. making? How do we do better MSD philosophy that comes with data management? What's through in a lot of your We want to find really good going on in the markets right interviews and writings is a investors and remove the now and how are we certain contrarian streak. Are distraction of running the positioned for it? Are we too there sectors or areas of the business from them, so all they exposed in one sector? Are investment world where you (Continued an page 9) EFTA00300972 Page 9 John Phelan feel like you have a contrarian real estate get hit. What will different years. Let me focus view currently? be the flow through in office, on a private deal we did. multi-family. and industrial? We're one of the big investors JP: I like to call it independent You want to look into where in IndyMac Bank now called thinking as opposed to there's a lack of liquidity or OneWest which was recently contrarianism. We really try to mispricing. Is part of the recent sold to CIT (CIT). In 1990. be as independent in our equity market volatility due to when 1 was with Zell. we were thought as possible. I don't Middle East Sovereign Wealth looking at RTC banks, and I want to get into a lot of Funds taking their money out remember the Basses made a specific investments and what of equities? fortune on American Savings. we're doing right now—that is IndyMac/OneWest was an for paying customers—but we On the topic of good investment we did try to look for big dislocations. businesses, when Rainwater phenomenally well on. and 1 We try to look for places that asked you what was the best think that was a combination other people are running from business ever seen you of good underwriting, good or people don't like. Zell used answered parking garages in management, and a compelling to always say. "I like to look New York City. With the risk/reward. Buying a bank in for trouble." I think that's benefit of 20-plus years of the first quarter of 2009 was something we try to do. as investing now, would you not a really easy thing to do. well. change your answer? We're looking for very good businesses with strong We try to think about the long JP: Well at that time I didn't management teams and very term implications of things and know a lot about companies defensible moats. how they're going to turn out. and businesses. I just hadn't That's something that we looked at that many. But it's Eddie Lampert is spend a lot of time on. Take, really not that hard of a famous for using case studies for example. the sustainability business when you think about and studying historically of a company or business it. It's pretty defensible and you successful investments to model. Today, competitive get the benefit of an increased develop pattern recognition. moats are getting smaller and value in real estate over time, Were you part of this effort at smaller and competition similar to car dealers, for ESL and did any investments tougher and tougher. Trying to example. There's a lot of that you made rely on this find really good businesses that inherent value in the real pattern recognition? can continue to compound at estate there. I would probably high levels is really hard. You answer the same way again. JP: Yes, I was. Pattern have to really think through all I've seen some other great recognition can mean different the risks out there and their businesses, but when you're things to different people. The implications. That's what I put on the spot like that you bottom line is this: good mean by independent thinking. have to think on your feet companies, just like managers. Is there a company or business pretty quickly, and that's the have to experiment. You have immune from technology risk? one that occurred to me at to constantly test new things. Maybe railroads, cement? that time. Sometimes that 30% Think about it. probability case shows up and Could you talk about you lose $0.25 of earnings or I think there could be some investments that you've been you make a bad investment pretty good opportunities in involved with at MSD that and people just kill the stock. It energy as that is a space which would qualify? doesn't mean your business or has been decimated. We have the company is dead or that been analyzing debt securities JP: We've had a number of it's a bad business. When I was in a number of energy. metals, investments that have gone at ESL I can think of four or and mining companies. We're extremely well. Because I am a five companies that we bought also trying to understand the big believer in pattern two or three times over the knock-on effects of the energy recognition and we have