From the 2014 Annual Report of Leucadia National Corporation:
March 1, 2015
Dear Fellow Shareholders,
Michael Mauboussin: Challenges and Opportunities in Active Management And Using BAIT #MICUS
Michael Mauboussin's notes from his presentation at the 2020 Morningstar Investment Conference, held on September 16th and 17th. Q2 2020 hedge fund letters, conferences and more Michael Mauboussin: Challenges and Opportunities in Active Management Michael Mauboussin is Head of Consilient Research at Counterpoint Global in New York. Previously, he was Director of Research BlueMountain Capital, Read More
We and our entire team have been working diligently to position Leucadia to achieve our number one goal: long-term value creation. We aim to achieve this goal by operating a merchant and investment banking platform that creates, acquires and operates a diversified group of businesses. We want Leucadia to be focused, diversified, driven and transparent. We will only invest where we see value and opportunity that fits our investment profile. We have instilled throughout Leucadia and its businesses a sense of urgency, as well as a constant drive to make things better and more valuable.
We have accomplished much, occasionally been frustrated and learned something new every day. In this letter, we will share with you our experiences to date and our rationale for many of the decisions we have made. By sharing specific ideas and examples we hope to provide insight into our thought process, how we view the world and where we hope to steer Leucadia over time. We also will give an update on each of our businesses.
Leucadia: Jefferies First Two Years
Leucadia has realized $2.5 billion in cash from asset sales since the period surrounding our combination. These were generally good businesses, but were ones where either we had too little influence or ability to add value, were not scalable, or were highly illiquid and too big for a company with $10.3 billion of shareholders’ equity.
We have eliminated long-term endeavors we felt were “quasi venture capital” and would have required meaningful further investment with a likelihood of satisfactory returns lower than we would like. In 2013, we closed Sangart, a biotechnology company that had been nurtured for years by Leucadia. This past year, we stopped investing in Lake Charles Clean Energy after it became apparent that our team’s heroic effort could not overcome the challenge of obtaining an acceptable fixed price construction contract.
We are continuing to pursue our Oregon LNG terminal project, but the change in energy dynamics, combined with the bureaucratic and political permitting process, are challenging. The burn rate here is modest (single digit millions per year), particularly compared to the two projects we stopped, but we will continue to monitor this closely.
We have also been hard at work looking to deploy fresh capital in smart ways, while operating in an environment where value can be elusive. Since March 1, 2013, we have invested or committed an aggregate of almost $2.2 billion to new investments that have followed two overriding themes:
- Finding unique value opportunities where our entry terms afford us a favorable risk-reward tradeoff – so far, Harbinger, FXCM and Golden Queen; and
- Building businesses with great managers one asset at a time and thereby creating enterprise value – so far, the various Leucadia Asset Management businesses (LAM), Juneau Energy and Vitesse Energy.
Harbinger, the LAM businesses and FXCM all originated from relationships developed at Jefferies, while Vitesse, Juneau and Golden Queen emanated from relationships of the Leucadia deal team.
We and the rest of the Leucadia deal team are also spending much time with our existing businesses. We saw several opportunities to drive growth in these companies, investing a further $534 million over the past two years in Garcadia, Linkem, Conwed, Foursight and HomeFed, including transferring Leucadia’s historic one-off real estate assets valued at $216 million into HomeFed for more shares. We also raised $4.4 billion of long-term capital over these past two years across our businesses at attractive rates.
We own businesses and investments in financial services and a diverse array of other industries (the latter group comprising what we call our “merchant banking” effort). We also maintain meaningful liquidity and have a significant tax NOL we expect to monetize substantially before the end of this decade. The chart below illustrates how we think about and manage Leucadia today (amounts as of 12/31/14, with some pro forma adjustments noted):
We believe this chart illustrates the diverse platform we are building that can take advantage of further opportunities as they arise. It also demonstrates the breadth of our effort, where our capital is allocated, and our ample liquidity and dry powder. We believe the foundation is now set for us to optimize the capabilities of our existing businesses, continue to deploy our cash judiciously and grow our book value per share, which we believe is the yardstick by which we should be measured.
We will talk more about all these businesses throughout this letter.
What We Have Learned and How We View the World
We Want to Be “The One Who Gets the Call”
Particularly in a world where value is so hard to find, we believe it is a huge advantage to be “the one who gets the call.”
Unique value opportunities tend to arise when there is some problem, uncertainty, complexity or urgency impacting a business, and a rapid and creative solution is necessary. In some cases, absent this solution, a good business will be either incredibly impaired or, in some cases, doomed. We are increasingly being recognized as one of the first groups to call in these circumstances. In 2012, we restored Knight Capital’s equity and, more recently, we invested in FXCM to replenish its regulatory capital, allowing the Company to avoid bankruptcy. Even when there isn’t a circumstance that changes the outlook of a company, but rather a new opportunity that is developing, getting “the call” is just as important. This was the reality that led to our becoming the largest shareholder of Harbinger and our investing in the Golden Queen mining project, where the ownership group in each case sought out our partnership. In all these companies, our investment became a catalyst for change and created a significant opportunity to drive long-term value for all stakeholders.
We believe there are a number of factors that increase the likelihood of being the “one who gets the call.” First, you must have the expertise instantly accessible in-house to quickly understand and assess the situation. Second, you must be able to mobilize rapidly, typically in days or hours, and sometimes even in minutes. Third, you must have the reputation with many constituencies that you are trustworthy and will do what you say you will do. Fourth, it helps when you can convey with confidence that you are a long-term investor and able to add meaningful value beyond capital. Finally, you must be able to make a decision quickly and wire the funds!
The best way we know to increase the likelihood that we get “the call” is to have real long-term relationships with as many quality people across as many industries and specialties as is humanly possible. The combination of Leucadia and Jefferies is no doubt a big part of this equation, as management teams and Boards of Directors recognize the uniqueness and power of our combined merchant and investment banking platform.
The Jefferies Platform Is Very Valuable As a Source of Unique Opportunities and Added Value
Some people ask us if it is complicated, cumbersome or distracting to have Jefferies and Leucadia under the same roof. The reality could not be further from the truth. Both platforms provide consistent, real and unique operating leverage and the activities of both companies are massively complementary. Aside from being a very valuable long-term source of what we believe will be growing earnings, Jefferies is a tremendous resource in helping us find unique long-term investment opportunities. In a typical week, Jefferies trades many billions of dollars of securities in many different markets and provides clients with valuable liquidity. We also help clients buy and sell businesses, raise capital around the globe and restructure companies facing challenges. These are all “regular way” transactions that serve our clients’ goals. Given this trading and transaction flow, countless relationships and diverse industry expertise, a small handful of times each year, we hopefully will get “the call” that presents an opportunity distinctly for Leucadia.