Short-Seller James Chanos of Kynikos Associates and Alexander Roepers of Atlantic Investment Management discuss what areas of the market they are focused on and what they look for when investing.
Q2 hedge fund letters, conference, scoops etc
Short-Seller James Chanos Breaks Down His Best Investment Ideas
Transcript
Great. So first of all.
I want to thank you guys for having me here. And I will use this time to also just. Make a plea to my good friend Ilan must appreciate the efforts in Thailand and fled. But if you really want to help but a charitable cause. You should be helping out. Wall Street short sellers it is is and it has been rough going on the short side. Fundamentally all kinds of companies that we consider to be concept type ideas have sprung to life in 2017 2018.
I want to talk about two companies. But before I do. I want to sort of. Put it in a way that maybe makes a little bit more sense to a lot of people. So I'm just going to for a moment imagine that we have Melissa in guys burger shack and Melissa and guys burger shack is not profitable. Because Malleson guy pull 100000 dollars between the two of them in salary each year. And after that the Burger Shack breaks even. I amMr. Private Equity. I'm going to come in and suggest that I'm going to buy. The burger shack for a hundred thousand dollars. Even though it's not profitable. And in order to make it profitable I'm going to ask Millicent guy to take a 50 percent cut in salary. So they're going to be working six days a week 16 hours for 50 thousand dollars. But the Burger Shack will not really be profitable by 50000 dollars for that. And an agreement for five years to take that salary cut. I'm going to pay you additional five hundred thousand dollars. So you're going to get six hundred thousand dollars for this unprofitable Burger Shack. You're going to get a cut in pay cumulatively of 250000 over the five years. But. You'll have gotten more cash upfront. Now who wouldn't do that deal right. That's fantastic. It doesn't make a lot of sense to me. I've got this money and after five years I know that they're either going to leave the Burger Shack or I'm going to have to pay them their original salaries or more.
Wall Street is doing these deals. What do I mean.
In the mid 90s a group of companies came forward. There were about nine of them that were public 9 or 10 called physician practice management companies and their business model was simply to buy up doctor practices typically affiliated with hospitals. Pay a reasonable multiple. For the existing business and then sign the docs up. For three to five to seven years. For reduced salaries. But paying them a lump sum that more than offset those reduced hours. Similar to my example. With Melissa and guys burger joint. Doctors flocked to this business model. If I was great a lot of them were getting ready to retire anyway. Some of the payment was in the form of a capital gain. Who wouldn't do this. Lots of them did. And lots of companies. Followed in in the public markets to do this. Why. Because it was an accounting scam. The lead company doing this was a company called fikir. They blew up. The reason they blew up was simple. Was after three to five to seven years. It became obvious to Wall Street investors that the reduced salary upfront payment game which was capitalized by the way was a scam. It was simply capitalizing salaries up front. And here you see what happened with.
