After my prior post about Andrew Ladhe’s farewell letter, I was searching for more information on his hedge fund, Ladhe Capital. I came across his February 2008 letter to investors.  Hedge funds usually send these monthly letters to their investors to give updates on their fund’s positions and reasoning behind their investments.  Top tier hedge funds usually provide enough information to make their investors feel comfortable, but not enough so that someone could copy their investment strategies (as Ladhe Capital points out in their letter).

At my prior position at my investment bank, we landed a huge deal valuing and restructuring a $4 billion distressed hedge fund.  Part of my analyst duties were to go through each letter and summarize the key points they made, in addition creating complex financial models to value their positions.  This hedge fund also had fund-of-fund positions, and I was able to see the performance of other hedge funds they had invested in.  By far the most impressive was Centaurus Energy Advisors, who returns of >20% each month for the greater part of 2007!

Here are some great excerpts from Ladhe Capital’s letter.  If you read the full letter you will see that he was way ahead of the curve and spotted the economic troubles that plague the US today:

We shorted the general obligations (via credit default swaps) of California, Florida, and Michigan – sort of an appetizer plate for the feast to come. We do not necessarily expect any of these states to file for bankruptcy. However, as their respective economies fall further into the toilet, we expect that the risk premiums for their debt will rise. This is how we make money.

We have a few more tricks up our sleeves with regards to shorting credit. We cannot share these with you at this time, as we have not yet executed trades in the latest space we are studying. Until we trade we would rather not tip off all the readers of this letter to our next great idea.

Click here to read Lahde Capital’s February 2008 performance letter to its investors

Fly LAX to Honolulu: Airfare + 5 Nights Hotel for $565 for TWO over Thanksgiving break. Price includes tax! Book on Orbitz.com

I found this amazing travel deal.  I would kill to be able to do this but alas, I already have plans to spend my Thanksgiving week in Southern Cal.  I plan to scout out Santa Monica beach and get in touch with the PE shop out there for a follow up position discussion.  I’ll be looking forward to the sun and so can you.

If anyone has suggestions on absolute things a first-time visitor to LA need to do, leave a comment, I’d love to hear.

Do me one favor though and watch Forgetting Sarah Marshall prior to your trip to prep yourself.  It is hilarious and one of the top 3 movies this year.  Click here for the link to Yahoo Movies! where you read the plot synopsis, reviews, ratings and more. Watch this hilarious trailer:

STEPS FOR THE LAX – HAWAII DEAL:

Book on Orbitz.com through this Link

Leaving Thur, Nov 27th, Return Tue, Dec 2nd (I didn’t check other dates, but some may work)

Enter in code: 5HAWAII250

Cheapest Hotel is Castle Ocean Resort Hotel Waikiki (or upgrade for a little more)…

Flight + Hotel $815.44
Orbitz coupon -$250
Total trip cost $565 (For 2 passengers!)  You can also select 1 passenger and get it for $302, good for going alone or with a friend if you want separate rooms.

Price will reduce when you click through.

2000 Original

2008 update

On Oct. 17, 2008, Andrew Ladhe, the 37-year-old founder of Ladhe Capital, wrote a farewell letter to his clients (and the WSJ), announcing his retirement and the closing of his fund.  Ladhe said he had hated the hedge fund business and had only been in it for the money.  After declaring he would no longer manage money for other people, because he had enough of his own, Lahde said that instead he intended to repair his stress-damaged health; he made it clear he would not miss the financial world.

Ladhe Capital is was a California hedge fund that returned more than 1,000% in 2007 betting against US credit default swaps and subprime home loans, making it one of the world’s best-performing funds of all time.

Click here for link to Andrew Ladhe’s farewell letter

My favorite part:

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths.  Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

This guy is a genius. Basically he made some very smart investments prior to the subprime loan financial crash that made him and his investors a ton of money, and then decided to quit while he was ahead of the game.  He was content with what he had done and chose to enjoy the rest of his life.

Amazing.  From now on, my goal is to do the same.

Above we have a sources & uses table for a sample PE deal that my firm was looking into.  Note the figures are in $ millions of dollars.  We looked at purchasing this company for $82.8 million, of which $41.3 million was common equity, $10m preferred, and the remainder split into senior debt ($12.5m), and subordinated debt ($19m).  The sub & preferred have warrants attached, and current management would get a 7.5% option pool (in the model they are labeled as warrants, same thing).

The senior notes pay interest at a rate of 7.0% per annum, payable quarterly.

The preferred stocks pays dividends at a rate of 8.0% per annum, payable quarterly as well.  It is also redeemable, meaning the company, at any time at their discretion after the 5 year non-callable period, has the right to redeem the stock at a certain price and retire it.

The seller of this business (and only shareholder), will be getting $68.0m in cash at close, and will rollover $8.3m into a 20% ownership interest in the new company.

I’d like to reflect my thoughts on this:

This guy just hit a $68m cash pay day.  I never would have believed it so much if I didn’t see it with my own eyes working on the deal.  I myself am now in the process of starting my own business because I am now an absolute firm believer that the only way to the “promised-land” is through running your own business.  You control your own destiny, go for it.

For entry-level investment banking analysts, the best case scenario happened in 2007.  Base salaries were $60,000 and bonuses were $80,000, for a grand total of $140,000 in compensation. Not bad for recent college graduates.

However, on average, investment banking analysts will work around 90-100 hours per week in their first year, with 52 weeks of work per year and no vacation (excluding major holidays)!

So, how does an investment banker stay sane, healthy, and most importantly, attentive in order to produce quality work with great attention to detail?  It is important to keep your body and mind in good shape with exercise and healthy eating.

The authors over at Internet Astronauts wrote up 10 reasons why it is important to exercise, and it relates well to the investment banking lifestyle of an analyst.  Here is an excerpt:

As an internet entrepreneur [or I-banker] you never have enough time complete all the things you have on your list get done. Often working out is not high up on that list, but I’m going to encourage you to put it up there at the top… Membership fees cost around $20-50 a month and I promise you you’ll get a great return on your investment of cash and time. Have more energy, feel better, be happy, sleep better, be more successful… yes, I’m going to stretch this one all the way out and say a gym membership will in the long run make you more successful.

Click here for post on 10 Reasons Every Entrepreneur (or I-banker for that matter) Should Have A Gym Membership…And Use It.

Take care of your body and it will take care of you, especially at 4am when you’re editing a pitchbook for the 1,000th time.

The NY Times published an article today that analyzed a hypothetical $10,000 invested in the S&P 500 since 1929, only exclusively when either a Democratic or Republican was in office.  So which party has been better for American pocketbooks and capitalism as a whole?

As of Friday, October 10, 2008,  a $10,000 investment in the S.& P. stock market index would have grown to $11,733 if invested under Republican presidents only, although that would be $51,211 if we exclude Herbert Hoover’s presidency during the Great Depression. Invested under Democratic presidents only, $10,000 would have grown to $300,671 at a compound rate of 8.9 percent over nearly 40 years.

Click here for the article comparing the S&P 500 investment growth with Democrats vs. Republicans in the White House

Harvard University’s Endowment fund is shopping around to sell its portfolio of PE fund commitments in one of the largest secondary sales of all-time!  If Harvard is looking to sell, this is not good news for the PE industry, as it implies the Endowment fund is under-weight in this alternative asset management sector.

The Ivy Leaguer has retained Cogent Partners to pitch what could be one of the largest secondary sales of all time, with an optimistic asking price in excess of $1 billion. The available portfolio includes a variety of venture capital and buyouts funds, albeit none of its crème de la crème VC (i.e., Sequoia Capital or Kleiner Perkins).

Link to article of Harvard selling stakes in PE firms

Harvard’s endowment fund is run by very smart portfolio managers and has consistently achieved positive returns for the past couple decades.  However, it will be interesting to see how its performance will do for the next year or so.  Given this, it still had an outstanding 2008 FY:

Harvard University’s endowment earned an 8.6% return during the fiscal year ending June 30, 2008, bringing the overall value of the University’s endowment to $36.9 billion.

The endowment’s return of 8.6 % puts it above the fifth percentile of the 165 large institutional funds as measured by the Trust Universe Comparison Service (3.2% and well above the median (negative 4.4%). Relative to the major U.S. indices, the endowment out-paced the negative 13.1% registered by the S&P 500 Index in Fiscal Year 2008 and the 7.1% registered by the Lehman Aggregate Index (which is a broad measure of bond market performance).

The 8.6% return for the last fiscal year brings the endowment’s annualized 10-year performance to 13.8 % and the 5-year annualized return to 17.6%.

Look at Barack & Michelle get down – damn they got moves!

Most Dow stocks were down more this week than during the week of the ’87 crash.  As shown, GM was down 45%, AA was down 41%, BAC was down 39%, CVX was down 27%, and AXP was down 25%.  Only two Dow stocks were down less than 10% this week: JPM (-9%) and GE (-0.32%).  Maybe the most important takeaway is the returns these Dow stocks have had since the ’87 crash.  Who knows when, but we will go up again.