March 13, 2012
Fourth Quarter 2011 Investor Letter
Review and Outlook
After a succession of “tail events” – the Arab Spring, Japanese earthquake and tsunami, US
debt downgrade, floods in Thailand, and Europe’s debt crisis – and the resultant extreme
volatility in trading conditions last year, 2012 has been downright tranquil thus far.
Economic growth globally has picked up and is running ahead of expectations. In the
United States, we have shifted from a middling minor recessionary to a moderate growth
environment. In Europe, the LTRO mechanism has taken the risks of chaos, credit
contraction, and domino default off the table for the near‐term and expectations have
moved upward swiftly from a deep recession to a welcomed flat line. In China, fears of a
hard landing have been replaced with confidence that the government transition will be
well‐orchestrated and growth will remain robust. The year of the Dragon is off to a bullish
start everywhere, and we see favorable sentiment and positive conditions continuing for
the time being.
For Third Point, the start of this year has created one especially welcome dynamic: a fall in
correlations. For the first time in nearly a year, single name stock picking is being
rewarded. We have steadily increased capital invested in event‐driven situations in
equities, corporate credit and mortgages. Today, our long exposure is ~120% and our
gross exposure is ~170%. Our equity beta is 40%, the highest it has been since July 2011.
While we are generally more constructive and finding many interesting situations, we are
focused equally on shorts and longs and building an all‐weather portfolio amidst the
feeding frenzy. Although general market conditions are favorable, we have not simply
strapped ourselves onto a raging bull; our main focus remains disciplined buying and
selling, prudent risk management, and thoughtful portfolio construction.
Notwithstanding economic data in the US, Europe, China and emerging markets which
suggest a “risk‐on” portfolio, we are carefully monitoring political and policy developments
around the world which could have a significant impact on our more constructive outlook.
Starting at home, recent economic data has trended upwards. U.S. data in
services/manufacturing, PMIs, auto sales and employment mostly surprised to the upside
in January and again in February. There is a growing perception that two of the most
significant drags on US growth – housing and jobs – are starting to turn the corner.
Perhaps this should be unsurprising, since in a Presidential election year economic
indicators often seem to trend in the right direction for the incumbent. For this reason,
while we are constructive in the near‐term based on these tailwinds, we see the potential
for a dangerous 2013 and beyond. Regardless of one’s political beliefs, it is hard to deny
that the unabated policies of a second Obama Administration would lead the country down
an unsustainable path of exploding deficits and marginal private sector growth. While our
concerns about a second Obama term are muted by the fact that much of his agenda will be
stymied by a Republican House and most likely a Republican Senate, gridlock is not an
effective way to run the country. It is, however, preferable to out‐of‐control entitlement
spending and deficits which would result from another Obama administration in which
both houses of Congress are under his control. Sadly, concerns about tax increases,
haphazard regulation, and further redistributive policies will hold private capital and
market participants in check for as long as Mr. Obama remains President.
Europe, on the other hand, is healing, with elections in France posing the next potential
landmine to an otherwise more “rosy” outlook. The Greek PSI exchange last week –
essentially an orderly default of government debt to private investors – was absorbed by
the markets. Bondholders forgave more than €100 billion on their Greek government
investments, completing the largest sovereign debt restructuring in history and moving
worries about Greece to the back burner for the moment. It is interesting to note just how
much Europe is starting to look like the “United States of Europe”. The EU is demanding
change in fiscal policies in various countries and Chancellor Merkel is offering to campaign
with President Sarkozy as if she is a Governor lending a helping hand in a neighboring
state’s election. While Europe is slowly moving towards a “fiscal compact,” the French
elections are a particularly important event because Sarkozy’s challenger Hollande has
argued that he will not honor the deal signed in Brussels should he become President.
Meanwhile, Italy, Portugal and Spain are implementing helpful austerity measures, but it is
imperative that some growth initiatives be adopted or the governments’ reform plans will
This is not an environment for rose‐colored glasses. Our portfolio is structured to reflect
the unfortunate, ongoing reality of decaying Western democracies staving off catastrophe
with Advil and bandages when multiple, complex surgeries are the only way to save the
patient in the long‐term.
Set forth below are our results through December 31, 2011 and performance to date for
Offshore S&P 500 HFRI
2011 Fourth Quarter ‐0.1% 11.8% 1.6%
2011 Performance 0.0% 2.1% ‐3.3%
2012 YTD Performance 4.9% 9.0% 4.6%
(through February 29, 2012)
Annualized Return Since
17.5%* 5.8%* 9.1%*
* Returns from inception, December 1996, through February 29, 2012.
The top five winners for the Fourth Quarter 2011 were Yahoo! Inc, Delphi Corp, Sara Lee
Corp, Williams Cos Inc, and Short A. The top five losers for the period were Genel Energy
Plc, Technicolor, Short B, Gold, and HollyFrontier Corp.
Firm assets under management at December 31, 2011 were $7.5 billion. AUM grew to $8.9
billion at February 29, 2012. The increase in assets was primarily due to the closing of the
Third Point Reinsurance Limited transaction in late December, which is discussed further
below. The funds remain closed to new investors with limited exceptions as discussed
Select Portfolio Positions
Since most of our investors heard an extensive review of our Q4 and 2011 results at our
Annual Investor Presentation in mid‐January, we have included summaries of more recent
positions in this letter. For those of you who were unable to attend the Presentation, video
of the event is available on our private Investor Website, and the slide deck is also available
for your review. Please contact Investor Relations for further details.
During our Investor Presentation, we discussed areas we thought were ripe for certain
types of event‐driven opportunities. As forecast, we have found a number of interesting
situations in two of these areas specifically in recent months: forced selling and hidden
We articulated particular interest in situations where we see forced selling. This is a
simple concept that has been a successful part of our event‐driven framework since our
earliest days. Sellers forced to dispose of low‐conviction positions for technical or
sentimental reasons create a dynamic favoring the buyer. When this sort of selling
happens due to non‐fundamental driven pressures and prices rationalize fairly quickly,
these cheap purchases can have especially compelling IRR’s. A few recent examples of this
applied framework are positions in Unicredit, Skyworks, and EksportFinans.
Long Position: Unicredit
One of the questions we have been asked most frequently by investors over the past 18
months is whether European bank‐related investments were as compelling to us as they
seemed to be to other managers, some of which even raised funds to capitalize on the
supposedly massive opportunities originating due to stressed conditions in Europe. We
bided our time and having dry powder proved fruitful in January when we were able to
capitalize on an extraordinary special situation.
Unicredit (UCG) is one of Italy’s largest commercial banks with additional retail operations
throughout Central and Eastern Europe. The EBA bank stress tests conducted in Q4
revealed UCG’s need to raise €7.5 billion of capital by June 30, 2012 to reach the minimum
9% threshold required under Basel III. In November 2011, UCG announced a €7.5 billion
rights offering with pricing to be determined in early 2012. Demand from UCG’s
shareholder base to underwrite the deal was weak however, given that nearly 25% of its
shareholders (mainly Italian foundations and the Libyan Central Bank) lacked additional
capital. This prompted the consortium of banks underwriting the deal to price the new
shares at a ~60% discount, nearly 2x that of similar transactions and more than doubling
the shares outstanding.
The deal was announced on the first trading day of 2012 in thin markets due to arcane
regulatory requirements in some eastern European countries where UCG operates. The
offering’s extreme discount and fears of indiscriminate selling by underwriters shocked
thinly‐staffed trading desks across Europe and drove the stock down by ~50%. Panicked
selling nearly forced the stock through the rights price, meaning the market temporarily
deemed the rights close to worthless.
The technical pressures and forced selling naturally caught our attention. The enormous
time we have invested as a team in attempting to understand the broader impacts of the
ECB’s recently announced three‐year LTRO also proved critical. The ECB’s latest attempt to
support ailing banks generated little fanfare when initiated in December 2011 but
appeared to us as a potential game‐changer for Euro area risk premia. Based on our belief
that the LTRO would significantly compress risk premia, particularly in Italian sovereign
yields, we began buying UCG rights. These rights, on a converted basis, allowed us to create
the stock at 10% discount to prevailing market levels and ~0.25x tangible common equity.
This multiple implied nearly a 25% cost of equity for a bank in the upper quartile of
capitalization versus its peers, with adequate liquidity for the foreseeable future, and
domiciled in a sovereign with collapsing credit spreads. Furthermore, at our entry prices
we were largely covered by UCG’s stakes in publicly traded Russian and Turkish banks and
effectively getting its Central European assets for free.
As expected, Italian sovereign yields compressed and attracted attention to UCG’s
meaningfully depressed valuation. The rights closed their discount to the shares and it
became clear underwriters would not be forced to hold unwanted stock. UCG quickly re‐
rated to 0.5x price to tangible common equity, enabling us to double our money in less than
one month. At the current valuation, investors need to be confident in management’s
operational restructuring plan. This was not a bet we were willing to take, and so we have
fully exited our position with a significant gain.
Long Equity Position: Skyworks Solutions
Skyworks Solutions is a leading provider of radio frequency (RF) semiconductors for
wireless devices. The Company is levered to the growth in connected devices such as
cellphones, tablets, and consumer electronics, and in connection options per device
(cellular 2G, 3G, 4G, WiFi, Bluetooth). The growth in wireless devices and forms of
connectivity is further amplified by the proliferation of new wireless spectrum bands used
in carrier networks (e.g. 700MHz, 800MHz, 1900MHz, 2100MHz, and 2500MHz). These
trends have resulted in a surge of RF semiconductor content in wireless devices.
During late 2011, Skyworks’ shares sold off aggressively due to market share shifts within
the iPhone 4S. By focusing exclusively on the Apple story, the markets missed the
company’s growing success outside of Apple products and the secular trends noted above.
Tax‐loss selling moved the share price from $22 to $14, and we capitalized on the sell‐off to
build a partially hedged position in December. Skyworks was trading at a steep P/E
discount to the semiconductor space and more specifically its RF peers RFMD and TQNT.
With solid 4Q results and 1Q guidance, continued 4G device traction, a window to regain
share within iPhone 5 in 2Q/3Q, and the recovery in semiconductor shares, we believed
Skyworks was poised to re‐rate back toward peer P/E multiples, which would imply nearly
$30 per share. Our thesis came to fruition quickly, and we exited the position in the mid‐
$20’s for a tidy gain early in March.
Long Credit Position: EksportFinans
At the Investor Day, we discussed our position in EXPT, a quasi‐governmental Norwegian
institution created to lend capital for private infrastructure projects primarily in the global
oil and gas industry. The government announced that EksportFinans would be wound
down and a new wholly‐government owned institution would be created in its place to
provide this export financing. Moody’s and S&P, which had previously treated this credit as
essentially government paper, interpreted this statement to mean that the government
would not continue to backstop the outstanding loans and downgraded EXPT by seven
notches, from AA to BB+.
Panic ensued among the traditional holders of the paper – primarily pensions and others –
and forced selling caused the bonds to trade off 15‐20 points, as shown on the chart below:
We saw this downgrade as an immediate opportunity and sent one of our credit analysts to
Norway to meet with government officials and traditional holders of these loans. Working
in our favor was the Thanksgiving holiday, and an analyst happy to give up his turkey and
football to build a $500 million position in a relatively low‐risk, high return credit situation
over just a few days.
Since we initiated the position, EXPT has performed as we expected. Before the
government’s announcement, the bonds were trading at ~115. We purchased most of our
position after they plunged to ~85, and spreads have since narrowed so the paper is in the
mid‐90’s today. We expect the spreads to further condense towards their pre‐crisis levels
in the near‐term and so continue to own our position.
We also spent time at the Investor Presentation discussing another approach we believe is
fruitful in this macroeconomic environment: paying fair multiples for “hidden” growth
rather than cheap multiples for stagnation. This approach has led us to revisit certain
emerging markets with renewed energy. While we have tended to gravitate towards
cyclical equity names in the past, we believe we need to have more balance in our portfolio
in a year which will continue to be turbulent from a macroeconomic perspective. A focus
on companies benefitting from hidden growth should help add this balance, ultimately
dampening volatility while increasing overall profit.
Long Equity: Abercrombie & Fitch
We began purchasing shares of Abercrombie & Fitch (ANF) in January after the stock price
declined by nearly half over the past few months. Abercrombie & Fitch was attractive
because we believe we paid roughly 10x cy12 EPS (ex $7 net cash) for a business that
should grow earnings at a double digit rate for at least the next few years. That growth will
come from recovering US profitability and from continued growth of the company's high
margin online (2009‐11 CAGR +38%) and international businesses (2009‐11 CAGR +70%).
In the US, management is aggressively right‐sizing the store base and plans to close another
20% of its stores by 2015. US profitability should rebound as the competitive environment
improves after a highly promotional holiday season and as average unit costs decline, in
part due to lower cotton prices. Outside the United States, the company is opening highly
profitable stores in Europe and Asia where the brand appeals to a wider customer base and
the company is able to charge a premium price. While it is difficult to know how overseas
profitability will trend over time, we think it is far too early to write off the potentially
lucrative international growth story and believe our entry point provides a sufficient
margin of safety if we are wrong.
Long Equity: Volkswagen
Volkswagen (“VW”) is a long‐term holding that we initiated in the spring of 2010. VW is
valued by the market as a low‐quality, cyclical stock at less than 7x forward earnings. We
have a differentiated view on VW’s earnings as we believe the market continues to
underestimate two of VW’s secular earnings drivers. First, VW’s ongoing shift to a modular
production system is driving structural margin expansion. Second, as we have explained
previously, VW sells more than half its units in emerging markets with a particularly strong
presence in China and Brazil. These two drivers are contributing ~20% to “through‐the‐
cycle” compounded annual earnings growth from 2008 to 2013 earnings.
VW’s pending acquisition of Porsche’s operating business remains a key catalyst for the
stock. We suspect that VW may find a way to acquire the remaining 51% stake in the next
12 months, which should be more than 10% accretive to VW.
Long Credit: Ally Financial
As our investors know, our Credit team has spent a significant portion of the past three
years investing in the auto industry. Ally Financial, formerly known as GMAC, is the world’s
largest auto finance company and a rapidly growing online savings bank with ~$30 billion
in deposits. Ally received government support during the financial crisis largely due to its
efforts to support its failing mortgage subsidiary, ResCap, which remains one of the five
largest mortgage servicers in the US. As a result of the capital injection, the US Treasury
now owns ~75% of Ally, diluting the stakes of its former owners, Cerberus Capital
Management and GM, and giving Ally a robust 11% Tier 1 Common Ratio under Basel III.
Given its strong capital metrics and ample liquidity, Ally’s debt structure traded in line with
more highly rated competitors like Ford Motor Credit for most of 2011 and maintained
fairly tight spreads in its long‐dated bonds and non‐UST preferred shares. However, Ally
was not spared when global credit spreads widened during the August sell‐off.
Simultaneously, fears began to mount over Ally’s mortgage‐related liabilities from
wrongful foreclosures, representation and warranty breaches, and securities law fraud
suits associated with its pre‐crisis sale of mortgage‐backed securities. The majority of
these potential liabilities originated from the ResCap subsidiary, and although Ally has
repeatedly stated its belief that any liability for these issues can be ring fenced at ResCap,
uncertainty remains. This combination of rising global credit risk premiums and mortgage
liabilities fears dramatically widened Ally’s spread to Ford Motor Credit and significantly
increased the spreads on its long‐dated bonds and preferred equity.
We began initiating our position in Ally’s long‐dated bonds and preferred shares during the
fourth quarter because we believed that the mortgage‐related liabilities would be
contained at ResCap or if not, that they would not be large enough to significantly impair
Ally’s capital or credit position. We also believed that 2012 would provide a meaningful
resolution of these liabilities such that Ally debt could be upgraded. Furthermore, all of our
securities were purchased at large discounts to par and carry between 8.0 – 8.5% current
pay coupons, providing significant downside protection.
Ally’s credit spreads have started to normalize in 2012 and the company recently achieved
the first milestone in resolving mortgage‐related liabilities via the widely publicized State
Attorney Generals’ Settlement. Despite returns of between 10% ‐ 25% so far this year, we
continue to hold our securities as we expect full clarity (if not resolution) of mortgage
liabilities and a potential eventual upgrade to an investment grade rating could drive
additional total returns of 15 – 35%.
Long Equity: Yahoo! – The Case for Alibaba
As investors are aware, we established a sizeable position in Yahoo following a difficult
operational and strategic stretch during the waning days of CEO Carol Bartz’s tenure that
culminated in a significant sell‐off in the shares in August. Initially, we were attracted to
the company simply by its significant discount to intrinsic value. In September, we
announced publicly that we had accumulated 5.2% of the shares of the company and laid
out our case for why the valuation was depressed. While the travails of “core Yahoo” grab
all the headlines, core Yahoo forms only a modest portion of the Company’s actual value (a
mere $1.50 per share, trading at ~$14.49 as of 03/12/12). The after‐tax value of Yahoo’s
Asian assets – Alibaba and Yahoo! Japan – currently constitutes $11 per share of its value
(76%), with an additional $2 per share of net cash.
Central to our investment thesis is the hidden jewel in the Asian asset portfolio, and indeed
in Yahoo itself: Yahoo’s 40% stake in Alibaba Group, the dominant e‐commerce platform in
China. According to iResearch, Alibaba currently has 49% of the B2B e‐commerce market
(four times greater than its nearest competitor), 90% of the C2C e‐commerce market
(analogous to Ebay), and 53% of the B2C e‐commerce market (analogous to Amazon) in
2011. It has complemented these core commerce positions with the leading online
payment platform, Alipay, with 49% market share, and also holds the #2 share of the
Chinese online ad market (17%, behind Baidu at 28%). Particularly exciting is Alibaba’s
share of China’s rapidly growing B2C market represented by Taobao Mall, or Tmall
(recently renamed Tian Mao).
According to iResearch, China had 187 million online shoppers in 2011, compared to 170
million in the U.S. As Boston Consulting Group noted in its November 2011 report, “The
World’s Next E‐Commerce Superpower”, e‐commerce transaction value in China is likely to
overtake the U.S. by 2015, helped by conditions that mirror the U.S. and in some ways favor
e‐commerce in China. A combination of broad product assortments and lower prices
mirror the U.S., while e‐commerce in China benefits from the fixed price certainty missing
in China’s traditional retail culture (where haggling is common), from relatively lower
shipping costs than in the U.S., and from the limited geographic reach of brick‐and‐mortar
chains. The Boston Consulting Group report highlights “The Taobao Phenomenon” and
notes more products were purchased on Taobao in 2010 than at China’s top‐five brick and
mortar retailers combined.
The scale and velocity of China’s e‐commerce opportunity, when combined with Alibaba’s
dominant position, make for a very compelling story. As it moves toward an IPO, Alibaba
should quickly take its place amongst China’s online leaders – Tencent ($47 billion market
cap), and Baidu ($48 billion market cap). A November 2011 report on Softbank by UBS’s
Makio Inui, the product of extensive research into Alibaba Group and a detailed valuation,
placed a $63 billion value on Alibaba Group, which would imply just over $13 per Yahoo
share after tax. It appears that while 2012 will be the year of Facebook, 2013 could very
well be the year of Alibaba as it moves toward a listing.
At the reported $35 billion valuation ascribed to the October 2011 purchase of employee
shares by Silver Lake, Temasek and Yunfeng (an affiliate of CEO Jack Ma), Yahoo’s stake
was worth ~$7.60 per share after tax. That implies Yahoo’s stake has grown at a
compounded rate of 55% per annum since its investment in October 2005, and it is
significant that the majority of Yahoo’s value is now driven by its Alibaba stake. Clearly, as
evidenced above, we see tremendous upside in just the Alibaba piece of the Yahoo puzzle.
While the media has covered the drama surrounding the negotiations with Mr. Ma in some
detail, Wall Street has continued to neglect the underlying Alibaba valuation story and the
press makes too little of it. Certainly there is some compelling reason why Mr. Ma is so
interested in repurchasing Yahoo’s stake! We share his excitement and enthusiasm for the
Alibaba opportunity, and we respect and appreciate the dominant and dynamic franchise
he has built amongst the world’s largest base of Internet users.
Over the last six months we have witnessed the Board of Directors’ “strategic review” that
has to date resulted in the hiring of a new CEO, Scott Thompson, the resignation of Jerry
Yang, and the pending exit of Board Chairman Roy Bostock and three other Directors. In
mid‐February we announced that we intend to run our own slate of Directors for the Yahoo
board during this proxy season. We stated our intention to nominate well‐known leaders
in the media space Jeff Zucker and Michael Wolf, restructuring guru Harry Wilson, and Dan
himself to the Board. We are glad Yahoo has played a critical role in Alibaba’s early
development and hope new leadership at Yahoo can chart a new course for the company’s
relationship with Mr. Ma and Alibaba.
Third Point Reinsurance Limited
During the Fourth Quarter of 2011, we achieved a critical firm milestone by closing the
Third Point Reinsurance Limited (“TP Re”) transaction. TP Re opened for business on
January 3rd, led by CEO John Berger and his elite team. With ~$800M of equity, TP Re has
already underwritten its first reinsurance contracts and met other significant operational
One reason we started TP Re was to bolster our already significant percentage of
“permanent” assets under management. Including employee capital, our London‐listed,
closed‐end TPOIL fund, and TP Re, over 20% of our AUM is now considered “permanent".
We believe this asset mix gives us an edge in investing by providing us with one of the most
stable asset bases in the world.
Thank you for your partnership.
Third Point LLC
The performance data presented represents that of Third Point Offshore Fund, Ltd. All P&L or performance results are based on the net asset value of fee‐paying investors only and
are presented net of management fees, brokerage commissions, administrative expenses, and accrued performance allocation, if any, and include the reinvestment of all dividends,
interest, and capital gains. The performance above represents fund‐level returns, and is not an estimate of any specific investor’s actual performance, which may be materially
different from such performance depending on numerous factors. All performance results are estimates and should not be regarded as final until audited financial statements are
issued. Exposure data represents that of Third Point Offshore Master Fund L.P.
While the performances of the Funds have been compared here with the performance of well‐known and widely recognized indices, the indices have not been selected to represent an
appropriate benchmark for the Funds whose holdings, performance and volatility may differ significantly from the securities that comprise the index. Investors cannot invest directly
in indices (although one can invest in an index fund designed to closely track such index).
Past performance is not necessarily indicative of future results. All information provided herein is for informational purposes only and should not be deemed as a recommendation to
buy or sell securities. All investments involve risk including the loss of principal. This transmission is confidential and may not be redistributed without the express written consent of
Third Point LLC and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made
by means of delivery of an approved confidential offering memorandum.
Information provided herein, or otherwise provided with respect to a potential investment in the Funds, may constitute non‐public information regarding Third Point Offshore
Investors Limited, a feeder fund listed on the London Stock Exchange, and accordingly dealing or trading in the shares of that fund on the basis of such information may violate
securities laws in the United Kingdom and elsewhere.