Institutional Investor's Alpha Magazine - September 2008 - (Page 35)

pert at Merrill Lynch Investment Managers; and KDA Capital, founded by David Baverez, previously a star mutual fund manager at Fidelity International. The ﬁrms’ assets and investment teams have grown swiftly: Algebris now has a squad of 13 overseeing $2.5 billion; Parvus has seven looking after $3 billion; and KDA has a team of seven investing $1 billion. Hohn himself leads a group of 16 investment professionals at TCI Investment Fund Management; the separate company that provides services to all four hedge funds, TCI Investment Fund Services, has 48 employees. The hedge fund ﬁ rms are headquartered in an elegant, Edwardian building on Clifford Street, in the heart of London’s tony Mayfair district. C hris Hohn did not start off as an activist investor. He ﬁrst began to consider becoming one in late 2004, when his ﬁrm invested in exchanges, including Euronext and Deutsche Börse. Hohn was also an unlikely crusader: He seemed shy and spoke haltingly, picking out his words with great care, Crowe says. But he was passionate about his ideas and didn’t like being thwarted by management teams. TCI’s ﬁght with Deutsche Börse kicked off in earnest in early 2005, when Hohn found out that the exchange’s then-CEO, Werner Seifert, had been quietly courting the London Stock Exchange instead of buying back shares. Hohn was incensed, and in the ensuing battle, he worked alongside another large institutional shareholder, Atticus — run by his Harvard classmate Timothy Barakett — which then held a stake of just over 5 percent in Deutsche Börse, as well as Baverez, then at Fidelity, which also held a 5 percent stake. Deutsche Börse was forced to withdraw its bid in March 2005, and Seifert resigned in anger two months later. Subsequently, German regulators at the Bonn-based Bundesbank and the German Financial Supervisory Authority, or BaFin, tried — and failed — to ﬁ nd some evidence of wrongdoing and collusion among the hedge fund ﬁ rms. Seifert, however, pursued his own form of revenge, writing a wrathful book about his professional ordeal, titled The Invasion of the Locusts. The disparaging metaphor was ﬁrst used by Franz Müntefering, former chairman of Germany’s Social Democratic Party, in reference to foreign private equity investors’ — not hedge funds’ — buying up German companies, but the expression stuck to TCI. Despite the name-calling, Hohn, who had scored a major victory with Deutsche Börse and watched as its stock price nearly doubled, to €84.75 ($100.63), by the end of 2005, was unfazed. He liked the taste of success and quickly realized that he could use a fairly small equity holding to leverage institutional shareholders’ dissatisfaction and spark proﬁtable shareholder revolts. Hohn’s tactics worked perfectly when it came to ABN Amro: With a stake of just over 1 percent of the bank’s equity, TCI issued a challenge to management, demanding in a February 2007 letter that ABN Amro either solicit takeover offers or sell or spin off some of its assets. TCI’s complaint hit a nerve, and other institutional shareholders joined to put pressure on the bank to consider a merger or breakup. In response, chief executive Rijkman Groenink entered into talks with British banking giant Barclays and then, reluctantly, had to extend “When I ﬁ rst heard about TCI’s link to the foundation, I wondered whether it was something he ought to be doing with his own personal money, because I thought it might be a distraction,” Crowe says. “But the more I thought about it, the more I liked the concept of incorporating the foundation into TCI’s business design — and coming from a foundation myself, I thought it was a pretty cool idea.” The ingenuity of the structure has helped alleviate the most onerous task required in foundation management: fundraising. CooperHohn, who has a master’s degree in public administration from Harvard University, has actually faced an equal but opposite problem: giving the money away fast enough to keep pace with the endowment’s phenomenal growth. CIFF’s assets surged from $32.7 million — including $10 million in seed money from the Cooper-Hohns — in December 2004 to $1.77 billion, as of December 2007. Not all the money has come from management fees. The foundation, which is heavily invested in the Children’s Investment Master Fund, has also benefited from the 42 percent annualized returns Hohn and his team achieved from 2004 through 2007. “We’ve historically donated the bulk of the proﬁ ts to the foundation after paying TCI’s staff, as well,” Jamie Cooper-Hohn adds. Developing grant-making programs quickly enough to distribute the cash has been CooperHohns’s greatest challenge. Unlike in the U.S., where foundations are required to give away 5 percent of their assets in a given ﬁscal year by the end of the following year, foundations in the U.K. are required only to distribute a reasonable amount in accordance with their charity’s aims. That has allowed Jamie Cooper-Hohn time to get systems and staff in place. CIFF now has a team of nearly 20 and expects to hire another 12 people in the coming year. But the volume of CIFF’s giving remains low relative to its asset base: Last year the foundation made commitments totaling $27.8 million and distributed $15.6 million; its commitments totaled just 1.6 percent of its assets, and it distributed just under 1 percent. Since CIFF’s inception, the foundation has distributed some $34.6 million — about 2 percent of its current assets. Cooper-Hohn explains the slow pace by describing the grant-making approach as researchintensive — more like a private equity fund seeking to earn a multiple on its investment than a traditional nonprofit’s one-time-only allocation. In 2006, for example, CIFF partnered with the William J. Clinton Foundation to spearhead a coalition of funding partners to enable universal access to and delivery of AIDS treatment for children in Africa. By promising to buy a year’s worth of antiretroviral drugs and committing to put 10,000 HIV-infected children on medication, CIFF helped the Clinton Foundation negotiate the cost of treatment down from $1,500 per child to $180 per child. The cost has since been renegotiated to $48 a child, and by the end of this year 300,000 children will have started treatment. “We weren’t going to let half a million children die of AIDS every year because it was just too expensive and complicated to get them on medication,” says Cooper-Hohn. “We simply refused to accept that.” — L.A. SEPTEMBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 35

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - September 2008

Institutional Investor's Alpha Magazine - September 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Culling the Herd The Good Guys: Ending the Cycle Interview: Press Credentials Cover Story: Rethinking Chris Hohn Strategies: At the Edge of the Earth Profile: Alpha Femals Strategies: Tails, You Lose Research Center: The Top Equity Trading Firms Alpha Bytes: The Light Is On Unhedged: Commentary: Not-So-Dire Diagnosis

Institutional Investor's Alpha Magazine - September 2008

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