Jeffrey Gendell's Tontine Associates had an atrocious 2008 and that's putting it politely. Founded 12 years ago, Tontine is a multi-billion dollar hedge fund firm that focuses on investing in macro themes by taking large, concentrated positions in companies poised to benefit from various theses. Prior to founding Tontine, Gendell graduated from Duke and worked in Corporate Finance for Smith Barney. While Tontine posted 100% returns in 2003, they posted nearly the polar opposite in 2008. After all, they closed down funds and were amongst the worst hedge fund performers of the year with some of their funds returning a whopping -63.6% and -91.5%.
The highly ironic and (admittedly) humorous part of this whole fiasco is the fact that Tontine is named after an older annuity created by Lorenzo de Tonti where investors desire to be 'the last one standing.' In this arrangement, investors pool their money and as they die off the remaining investors split the deceased's stake. The last investor standing then inherits the riches. By naming his firm as such, Gendell's desire is obviously to be the last man standing. The problem here is that he nearly fell flat on his face last year. But with a new year comes a figurative and literal new light.
Tontine somehow survived and a recent flurry of SEC filings and their latest investor letter shed light on their future. Gendell updated investors on the status of the firm by noting the wind down of the Tontine Partners fund, the Tontine 25 fund, and the Tontine Capital Partners fund has been underway since late last year. He also announced that they would be restructuring their legacy funds to allow redeeming investors to exit while allowing longer-term investors to remain. In the letter, Gendell highlighted the fact that they owned majority stakes in many illiquid stocks and getting out of those positions has been quite the task. We had previously noted their troubles when they sold out of 15 positions and dumped some of their less liquid Broadwind Energy (BWEN) shares. Late last week, Tontine filed a new slew of SEC filings and we'll detail their portfolio changes below.
All of the following are amended SEC 13D filings that were filed due to activity on October 22nd, 2009. Firstly, we see that Tontine has disclosed a 27.0% stake in Westmoreland Coal Company (WLB) with 2,652,635 shares. Secondly, they have also disclosed a 56.5% ownership stake in Patrick Industries (PATK) with 5,174,963 shares. Thirdly, Gendell's firm disclosed a 63.7% stake in Neenah Enterprises (NENA) with 9,550,697 shares, an unchanged amount from their last 13D filing back in March. What's interesting here is that those filings all make no mention of purchases made on margin, whereas the next set of filings below practically all included the phrasing "were purchased with working capital and on margin" with UBS Securities. If Tontine held these margin positions during the crisis last year, it's safe to say UBS would have shat their pants upon learning about the clusterfuck otherwise known as Tontine's portfolios.
So, moving on to the margin positions, Tontine filed on Integrated Electrical Services (IESC) and show a 55.6% stake with 8,562,409 shares. Fifth, we see a filing on Innospec (IOSP) where they show a 20.4% stake with 4,828,345 shares. Additionally, Tontine filed on Exide Technologies (XIDE) and currently have a 31.4% ownership stake with 23,705,133 shares. Lastly, Jeffrey Gendell's firm has disclosed their stake in Broadwind Energy (BWEN) is now 47.7% of the company with 46,088,635 shares. As you can see, quite a lot of concentrated positions to deal with as they wind down some of their funds and restructures their remaining portfolios. Let this be a lesson to all about highly concentrated stakes in illiquid positions.
Interestingly enough, Tontine's economic outlook is not as pessimistic as many of their hedge fund counterparts. While Gendell highlights the fact that 'Blue' states and the coasts of the US are economically declining, he also notes that 'Red' states in the middle of the country are doing fine. Going forward, Gendell also mentions that he'll likely be playing companies with solid balance sheets and few impending debt maturities. Specifically, he likes oil service companies, wind energy (and alternative energy in general), and industrial process companies. While he fancies those, Gendell has deemed 'the movement of electricity from production to transmission and then to storage' as the most attractive area.
For details on the restructuring of their funds, we refer to Gendell's latest missive to investors where he highlights the differences in their funds going forward:
- Tontine Financial Partners fund remains unchanged
- Tontine Total Return Fund will be unlevered, less concentrated, and will not focus on tax efficiency. However, it will be more liquid. This fund will actively trade positions and through September 30th of this year was up 53.8% net of fees.
- Tontine Capital Partners II will focus on thematic long-term investments and will be more highly concentrated.
For more on the happenings at Tontine, embedded below is their latest letter courtesy of Dealbreaker. (And fyi, the document is formatted in a funky way because of a watermark that had to be erased so as to not 'out' the individual who leaked the document): Tontine Associates Letter You can download the .pdf here. Despite Tontine's horrid 2008, they have since rebounded in an emphatic manner as they attempt to recover losses from the previous year. Tontine did not die, but they came damn close. Enter the proverbial rebirth. With their wounds still healing, one can hope they've learned from their mistakes and this restructuring is more conducive to the fund(s) running concentrated portfolios.
Lastly, in terms of other recent activity from Tontine, we saw them boost their stake in Willbros Group (WG) back in September. While their performance this year is reassuring (who doesn't love a comeback?) there's no doubt that investors will dread receiving a letter from Tontine like the one from last October. Never has the simple act of opening a letter invoked so much shock and disbelief. All kidding aside, we do wish the best to Tontine and we'll continue to track their comeback story.
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