Third point starting Greek-focused hedge fund on recovery bet

Daniel Loeb’s Third Point LLC is starting a hedge fund focused on buying Greek assets after a wager that European officials would rescue the indebted nation from financial collapse helped drive gains last year for his $11.7 billion investment firm.

The Third Point Hellenic Recovery Fund will invest in “event-driven corporate situations,” the New York-based firm said in a letter to investors Wednesday. Third Point plans to invest less than 1.5 percent of the assets in its existing hedge funds in the new pool and will raise additional money from institutional investors, the letter said.

Third Point Offshore Fund Ltd., the firm’s biggest hedge fund, rose 21 percent in 2012 after buying Greek sovereign bonds that surged when German Chancellor Angela Merkel softened her stance on spending cuts in Greece and the European Central Bank unveiled measures designed to keep the euro currency bloc intact. Third Point joins U.S. firms including Oaktree Capital Group LLC and Fortress Investment Group LLC in hunting for bargains in Greek assets after more than five years of recession drove down equities and property values.

“The recent rally in Greek government bonds indicates that asset prices had previously incorporated the possibility of the exit scenario, which was priced out as fears faded,” said Ilias Lekkos, chief economist at Piraeus Bank SA in Athens. “Investors believe that the economic environment is stable enough to enter the Greek market now to benefit from a future recovery.”

Yahoo ouster

Third Point’s Greek fund will use a so-called draw-down structure, meaning it will deploy capital as investment opportunities arise, the letter said. The structure will allow the firm to buy assets that it currently had to reject because they didn’t fit the liquidity requirements of existing Third Point hedge funds, according to the letter.

Third Point’s Offshore fund has returned 17.9 percent a year on average since its inception in 1996, company filings show. Loeb, 51, who’s known for triggering last year’s ouster of former Yahoo! Inc. Chief Executive Officer Scott Thompson, started the hedge fund firm after stints as a distressed debt analyst at Jeffries & Co. and a high-yield bond salesman at Citigroup Inc. A Third Point spokeswoman, Elissa Doyle, declined to comment on the firm’s plans for investments in Greece.

Greece, with unemployment topping 26 percent, is expected to see its economy contract for the sixth consecutive year, according to the International Monetary Fund. While the value of the 60 companies traded on the Athens Stock Exchange rallied 33 percent in 2012, the benchmark has still lost 83 percent of its value since the end of 2007.

‘Opportunistic’ investments

Still, Third Point is convinced “more than ever” that Greece will rebound and plans to participate in the recovery through “opportunistic equity investments,” the hedge-fund firm wrote in a Jan. 9 letter to clients.

“The Greek equity market is relatively small, but the nation is starved for capital,” the January letter said.

Among the investments Third Point has considered is Opap SA, the state-controlled gambling company that Greece agreed to sell a 33 percent stake in as part of the nation’s bailout. Third Point was among seven companies, including private-equity firms TPG Capital and BC Partners Ltd., that Greece approved in November to participate in the bidding for Opap, which had revenue of 4 billion euros ($5.2 billion) last year.

The market capitalization of all publicly traded Greek companies is $42 billion, data compiled by Bloomberg show. More than 90 businesses traded in New York, including Exxon Mobil Corp., Apple Inc. and Morgan Stanley, have a bigger value. All U.S. public companies combined are valued at $19 trillion.

Oaktree, fortress

Oaktree, the world’s largest distressed-debt investor with $77 billion of assets under management, hired BNP Paribas SA investment banker Spyros Spyropoulos in Athens last year to help the Los Angeles-based firm search for Greek assets, according to a person with knowledge of the matter. Fortress, a New York- based private-equity and hedge-fund firm that oversees $53.4 billion, has also added advisers in the Greek capital to target investments, the person said. Spokesmen for Oaktree and Fortress declined to comment.

Other investors are more skeptical. Dromeus Capital Management SA said last month it has started scaling back trades and increasing cash balances in a hedge fund focused on Greece that the firm started in October. Dromeus, a hedge-fund firm formed in 2008 with offices in Athens and Geneva, cut risk after determining that an asset rally in Greece was fading and future price appreciation would increasingly depend on the government reducing spending and an economy that is shrinking.

Currency risk

Another concern remains the risk that Greece won’t adhere to debt-reduction forecasts required to stay in the euro, said Sohail Malik, a senior portfolio manager in London at hedge-fund firm ECM Asset Management Ltd. As a result, any assets bought in euros could immediately fall in value if they are converted to a weaker drachma. That risk may increase should Merkel or a possible successor take a harder line on Greece after German parliamentary elections in September, Malik said.

“I don’t see Germany post-election being as accommodating,” he said. “The redenomination overhang with Greece shouldn’t be forgotten. That overhang is likely to last at least through 2014 and probably onward.”

Third Point began buying sovereign bonds after voters in June parliamentary elections gave a majority of seats to Greece’s New Democracy party, which favored relaxing austerity measures demanded by Europe rather than scrapping them and risk leaving the euro.

The election results and a July pledge by ECB President Mario Draghi to protect the currency bloc bolstered the debt, with Greece’s 10-year government bond almost tripling in price during the second half of 2012, data compiled by Bloomberg show.

‘Meaningful position’

Third Point sold a “significant portion” of its bonds in December as part of a $13 billion government buyback designed to reduce Greece’s debt, the firm said in its January letter. The hedge-fund manager told clients it still held a “meaningful position” and Greek debt was Third Point’s worst-performing investment in March, according to a company filing.

Third Point already invests indirectly in Greek real estate as the biggest shareholder of Dolphin Capital Investors Ltd., a developer of holiday resorts that describes itself as one of the largest private owners of seaside land in Greece and Cyprus. The Dolphin stake has surged 67 percent since Third Point made the investment in last year’s fourth quarter, according to Wednesday’s letter to clients.

Dolphin was co-founded in 2004 by Miltos Kambourides, a former Goldman Sachs Group Inc. banker who previously helped run a real estate investment firm for George Soros. In addition to Third Point, its biggest shareholders include hedge-fund firms and asset managers such as Toscafund Asset Management LLP, Fortress, BlackRock Inc. and Fir Tree Partners Inc.

Dolphin said it’s benefiting from the financial crisis affecting Greece and Cyprus, according to a March 20 statement.

“There are several opportunities to acquire land and resort assets in prime locations at a significant discount to both their replacement costs and fair values,” Dolphin said. [Bloomberg]