Charles Davidson and Joseph Jacobs founded Greenwich, CT based Wexford Management in May 1994
Charles Davidson and Joseph Jacobs founded Greenwich, CT based Wexford Management in May 1994. Chuck previously spent ten years with Michael Steinhardt where he was a general partner in charge of bankruptcy and special situations. At Steinhardt Partners, Chuck directed major reorganizations of Sunbeam-Oster, Wang and Integrated Resources. Joseph Jacobs, 43, previously spent twelve years at Bear Stearns where he was President of its Real Estate Group. Joe received his B.A. from the University of Pennsylvania and his M.B.A. from Harvard Business School. Shaiy Pilpel, 46, joined Chuck and Joe from the Canadian Imperial Bank of Commerce, where he was Managing Director in charge of the mortgage arbitrage and quantitative strategies proprietary trading groups. Shaiy had previously worked with Chuck at Steinhardt Partners, in research at IBM, taught at universities in Israel and the United States and served for 13 years in the Israel Defense forces, retiring as a Lieutenant Colonel. Shaiy received a B.Sc. in mathematics and a B.A. in philosophy from Tel Aviv University, a M.Sc. in mathematics from the Hebrew University, a Ph.D. in statistics from the University of California at Berkeley and an M.B.A. from Columbia University. Today, Wexford is an impressive organization, with over 75 employees and $1.5 billion in assets under management, including Presidio Capital, the successor to Integrated Resources, Resurgence properties, the former Lomas and Nettleton REIT, and $300 million in special situations partnerships. The company's investment activities have been focused in the areas of bankruptcies, distressed securities, mortgages and equities as well as oil and gas exploration, real estate, mining and shipping. Wexford's geographic scope has ranged from the United States to Africa, Italy, Eastern Europe, Russia and Asia. Antoine Bernheim spoke with the principals of Wexford in late January, 1997.
Profile of Charles E
Profile of Charles E. Davidson
Born: March 15, 1953
Education: UCLA, BA 1975; MBA 1977
Family: Happily married, one girl, one boy, one dog
Last vacation: San Francisco with his family
Last book read: Lenin's Tomb by David Remnick
Hobbies: Chess, Political History and Travel
Favorite quote: "Buying cheap is the best hedge"
How he best describes himself: "Carnivore"
Q. What are the major investment areas in which your firm has been involved?
A. Historically, we have been heavily involved in restructurings, bankruptcies, and opportunistic acquisitions in selected industries such as natural resources (oil and gas, drilling equipment and precious metals), transportation (airplanes and ships) and real estate. We have also invested heavily in technology and software companies. To date, we have created a few start-up companies, notably: DLB Oil & Gas, which we took public, and a company which creates 3-dimensional imaging for computer and internet applications, which we merged into a public company. We like physical assets. In the last nine months, we have bought and sold two drillships, and bought jack-up oil rigs, oil tankers, oil properties, airplanes and buildings. Our deal flow does not come from the conventional Wall Street M&A departments; we study all the major bankruptcies and have longstanding industry relationships who not only show us opportunities but also become our joint venture partners; and, believe it or not, we see many deals from our investors.
Q. Given the scope of your activities, could you describe the mix between macro factors and bottom-up analysis in your investment decisions?
A. We are overwhelmingly focused on bottom-up analysis and focus relatively little on macro factors. We may have a general idea as to which direction a particular industry or market is moving and this helps us focus our search for investment opportunities, but what makes the deal for us is the deal itself. We focus on fundamental value analysis and believe that, over time, public markets will converge toward private market values. We have an impressive infrastructure of individuals who specialize in different industries and regional markets. Our deal people work closely with outside experts in their fields, identifying specific opportunities, and internally we assess the relative value and timing of individual situations. Our trading desk is driven by the market. We love markets with imbalances of buyers and sellers, markets that are under stress and assets that are difficult to value.
Q. What has been driving the mix between private and public investments?
A. Valuation. Right now, with the stock market trading at its historical high, public markets are relatively unattractive vis-a-vis private markets and our interest in public markets is the liquidity they offer. We recognize Wall Street's ability to sell. As such, we most often find ourselves relying on our own valuations when buying while selling to or through Wall Street.
Q. What has been your track record since you started?
A. We have raised three separate LP funds since 1994. One has annual returns in the low 40% range and the other two are returning well above 50% annually. Some years are easier than other years, we have the discipline to take what the market gives us. Understanding and managing the risks in our investments is key to generating consistent returns. Much of the money we manage is our own and we are not interested in losing it or earning mediocre rates of return.
Q. Could you describe your trading style in publicly traded securities?
A. We are value driven and we believe we are a very good buyer and not a particularly good seller. We scale into positions and really believe buying cheap is the best hedge. We are too cynical to stay around for the last half of a point because too many times we have seen liquidity in markets suddenly vaporize. The publicly traded stocks we own are either a result of unique situations or derived from our private companies which have gone public. In 1995, we acquired a debt position in a bankrupt public company called O'Brien Environmental Energy, which develops and operates alternative fuel and cogeneration projects. When we were not satisfied with the liquidation plan proposed by management, we brought in Northern States Power, a strategic industry partner, and reorganized the company ourselves. We created a software company in 1996, merged it into a public company at the end of that year, receiving the majority of our investment back in cash plus an attractive position in the equity of the acquiring company. We are typically under-leveraged and less than fully invested. In 1994, we had no position in mortgage derivatives because we didn't agree with Wall Street's pricing, never mind there were mortgage securities for any and every market view. When the debacle hit, we saw an opportunity and selectively bought mortgage derivatives. We view the former Soviet Union and Eastern Europe as fertile ground for restructuring opportunities. We constantly test the liquidity of markets, and often have multiple methods to exit or close our positions.
Q. Could you describe how your organization functions?
A. We didn't want to create a company of individual stars and fiefdoms. So we recruited the best and the brightest deal makers and traders we knew. We have more degrees (including several Ph.D's) and years of market experience than some of the oldest, most established money management firms. The deal specialists sit in offices and are supported by analysts, accountants, and attorneys and the traders sit in a centralized trading room. Individual ideas are only executed after a series of reviews. Because Chuck is responsible for everything that happens here, he knows about every trade. Our organization is pyramidic in shape with a great emphasis on internal controls. Wexford is not a one product firm, we have a handful of unique products and partnership vehicles that match the type of investments we make. Costs and expenses are monitored as closely as revenues. We are a company of specialists. We are very entrepreneurial in making investments but in managing our business we are team oriented.
Q. How do you individually organize your time?
A. Most of Chuck's time is devoted to meeting individuals both internally and outside Wexford to discuss specific ideas and proposals and making investment decisions. He also spends a lot of time reading research. Joe describes his role as overseeing the management of the organization as well as identifying and managing many of Wexford's investments. Shaiy watches screens, but believes that trading is the easiest part of his job and spends time in training and preparation. Shaiy noted that financial catastrophes occur when unqualified people invest and trade in complex securities and, like the bomb squad, he stays equipped to understand explosive situations, so he can profit from them.
Q. Where do you see the best investment opportunities over the next couple of years?
A. There will be a number of industries that will generate major restructuring opportunities. The communications companies, like radio stations, TV and cable, are undergoing technological and regulatory changes that should lead to restructurings. Also the electric utilities industry is undergoing a wave of deregulation, which will create the kind of stress in which we find investment opportunities. What's started now in Eastern Europe will continue in Africa, India and Asia. In the public markets, financial engineering will continue to offer complex and esoteric structures. Finding opportunities where these are mispriced is our specialty. Our raison d'¿tre is to make money for our investors and ourselves. If we can do that trading goats for tires, that's what we'll do. u