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Tag Archives: #Activist


Yates_private prisons


Investors in listed private pension companies Corrections Corporation  of America (CXW), and The GEO Group, Inc. (GEO), got murdered yesterday. $CXW fell nearly $10 to close $17.57 (mkt cap $2.1bln), down 35% on the day, with $GEO closing down 40% to $19.50 (the smaller of the two, mkt cap $1.44bln).

Most articles published since that I have read focus on the morality issues, but IBC readers have their own steady compass on that front, the Peanut Gallery is here to guide your investment thinking and analysis when tape bombs like Deputy Attorney General Sally Yates memorandum to the Bureau of Prisons (BOP) hit the wire (link to actual letter at top of post). Amazon’s Washington Post broke the story that stated the US Justice Department plans to end the use of private prisons.

This is a big deal and should not be discounted as a driver of the valuation of these companies going forward. The Democrats have had this issue on their radar for some time. Obama has been keen to push reforms of the criminal justice system in the US, acknowledging the fact that the US incarcerates too many,almost 0.7% of the entire population (the “1%” nobody likes to talk or think about) with an undue weighting of African-American inmates (2.7% versus 0.5% for other races). It is clearly too late for “Obamabars” or whatever catchy reform slogan they might come up with, but Hillary is clearly ready to take the baton and she is not likely to miss the hand off. In her well publicized tweet of November 2015 Hillary tweeted, “We need to end private prisons.” The aforementioned prison outsourcing stocks were down 4-6% of the day of the tweet, but bounced back in the absence of immediate follow up. Enter Sally Yates.


The typical legacy contracts which granted private prison operators 20 year terms with 90% occupancy will be no more. More lucrative deal which were negotiated on a “set price” basis, irrespective of occupancy levels, will likely be re-negotiated.

The Bureau of Prisons (BOP) contracts for Federal prisons and have traditionally have up approximately 1/2 of the revenues for both $CXW and $GEO. State and Municipal contracts make up the remainder and while BOP’s directive will have sway going forward, the pace of contract roll-off will likely be measured due to tight budgets.

While only 8% of Federal prisoners are housed in private prisons, 62% of immigration detainees are housed in private facilities. Immigration & Customs Enforcement (ICE), a division of the Department of Homeland Security (DHS) are the ones that contract for immigration detainees. Immigration offenses now exceed drug offenses in absolute number and full 1/3 of all Federal criminal cases are immigration related.

Politicians, regardless of level of government, do not like having things blow up in their faces. When the US already spends 6x more on prisons than on education, cost containment will be key as BOP figure out the optimal way to respond to the clear DOJ directive (a 5 year run-off period has been assumed).


Private prisons are officially in the “sin” category along with tobacco, liquor, and casinos.

What to do. My focus will be on $CXW; Correction Corporation of America. For those, like myself, without current exposure to either name this is a time for study and analysis.

Brave analysts to comment thus far appear to be in the buy the dip (BTD) camp and appear to have a modest preference for $GEO over $CXW, speaking to the listed equity. Looking at the capital structure, $GEO has more debt, $2.23bln with Senior secured rated Ba3 and Senior Unsecured rated B1. CXW was upgraded by Moody’s to Baa3 in June 2015 and has $1.4bln in debt.

CXR 4.625% May 2023’s were not immune from the carnage of yesterday’s trade, falling from $102 to $85.50 (-16.2%) on the day. My expectation would be for the equity to rebound from the current levels and for the bonds to drift lower concurrently. The catalyst for a sharper move in the debt would be loss of investment grade rating by Moody’s. Assuming the debt is taken back (i.e. downgraded) to Ba2 (speculative grade) from investment grade there may be an opportunity to buy the debt ($70.00ish) on a hedged basis, shorting $CXR equity to the expected recovery rate on the bonds. As this opportunity unfolds, I would expect there would be cuts to the dividend on the common shares which would reduce the negative carry on the hedge.

The closest proxy I could come up with in analyzing private pension debt is military housing debt. To be clear, no analogy is to be drawn between criminals and brave service men and women that protect the nation, this is purely an asset valuation exercise. A large portion of the USA’s military housing has been privatized. The debt issued is not municipal debt, an important distinction, but is supported by the “Basic Allowance for Housing” (BAH) that is earmarked annually as an appropriation from the Federal budget by the Department of Defense (DOD), the world’s largest employer. On balance, the location of the private military housing complexes is favorable (something to think about as bases get slated for closure on occasion) to private prisons. Military housing has a much better alternate use as well, including civilian use and/or re-purposing.

The fix is in, it would appear. Private prisons will be as popular as a coal seam in the Appalachians. Trade accordingly. JCG


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$TPOU.L  Third Point Offshore Master Fund, Ltd.

The institutional hedge fund space is typically difficult for the average Joe to access. Only accredited investors can buy and the minimums are high ($5mm typical) with smaller dollops (i.e. $100,000) subject to another layer of fees (1% typical via fund of funds). Dan Loeb’s track record running Third Point has been stellar, trouncing the S&P return by almost 9% per year since it’s 1995 start at $3.5mm to $15bln AUM presently:


Loeb’s Third Point fund is closed to new investors, making access a more definitive issue. Enter Third Point Offshore Investors Limited, a London listed (TPOU.L) feeder fund which individuals can buy. This is far from an institutional avenue as typically daily volume is light, but a patient investor can leg into an allocation of a couple of % relatively easily.

Third Point_2016-03-March-Monthly-Report-TPOI

The fund is listed as having an Event Driven, Value Focus. Dan Loeb is perhaps best known as an activist investor in recent years, but his background is varied. Long/short equity typically gets a large gross allocation, but credit, asset-backed securities, and macro are all utilized. This strategy diversity gives Third Point a lower correlation to the straight beta of the equity market (S&P), along with smaller drawdown (Sortino ratio of 1.87 reflects the funds ability to limit downside deviation).

For the typical retail investor, bewildered with what to do in a typical year and made more cautious by the -10%+ start we had to 2016, a modest allocations to listed hedge funds is worth further investigation. This is a whole other level from other forms of active investing, of which up to 40% is really “smart beta” (i.e. alternative indexing methodologies).

The expertise does not come cheap at 2/20. 2% of NAV is the Management Fee, which is really more like 2.25% give the persistent discount to NAV evident in the closed-end fund space. Performance fees are 20% of NAV growth, but there is an investor friendly clause whereby fees are cut in 1/2 in the event of a fall in NAV in any given fiscal year (in place until the NAV fall is recouped by a factor of 2.5X). Performance for TPOU.L  will track very close to 1:1 with the Third Point Master Fund performance.


Jeffries went positive on the listed hedge fund space in early February, including Third Point’s closed end-fund TPOU.L. Early in his career Dan Loeb (54) was an SVP Distressed Debt Investing with Jeffries, pointing to his multi-disciplined investment acumen. Barron’s also cast an admiring eye to the space last week, but lumping Loeb’s Third Point in with Bill Ackman’s high wire act did not seem to resonate well with readers/investors.

Many hedge funds have found increased regulations burdensome. Dan Loeb has built his sizeable wealth of $2.7bln through his multi-decade success at the helm of Third Point. A common strategy evident in the market is to return 3rd party money and convert to a Family Office structure, mandated to manage the founder and staff’s accumulated wealth. Getting rid of regulatory headaches/cost and re-sizing to more nimble size must be a tempting proposition. In addition to the merits of hiring a proven quantity manager, this is clearly a potential catalyst for the closed end fund discount to close to zero over the medium term (approx. -14% discount to NAV at present after a +1.8% gain in NAV and a better fund performance just reported for March). Third Point Offshore have both announced and executed stock buybacks (5% typically) in the past to assist in controlling the closed-end fund discount.

The listed funds are tiny at approx. $675mm in relation to the $15bln + run in the Master LP, making the closed-end buyback at NAV a finger snap easy proposition. JCG

Disclosure: Long just shy of 2% allocation in TPOU.L from February. A good fit with my other hedge fund exposure which, while multi-strat, does not employ equity long/short and is light on both activist and event driven strategies.

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