Saturday, October 9, 2010

Department of Sycophancy: "Sheikh Mansour Emerges as the Arabian Warrent Buffet"

الشيج واران بوفيت منصور

So we're told by Arabian Business.

When I think of Warren Buffet I think of many things:
  1. A determination to succeed and lots of hard work.  Warren began his career delivering newspapers from his bicycle (which he duly depreciated on his tax return!).
  2. A ferocious pursuit of deals, many originating from "cold calls" on firms.
  3. A generally single-minded focus on a particular investment philosophy (value investing as taught by Benjamin Graham).  
  4. A cool rational head not swayed by whatever was the then current irrational exuberance.
  5. A painstaking building of a fortune.  Earning money, saving, reinvesting, making a profit, and repeating the cycle
  6. Many highly profitable and visible deals.
  7. Despite all of this, little affect on his ego or lifestyle.  He lives in the same rather modest house in Omaha that he bought long ago.
Arabian Business is silent on all but the sixth point so we can only imagine how the other six apply to the Sheikh.

What we do learn from the article apropos of the sixth point is that:
  1. He owns Manchester City Football Club.  How this came about and how it was funded are presumably too well known to require recounting, which is perhaps sad because we are left not knowing how he displayed his legendary skill in closing this transaction.  Did he begin with a paper route for The National or perhaps more likely Akhbar Al Arab?  Save his first earnings and by repeating the cycle amassed the GBP 300 million to buy the Club?
  2. "He" made an investment in Barclays in the dark days of 2008 and has now made US$3 billion on an "exit".   One that we learn that leaves "the sheikh exposed to any upside in the share price and completely protects him from any downside."  
The latter deal sounds almost miraculous.  He exited Barclays yet retains upside in the shares.

So how can we understand Arabian Business's statement: he "completed his exit from this cool investment"?    Frank Kane has an account here.  As the words suggest, risk has been hedged but not eliminated.

First, PCP3, not the Sheikh,  will continue to own the shares.  PCP 3 has entered into a derivatives transaction with Nomura.  In effect risk on Nomura has been substituted for Barclays.

And as always with derivative transactions the devil is in the details.  What are the conditions for exercise?  Any restrictions or limits on the number of shares to be "put" at any one time?  What is the strike price (or its equivalent) on the transaction?  Current market price?  Something lower?  Is there a time limit at which point the (derivative) contract expires and Nomura is no longer obligated?   Will PCP3 need to roll the derivative forward to maintain its protection at that future date at a price to be determined?    And perhaps very importantly what did the derivative cost?  Are there future costs associated with it?   One presumes Nomura priced for the risk they're taking considering both price and time.  So this isn't a costless transaction.  But then PCP3 gets to keep the upside.

Still a remarkable return.  One worthy of much praise.  Especially when one considers such debacles  as one SWF's investment in Citibank convertible securities.

But before Arabian Business rushes to describe the Sheikh as the Arabian Warren Buffet, it may be appropriate to wait for the development of a consistent track record.  

Not so long ago, Maha AlGhunaim, Esam Janahi and others were lauded for their investment prowess.  And like many a legend, time has not been kind to these.

3 comments:

Chapter 11 said...

Amen.

2 dirham journalism my friend.

Abu 'Arqala said...

C11

One hopes that it is a misguided author. Not that the Sheikh is paying to have press puffery done.

If the latter, it would pay to hire a PR advisor because articles this far out just make him look ludicrous.

Chapter 11 said...

I think the photo does that well enough itself...

... love the mullet