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Philip Falcone, Former Head of Vast Fund,
Tries a 3rd Act
By RANDALL SMITH SEPT. 3,
2015
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Philip A. Falcone, barred from
the securities business until 2018, now oversees HC2 Holdings, a
publicly traded company.
Credit Chang W.
Lee/The New York Times |
Philip A.
Falcone, the brash hedge fund titan who once managed $26 billion
before stumbling and running afoul of regulators, is pressing ahead on
a new comeback effort, his second.
His latest
investment platform is a publicly traded company with $800 million in
assets called HC2 Holdings. It has bought a couple of midsize
businesses — an undersea cable installer and a steel fabricator — that
are intended to generate cash to help support several smaller growth
prospects that include operations in wireless services, natural-gas
truck-fueling stations, life sciences, insurance and sports.
For Mr.
Falcone, the goal is to make smart acquisitions and hit home runs with
some of the smaller earlier-stage ventures, much as he once did by
buying bonds of companies in financial distress.
The new
venture also allows him to stay active during a regulatory ban that
bars him from the securities and investment advisory businesses until
2018; regulators have allowed him to run a public company that buys
whole businesses instead of managing a fund trading stocks and bonds.
In an
interview, Mr. Falcone said he was aiming to “go out and acquire
companies and build on that,” creating value through growth in diverse
industries.
“I feel
like, not that I have a lot to prove, but I look at this vehicle as
‘success is the best revenge,’ ” he added.
Charles
Frischer, a private investor in Seattle whose family owns 1.7 million
shares, or 6.5 percent, of HC2, said Mr. Falcone would be “completely
redeemed” if he could build HC2’s assets to $2 billion or $3 billion.
But Mr.
Falcone faces hurdles at HC2, which has been hampered by his history
and has already encountered a few setbacks. After quadrupling in price
based on its debt-financed acquisitions, its stock has fallen by 40
percent this summer amid sales by a large investor. And a $195 million
takeover bid that could have doubled HC2’s size was rejected recently.
And the
results at his first comeback, a larger public-company vehicle he
started six years ago, were underwhelming.
Still, Mr.
Falcone is undeterred.
“People
kind of look at me as I am unbelievably aggressive, and I probably do
make some people nervous,” Mr. Falcone, a former Harvard hockey
center, said in a large conference room in his Park Avenue office for
which he pays part of the rent because HC2 alone is not big enough to
afford it.
Explaining
his motivation, he said, “I’m a competitor. I think I’m an
unbelievable competitor.” He added, “As the youngest of nine kids in a
three-bedroom house, I learned how not to give up.”
Mr.
Falcone, 53, has already known triumph and adversity on a large scale.
After a
decade as a high-yield bond trader on Wall Street, he began the
Harbinger Capital hedge fund in 2001, initially focusing on distressed
debt. In 2007, he personally earned $1.7 billion and doubled his
investors’ money on a winning bet against subprime mortgages.
He also
indulged in a real estate spending spree, paying $49 million for a
27-room Manhattan townhouse once owned by the Penthouse publisher Bob
Guccione and $39 million for a mountainside Caribbean villa in St.
Barts.
But in
2008, he got caught in the market downdraft with too many illiquid
positions just as he faced $10 billion in redemption demands from his
investors. Those demands forced him to block investor exits, even as
he took a $113 million loan in 2009 to pay his own taxes while he was
also buying out a co-founding partner for about $100 million.
While
Harbinger documents gave him the right to obtain the loan, the
Securities and Exchange Commission said in 2013 that he did not form a
required fairness committee, did not pay the same rate as Harbinger
was paying to borrow and did not disclose the loan to investors for
five months.
The cloud
of the S.E.C. inquiry, which began in 2010, coupled with losses in
2010 and 2011, eventually doomed the hedge fund. Still two-fifths
owned by Mr. Falcone, it retains a few illiquid holdings, chiefly a 48
percent stake in LightSquared, a wireless spectrum owner potentially
worth billions, and a hotel-casino-golf resort in Vietnam.
Mr.
Falcone’s first comeback attempt was a public company shell he bought
through his hedge fund in 2009 and renamed
Harbinger Group, now known as HRG
Group.
With Mr.
Falcone as chief executive, HRG grew to a market value of $2.7 billion
with debt of $1.4 billion, partly by issuing new shares in exchange
for assets from the hedge fund. For example, it acquired a majority
stake in Spectrum Brands, which sells Black & Decker appliances and
George Foreman grills.
But the
S.E.C. charges and Harbinger’s losses put a cloud over HRG stock.
An article in Barron’s noted that
the shares traded at a discount to its net asset value, “partly
reflecting investor uneasiness with Falcone.”
With the
hedge fund selling HRG stock to meet redemptions, two outside
investors,
Leucadia National and
Fortress Investment Group, built
positions totaling 31 percent by mid-2014, gaining three board seats.
And that paved the way for Mr. Falcone’s departure.
In early
2014, HRG invested about $20 million for a 40 percent stake in HC2 as
a new but smaller Falcone acquisition platform with a broader mandate
that gave him more autonomy. Mr. Falcone said HRG directors “had lived
through the issues with the S.E.C. and I think it created a little bit
of tension and uneasiness with the board.” In order to expand HRG in
the wider way he envisions for HC2, “I really would have had to push
and battle.”
So Mr.
Falcone turned his focus to HC2. Last November, he stepped down as
HRG’s chief executive, reaping a $40 million exit payout. During his
tenure, HRG stock’s price gain of 78 percent trailed broader market
averages. The Standard & Poor’s 500-stock index, for example, gained
135 percent over the same period.
HC2 is now
the stage for Falcone comeback No. 2.
Last year,
the company paid $260 million for Global Marine Systems, an undersea
cable installer, and $85 million for the Schuff International steel
fabrication business.
Those
companies are meant to generate cash to help fund the venture-stage
growth bets. One such bet is American Natural Gas, a small chain of 10
truck fueling stations that sell compressed
natural gas instead of diesel
fuel.
“We
probably started off a little bit slow,” Mr. Falcone told investors in
August, referring to American Natural Gas. “We’re going to make a big
push in that area over the next six to 12 months.”
But the
risks can be seen in the steep 11 percent interest rate that HC2 is
paying on its $300 million in junk-bond debt, and in its roller
coaster stock action.
Earlier
this year, with HC2 stock still rising, Mr. Falcone sought to buy MCG
Capital — a middle-market commercial finance company whose cash assets
could have doubled HC2’s size — in a bid of mostly stock. MCG,
however, spurned Mr. Falcone, choosing another suitor and raising the
prospect of potential regulatory hurdles because of the S.E.C. case
against him.
Just then,
with the takeover battle in full swing, HRG signaled that it had begun
selling HC2 shares, sending the stock price sharply lower and cutting
the value of the bid for MCG. As the stock fell, Mr. Falcone said the
question arose why he wasn’t buying. On Aug. 14, MCG holders
decisively rejected the Falcone bid.
Although
Mr. Falcone had been blocked from buying HC2 shares just then by a
pre-earnings trading blackout, the issue of his HC2 stock ownership
remains valid. Most of his holdings are in options, which he can earn
under a performance formula tied to bolstering the company’s net-asset
value.
While the latest HC2 proxy lists him as owning
2.4 million shares for an 8.9 percent stake, most of that count
represents options he has not exercised. As of April 15, he owned only
565,951 shares outright, currently worth just $4.2 million.
That means
Mr. Falcone gains more if the stock rises than he loses if it drops.
Trying to build HC2 quickly to reap such rewards could heighten the
risk for other investors. But Mr. Frischer, the Seattle investor, said
the upside from HC2’s speculative holdings “could be very high.”
Explaining
his small stake in HC2, Mr. Falcone said his money “is tied up,” with
about one-third in his personal real estate holdings — estimated to be
worth a few hundred million dollars — and much of the rest in his
remaining stakes in the hedge fund and HRG. As a concession to his
shrunken empire, this year he sold his minority stake in the Minnesota
Wild professional hockey team.
Mr.
Falcone insists he is not going to rush things at HC2, calling the
recent stock-price decline “a blip.”
“From a
logic perspective, I have to take my time, I can’t be flippant,” he
said. “I’m looking to build value between now and 10 years from now.
It doesn’t happen overnight.”
A version of this article appears in print on September 4, 2015, on page B1
of the New York edition with the headline: Former Head of Vast Fund Tries
3rd Act..
Copyright 2015
The New York Times Company |
