SREG Embraces ‘Buffett Style’ Investing thru New Affiliate

by / Wednesday, 07 March 2012 / Published in Blog

Schottenstein Capital Partners, LP was established in December, 2011 as an affiliate of Schottenstein Real Estate Group, LLC.  SCP operates as a Buy-Side Institutional Investment Firm specializing in DIRECT INVESTING in public Equity.

The Portfolio Manager of Schottenstein Capital Partners is Corey M. Schottenstein, who is coming over from Forefront Capital, a Multi-Strategy Manhattan Hedge Fund.

SCP’s style of Direct Investing for Public companies is very niche and one that not many people in the industry were familiar with prior to a $5 Billion PIPE Deal Warren Buffett made with Bank of America that got the whole Street talking about “Only the deal that Buffett can get.”  The difference between Buffett’s investment in Bank of America and the average Stock trader is Buffett was not purchasing the NYSE symbol BAC, but rather giving the company direct working capital in exchange for a newly formed, exclusive and separate security.  This security included preferred shares at a discounted price from what (NYSE: BAC) was trading at, a 6% annual dividend, and an additional 700 million FREE warrants that can be exercised at $7.14 for as long as 10 years.  The Warrants act similar to a call option, meaning for the next 10 years, Buffett has the option to buy BAC stock at $7.14 even if (NYSE: BAC) is trading at $50.

In summary, the key advantages of Buffett investing Directly into BAC VS buying the stock on the open market are:

  1. He gets Discounted Preferred stock so in case Bank of America continued to struggle, the option to re-negotiate or lower his cost basis by increasing the principal is always open.
  2. He gets the upside “Kicker” in the warrants which make the deal Home-run capable.
  3. He gets “paid while he waits” with a dividend 12X greater than the regular NYSE: BAC.

Portfolio Manager, Corey Schottenstein, takes this same strategy and executes Direct investments in Public companies with valuations between $100-500 million, whereby market inefficiencies are the greatest.  Schottenstein explains that because of this Direct investing style, SCP is not too correlated to volatile market movements or macroeconomic pressures like an accredited investor would be using the old fashioned way of having a Financial Advisor allocate them into a handful of common stock-picks.

“Most investors’ strategy thru a Financial Advisor is that of a “Buy & Hold” for large cap, dividend-paying stocks.  2008 proved that no mega Multi-national is “Recession-Proof,” says Schottenstein.

One of the main reasons the Industry of Financial Advisors is fading out is due to the erratic behavior of equity markets and high correlation among individual stocks. In 2011, the correlation in the S&P500 eclipsed 85%, an all-time high. Put another way, stocks moved with the daily direction of the market more than ever before, offering very few opportunities for “Stock picking.”

Schottenstein explains, “A lot of Financial Advisors try to sell their firm, service, & lower-risk styles, but the reality is all of the tools in the world can’t save you from a recession or allow you to outperform during a prosperity, but the investing style can.” Corey adds, “Our Goal is to alleviate Risk, but still maintain the upside potential of an asset.  I execute this by scaling out of the majority of the position at the time of effectiveness, and hold onto the warrants as a free gift.  By utilizing this strategy, we can then re-deploy the same cash into another deal, looking to build a “Treasure chest of warrants.”

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