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For @Michael Dell (Trades, Portfolio), making money seemed the least of his challenges. From his high school days onward, he scored success after success. The biggest of those successes was eliminating the middleman in retail personal computer sales; it not only changed Dell’s life, but the whole PC industry.  He continued to show his mental acuity by forming a family office hedge fund to manage the money he was making, and to allow the fund managers to run the fund without his micro-management. This is how the ultra-successful founder of the Dell Computer Corp. put his wealth to work. Who is Dell? Born in 1965, Dell grew up in Houston, Texas, the son of a stockbroker and an orthodontist, and received his first computer at age 15. The young Dell was entrepreneurial and a quick study, as demonstrated in his high school jobs. Then, famously became involved in the computer business while in college, assembling and selling upgrade kits for then-nascent personal computers (PC) from his dorm room. ABG 30-Year Financial Data The intrinsic value of ABG Peter Lynch Chart of ABG In the early 1980s, he realized he would enjoy a strong competitive advantage if the retail channel could be eliminated. Dell launched a company that was to become Dell Computer Corp. in 1984, in a condo suite where employees assembled computers and kits, and sold directly to consumers. Dell says the staff consisted of “three guys with screwdrivers sitting at six-foot tables.” In 1996, he began selling computers over the internet and in his 1999 book reported that sales soon grew to more than a million dollars a day. With all that cash to manage, Dell started MSD Capital L.P. in 1998. Its mandate was to manage his family’s investments, and it now has done so for nearly 20 years. Dell is not involved in managing investments; those decisions are made by hired managers. It seems Dell made the right decision by sticking to his circle of competence in the computer industry, and leaving the outside investments to others. The returns he brings in from his computer business undoubtedly outperform the results he might expect to gain from managing investments. What is MSD Capital? The entity filing a Form ADV Part 2A is MSD Partners L.P., which advises MSD Capital L.P. The firm is managed by Glenn R. Fuhrman and John C. Phelan. At the MSD website, it is noted MSD Partners was founded in 2009 by the partners of MSD Capital (read Dell), which in turn exclusively manages the assets of Michael S. Dell. MSD Partners operates six fund structures, each of which pursues an individual strategy within a strategic framework: Credit Opportunity Funds. Private Credit Opportunity Funds. European Opportunity Funds. Torchlight Funds. India Funds. Mortgage Funds. There are also several subsidiaries, including MSD Capital in Europe. As of Sept. 29, the firm managed $7.4 billion of discretionary assets under management, while GuruFocus reports $237 million of that total is invested in equities. This is effectively a hedge fund, one that started as a family office and continues to focus on that role. At almost $7.5 billion, it is also one of the biggest of family offices. Strategies MSD Partners lists its objective as aiming to make investments that produce “attractive risk-adjusted returns over the long-term.” To get, or try to get, those returns, it uses multidisciplinary, analytical frameworks in hopes of producing “thoughtful and robust” investment ideas. Behind those ideas is an “intense curiosity” about the “underlying truths that govern financial markets and economic behavior.” They acknowledge such truths may run against the grain, but insist their discipline as independent thinkers will help them find those truths and establish their long-term success. In tactical terms, the managers use the six funds listed above to seek out potential deals, according to the Form ADV Part 2A: The Credit Opportunity Funds focus on distressed, stressed, special situation and event-driven value opportunities. This includes securities selling for less than intrinsic value because of lack or liquidity or lack of access to capital. The mandate is flexible, allowing the firm to invest in bank debt, bonds, trade claims and other types of loans and equities. The Private Credit Opportunities Fund invests in loans, structured debts and debt-like securities. This involves private loans to companies,as well as special situations where companies in out-of-favor or cyclical conditions require funding. Downside risk is at the core of decisions in this fund, and they have a medium- to long-term focus. European Opportunity Funds looks for mispriced investments in Europe, again looking for securities trading at a “significant discount” to their appraised value. They invest in various types of securities, including bank debt, bonds, hybrid securities and equities. Here, too, they favor special situations such as financial restructurings, litigation claims and breakups. Torchlight Funds aims to generate attractive, long-term returns without excessive risk. The way it does this is by buying financial instruments at less than their current liquidation value and that are expected to produce significant internal rates of return over the long term. The fund may invest in any type of security, anywhere in the world, but prefers “complex and misunderstood situations” in the domestic market. India Funds, as the name suggests, looks for opportunities among companies that have some connection to India. That includes companies registered in India, have securities trading in India and even companies outside India that sell goods or services in that country. Mortgage Funds was created to acquire and hold a “direct limited interest in Partners in Prophet, Ltd.” Partners specializes in buying, holding and disposing of mortgage-backed securities. The securities include those backed by U.S. government agencies and those backed by non-government agencies. In 2015 and 2016, MSD’s financial savvy was likely quite helpful, as Dell set out to take over the much larger storage giant EMC Corp. (NYSE:EMC) and create what was called an “End-to-End Technology Company.” It was a complex, huge, $67 billion deal that brought together the Dell Co., EMC and VMware (NYSE:VMW), the latter majority-owned and controlled by EMC, MSD Capital and others. Dell himself, MSD Capital and two other firms contributed $4.25 billion in new cash to the transaction. Although MSD is a global macro fund, it, on the equities side at least, shows many signs of being built on a value investing framework. Phrases such as “intrinsic value” and “mispriced securities” remind us they are driven by currently underperforming stocks and other securities. Holdings Dell and MSD hold a highly concentrated equities portfolio, one that is made up of just five stocks: Asbury Automotive Group Inc. (NYSE:ABG): 48.82% (auto dealerships) Wesco Aircraft Holdings Inc. (NYSE:WAIR): 17.9% (industrial distribution) DineEquity Inc. (NYSE:DIN): 13.41% (restaurant franchiser) PVH Corp. (NYSE:PVH): 12.97% (apparel – design, manufacturing, marketing) Townsquare Media Inc. Class A (NYSE:TSQ): 6.9% (entertainment and media) As with most hedge funds, sorting out assets is complicated. Dell, EMC and VMware do not show up on this list, presumably because of the nature of the structural relationships among these players. The Dell computer company went private in 2013, and theoretically should not have to do the usual filings. However, it must report some information and data publicly because EMC and VMware continue to trade as public companies. No FAANGs in this portfolio. Instead, it owns pieces of companies that provide the near necessities of life. Nothing spectacular expected, but they should grow with the economy and provide steady growth. Performance No public information on the returns of MSD Capital appear to be available. However, there are some interesting characteristics to the names in the portfolio: Asbury Automotive: ROE: 54.61%, P/E: 8.67. Wesco Aircraft: ROE: -29.48, P/E: 9.13. DineEquity: ROE: -245.19%, P/E: not listed PVH Corp: ROE: 10.68% P/E: 20.23 Townsquare Media: ROE: 4.99%, P/E: 11.85%. With their positive and negative returns on equity (ROE) and all but one of them with a price-earnings (P/E) ratio of less than 15, these appear, on the surface at least, to be undervalued stocks. Notably, on the ROE side, there is one high and one very low position. Conclusion While we do not know whether Dell himself was involved in setting the strategic direction of MSD Capital, we can see it combines the hedge fund model with many value investing principles. Like many other hedge funds, it employs a global macro approach, which basically means any type of security in any global market. The value investing side means looking for securities priced below their intrinsic value or similar criteria. For value investors, there may be some lessons, but, with the usual opaqueness of a hedge fund, investors cannot determine what kinds of results have been produced by this strategy.

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