Behind Paul Singer’s Fearsome Reputation

Widely perceived as tough, aggressive, scary-smart, and fiercely unyielding, Singer, seventy-three, is often described in print as a combative Wall street investor and activist who has faced down nations, from Argentina and Peru to the Republic of Congo, to be paid his due on Elliott Management’s investments on defaulted sovereigns – once even having the argentine navy’s tall ship impounded to press his claims. Nor do either a target’s size or its reputation seem to daunt Elliott Management. In the spring of 2017, Elliott went public with demands that Australia’s BHP, the world’s largest mining company, spin off its U.S. oil assets. The Australians grudgingly complied, announcing they would seek to exit their U.S. shale ventures. Late that summer, Singer thwarted Warren Buffett’s Berkshire Hathaway’s planned takeover of a long-troubled Texas utility, Oncor Electric Delivery Co., by demanding his bid be sweetened by at least $300 million. Singer’s fund had picked up a slug of Oncor’s junior debt in bankruptcy and that sizeable increase in the bid would have put it in the money. When the famously value-conscious Berkshire Hathaway chairman refused to budge, san Diego-based Sempra energy swooped in with a bid of $9.45 billion for 100 percent of Oncor’s parent, energy Future Holdings Corp, which amounted to $450 million more than Buffett’s offer. (Energy Future, the erstwhile TXU Corp., was subjected to a spectacularly ill-timed leveraged buyout – at $45 billion, the largest ever – in 2007 and finally emerged from its long-running bankruptcy when the Sempra deal was completed in March 2018.)

Singer’s Elliott Management is also credited as the activist fund responsible for driving EMC Corp. into the arms of Dell in 2016, creating the largest tech merger in history. It has likewise played the activist role in a long line of liquidity events in technology companies, including Mentor Graphics, LifeLock, Polycom, Compuware, Informatica, Novell, Riverbed, and Qlik Technologies, among others. In the tech sector, says Singer, Elliott has frequently “found itself knocking on an open door.” Managements were relieved, in other words, in one way or another, to find Singer’s fund coming up with solutions to issues that may have seemed intractable from the inside. Elliott Management’s activism has likewise reshaped industries outside of the tech sector. Its sudden appearance as a large and dissatisfied shareholder in Cabela’s, in 2015, for instance, ended up driving the outdoor outfitter’s merger with rival Bass Pro shops a year later.

Shortly before the financial crisis, in early 2007, Singer warned the G-7 finance ministers – to no avail – about the critical vulnerability of major banks. During the Obama administration’s bailout of Detroit, it was Singer’s last-minute intervention in tense negotiations with the U.S. Treasury’s auto task force that permitted crucial General Motors supplier Delphi automotive to emerge from bankruptcy and allowed GM to reopen plants. More recently, after the Brexit vote hammered the value of the pound, Elliott Management was one of several large shareholders that succeeded in convincing Anheuser-Busch to increase its original cash bid for SABMiller to compensate shareholders for the decline in the British currency.

Singer is crystal clear on the principle that has guided his career. “I don’t want to lose money, ever, with no excuses. My goal with investors is a combination of underpromising and overdelivering whenever I can. And I try not to be benchmarked. We just try to make a moderate return – as high as possible – given that our goal is not to lose money.” Elliott’s performance over its forty-year history offers abundant evidence that he’s rarely failed to sail over that bar. News reports cite his fund’s track record of consistent returns (around 13.5 percent annually, on average), including only two down years (1998 and 2008) out of more than forty.

Singer’s firm, Elliott Management (Elliott is his middle name), now employs more than four hundred people in five cities: Manhattan, London, Hong Kong, Tokyo, and Menlo Park. But when founded in 1977, it was decidedly a party of one. Raised in Teaneck, New Jersey, one of three children of a Manhattan pharmacist and a homemaker, Singer grew up thinking he’d become “a courtroom lawyer, someone like Perry Mason.” Pursuing that goal, he picked up a BS in psychology in 1966 from the University of Rochester, and then a JD in 1969 from Harvard.

Finance didn’t even enter his thoughts, Singer says, until after he was admitted to Harvard Law and his proud and excited father told him, “You have to learn how to invest.” He was coming of age, of course, in the eye of Wall Street’s go-go years. Singer continues, “So he and I started trading stocks together. I was so ‘clever’ that I was shorting and buying on margin and trading at the same time I was reading about investing. I was the kind of person who went to the library and took out all the books on investing. I read everything written on cycles in the late 1960s. Then I started reading Barron’s. It became my bible and my rabbi was Alan Abelson. ‘A battle of wits between unarmed opponents,’ is an Abelson line I use a lot.” Yet all of Singer’s reading wasn’t getting him very far. “Basically, my dad and I found every conceivable way to lose money, on the long side, the short side. It was pathetic. But what that engendered was a deep desire to figure it out.”

Asked to reflect on what has contributed the most to his investment success in the years since, Singer says, “I actually think the technical skills are secondary. The important stuff is creativity and a little intelligence. You have to be good at numbers and have the ability to analyze. The legal background was good – really important. As a lawyer, you’re supposed to be able to read complicated documents, analyze complicated situations, learn about new things your client is doing, figure it out, and drill down to the essence. As an investor, you need tenacity, resilience. Everybody makes mistakes – sometimes big – and you have to have resilience to come back, survive, make decisions amid ambiguity.” What’s more, insists Singer, “You have to have character. You have to be trustworthy. If you’re trading with the street, you have to be straight. You often hear complaints about Wall Street. ‘Oh, Wall Street is terrible; its people are terrible.’ But I haven’t encountered another business or profession with higher ethics than I’ve seen in the street over my forty-year career.” another required attribute, says Singer, is “physical stamina – it’s not exactly the same as resilience, but it’s close. I mean, you have to keep doing it – and you have to have flexibility and subtlety to be able to work at it through different phases of your life.” The key, he continues, “for anyone in the business for a long time, no matter what he or she starts with – and most start with nothing – is to be able to apply the same rigor and effort when you’re not poor. Then, when you’re really not poor, you can’t let up, ever.”

The other critical variable behind his success, Singer explains, has been “risk management. It is something that needs to be central to every investor’s and every money manager’s consciousness. It’s so odd how most people don’t bother looking at history and asking, ‘Has anyone ever consistently gauged turning points, timed markets?’ sure, people can get it right once, twice. But then they’re dead the third time or the fourth time. I mean dead. I mean, buried.” Singer then points to the crash of 1987 – which his erstwhile guru, Marty Zweig, ironically enough, predicted on Lou Rukeyser’s TV show – to prove his point. “The strategy that had worked for us for ten years at that point was convertible bond arbitrage. Long the bond, short the stock – generate a big positive cash flow, a couple of bucks trading profit and you’re done. Not too much leverage – I’m not a big fan of leverage. It did the job, meaning that it produced consistent, modest returns, making money more or less all of the time. Then the crash of ’87 comes as a big surprise.” But, Singer emphasizes, “I survived the crash by being hedged.” and his commitment to his goal, not to lose money, was reinforced once more. A specialized form of arbitrage, convertible bond hedging was a quiet but lucrative backwater in the investment world when Singer started plying the trade in the mid-1970s. “The ownership of convertibles used to be 20 percent arbs and 80 percent institutions,” he recalls. “Then it shifted, and over a period of ten or fifteen years became the opposite. It became dominated by arbs, very competitive and very quantitative. People started using computers, the arbs were monetizing volatility, and pricing became completely ridiculous. Plus, there were two or three convertible hedging crashes in the last twenty years. So the business became very uninteresting to me.”

Luckily for Elliott’s clients, however, another business had begun to catch Singer’s eye – even during the heyday of convertible hedging – in the 1980s. It is called distressed investing – buying the securities, usually bonds, of distressed companies at bargain prices and holding on to profit via repricings, redemptions, or conversions into equity in a restructured entity. “I’m a curious guy, good at math,” he explains, “also a tell-me-a-story kind of guy. So I got involved in distressed investing early. There was Western Union’s liquidity crisis in ’84, I believe. I know that LTV’s Chapter 11 [at that time, the largest in history, with $4 billion in liabilities] was in the summer of ’86. [LTV Corp. was the second-largest steelmaker in the United States.] Then Public Service New Hampshire’s bankruptcy in ’88 was another opportunity, and there were others – El Paso Gas & Electric a year or two later.” In fact, Singer allows, “I don’t want to rank our businesses, but one of our strengths is distressed situations. The only problem is that it comes and goes. So it’s parenthetically interesting that there have been some intriguing distressed positions – Caesar’s restructuring, the entire energy sector – in recent years, despite the nine-year bull market. It’s actually weird to have this juxtaposition of a bull market with a real collapse in the securities of energy companies.” Don’t think Singer is complaining, however.

He observes, “It’s not an accident that when Mike Milken’s high- yield business created this pool of preprogrammed distressed stuff – this asset class, the Macy’s and the Federated, the Southmark – that it was arbs who mostly were the first to populate the world that Milken had helped create. Sure, there was a Marty Whitman, a curmudgeon who had been a lawyer for distressed clients, who became a distressed value investor [M.J. Whitman & Co. and Third Avenue Management]. But more typical were the guys at Angelo, Gordon & Co. and me – I mean, we were arbs – and it was an easy migration from arbitrage into distressed.”

Mario Gabelli is the founder, chairman, and CEO of Gabelli Asset Management Company Investors, an investment firm headquartered in Rye, New York.

Kate Welling is the founder of welling@weeden, a biweekly journal of investment news analysis and research. Kate has transformed welling@weeden into a secure web-based service, through which she delivers independent market intelligence, analysis and perspective to institutional investors and market pros.

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