By Irwin Speizer
When it comes to investments, Mark Nordlicht is decidedly agnostic. As the founder, chairman and chief investment officer of Platinum Partners, he follows his profit instincts wherever they lead: lending money to explore seemingly dry oil and gas wells in Texas, making loans for advance settlement payments to plaintiffs in personal injury claims, providing financing to a company that makes handheld bomb-detection devices, investing in a business that plans to put convenience stores inside Chinese post offices.
|Uri Landesman (photographs by Mark Hartman|
Launched in 2003, Platinum manages about $930 million and employs a multistrategy format, with an emphasis on multi. Nordlicht takes two or three pitches each week as he scours the globe, looking for opportunities that others might miss. Platinum’s flagship, the Value Arbitrage Fund, has about 40% of its assets tied up in unusual investments that are often hard to value or quickly convert into cash, and he has been working to raise the level of liquidity in the portfolio.
Just explaining what these investments are and how they work can be a challenge. “Out-of-the-box strategies are what give you an edge,” Nordlicht says. “But sometimes you start to think, ‘Am I crazy? Why am I the only one seeing this?’”
For Platinum investors, the proof is in the performance. The $570 million Value Arbitrage Fund posted net annualized returns of 20.98% from inception in January 2003 through the end of March, with a Sharpe ratio of 3.26.
It made money every year, including the market meltdown year of 2008, when it posted a 4.37% gain. That year, the AR Multistrategy Index dropped 12.82% while the AR Composite Index fell 6.87%.The fund rose approximately 8.85% year-to-date through March. It posted a 19.27% gain in 2010, compared with an 8.91% rise in the AR Multistrategy Index and a 9.15% increase in the AR Composite Index. The Value Arbitrage Fund was the AR multistrategy fund of the year in 2008, and it has steadily moved up in rank on the Barron’s Hedge Fund 100 list, from number 26 in 2008 to number 16 in 2010.
Nordlicht, 42, has had his share of setbacks as well as triumphs during his Wall Street career. When the redemption run that swept the hedge fund industry hit Platinum in 2008, Nordlicht restricted withdrawals to protect some of his more illiquid investments by setting up a special purpose vehicle—a move that irked some of his investors. In addition, several lawsuits over the years have involved Platinum and/or Nordlicht and various of his companies and investments.
“Perhaps it is inevitable when you are as opportunistic as we are that you get into some scrapes here and there,” Nordlicht says.
In one legal battle, Platinum is trying to recover money from an investment in Florida that turned out to be one of the largest Ponzi schemes in the state’s history. In that deal, Platinum loaned money to Banyon Investments of Florida and its related companies starting in 2008 to finance advance payments for structured settlements in a program run by a Florida lawyer. The lawyer, Scott Rothstein, was charged as the architect of the Ponzi scheme and was sentenced in federal court to 50 years in prison. Platinum got repaid some of that money before the Ponzi scheme collapsed.
The Banyon-Rothstein deal is now mired in a tangle of legal cases and claims that Nordlicht believes he can finesse to Platinum’s advantage. Nordlicht, who prides himself on his ability to separate unusual investment opportunities from dreck, argues that Platinum got suckered in by Rothstein’s bank, TD Bank.
He contends that officials in the bank’s Florida office were in league with Rothstein and presented data and documents that appeared to support Rothstein’s business claims, and thus TD Bank should be liable for some of Platinum’s losses. In a statement, TD Bank said it cannot discuss the case but that it believes and expects the facts to prove that it is not liable for Rothstein’s acts. Platinum is also subject to a lawsuit by the bankruptcy trustee, which argues that Nordlicht and Platinum kept quiet after discovering problems in order to continue getting money out before the scheme collapsed.
Still, Nordlicht says he structured the investment with so much downside protection that Platinum should be in line for a good recovery as remaining assets are distributed and its lawsuit plays out—perhaps enough to break even. Nordlicht also notes that while he got caught by surprise in the Banyon investment, he took a pass on a Minnesota deal run by Tom Petters that was supposed to finance merchandise purchases for distribution to big-box retailers but subsequently was revealed to be another large Ponzi scheme.
For those who know and have kept track of Nordlicht, his performance in hazardous situations, whether the economic meltdown of 2008 or the Florida Ponzi, says as much about him and his firm as his ability to post double-digit returns in good years.
“His approach is to protect the downside while preserving the upside,” says Dov Wiener, a managing director at Casimir Capital, an investment bank that has structured deals involving Platinum Partners. “He does a tremendous job with that.”
Uri Landesman, who joined Platinum Partners as president in April 2010, expands on that idea, saying that what sets the firm apart is Nordlicht’s ability to uncover unusual opportunities and then structure them so that Platinum is in a strong position even if the deal tanks. While Platinum runs some traditional strategies, including a long/short equity book, the unusual deals provide the extra boost to profits, Landesman says.
“That is the most important part of our returns,” he says. “To suggest that it is something other than Mark’s talent is foolish. Clearly, he is the driving force of Platinum Partners. You are not going to develop a system that will be able to outperform Mark.” Nordlicht’s personal touch may be the key ingredient for Platinum, but he has plenty of help executing the strategies. Platinum has a staff of 35 investment professionals and another 20 operations personnel. When he gets a pitch that he likes, Nordlicht will sometimes hire the pitchman to run the investment. As a result, the investment staff can change as he adds and drops individual strategies. The firm also uses a third-party company, Sterling Valuations Group, to provide an extra check on pricing Platinum’s sometimes hard to value investments.
At the moment, the Value Arbitrage Fund runs what the firm describes as 10 specific investment strategies grouped into three categories: market neutral, event driven and collateralized debt. Collateralized debt holds the biggest share at 38% and is subdivided into asset-based convertible debt; a commodity arbitrage program that focuses on financing debt investments in oil and gas; and receivables financing, with a heavy emphasis on buying discounted debt of health care–related receivables. Market neutral accounts for 33% of investments and includes a long/short fundamental equity book, a small quantitative effort and three arbitrage programs (Asian convertibles, energy location arbitrage bets on the price of gas at individual delivery points, and energy volatility that bets on spreads in options and futures). Event driven takes up the remaining 29% of assets and has two components: one focused on investments in Asia and another on health care.
The operation is managed out of the firm’s offices on the fourth floor of Carnegie Hall Tower in midtown Manhattan, with the help of some firm associates in Asia. Nordlicht and Landesman acknowledge that the eclectic mix of strategies can be a turnoff to staid institutional investors and pension funds that must be able to explain and quantify the risk of their investments to boards and committees. But the same complexity that can confound institutional investors serves as a magnet for certain family offices and wealthy individuals. David Schick, a New York inventor and entrepreneur who started and sold a dental-device company, invests with Platinum and says he appreciates Nordlicht’s style.
“He has an incredible appetite for dealing with very complex long-term situations and being able to sniff out where the profit is,” Schick says. “In some respects, the worse something looks, the more Mark is interested in it.”
One result of the unusual basket of investments that make up Platinum’s portfolios is that returns tend to be especially uncorrelated to other markets or investors. Lots of hedge funds tout their ability to produce returns that strive to be uncorrelated to debt or equity markets. But Nordlicht can be so far out of the Wall Street mainstream that he is sometimes flying solo in the investments he picks. A recent example of how Nordlicht operates is Black Elk Energy, a Houston company that buys up old oil and gas wells in an area from Oklahoma to the Gulf of Mexico. The company’s president, chief executive and founder is an oil industry veteran named John Hoffman, who came up with the idea of persuading oil and gas companies with wells that were petering out to sell them at a deep discount—often little more than the cost required to decommission the wells. He then developed ways to locate and drill for additional reserves in those wells.
Black Elk’s key early investor was the New York hedge fund operator Plainfield Asset Management. But when Plainfield got hammered in 2008 by the economic collapse and a furious redemption run, Black Elk’s money pipeline dried up, and the company needed a loan to keep operating. When Hoffman finally arrived at Carnegie Hall Tower to pitch his idea to Platinum in 2008, he was getting desperate. Nordlicht liked the business plan almost as much as he appreciated Hoffman’s predicament. Nordlicht agreed to loan money to Black Elk in exchange for generous rights to equity in the company.
Platinum first loaned Black Elk about $10 million in 2009; the loan eventually grew to $63 million and has since been repaid. In exchange, Platinum wound up owning 67.5% of the equity in the company. Black Elk’s wells quickly started producing, and by early 2011, the company was worth $550 million to $600 million, based on a common oil and gas industry valuation method.
That could make Platinum’s investment worth more than six times what it loaned, although Platinum remains cautious on the ultimate payoff, marking the investment on its books at about 20% of the industry valuation.
Landesman says the Black Elk deal demonstrates two of Platinum’s principles in its more esoteric investments: finding opportunities that others pass up, and then using the promise of a quick decision to extract highly favorable terms. “One of the things we are able to bring to the table is the ability to review and pass muster much quicker than traditional lenders,” Landesman says. “People come to us and are willing to pay more for money because of our ability to turn around requests so quickly.”
Platinum is hoping for another big payout in China through an investment in a company called China Horizon Investments Group. China Horizon negotiated a joint venture deal with China Post, the national mail service, to run convenience stores inside or next door to post offices. China Post already operates some basic stores at its facilities, including thousands of rural outlets that sell fertilizer to farmers. The ambitious long-term plan is to open as many as 300,000 new stores across China in a more modern format stocked with name-brand convenience items such as toothpaste, peanut oil and salt. The plans are grandiose, but there is no guarantee that the Chinese government and China Post won’t decide to change course or management of the effort.
Nordlicht decided the potential upside was worth the risk and invested $4 million with China Horizon. Platinum now owns about 40% of the company. The project is advancing slowly and faces a number of logistical and bureaucratic obstacles. But if it works out, the payoff could be huge. “This is a tremendous opportunity,” Nordlicht says. “But there is definitely a lot of execution risk. So either it hits very well or it will be a small loss for us.”
That philosophy guides investment decisions Nordlicht makes when he shops for unusual opportunities. He expects some of them won’t perform up to expectations or will fail entirely. But he also anticipates hitting enough home runs to more than make up for it. And while he dabbles in unusual and sometimes exotic investments, he keeps some traditional investment programs running in the background, operated by other professional managers.
Those who know Nordlicht say he has a natural talent for spotting, vetting and negotiating deals. Yet Nordlicht very nearly became a lawyer instead of a Wall Street trader and investment manager.
Nordlicht grew up on Long Island, in New York. His mother was a part-time social worker, and his father was a successful commodity broker and trader who at one point was a major seat holder on Nymex. His father got involved in a tax-loss scheme and pleaded guilty in 1978 to a federal charge of conspiracy to create $27 million in fraudulent tax losses through the manipulation of crude oil futures: He paid a $10,000 fine. Mark Nordlicht was a boy at the time and says he was unaware of the case until decades later.
As he grew up, the legacy of his father’s brush with investment regulators didn’t deter the younger Nordlicht from pursuing a similar career path on Wall Street. Nordlicht today regards his father as a key influence in his life and career. He views his father as a savvy investor who knew how to uncover value and shield against losses, and whose character should not be judged by a single past event. “Anyone who has ever had any kind of business or personal interaction with my father will tell you just about unanimously that he is a gem—a person of utmost integrity and character,” Nordlicht says.
Nordlicht interned in an oil commodity trading shop while in school. After graduating from Yeshiva University in New York in 1989 with a bachelor’s degree in philosophy, he briefly considered continuing to law school. Nordlicht decided that he could make more money in less time working on Wall Street. His father still had a seat on the New York Cotton Exchange that the younger Nordlicht borrowed to begin trading options, starting with $11,000 he had saved from his bar mitzvah presents. At 22, he was the youngest trader in the pits at the time.
Nordlicht did well enough that he formed Northern Lights Trading in 1991 as a proprietary trading company, which he built into a firm with a half dozen other options traders in cotton, coffee, natural gas, crude oil, gold and silver. Even with that, Nordlicht found himself with enough spare time to branch out. He joined two friends from school who had become lawyers and launched West End Capital in 1997 as a private equity vehicle.
Operating out of the World Trade Center, West End focused on technology companies in the late ’90s boom that ran into financial difficulties. West End grew into a company that did individual partnership deals and managed about $150 million in investor assets.
“Both West End and Northern Lights were instrumental in developing my philosophy for Platinum’s style because I developed a fondness for strategies with an edge,” Nordlicht says.
Those two businesses still weren’t enough for Nordlicht, so he launched Optionable in 2000, an electronic trading platform for options. He merged that company with a brokerage shop called Orion, which took over management of the combined operation, while he stepped back as nonexecutive chairman.
The company went public, and Nordlicht says he envisioned it gaining enough traction to sell out to a bigger brokerage house at a profit.
Nordlicht wound down or eased out of his early businesses over the years. As West End took off, he closed Northern Lights in 2001. When West End’s prospects dimmed after the tech bubble burst, he and his partners began winding down the operation; Nordlicht exited at the start of 2002, and his partners continued for a while longer before moving on.
Optionable is another story. The company went through a rapid rise, becoming the major clearinghouse for natural gas options and attracting a 20% investment partner in Nymex.
At its height, Optionable reached close to $500 million in value as its stock neared $10 a share. Then the company collapsed in a scandal over its trading practices. In its most recent Securities and Exchange Commission filings, Optionable lists no operating revenue.
Optionable notes in those filings that both the Commodity Futures Trading Commission and the SEC lodged complaints against company executives alleging fraudulent trading practices. Nordlicht was never named in those cases. But he was named as a defendant among a longer list of former company officials in two civil lawsuits alleging fraud, one by Nymex and another by the company that was Optionable’s largest customer, Bank of Montreal. Nordlicht points out that the company had new management at the time the scandal broke and says he had no part in running the company then. Nordlicht still shows up in SEC filings as owning 4 million shares of Optionable, representing 8.5% of the company, although those shares have been trading at one to two cents.
“All in all, it was really an eye opener to see a company I had founded go from wild success to collapse overnight amid scandal,” Nordlicht says. “It definitely reinforced my philosophy as to how we lend at Platinum, which is lending against hard- asset collateral, giving very little weight to intellectual property.”
Nordlicht also decided it helps to have a diverse mix of strategies, so that when one strategy goes cold, another might get hot. With that in mind, he started Platinum Partners and launched the Value Arbitrage Fund in January 2003. The Value Arbitrage Fund began with about $30 million. By the end of the year, the fund had grown to $59 million and returned a net 17.33%.
Nordlicht hired a quant and started running energy arbitrage strategies. He began loaning money to a variety of businesses, usually employing convertible debt and warrants. His big payoffs often came when he was able to cash out his equity at a windfall price.
Value Arbitrage returned 12.97% in 2004, 16.94% in 2005, 23.94% in 2006 and a record 53.25% in 2007. Assets in the fund went from $102 million in 2005 to $568 million in 2007 and grew to $700 million in 2007 before Lehman Brothers collapsed in September 2008, sending markets into free fall and giving the fund its worst month ever, losing 3.41%. By the end of 2008, the fund was down to $409 million as redemptions drained nearly 40% of its assets.
Those who know Nordlicht describe him as down-to-earth and easy to get along with, always eager to help a friend. But one thing that sets him off is losing money.
“I am a miserable person to be around if we underperform one month,” Nordlicht says. “I take the competitiveness to heart.”
The S&P 500 lost 38% in 2008, but Nordlicht still had enough tricks in his portfolio for the fund to end the year with a 4.37% gain. That profit in the face of adversity wasn’t enough to prevent a redemption run. Nordlicht had a majority of the portfolio tied up in loans and deals that were exceptionally difficult to unwind, so he collected them into a special purpose vehicle that prevented investors from getting their money out quickly.
“To sell out at fire sale made no sense,” Nordlicht says. “So we liquidated over time as money came due. Obviously, to a lot of people who needed money in December 2008, it was not great. We were probably in the penalty box with investors for a year.”
Nordlicht notes that the assets he placed in the special purpose vehicle wound up performing well, earning what he estimated was approximately a 15% annualized return. But the fact that investors at the time were restricted from timely redemptions on nearly 60% of their Platinum assets soured many of them on the firm.
Platinum bounced back in 2009, with the fund gaining 20.86% and assets rising to $435 million. Nordlicht says he has worked since 2008 to improve liquidity, aiming for a portfolio mix that, even with the unusual deals he structures, would be about 70% liquid at any given time. In a nod to the investor outcry, Platinum has waived the right to set up special purpose vehicles in the future.
“We feel very strongly that we are not going to have another liquidity situation that we couldn’t meet naturally,” Nordlicht says. “And we know our customer base very well now. We are very confident that 75% of the money is extremely sticky. It would take a worse event than 2008 [to cause a similar run].”
Still, the effort to make Platinum more liquid didn’t stop Nordlicht from pursuing the kinds of deals he relished. In December 2008, Platinum loaned $5.6 million to Implant Sciences, a Wilmington, Mass., company that makes handheld explosives-detection devices. The loan carried an 11% interest rate and could be converted to equity at 26 cents a share. Platinum also got a five-year warrant to purchase another 1 million shares at the same price. The company won a contract with China for its subway systems and another with India’s Ministry of Defence, and the stock shot up to 90 cents last December, although it has since drifted back to around 50 cents.
In another deal begun in 2008, Platinum loaned $7 million to Neoprobe of Dublin, Ohio, an emerging company that makes biomedical products and devices for use in the treatment of cancer. The loan was in the form of senior secured convertible debt with warrants, and as the company developed its products, Platinum provided additional funding with similar equity rights. As a result, Platinum now owns about 40% of the company. Neoprobe stock, which was trading at around 50 cents in 2008, hit $4 this February.
During the tough times in 2008, Nordlicht could take some solace by commiserating with friends from his temple and from others in the Orthodox Jewish community. Nordlicht views his faith as a key part of his life, and it guides much of his philanthropic work, including involvement in organizations benefiting Israel and Yeshiva University.
Nordlicht also had developed a close bond with another member of his temple, Wall Street veteran Uri Landesman. Their families socialized and vacationed together. When Nordlicht was wrestling with a management issue, he took to calling Landesman for advice.
Landesman, 49, graduated from Yeshiva University in 1985 with a bachelor’s degree in psychology, landing his first job as a materials and energy analyst with Sanford C. Bernstein & Co. After holding several other analyst and portfolio manager roles at firms including J.P. Morgan and Federated Investments, Landesman joined ING Investment Management in 2002, where he oversaw $3.5 billion in assets. Landesman says he was intrigued by Nordlicht’s investment style, which encompassed so much more variety than the long equity strategies he worked with. Nordlicht, meanwhile, appreciated the connections Landesman had developed with pension funds and institutional investors, as well as his operational and risk management skills. In 2010 he approached Landesman about joining Platinum.
“The opportunity to branch out beyond equities and to not be long only, and the opportunity to learn nonequity areas from Mark and to participate alongside someone with an impressive career—it was too attractive to pass up,” Landesman says.
He joined Platinum as president in April 2010 and quickly became a spokesperson for the firm, showing up on television business programs, discussing markets and touting Platinum holdings. Nordlicht says he is looking to allow Landesman to spend more time scouting and running investment opportunities. Investment letters are now cosigned “Mark & Uri.”
While Platinum continues to look for new assets, it anticipates closing the Value Arbitrage Fund to new investors before it exceeds $700 million.
Still, Landesman says he can envision a much larger asset base for Platinum spread among new funds, and he doesn’t rule out managing up to $3 billion—provided Nordlicht can continue to produce the same level of returns. Part of Landesman’s job is to convince pensions and institutions that Platinum is worth a look. Nordlicht, meanwhile, plans to continue taking pitches in his Carnegie Hall Tower office as he searches for deals.
“I have been pitched the wackiest strategies,” Nordlicht says. “The overwhelming majority will not be for us. But you have to listen to everything. You don’t know which one will be the next gem.”