The Morning Brief: Drapkin’s Casablanca Wants to Split Cliffs
A hedge fund headed by Wall Street veteran Donald Drapkin, Casablanca Capital, disclosed it owns 5.2 percent of Cliffs Natural Resources and is calling for the iron-ore miner to break itself into two parts international and domestic. Drapkin says in the filing that he and his team have met twice with executive chairman James Kirsch over the past six weeks and had a number of “constructive” follow-up conversations with him and senior members of the executive team. According to a letter sent to Kirsch, Drapkin argues that Cliffs’ international assets are directly exposed to the competitive “seaborne” iron-ore market and its “large Bloom Lake project” is still in the development stage while the Cliffs USA iron-ore assets “benefit from unique supply and demand characteristics and barriers to entry in the Great Lakes, generate strong cash flow and enjoy long-term contracts, which provide volume and price visibility.” He wants the company to convert the domestic operation to a master limited partnership, double its dividend, cut costs, divest assets and hire strategic and financial advisors to help evaluate and execute these measures. Drapkin points out that Cliffs’ stock has lost more than 80 percent of its value since its five-year high of $101.43 in mid-2011. Drapkin founded Casablanca Capital in 2010. He was previously a vice chairman of Lazard International and vice chairman of Ronald Pearlman’s MacAndrews & Forbes Holdings. Two years ago, Drapkin was awarded $16 million in a lawsuit filed against his one-time friend Pearlman.
This sounds like a case of the doctor who suddenly becomes the patient. A former lawyer for Stanley Druckenmiller, of Duquesne Capital and Soros’ Quantum Fund fame though now retired, is actually complaining about the terms of partnership agreements now that his client is an investor in other hedge funds. According to Bloomberg, Gerald Kerner, Druckenmiller’s lawyer since 1997, complained in a paper presented yesterday to a group of endowments and foundations that partnership agreements often leave investors responsible for legal fees when there is wrongdoing committed by fund employees and allow managers to simply suspend redemptions when they choose, also known as gates. Many prominent hedge funds were criticized for gates after the 2008 financial market meltdown. Kerner is now calling on investors to fight back and urge fund firms to change their contracts and refuse to invest in funds that won’t agree to change their terms. For those of you who don’t know, this is the definition of chutzpah.
Easy come, easy go. Deepak Narula’s Metacapital Mortgage Opportunities Fund finished last year flat after surging 41 percent in 2012. According to Reuters, he blamed the Federal Reserve’s changing stance on economic stimulus last year for the down performance. “After a dismal second quarter the fund was up nearly 10 percent in the second half of 2013 to finish the year in the black at +0.53 percent,” Narula reportedly told clients in a letter dated Jan. 24. Last year Narula’s success enabled him to earn $125 million, qualifying for the second team on Alpha’s rich list.
The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert related to how investment advisers recommend or place clients’ assets in alternative investments such as hedge funds, private equity funds or funds-of-private funds. “Money continues to flow into alternative investments,” said OCIE director Drew Bowden in a press release. “We thought it was important to assess advisers’ due diligence processes and to promote compliance with existing legal requirements, including the duty to ensure that such investments or recommendations are consistent with client objectives.” The alert notes that advisers these days are increasingly seeking more information and data directly from the managers of alternative investments, using third parties to supplement and validate information provided by managers and performing additional quantitative analysis and risk assessment. Shares of Apple slumped 8 percent to $506.50 after sales of iPhones came in below expectations and it provided disappointing guidance for company-wide results for the second fiscal quarter.