Seth Klarman Eyes Commercial Real Estate, Letter to Baupost Investors Says

• Seth Klarman’s annual letter to investors in his $31 billion hedge fund is out.
• Klarman warns that rising interest rates and inflation pose “a real threat to financial markets.”
• The value investor is also looking for bargains, including in commercial properties affected by the pandemic.

Seth Klarman is concerned about the state of the world. That doesn’t mean he lacks optimism about his $31 billion hedge fund.

Klarman, the CEO of $31 billion fund Baupost, outlined the state of the U.S. earlier this month in a 25-page annual letter to investors. The picture he painted was of a socially divided, pandemic-weary nation plagued by get-rich-quick schemes and rising inflation.

An outspoken critic of Donald Trump, Klarman slammed the former president for his handling of the Jan. 6, 2021 attack on the US Capitol and denounced the “stories of incredible profits coming from startups, hot IPOs, meme stocks or cryptocurrencies and tokens.” were achieved.”

He also warned that the specter of rising inflation, coupled with the potential for “significantly higher” interest rates, “poses a real threat to financial markets.” Baupost “bought hedges that are profitable in such an environment,” he told investors in the letter, which Insider received a copy of.

But Klarman said the state of the world has also opened the door to buying opportunities for value-seeking investors like him, including in commercial real estate and “a host of inefficiencies in the customized personal loan and preferred stock markets.”

“Amidst a roar

bull market

with valuations puffy, one would think that Baupost would see a drought of investments that met our return and risk criteria,” Klarman wrote.

A value investor legend

Klarman’s reputation as

investment

Genie made him a billionaire and earned him the nickname “The Oracle of Boston,” a nod to Warren Buffett’s nickname, the “Oracle of Omaha.” Baupost, Klarman said in the letter, has only lost money four times in nearly 40 years.

But at a time when stocks like Tesla and GameStop have soared to dizzying heights, value investing has lost some of its luster as funds like Baupost are posting subpar returns compared to peers. In 2020, the company delivered a 5% return, compared to an 11% industry-average gain.

In his letter, Klarman blasted the notion that Baupost would be looking for easy returns in a seething market. “We’re definitely not trying to buy the hottest high-flyers hoping they’ll keep going up,” he said. “We strive for safety
Grow client equity over the next three to five years, not next week or next quarter.”

Baupost will share its 2021 returns and information on its top 10 holdings with investors in February, the letter said.

Among the 2021 investments that Baupost touted in the letter were its commercial real estate projects. The firm made a $380 million loan last January for quality condos in the Central Park Tower development in New York City, he wrote.

Baupost’s real estate group completed three additional lending opportunities last year, including a mezzanine loan for a condominium project in Austin, Texas. It has also invested in opportunities to build laboratory space, cold storage and data centers, he wrote.

The company also made a series of private equity bets last year, injecting $1.6 billion in capital into the space, with another $1.2 billion in dealflow the company plans to fund this year . Private equity deals included a chain of veterinary surgical hospitals and a group of orthodontic and pediatric dentistry practices.

Baupost has also identified inefficiencies in the personal loan and preferred stock markets.

“Examples include companies looking to secure growth capital without immediately diluting equity or relinquishing control, and other sources of financing,” Klarman wrote. “We have invested more than $1.2 billion in gross capital in this space in 2021, with $1 billion in future transactions in the pipeline.”

“We often have success sifting through the market’s ‘abandoned properties’ bins,” Klarman wrote. “Because of our broad approach, we don’t need the entire market to undervalue – just a limited number of investments from time to time.”