The FT puts Warren Buffett’s lieutenants under the microscope

One thing to start: US regulators are poised to approve ExxonMobil’s $60bn acquisition of Pioneer Natural Resources on condition that the smaller oil company’s former chief executive does not join the supermajor’s board. More here.

In today’s newsletter:

• How Buffett’s successors stack up

• Viking river boat cruise makes PE rich

Can Buffett’s successors beat the S&P 500?

Late last summer, the FT set out what it thought would be an ambitious — but feasible — goal: trying to grade the two men who invest alongside Warren Buffett.

The questions we were keen to answer were how do Buffett’s deputies approach investing, are they any good, and could they build on their mentor’s astonishing record? They are perhaps the biggest outstanding questions for Berkshire Hathaway investors, given the 93-year-old publicly anointed his successor, Greg Abel, in 2021.

We learned quickly just how difficult it would be to assess Todd Combs and Ted Weschler, the fund managers who work for Buffett. Databases run by financial data providers often missed key holdings. In other cases they were outright wrong. And then there was the job of actually identifying which trades could have been Buffett’s and which had been executed by the pair.

Yesterday, a team led by DD’s Eric Platt published its findings after reconstructing the portfolios itself, trawling through almost everything Buffett has written or said on his investments over the past 13 years, as well as relying on the reporting of this paper and its rivals.

The results are not flattering: Combs and Weschler are trailing both Buffett and the S&P 500. We found the combined portfolio of the two men had generated a total return of 113 per cent over the past decade, below the 165 per cent gain Buffett registered and the 211 per cent advance by the S&P 500.

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How Combs and Weschler perform is top of mind for shareholders such as Christopher Rossbach, who invests on behalf of the investment management firm J Stern & Co. Rossbach believes it is critical to understand how the pair will “contribute to and take” Buffett’s investing legacy forward.

If the pair cannot match what Buffett did, it raises a question about both the company’s value and its reason to exist in a world where passive index funds are touted as safer, cheaper and more reliable than active fund managers.

They are trading in and out of stocks more quickly than the Oracle of Omaha, the FT analysis found, and their holdings have been somewhat less concentrated than Buffett’s, which is skewed heavily by his stake in Apple.

One of the trades Combs or Weschler first initiated was in Apple, which has been one of Berkshire’s most successful. But the pair cut their stakes in 2017, 2018 and 2019, so they didn’t have nearly as much exposure to the iPhone maker as its shares surged.

(Before any DD reader emails saying we should credit Apple to Combs or Weschler, we should underscore — we have! — but just the portion our analysis showed they held. Nothing was stopping them from buying more.)

When Eric set out on the project, Buffett told him he didn’t think it was in Berkshire’s interest to dive into the topic or put Combs or Weschler up for an interview.

“I’ve never felt that it’s in the interest of Berkshire shareholders to talk about anything that we do that is successful and that we want to continue to do,” he said. “I enjoy reading the FT every day even if it doesn’t tell me what its owner is likely to do next.”

We’ll see if he has anything to say about the findings this weekend, as thousands of shareholders gather in Omaha for the company’s annual meeting.

Eric has more coming in the days ahead, including today’s deep dive into the other succession challenge at Berkshire.

Private equity hope floats on a European river boat

When it comes to the current malaise in private equity markets, there are many pensioners and retirees with large nest eggs exposed to the tepid dealmaking of recent years.

There is a “towering backlog” of more than $3tn in investments that PE firms must sell to return cash that was invested mostly by pension funds in the US and Europe.

It turns out ageing boomers are doing their part to revive the private equity machine.

It is the 55-and-over crowd of travellers who have helped fuel the second-largest US initial public offering of 2024, the listing of cruise operator Viking Holdings on Wednesday. The IPO in turn has cemented billion-dollar plus windfalls for US private equity group TPG and Canada’s largest pension fund, CPP Investments, DD’s Antoine Gara reports. 

The duo first invested in Viking in 2016 as they both won a competitive deal to back the river cruise operator’s billionaire founder Torstein Hagen, a former McKinsey partner who created the company in 1997 with just a few routes on rivers in Europe.

Hagen has dominated the market for upscale river cruises catering to retirees looking to spend their golden years travelling the world — and importantly without the noise of children, or the preening of millennial and Gen Z travellers.

TPG and CPP invested $500mn in Viking so that Hagen could expand its European roots to oceanic voyages. Viking tripled profits in the three years leading up to the Covid-19 pandemic.

Though cruise ships were a terrible business during pandemic lockdowns, Viking was an outlier in its financial performance — thanks in large part to its retiree customers.

They had booked trips two or three years in advance and few cancelled their plans. Retirees don’t have jobs to lose, after all. It left Viking in a stable cash position. By contrast, rivals such as Carnival and Royal Caribbean had to significantly prime their balance sheets to survive. 

(Cruise operators are domiciled in havens such as Panama and Liberia, meaning governments like the US felt little sympathy to offer pandemic bailouts.)

TPG and CPP smartly doubled down on Viking during lockdowns, pumping in an additional $500mn in preferred equity. Collectively, they invested roughly $680mn each to own individual stakes of just over 20 per cent of the company.

At Wednesday’s IPO price of $24 a share, the duo roughly tripled their money with gains exceeding $1.5bn apiece, the FT calculates. Their stock sales as part of the IPO mean they’ve each returned most of their initial investment, while retaining valuable stakes.

The biggest winner of all is Hagen, Viking’s founder. 

He didn’t sell a big block of stock in the offering and enjoyed an IPO pop of over 8 per cent on Wednesday. He sits on a stake exceeding $5bn, making him one of Europe’s wealthiest executives.

Job moves

• Tesla’s top human resources executive, Allie Arebalo, has left the company after six years, according to Bloomberg. She joins a number of other senior leaders and employees that have recently departed.

• Goldman Sachs has promoted Dan Blank to co-chair of its global M&A group. He joined Goldman in 2021 and previously led Morgan Stanley’s North American industrials investment banking business.

• JPMorgan has hired Alexander Mayer in a senior role, according to Bloomberg. He joins from Goldman Sachs where he was head of Germany and Austria investment banking.

• Clifford Chance has hired Chang-Do Gong as a partner in its US M&A practice. He joins from White & Case.

• Unity interim chief executive Jim Whitehurst has stepped down after the software company hired Matthew Bromberg as its full-time chief. Whitehurst will become executive chair and return to private equity group Silver Lake.

Smart reads

Driving forward Car companies operating in China plan to bring 71 new battery electric models to market this year. The fleet of larger and more technologically advanced cars threatens to extend their lead on global rivals, The New York Times writes.

Deep dive BP is betting big on the Gulf, 14 years after the Deepwater Horizon explosion caused the biggest offshore oil spill in US history, The Wall Street Journal reports.

Weight loss Denmark is beginning to feel the effects of Novo Nordisk’s exceptional growth and they’re not all positive, Bloomberg reports.

News round-up

BBVA reveals Sabadell bid valuing rival at €12bn (FT)

Inside Apollo’s alleged grim-reaper gamble (FT)

Embraer explores options for aircraft to rival Airbus and Boeing (FT)

Nord Anglia draws Permira, KKR interest in $15bn EQT exit (Bloomberg)