Michael Dell, the founder of Dell Computers, formed MSD Capital in 1998 to manage his personal capital and that of his family. It is managed by Glenn Fuhrman and John Phelan. The pair have managed it together since its establishment; it was the same year Phelan graduated from Harvard Business School. Fuhrman had graduated Wharton a few years earlier, in 1988. Since its humble beginnings, MSD Capital has grown to a team of 80 people, spread across 3 time zones; there are offices in New York, California and London.
MSD Capital’s strategy has always been to focus specifically for opportunities in publicly traded securities and investments in leveraged and management buyouts. Typical investment transactions vary from $50 million to $200 million, although some transactions do fall outside these parameters. To date, MSD has been a stronger performer but its returns have been low as of late. Since the end of last quarter, MSD Capital’s top stock picks in its 13F portfolio has had a negative 11.5% return, compared to the S&P 500’s 7.8% loss for the same period.
Out of MSD Capital’s top 15 stock picks, only two have produced a positive return. The first, Nalco Holding Company (NLC) returned 31%. The chemical company is a favorite of Alexander Roepers’ Atlantic Investment Management. Roepers increased his position in the company by 747% last quarter (check out Roepers’ top stock picks). MSD Capital also enjoyed an 11% return via its position in Dominos Pizza Inc (DPZ). Jim Simons increased his Renaissance Technologies position in the pizza company by 292% last quarter (read more about Simons’s top picks).
MSD Capital’s largest losses were in its Sunstone Hotel Investors (SHO) position; it lost -39%. Fuhrman and Phelan reduced MSD Capital’s position by 10% last quarter in the hotel company. John Paulson, of Paulson & Co, whose position in Sunstone is even larger than MSD’s, reduced his position by over 25% last quarter (check out Paulson’s top positions). MSD Capital also lost more than 30% through its positions in Echostar Corporation (SATS) and School Specialty Inc (SCHS).
MSD Capital has retained a strong difference from its competitors – it has a permanent capital base. This fact has formed the basis of its operational strategy as well as its investment strategy. For example, it has always focused on the long-term performance of its positions and selected its positions accordingly, even to the disadvantage of its short-term performance. We like Michael Dell’s MSD Capital. Investor might be able to outperform the market over the long-term by imitating their top stock picks.