MSD Capital’s Recent Portfolio Moves

In 1998, MSD Capital was founded strictly to manage Michael Dell’s funds. Dell is chairman of the board of directors and CEO of Dell Inc. (NASDAQ:DELL), the global information technology company. The hedge fund engages in a broad range of investments ranging from publically traded securities to privately traded companies, and even dabbles in real estate. A key differentiating aspect of the fund is that it maintains a permanent capital base. This allows the firm to participate in unique transactions with greater flexibility. Eighty employees work for MSD Capital at offices located in New York, Santa Monica, and London. Today the hedge fund is run by both Glenn Fuhrman and John Phelan.

Michael Dell

John Phelan is the co-founder and co-managing partner at MSD Capital. Prior to forming MSD, Phelan worked at ESL Investments, a Connecticut-based investment firm, where he helped the fund to expand its assets under management from $50 million to $2 billion-plus. Before ESL, Phelan gained experience in the real estate market while working as Vice President of Acquisitions for the Zell-Merrill Lynch Real Estate Opportunity Fund. Prior to receiving his M.B.A. from Harvard Business School, he began his career working as an investment analyst for Goldman, Sachs & Co., in its investment banking division. Glenn Fuhrman, the other managing director and co-founder of MSD Capital, worked as a managing director of the Special Investments Group at Goldman Sachs before his current post, and has an M.B.A. from The Wharton School at the University of Pennsylvania.

Like Joho Capital, MSD’s philosophy is to strategically place bets in only a few companies, while maintaining holding periods that are longer than most of their peers. In a rather surprising move, MSD liquidated four of its twelve stocks in the second quarter of 2012, according to its 13F filings with the SEC. The holdings liquidated include: a $61 million position in Echostar Corporation (NASDAQ:SATS), a $52 million position in Tyler Technologies, Inc (NYSE:TYL), a $39 million position in Domino’s Pizza, Inc. (NYSE:DPZ), and a $24 million position in Blueknight Energy Partners L.P. (NASDAQ:BKEP). After cleaning out nearly $230 million, or more than 30% of its 13F portfolio, MSD Capital is now heavily overweighted in the services sector.

The largest holding in MSD Capital’s 13F portfolio is DineEquity Inc (NYSE:DIN), operator and franchisor of Applebee’s and International House of Pancakes. MSD holds 2.5 million shares of DineEquity, 13.7% of the company’s total shares outstanding. MSD is the hedge fund industry’s second largest DineEquity bull, behind only Southeastern Asset Management. Since the second half of 2010, MSD has not sold or bought any shares in DineEquity, while the stock’s price has staggered, failing to breakout above its 2010 high of $58.81. Although shares of this small-cap company have increased by more than 30% year-to-date, they have not created any appreciative value for MSD over the past two years. The restaurant operator and franchisor trades at 11.47 times earnings, and has an EBITDA multiple of 9.38.

Apparel company PVH Corp (NYSE:PVH) is MSD’s second largest holding, and is known for its popular Tommy Hilfiger and Calvin Klein brands. The $98 million position accounts for 20.3% of the hedge fund’s total portfolio, and was initiated during the second the quarter of 2012. PVH Corp’s stock price has increased over 31% year-to-date, and is trading at 20.26 times its earnings, while sporting a 9.53 EBITDA multiple.

By having a focused and long term investing approach, Phelan and Fuhrman have positioned their hedge fund’s performance to be reliant on a small group of stocks, and another dramatic shakeup is not expected to occur any time soon. While this may be a riskier approach than having a more diversified portfolio, their strategy allows them to capitalize on their top investment ideas. Our research has shown that this may be a great idea for the individual investor as well.