Creating Cigar-Butts In Deep Value Special Situations Investing

During his recent interview on The Acquirers Podcast with Tobias, Dan Zwirn, CEO of Arena Investors LP discussed Creating Cigar-Butts In Deep Value Special Situations Investing. Here’s an excerpt from the interview:

Tobias: And before Arena, what was your focus as an investor?

Dan: Before and throughout Arena, it’s always really been the same, which is really the equivalent of deep value investing.

Tobias: Your structured convertibles, what is that for the folks who perhaps don’t know?

Dan: Well, I think just to step back, deep value is deep value. Whether that’s in a company or a piece of property, or a structured finance asset, or securities, and how you create that is just a matter of structure. Whether that’s a loan or buying an existing loan, or a bond, or a convert, or whether it’s public or whether it’s private, those are all just tools in order to extract and optimize return per unit of risk, within any given situation.

Structured private convertibles are an example of something that’s interesting that we do with public companies around the world that benefit from, frankly, situations that are more volatile, where the companies are the opposite of what you would look for, as a Buffett-style value investor. They may not have moats, they are capital intensive, there’s high volatility, there’s lots of things out of your control but in the case of the value investment going on there, is what we’re doing. As an example, those kinds of companies might be sub $200 or $300 million market cap, may not have otherwise available access to liquidity. We act as the casino, not the gambler, so to speak. Someone says, “Well, I have this stock that’s trading with decent volume.” We’ll say, “Okay, we’ll write you a convertible that converts actually at a discount to your trailing number of days trading pattern.”

Day one, we’ve created a cigar butt, so to speak. We’ve created a pretty darn certain spread, and we’re also given a quite a few out of the money call options, warrants of various sorts along with that. They then take those proceeds from the original issue that we’ve done, and they enhance their mine, they enhance their pharmaceutical project, they enhance their digital online, media oriented, whatever it’s going to be and that works out, great for them. If it doesn’t work out, not great for them. In either case, we’re going to make money. We’ve turned in that situation what otherwise would be a difficult to invest in situation into a Ben Graham style deep value, heads I win, tails you lose situation.