Following its first losing year in two decades, Richard Perry's $7 billion Perry Capital posted a strong comeback in 2009. The firm's flagship multistrategy fund, Perry Partners International, gained 25.2% last year after plummeting 26.8% in 2008. The firm attributes last year's performance to credit investments, which it focused on in 2009, to the exclusion of equities. In a February 1 letter to investors, Perry warned that the price of 2009's economic resurgence might be a 2010 retreat. "This has been a nice party," said the letter. "We hope the hangover is mild."
Richard Perry
While the markets in 2009 benefited from a combination of fiscal stimuli, easy monetary policy, and strong momentum, Perry argued that the obligation to pay off debt will stand in the way of a substantial recovery. And in some cases, debt may not be paid off but instead extended, exchanged for new debt or converted into ownership, all of which would require large amounts of capital.
The multistrategy fund's position in General Motors boosted returns in 2009. Last quarter, Perry built a position in two classes of General Motors unsecured bonds: GM corporate bonds issued by the parent entity and GM Nova Scotia bonds. These bonds will receive a combination of equity and warrants in the new General Motors. Perry wrote that the postbankruptcy GM "will be a vastly improved company from the GM that filed for Chapter 11 bankruptcy in June 2009." GM has a bright future, Perry argued, because the carmaker has shed liabilities, including $30 billion in debt, and has refocused its brand strategy.
Meanwhile, the fund lost money on its investment in mobile-device maker Palm, which was hit in part by the entrance of a new flashier competitor, the Motorola Droid for Verizon Wireless. Perry continues to bet on Palm, while noting that fears about competitive pricing among smart phones has led the firm to ramp up some of its hedges in the industry. Perry also built positions in Lloyds Banking Group and Royal Bank of Scotland last quarter, arguing that European financial companies will benefit from government support and stronger credit markets.
The firm hedged its exposure to Asia, with the majority of its fourth-quarter gains coming from its new equity positions in Japan and equity and convertible positions in China. Japan's fiscal deficit led to a major sell-off, primarily from September through November. During this time, Perry bought stocks in industrial companies, diversified trading firms and businesses issuing equity to recapitalize stretched balance sheets, which were all trading at significant discounts, providing excellent opportunities, according to Perry.
Despite its gains, Perry has not yet recouped its losses, having instituted a modified high-water mark that will remain in effect until investors recoup 250% of their high-water mark. This allows investors to pay a performance fee of 10% on any gains after January 2, 2009, and could remain in effect for years.
—Suzy Kenly