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Jeffry Gates’ Gates Capital Management’s Return, AUM, and Holdings

Nina Zdinjak

Jeffry Gates’ Gates Capital Management is an event-driven alternative asset manager founded back in 1996, which managed around $2.69 billion on a discretionary basis at the end of 2016. Besides being its founder, Jeffrey Gates is the current President and Portfolio Manager of the fund, whose headquarters are in the Big Apple. Before launching his own fund, he was a director at Schroder & Co., where he was concentrating on high yield bonds and post-restructuring equities; and, prior to being promoted to director, he worked at the same company as a high yield bond research analyst and as a high yield salesperson. The very beginnings of his career were at Kidder, Peabody & Company, where he was also a high yield bond research analyst. Aside from being a successful investor, Jeffrey Gates is also known for his philanthropy and was prized with the Golden Heart Award for Outstanding Volunteerism from Gods Love We Deliver. He graduated with a BS in Finance from Kansas State University and with an MBA from the Wharton School, University of Pennsylvania.

Jeffry Gates’ Gates Capital Management’s Return, AUM, and Holdings

Gates Capital Management employs an event-driven investing strategy, which means that the fund tries to benefit from brief stock mispricings that can happen prior to or after a corporate event occurs. Under the term ‘corporate event’ many structural changes within a company can be included, such as mergers/acquisitions, spin-offs, restructurings, bankruptcy, to name a few. This type of strategy is very demanding and asks for a team of experts to conduct a series of professional and detailed research. Besides being challenging, this strategy can be quite lucrative, as is for Gates Capital Management, whose ECF Value delivered averaged annualized gains of an impressive 17.5% a year since its inception (1996) through 2011. In spite of an amazing annualized return throughout the course of 15 years, ECF Value was hit by the 2008 market crisis when the fund lost 38%. Nevertheless, those faithful investors who continued to invest with Gates Capital Management must have been satisfied with its choice, as the fund managed to achieve an eye-popping return of 131% in the following year. Let’s examine the fund’s performance furthermore.

For example, its ECF Value Fund II LP had a 3-year compound annual return (ending December 2013) of 16.04%, while in 2013 alone it delivered strong 19.47%. Its ECF Value Fund, LP gained 19.66% in 2013 and then lost 1.37% in 2014, followed by an even more challenging year in terms of performance when it lost 19.77%. In 2016 it came back on its feet, delivering an impressive 31.01%, and strong 16.84% in 2017. Last year through October it reported a gain of 0.41%. ECF Value Fund LP’s total return was 1803.80% for a compound annual return of 14.1%, while its worst drawdown stood at 43.48.

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Gates Capital Management’s equity portfolio was valued around $1.81 billion at the end of December 2018, which is down by 54% from the previous quarter when its portfolio carried a value of $3.94 billion. Among its top ten positions was Altaba Inc. (NASDAQ:AABA), a company with a market cap of $42.537 billion and one of the 30 Most Popular Stocks Among Hedge Funds. This is a non-diversified, closed-end management investment company with headquarters in NYC; it was formerly known as Yahoo! Inc, and it was built upon Verizon’s acquisition of Yahoo! Inc.’s Internet business.  Over the last six months, Altaba’s stock gained 16.74%, and on March 1st It had a closing price of $74.96. Gates Capital Management had a position in the company that was worth around $93.03 million, on the account of 1.61 million shares. More about the fund’s biggest holdings and most important investments from the fourth quarter of 2018, you can find out on the next page.

The biggest position in Gates Capital Management’s concentrated portfolio at the end of December 2018 was in DaVita Inc (NYSE:DVA) and it was valued $114.56 million, on the account of 2.23 million shares outstanding. DaVita Inc, previously known under the name DaVita Healthcare Partners, Inc is a medical care company that provides kidney dialysis services to people who have chronic kidney failure. Its headquarters are in Denver, Colorado, and the company has been operating for 25 years.  DaVita has a market cap of $9.23 billion, and it is trading at a price-to-earnings ratio of 69.74. Over the past 12 months, the company’s stock lost 20.97%, and on March 4th it had a closing price of $55.44. In November last year, the company was in the news having made a settlement with the families whose relatives had cardiac arrest and died very soon after they had received dialysis treatments provided by DaVita. The families filed a lawsuit, and according to the settlement, the company had to pay $25.5 million to the families, as they have won a $383.5 million jury verdict.

For the three months ended December 2018, the company reported consolidated revenues of $2,821 million, compared to revenues of $2,847 million in the fourth quarter of 2017. It also disclosed adjusted net income from continuing operations of $149 million and adjusted earnings per share of $0.90 compared to net income of $170 million and adjusted EPS of $0.92 in the same quarter of 2017. Its net loss for Q4 2018 was of $150 million or $0.90 per share, compared to a net income of $303 million or $1.64 per share in Q4 of 2017. Recently, SunTrustBanks restated its ‘Hold’ rating on the company, while Robert W.Baird lowered its price target to $70.00 from $90.00 with ‘Outperform’ rating on it.

Gates Capital Management had the second biggest position at the end of December 2018 in Hilton Hotels Corporation Common Stock (NYSE:HLT). Its stake in the company counted 1.57 million shares, which were worth $112.61 million, accounting for 6.2% of the fund’s portfolio. It also held a large stake in Gaming and Leisure Properties Inc (NASDAQ:GLPI), which included 3.29 million shares, with a value of $106.38 million, amassing 5.86% of its equity portfolio.

The only new long position Gates Capital Management initiated during the fourth quarter of 2018 was the one in Fortive Corp (NYSE:FTV), a diversified conglomerate company, which was spun off from Danaher and after which it became one of the S&P 500. The fund purchased 795,690 Fortive’s shares, which carried a value of $53.84 million, establishing a position that accounted for 2.96% of its portfolio. Year-to-date, the company’s stock gained 22.61%, and on March 4th it had a closing price of $82.58. Fortive Corp has a market cap of $27.58 billion, and it is trading at a price-to-earnings ratio of 9.83. In its last financial report for the fourth quarter of 2018, the company disclosed net earnings from continuing operations attributable to common stockholders of $222.8 million, and net earnings per share from continuing operations of $0.66 compared to net EPS of $0.84 for the corresponding quarter of 2017. Fortive also reported that revenues (for Q4 2018) from continuing operations have increased by 11.4% on a year-to-year basis to $1.8 billion. On February 12th, William Blair restated its ‘Market Perform’ rating on the stock, and earlier (at the beginning of the year) Credit Suisse Group repeated its ‘Neutral’ rating with a price target of $78.00.

During the fourth quarter of 2018, Gates Capital Management lost faith in 9 companies and decided to sell out its positions in them. The biggest stake the fund dumped was the one in Caesars Entertainment Corporation Common Stock (NASDAQ:CZR), and it counted 6.71 million shares with a value of $68.79 million. Among other large stakes the fund said goodbye to in the last quarter of 2018, were those in Wyndham Destinations Inc (NYSE:WYND), which included 1.41 million shares that were worth $61.09 million, and Ingersoll-Rand PLC (NYSE:IR), whose 535,167 shares, with a value of $54.75 million the fund sold out.

Disclosure: None

This article was originally published at Insider Monkey.