Dan Loeb's letter to Third Point investors for the first quarter ended March 31, 2025.
See more hedge fund letters here.
Dear Investor:
During the First Quarter, Third Point returned -3.7% in the flagship Offshore Fund and -4.4% in the Ultra Fund. Assets under management on March 31, 2025, were approximately $19.3 billion.
Read more hedge fund letters here
The top five winners for the quarter were Meta Platforms Inc., Rolls-Royce Holdings PLC, Intercontinental Exchange Inc., Phoenix Holdings Ltd., and Telephone and Data Systems, Inc. The top five losers for the quarter, excluding hedges, were Pacific Gas and Electric Co., TSMC, Carvana Co., Amazon.com Inc., and Danaher Corp.
Review and Outlook
The First Quarter began with investor optimism about the new administration’s expected plans for deregulation, improved tax and energy policy, reduced government waste via “DOGE”, and a business-friendly environment. By quarter’s end, concerns about trade policy – reaching a climax with the seemingly incoherent tariff schedule released on an unironically dubbed “Liberation Day” in the beginning of April – had turned market sentiment decidedly negative. Over the past few weeks, the administration seems to have mitigated some of its more aggressive tariff objectives in what we hope is part of its “Art of the Deal” negotiating approach, however the slowdown in deal-making, financing, and general economic activity continues. As of today, we await details of any individual trade deals and are working with a wide spectrum of possible economic and market outcomes until negotiations yield tangible results.
We realized gains earlier in the year through opportunistic sales near the highs in Meta and Apollo.1 We subsequently re-entered Apollo towards the lows in March. We sold or reduced several other positions throughout Q1 and into Q2 that took our gross and net exposures to multi-year lows, giving us dry powder to deploy at the right time. While not unscathed, our overall net year-to-date losses in the Offshore Fund are less than the S&P’s, and we feel we are well positioned in several new names for the current environment.
See more hedge fund letters here.
Portfolio Updates
Equities: CoStar Group
CoStar is the leading vendor of real estate technology, often referred to as the “Bloomberg of commercial real estate”. The company’s portfolio includes data and software products (the “CoStar Suite”) and digital marketing platforms (LoopNet, Apartments.com). We have long admired this collection of franchises, which provide the real estate industry with missioncritical data, software, and services that are designed into workflows and function as a system of reference. They hold dominant market share, have low TAM penetration with a long runway for future growth, have significant untapped pricing power, and enjoy highmargin business models with ample room for further margin expansion. These attributes have allowed CoStar’s core business to compound EBITDA at a 20% CAGR over the past ten years, a level which we expect to sustain going forward.
Despite the continued strength of its core business, we believe recent capital allocation decisions have derailed CoStar’s compounding algorithm. Over the past five years, management has increasingly focused on leveraging CoStar’s dominance in commercial real estate (CRE) to expand into residential real estate (RRE). The primary vehicle for this expansion has been its nascent Homes.com business, which aims to supplant Zillow as the leading digital marketplace for home sales in the U.S. In pursuit of that goal, we estimate that CoStar is spending almost $1 billion annually on growth investments (and will have spent more than $3 billion cumulatively by the end of this year), but this investment has yet to generate meaningful revenue. Expanding losses at Homes.com have obscured rapid growth in the core business and reduced consolidated EBITDA by approximately 80%.
Read more hedge fund letters here
Corporate Credit
Credit markets were relatively strong the first two months of 2025, supported by light net new issuance and the sharp decline in interest rates. These gains round-tripped in March as concerning tariff rhetoric began to crystallize into action. Our corporate credit portfolio was up marginally on a gross basis in Q1 but declined by about 30 basis points on a net basis. Following quarter-end, the market suffered its most violent selloff since Covid from the “Liberation Day” tariff announcement, and while some losses were recouped, we expect volatility to remain extremely elevated. Even before the tariff tantrum, our thesis was that consumer weakness and persistent inflation would cause more dislocations this year, and thus more opportunities for us.
While any long exposure feels like too much in a decline such as the “Liberation Day” purge, we believe our credit book is in very good shape. As always, we are invested in relatively liquid names with larger capitalizations that we believe give these companies more levers to pull when the capital markets become difficult. We run the portfolio without leverage and our industry positioning is weighted in defensive sectors. That said, in indiscriminate panics, in our view, what you own is not as important as who else owns it. We have taken marks in some positions that tend to have more hedge fund-oriented holders. Credits that are rumored to be heavily owned by the highly leveraged multi-manager platforms have been whacked particularly hard. This is the first selloff where this technical has contributed to meaningful volatility and we expect to take advantage of these dislocations going forward.
Structured Credit
Structured Credit returned +1.5% gross (1.1% net) in the first quarter. Our portfolio is predominately composed of fixed-rate residential mortgages (74%), in addition to consumer asset-backed securities (20%) and commercial mortgage-backed securities (6%). During Q1, we saw treasuries rally 40bps and credit spreads tighten through February, which provided a tailwind to our predominately fixed rate portfolio. In March, we saw the lagged effect of broader equity volatility as credit spreads slowly widened in tandem with Treasury yields going lower. With heightened market volatility expected to continue, we see a few themes emerging in structured credit:
1) We believe the rate rally is constructive for U.S. residential mortgages. We refinanced 12 reperforming mortgage securitizations despite interest rates moving 50bps higher in 2024. Fixed rate loans backed by U.S. homes are a credit defensive asset class during a rate rally, in our view. While we may experience credit spread widening, we believe there will be a credit preference for U.S. mortgages where borrowers have more than 50% equity in their homes and are locked into a fixed rate. A potential Fed rate cut or this Treasury range (even with an offsetting credit widening) should create an opportunity for underlying mortgages to rally. If we saw a 20% decline in house prices, the loan-tovalues of mortgages would still be around 62.5%, creating a cushion for potential defaults. As credit markets dislocate, we believe there will be a credit tiering and preference for first lien, owner occupied, residential exposure based on credit fundamentals and longer duration capital specifically raised for this market sector.
Read more hedge fund letters here
Business Updates
Birch Grove Integration & Private Credit Launch
In February, we completed our acquisition of Birch Grove, a diversified credit asset manager. Integrating Birch Grove into Third Point brought over $8 billion of new capital invested in mature collateralized loan obligations, private credit, and other strategies, as well as a talented and experienced team led by CEO/CIO Jonathan Berger. When I envisioned acquiring Birch Grove, I believed we could achieve meaningful synergies between our existing strategies and their businesses. I am pleased to say that we are off to a strong start.
Our private credit effort, incubated since late 2023, expects to launch several different tailored strategies starting in Q2, including an insurance-dedicated vehicle as well as a strategy for which we recently filed a registration statement with the SEC. Chris Taylor, who leads our private credit effort, has vast experience in direct lending, with a deep network of sourcing and relationships, while Birch Grove’s strength in private credit is in solutions lending. Their experienced team has what we feel are equally deep relationships in the middle market solutions space. These teams have quickly combined to form Third Point Private Credit and are coming to market with a strategy that offers access to core middle market direct lending and capital solutions that will seek to provide investors with attractive current income, risk-adjusted returns, and portfolio diversification. Augmented by Third Point’s three-decade history investing in credit securities and institutional platform, these integrated businesses aim to offer a powerful combination: a strategy that can tailor a broad range of bespoke lending solutions for middle-market borrowers and create compelling returns for investors. They have already co-completed their first deal and have a robust pipeline.
We welcome investors who are interested in learning more to contact Investor Relations for more information about this opportunity.
I believe that Third Point’s edge comes from our collaborative culture and ability to toggle between equities and credit depending on the market environment. We will celebrate on June 1 the 30th anniversary of the date in 1995 when we launched as a distressed debt fund, before evolving to include the many strategies we incorporate into the main fund portfolio today. Bringing more perspectives into the credit side of the business has already invigorated our views on credit opportunities. Birch Grove’s team of CLO analysts brings a wealth of knowledge about the debt profiles of individual companies and sectors and offer insights into our main fund equity research process.
Combined with the significant track records and dedicated capital in our structured and corporate credit funds, our desire to offer our investors diversified solutions for their portfolios – in strategies ranging from the earliest stages of venture capital to our flagship hedge fund, to varying credit strategies, and our life and annuity reinsurer Malibu Re – is well underway. We look forward to sharing more about these exciting developments with you at our 30th Anniversary Investor Summit on May 29, 2025, in New York City.
Sincerely,
Daniel S. Loeb
CEO
Third Point
Read the full letter here.
See more hedge fund letters here.
