Barring last-minute objections, this is the week that another hedge fund, Chatham Asset Management, takes over another newspaper company.
Justifiable angst has been permeating newsrooms that are under the ownership or influence of funds — Alden Global Capital especially — but I am not so sure everyone who is worried understands the basics of these big-money entities.
I didn’t before doing some research. Jon Schleuss, president of the NewsGuild and a fierce critic of what the funds are doing to the news industry, did not either, I found as we were talking recently.
To start at the start, hedge funds have flourished over the last 45 years because they make a lot of money — for investors, not just their owners. So despite extortionately high fees, occasional bad years and critics including Warren Buffett and Yale endowment guru David Swensen, the industry keeps growing.
More to the point for the current plight of newspaper companies, they serve the capital markets function of providing liquidity — loans to finance continuing operations — when hardly anyone else will.
Take Chatham. Chatham and Alden were the only bidders for McClatchy in an auction earlier this month. Without hedge funds, would anyone have stepped up to buy the company and keep its 30 newspapers running?
Or take the GateHouse acquisition of Gannett in November last year. Conceivably, a bank or group of banks could have financed the deal. In fact, though, Apollo Global Capital — one of the largest of the funds — provided a $1.8 billion loan to cover new and existing debt (at an 11.5% interest rate!).
The “hedge” allows the funds to short sell — buying shares with an agreement to sell them back to the company after a fixed period of time. It means they can simultaneously accumulate shares and bet on their decline, thus minimizing risk
But hedging is far from all the funds do.
Charles Elson, an expert on corporate governance at the University of Delaware and longtime friend, filled me in on a couple of other salient features.
Unlike many other investment vehicles that are riding a portfolio up and down, hedge funds are proactive managers of the companies they take over with an end game of selling and making a profit.
“They’re looking for poorly managed companies that they can restructure. … Some of these companies have real estate that’s worth more than the company itself (on an operating basis).” So selling or accelerating the sale of property, as Alden has done with its MediaNews Group papers, is part of the playbook.
A second feature of the funds is that they typically have one or a couple of areas of specialization. “I was once on the board of a beer company,” Elson told me, “and we were approached for takeover by a fund that really knew that industry.” Funds can employ a cadre of analysts experienced at where to look for efficiencies or engineer mergers in a particular industry — a deeper level of expertise than other institutional investment firms have.
Typically they want to buy distressed companies that Wall Street has given up on.
That’s a fairly exact match to the roster of hedge fund investors active in newspapers, where shares are trading at rock-bottom prices.
Alden has been making a wide variety of investments in newspaper chains for a decade, as I first wrote in a 2011 profile of founder Randall Smith. That may not always be in the form of a takeover attempt. In a bootleg report I found of Smith’s talk to an investment club, he touted Gannett, which then included a broadcast division, as the single most undervalued stock on the market. Smith profited by buying a big block of shares low and selling high a year later.
Also keep in mind that Alden at first spent money to grow its newspaper group, then known as Digital First, under the leadership of flamboyant digital evangelist John Paton. The centerpiece of Paton’s strategy was the tech and journalism center known as Thunderdome, staffed with digital news stars in high-rent Manhattan.
Despite some successes, Digital First did not hit overall financial targets. So the cut-to-the-bone strategy of recent years is Alden’s plan B for the group.
Similarly, Chatham has grown its presence gradually over at least a decade — providing lending to McClatchy in increments until it consolidated the company’s debt in mid-2019. That put Chatham first in line to convert debt into ownership in McClatchy’s bankruptcy reorganization, initiated in February, and most likely wrapping up this week.
In 2016, Chatham gained controlling shares in two other news companies — American Media, best known for the National Enquirer but also a collection of lifestyle and celebrity magazines, and Postmedia, a big chain of regional newspapers in Canada.
To me, that track record provides scant hints to what Chatham will do once it assumes ownership. A new CEO and new strategy are coming soon — but changes may be gradual.
Apollo is much bigger ($60 billion in assets under management) — a hybrid of a fund and a bank. The Gannett takeover loan is thus a tidy fit. If all goes well, Apollo gets five years of that 11.5% interest. If not, it would be first in line, as Chatham ended up, to take over or control a sale.
Three other characteristics of the funds are worth noting. Their fee structure is sweet for the funds’ managers. The so-called 2-20 system means that investors pay a 2% management fee, and the fund gets to keep 20% of any appreciation. If a fund loses money, it still charges investors the 2%.
The funds are not open to the average investor, requiring a six-figure outlay to get in. Apollo is effectively an exception, a public company traded on the market.
Not all funds are successful. Many end by quietly closing up shop. Others succeed on some investments and whiff on others, as Alden has done in its retail efforts to turn around Fred’s Pharmacy chain and Payless shoe stores.
I am not recommending that journalists working in the for-profit sector of the industry learn to love hedge fund owner-investors. Brace yourself, though, by recognizing what they are and how they operate.
They are here, they are almost certainly going to stay here, and the story of where they take media acquisitions is still being written.
Rick Edmonds is Poynter’s media business analyst. He can be reached at firstname.lastname@example.org.