Berkowitz Gets ‘Long Leash’ at Fairholme to Pursue Mall Offer

March 11 (Bloomberg) -- Bruce Berkowitz’s bid to help take mall owner General Growth Properties Inc. out of bankruptcy isn’t the first time the manager of the $11.2 billion Fairholme Fund has strayed from conventional mutual-fund investing.

Berkowitz in late 2008 swapped bonds for stock to reduce the debt of AmeriCredit Corp., a Fort Worth, Texas-based auto lender that needed to raise money. The company’s shares have almost quadrupled since then.

Like legendary investor Warren Buffett, whom he quotes frequently, Berkowitz can use his clout as one of a company’s biggest investors or creditors to cut deals not available to others, his shareholders said. As he bets on cash-strapped companies, Berkowitz, 51, resembles a hedge-fund manager like William Ackman, who is also participating in General Growth’s recapitalization.

“As the fund has gotten larger, he has used his leverage to help determine the fate of the companies he owns,” said Christopher Sizemore, who oversees $230 million at Vision Capital Management Inc. in Portland, Oregon, and is an investor in Berkowitz’s fund. “He’s trying to control his own destiny.”

The approach has been successful for Berkowitz, who worked at the former Smith Barney brokerage and Lehman Brothers Holdings Inc., which collapsed in September 2008, before founding Miami-based Fairholme Capital Management LLC.

The Fairholme Fund returned an average of 13 percent a year in the past decade, compared with the 1 percent loss by the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. Berkowitz, who started the fund in December 1999, beat the index in nine of the last 10 years.

‘Little Spooked’

Berkowitz “has built up enough goodwill to earn a long leash,” Patrick Ryan, a portfolio manager at Madison Asset Management LLC, said in a telephone interview.

Fairholme “doesn’t operate like a standard mutual fund,” said Ryan, whose Madison, Wisconsin-based firm oversees $15 billion and is a shareholder in Fairholme Fund. “You are getting access to a more hedge-fund-like strategy.”

Still, Ryan said he initially was a “little spooked” by the size of Berkowitz’s proposed General Growth investment and by the decision to plunge into the troubled commercial real estate market. The deal would be Berkowitz’s largest.

General Growth said March 8 that Fairholme Capital, its largest creditor, and Ackman’s Pershing Square Capital Management LP offered to put up $3.93 billion to help the Chicago-based mall owner emerge from Chapter 11. Their proposal came on top of pledge of $2.63 billion from Toronto-based Brookfield Asset Management Inc., which owns about $500 million of the company’s unsecured debt.

Fairholme Contribution

Pershing Square is General Growth’s biggest equity investor, with a 25 percent economic interest, including 7.5 percent of its shares. Fairholme Capital holds $1.83 billion of General Growth debt, according to a March 9 filing with the U.S. Securities and Exchange Commission. The firm oversees about $15 billion in assets.

The plan calls for Fairholme Capital to buy $2.71 billion of new stock in General Growth, which would make it the firm’s largest equity holding. General Growth’s board and the bankruptcy court would have to approve the proposal and better offers may still emerge, according to General Growth, which filed for bankruptcy in April 2009.

Berkowitz was named the top U.S. stock manager of the decade in January by Morningstar Inc., the Chicago-based fund research firm. The fund has attracted $7.7 billion from investors since 2006, Morningstar data show.

‘Cash Doesn’t Lie’

Berkowitz has said he looks for companies whose stock is cheap based on their cash flow.

“At the end of the day, cash doesn’t lie,” he said in an interview with Bloomberg Television in May.

He puts potential investments through a stress test, a process he calls “killing the company,” to see what might disrupt cash flow. He also evaluates management’s track record.

“It’s hard to make a good investment with bad people,” he said in a September conference call with Fairholme shareholders.

Berkowitz wasn’t available to comment, according to Tom Pinto, a spokesman for the firm.

Berkowitz gets involved in bankruptcies and so-called special situations that the average mutual fund might avoid, said Ronald Sugameli, manager of the $135 million New Century Alternative Strategies Portfolio at Weston Financial Group Inc. in Wellesley, Massachusetts, which owns a stake in the fund.

“It is an excellent fund, but you have to know what you are buying,” he said in a telephone interview.

Equity & Debt

The fund had 8.5 percent of its assets in corporate bonds at the end of November, Bloomberg data show. In an interview published last March, posted on Fairholme’s Web site, Berkowitz called bond returns “compelling.” He also said he was buying the bonds and stocks of the same companies.

“Sometimes you can create a better package of risk and reward owning both stocks and bonds,” said Margie Patel, who manages two funds with about $1 billion that hold stocks and bonds for Evergreen Investment Management Co. Evergreen is owned by San Francisco-based Wells Fargo & Co.

In November 2008, Fairholme sold senior bonds in AmeriCredit back to the company in exchange for new equity. Fairholme bought most of its stake in the firm at $6.02 a share, Berkowitz said.

AmeriCredit closed yesterday at $23.54. Fairholme Capital owns 26 percent of the company’s shares, making it AmeriCredit’s largest owner, Bloomberg data show.

Creative Deals

“These are the kind of creative deals we’ve seen from Warren Buffett,” Michael Breen, an analyst with Morningstar, said in a telephone interview.

Buffett, Berkshire Hathaway Inc.’s 79-year-old chairman, pumped money into New York-based Goldman Sachs Group Inc. and General Electric Co. of Fairfield, Connecticut, during the depths of the financial crisis in 2008. In both cases, Buffett got securities that pay 10 percent annually and that can be converted to stock.

Berkowitz’s fund held a 12 percent stake in Sears, the Hoffman Estates, Illinois-based retailer run by hedge-fund manager Edward Lampert, as of Nov. 30, according to Bloomberg data. In his September conference call, Berkowitz said if Sears were liquidated, “the value of its pieces would be worth more than the current market price.”

Sears shares gained 179 percent in the past year.

Last March, Berkowitz demonstrated his influence by getting Jeffrey Kindler, chief executive officer of drug maker Pfizer Inc., to join him on a conference call to talk about Pfizer’s prospects with Fairholme shareholders.

“Berkowitz must have had some pull with the company to get the CEO on the call,” Sizemore, the Vision Capital manager, said in a phone interview.

Fairholme Fund cut its investment in Pfizer to 17.3 million shares from 76.5 million in the three months ended Nov. 30, according to a regulatory filing. By the end of the year, the firm held 93,600 shares. Morningstar’s Breen estimated Berkowitz made a small profit on Pfizer.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net