Bull, Value And Bear

British Columbia Power was an interesting story back in 1962. It had been one of the biggest positions of the Buffett Partnership at 11% of the total property. It was a Canadian company going through an acrimonious court struggle with the British Columbia government. At issue was the business’s very life. The newly created British Columbia government of WAC Bennett wished to expropriate the property of BCP, which was the largest electricity generator in BC at the right time. The Bennett government wanted to control and expand hydro-power generation in British Columbia by constructing new dams along the Peace River and eventually exporting the power to the united states. To the end the government expropriated BC Electric, which is BCP’s wholly owned subsidiary.

110M for BC Electric. 62M. By 1962 it was clear that BCP wished more for its assets before it could dissolve. At 1962, the BC government had been in charge of BC Electric for a calendar year. And BCP was fighting the Bennett authorities in the courts for many that right time. 172M in 1962 but under protest.

225M BCP was asking. 0.925 USD back then. 20 5⁄ 8. Quite simply, the ongoing company was trading at book value with no money making assets. It simply had the half of BC Electric proceeds that it hadn’t yet distributed in addition to the hope of additional compensation the court would award.

It is against this backdrop that Buffett bought his large position predicated on Charlie Munger’s recommendation. I don’t believe that the description is very accurate though. 19 USD but there was no assurance the court would rule in its favor and even if it did no one knew exactly how much. But Munger, being a lawyer, probably had a hunch that the company would get heavily a favorable ruling and bet. In any case, there was no downside.

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The money for BC Electric was in the bank; so, BCP wasn’t going to get BC Electric back. 25M more than the expropriation price. 22.20 USD before dissolution. I believe this full case shows merger arbitrage with minuscule risk. And how Buffett and Munger would wager big in such a situation especially. Buffett got a 15-20% annualized return on his investment and Munger did much better with leverage.

According to the newest NACUBO (National Association of College and University Business Officers) study of endowment money, larger endowments have about three times more contact with hedge funds than smaller endowments. Private collateral, venture capital, and real estate or infrastructure are popular assets also, making up as much as half of choice investments created by large endowments. The fact that these kinds of investments are often unavailable to smaller endowments is not the only problem that endowments of the size face; lack of liquidity can create additional problems to be dealt with.

Even very large endowments can be stricken with liquidity difficulties. In fact, during the 2008/2009 economic downturn, some large endowments were pressured to market private investments at a significant discount in the secondary market. Though some nonprofits, smaller ones especially, may be enticed to oversee investments internally, this is not advisable generally. As the management of endowment assets requires objective oversight, the potential to generate both a conflict of interest for anyone with the fiduciary duty of a trustee and a liability for the organization as a whole is always present.