Seth Klarman Parts the Curtains, Carefully

February 16, 2013  

Generally secretive, the Baupost Group founder takes a meaningful step to improve public relations, while guarding his firm’s privacy.

   Baupost Group's Seth Klarman
The Baupost Group’s Seth Klarman is not exactly a media hound.

One of the most widely respected value investors in the country, Klarman rarely gives interviews or speaks at conferences. And, you can comfortably bet a tidy sum he will never go on CNBC to debate one of his investments with the likes of Carl Icahn or William Ackman.

This cloak of secrecy hasn’t hurt his image. Klarman’s Boston-based hedge fund firm now manages $26.3 billion largely on the strength of performance. Klarman has compounded returns of about 18 percent per year since he helped to launch Baupost in 1982, despite — or because of — a penchant for holding large wads of cash at any given time.

Many hedge fund firms either rely on outside public relations firms or have full-time internal communications employees to deal with media. But Baupost appeared to be one of those fiercely private firms that felt they couldn’t be bothered.

So, it was initially surprising, unnerving even, to see Baupost discuss its public image and its relationship with the media in its year-end letters to investors.

In a 21-page missive, Klarman says the firm’s goal is to operate below the radar, but he admits that it has become increasingly difficult. "We prefer to invest with near-anonymity because good ideas are scarce and not to be advertised, while selling is best done in the absence of energetic competition from others," he writes.

Klarman is evidently worried not only about protecting the secret sauce and specific investment strategies. He is also determined to protect Baupost’s image and how the outside world perceives the firm. "In contrast to the sometimes well-deserved poor reputations of Wall Street firms and investment businesses, we are proud of our firm’s values and actions that put clients first," he explains in the letter. "A licentious media and sometimes fact-free blogosphere nearly guarantee ongoing coverage of Baupost regardless of our best efforts to stay out of the headlines."

Paul Gannon, Baupost partner and chief operating officer, also addresses this issue in a separate year-end report to clients. Gannon acknowledges the growing difficulty of remaining below the radar, telling clients that late last year the firm created a formal corporate communications position, hiring Diana DeSocio to lead this effort.

DeSocio previously spent more than five years as senior vice president, corporate communications at MF Global, the derivatives broker that filed for bankruptcy in 2011. MF Global’s chairman and CEO, Jon Corzine, made a concentrated bet on European sovereign bonds, and the firm was unable to account for about $1.2 billion in customer assets.

Gannon explains in the letter that DeSocio’s mandate includes "monitoring our profile in the press and — to the extent possible — keeping us out of it or, at a minimum, influencing the accuracy of coverage."

He also says the corporate communications department will collaborate with the firm’s investment teams "to identify potential reputational concerns early in the investment sourcing process, helping us avoid any action or association that is counter to our corporate culture and values, and thus at odds with our goal of having a low profile, yet excellent reputation."

For a firm that’s easily one of the least accessible to the media, this is a meaningful step. That Klarman went to the extent of articulating concerns in print seems to signal Baupost’s determination to manage the public perceptions of the firm, especially under a changing regulatory environment.

Not that he has any quarrel with the media, or that he has any skeletons in the closet to hide. Remarkably, Baupost has kept a relatively pristine image from the start. During all the years since Klarman earned his MBA from Harvard Business School in 1982, his integrity has never been questioned. Nor has there been a whiff of taint surrounding the firm, not even whispers or suggestions of how the firm "really made its money," as one hears about other hedge fund firms, many of them prominent names in the industry.

Klarman, who comes across as scholarly and professorial, has been around long enough to know that it is not only important to deliver outstanding, noncorrelated returns to attract, and more importantly retain, clients. He understands that, perhaps more than ever, there is an enormous, intangible value for any Wall Street institution to maintain a squeaky-clean reputation.

If you want to know how important this intangible is, just ask SAC Capital Advisors’s Steven Cohen. These days Cohen is desperately trying to stem the capital flight from his New York firm, while federal investigators continue to probe its activities.

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