Paulson & Co., Inc. is an investment management company based in Palm Beach, Florida, US. Previously, it was a hedge fund established by John Paulson in 1994. Since 2020, the firm has operated as a family office managing Paulson's personal wealth. Specializing in "global mergers, event arbitrage, and credit strategies", the firm had a relatively low profile on Wall Street until its hugely successful bet against the subprime mortgage market in 2007.
At one time the company had offices in London and Dublin.
Contents
History
Early years
Paulson & Co. Inc. was established by John Paulson, its founder and president, in 1994.
Paulson has invested in a number of undervalued companies that are acquisition targets, aiming to increase the bid price on these companies as a large shareholder. In 1997, Paulson, which owned a 6.2% stake in Washington National Corp., opposed PennCorp Financial Group Inc.'s $400 million deal to take over Washington National, calling the terms of the deal "inadequate". This holding out paid off when another suitor, Conseco Inc., purchased Washington National for $410 million.
2008 financial crisis and the Great Recession
In 2005, Paulson Co. analyst Paolo Pellegrini convinced John Paulson of the danger of weak credit underwriting standards, excessive leverage among financial institutions and a fundamental mispricing of credit risk particularly in the housing market. Paulson began "shorting" this credit risk by purchasing the hitherto obscure derivative known as credit default swaps to "insure" debt securities (Paulson Co. did not own the securities it was "insuring", but merely believed they would default) they thought would decline in value due to weak credit underwriting. The bubble continued to grow through 2005 and 2006, but by 2007 began to deflate.
In one later widely publicized deal, Goldman Sachs put together a "synthetic" collateralized debt obligation (CDO) called ABACUS 2007-AC1 where investors (such as the European banks IKB Deutsche Industrie, and ABN Amro, and the New York insurance company ACA Financial Guaranty) provided the "long" by taking the risk from subprime mortgage bonds, effectively providing Paulson with insurance in the case of subprime mortgage default. The deal was made in late April 2007 and several months later the bonds began to default and Paulson eventually made about $1 billion total from those investors' losses. In total Paulson reportedly earned $15 billion on $12.5 billion of investment in 2007—a return of over 100%.
In 2008, Paulson's bearish outlook on the credit markets continued. Paulson believed that credit problems would expand beyond subprime mortgages into consumer, auto, commercial and corporate credit, stressing financial institutions and causing some to fail. This led them to take short positions in several large financial institutions in the US and the UK that had high degrees of leverage, high concentrations of assets in deteriorating sectors and rising credit costs. Sectors include mortgage finance companies, specialty finance companies and regional, national, and global banks.
In September 2008, Paulson bet against four of the five biggest British banks including a £350m bet against Barclays; £292m against Royal Bank of Scotland; and £260m against Lloyds TSB.
Paulson is reported to have earned a total of £280m after reducing its short position in RBS in January 2009.
Recovery and bankruptcy investment
Paulson also has a long track record of investing in distressed debt, bankruptcies and restructurings. The Great Recession resulted in a record high level of defaults and bankruptcies across numerous industries, and Paulson was a large investor in many of them, including the Lehman Brothers bankruptcy and liquidation.
At the end of 2008, following the collapse of Lehman Brothers and the subsequent turmoil in the markets, Paulson launched a fund dedicated to restructuring and/or recapitalizing companies such as investment banks, hedge funds, insurance and hotel, that were feeling the pressure of the more than $345 billion of write downs of under-performing assets linked to the housing market. By providing capital to companies at "trough valuations", Paulson believed it would enable the firms to survive the crisis while Paulson would profit from recovery by buying at the market bottom.
Amongst some of the holdings disclosed in Paulson's June 30, 2009 13F filings were 2 million shares of Goldman Sachs as well as 35 million shares in Regions Financial. Paulson also purchased shares of Bank of America in the spring of 2009 when the bank was forced to recapitalize its balance sheet following the results of the bank stress tests conducted by the US government, and was reported to have a 1.22% stake in the bank in 2011. According to Bloomberg, Paulson purchased the shares expecting the stock to double by 2011.
Paulson's invested in Citigroup and reportedly earned $1 billion in 2009 through the end of 2010, which John Paulson called a demonstration of "the upside potential of many of the restructuring investments we have added to our portfolio and our ability to generate above-average returns in large positions."
In February 2010, PCI was linked to the restructuring and recapitalization of the publisher Houghton Mifflin Harcourt. The agreement included restructuring about $4 billion of its $7 billion debt load by converting it to new equity issued to the senior debt holders, one of whom was Paulson. Through this debt to equity conversion, Paulson would reportedly become the company's largest equity investor.
Another one of Paulson's specialties is proxy event investment. In May 2008 Carl Icahn launched a proxy fight at Yahoo to replace its board and a 13F filing for the quarter ending March 31, 2008 showed ownership by Paulson of 50 million shares of Yahoo.
Family Office
In 2020, Paulson & Co. returned all external investor capital and converted to a private Family office, focusing on John Paulson's fortune.
Hedge fund business model
The firm was a partnership, the partners being John Paulson and 10+ other members of the firm.
Paulson provided services to investment vehicle pools and manages accounts for banking institutions, corporations and pension and profit sharing plans. As of December 2015 the John Paulson's hedge funds had $19 billion assets under management, compared to $18 billion in September 2013 and $36 billion in early 2011. Almost 60 percent of the assets under management belong to the firm's own employees, including John Paulson's, as of 2012. External investors in the Paulson funds included financial institutions, corporate and public pension funds, endowments, foundations and high-net-worth individuals.
The hedge funds previously managed by Paulson & Co, included:
Paulson Advantage Fund (its flagship fund)
Paulson Advantage Plus Fund
Gold fund (launched in January 2010 with a long-term strategy focus investing in mining companies and bullion-based derivatives)
Paulson Partners
Paulson Enhanced
Paulson Recovery
Paulson Real Estate Recovery (launched in 2009 to invest in distressed real estate markets with a 'private equity' investment style)
Credit Opportunities Fund
Areas of expertise include:
Merger arbitrage: High quality spread deals, announced mergers with the possibility of higher bids, unique deal structures, short deals unlikely to close;
Event arbitrage: Spin-offs, litigations, restructurings, proxy contests, post-Bankruptcy equities;