Warren Buffett’s Image Tarnished by 3G Capital

Warren Buffett loves needling the hedge fund industry by basically saying hedge fund managers are well-paid underperformers.
Seven years ago, he made a $1 million bet (for charity) that a low-cost index fund would beat a portfolio of hedge funds over 10 years.
He’s winning his bet. At the Berkshire Hathaway (NYSE: BRK-B) annual meeting in early May, he displayed a slide showing S&P 500 index funds ahead after seven years by 63.5% to 19.6%.
But now a leader in the hedge fund industry struck back at Buffett, saying in effect, “the pot is calling the kettle black.”

Daniel Loeb’s Swipe at Buffett

The man in question is Daniel Loeb, founder of the $17 billion hedge fund Third Point Management. He took his shots at Buffett at the SkyBridge Alternatives Conference in early May.
Loeb said, “I love reading Warren Buffett’s letters. I love contrasting his words with his actions.”
He went on about what he sees as a big “disconnect” between Buffett’s words and actions: “I love how he criticizes hedge funds, yet he really had the first hedge fund. He criticizes activists. He was the first activist. He criticizes financial service companies, yet he likes to invest with them.”
Don’t be so shy, Dan. Tell us how you really feel about the Oracle of Omaha.
How can anyone not like perhaps the greatest investor of all time? Especially a grandfather who dispenses investing wisdom to the masses in such a folksy way?

Buffett’s Brazilian Fling

Actually, Warren Buffett’s image has taken a hit in recent years, thanks in large part to his alliance with Brazilian private equity firm 3G Capital.
3G is best known for its no-nonsense methods. These include aggressive cost cutting, the elimination of thousands of jobs and the appointment of its own executives in key positions.
The latest combined transaction of 3G and Buffett’s Berkshire Hathaway is the pending merger of Kraft Foods Group (NASDAQ: KRFT) with Pittsburgh-based condiment maker H.J. Heinz. Kraft is being acquired for $100 billion, including debt. Heinz was already acquired by Berkshire and 3G in 2013 for $23 billion.
As a native of the Pittsburgh area, the Heinz deal particularly hit home for me. Not many months after the deal was done, 11 of 12 top managers were gone. And more importantly, 7,000 employees throughout the company are no longer employed.
Nothing folksy about that. What happened to that friendly acquirer of companies?

Not All Smiles at the Berkshire Hathaway Annual Meeting

The disgruntlement toward Buffett’s growing relationship with 3G Capital was even heard at the normally amicable Berkshire Hathaway annual shareholder meeting.
One long-time shareholder told Buffett that 3G’s aggressive cost-cutting gave him “heartburn.” The shareholder pointed to the promised $1.5 billion in annual cost savings in the Kraft deal.
Another shareholder called 3G’s cost cuts “brutal.” This investor asked Buffett whether he no longer “aspired to balance capitalism and compassion.”
The vastly differing styles of 3G Capital and Berkshire Hathaway are raising more and more eyebrows. After all, hasn’t Buffett often criticized the tactics of private equity companies in the past?
Buffett says he considers 3G to be “different,” because it prefers long-term ownership of the companies it purchases. 3G has not had a history of selling its acquisitions just a few years down the road.
Perhaps 3G Capital is a different sort of private equity company, but the line that Daniel Loeb drew between Warren Buffett’s words and deeds is drawing more and more attention.
3G Capital may good for Buffett’s bottom line. But what about his legacy?

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