FINANCE Bloomberg Businessweek September 30, 201924
PHOTOS: EINHORN: ALEX FLYNN/BLOOMBERG. LOEB: DAVID PAUL MORRIS/BLOOMBERG. VIRGIN TRAINS. COURTESY BRIGHTLINE○ Fortress-backedVirginTrains
USAhasbuilta linein Florida.
Nowit’sheadedtothedesertPrivate Equity Bets
On a Train to Vegas
VirginTrainsUSAhasa bigidea:Maketraintravel
a hip,convenientalternativetodrivinginsomeof
themostautocentricpartsofthecountry.Backed
byFortressInvestmentGroupprivateequityfunds,
thecompanylastyearlaunchedalongFlorida’seast
coastthecountry’sfirstnewprivatelyfinanced
intercitypassengerrailina century.ItsMiamihub
is a gleaming,citrus-perfumedstationwhereblue-
blazeredemployeesstocktheVIPloungewithcom-
plimentarycharcuterie.
NowthecompanyhasLasVegasinitssights.It
saysit canbringrevelerstherefromtheLosAngeles
areabyelectrictrainsthatcanreach150 mph.
Wowedbytheprospectofjobsandtrafficrelief,a
CaliforniastateagencyinSeptemberapprovedthe
firststepinVirginTrains’planstosellasmuchas
$4.2billionintax-exemptdebtforthe$4.8billionTHEBOTTOMLINE Hedgefundsdoveintothereinsurance
business,buttheyfoundit hardtoekeouta profit.Poorreturnsin
theirinvestmentportfoliossometimesmadethingsworse.project. The company says construction of the 170-
mile line, mainly along the median of Interstate 15,
will take three years, and it’ll start in 2023.
The hitch: The California terminus isn’t in L.A.
itself but in the outlying community of Apple Valley,
90 miles northeast of downtown. Virgin Trains will
have to persuade Angelenos to pay about $60 each
way for a 90-minute train trip—after they’ve already
driven as far as the Mojave Desert.
In pitches to California and Nevada officials,
Virgin Trains talks about eventually connecting to
Los Angeles, but it doesn’t offer a timetable for that.
And when executives tout their Florida achieve-
ment, they don’t mention they’re behind ridership
projections. It was only in June that the com-
pany broke ground for an extension of the line—of
about 170 miles—running northwest to tourist-richGreenlight Capital Re Ltd. and Loeb’s Third
Point Reinsurance Ltd. have had trouble with both
at times. The companies’ shares are trading below
their initial public offerings. “Investors have really
soured on this model because it doesn’t seem to
work,” says Meyer Shields, an analyst at Keefe,
Bruyette & Woods Inc. “It’s not like it couldn’t
work. It just hasn’t.”
Greenlight Re is at a crossroads: Facing criticism
from an insurance ratings agency about its under-
writing, it announced in May it was reviewing its
business. Einhorn said in August that the company
had to search for the “best strategic direction,” but
liquidation wasn’t his first option. Third Point Re
hasn’t posted an annual underwriting profit since
at least its 2013 IPO.
The insurance business got crowded. In 2013
the “floodgates” of capital opened and altered the
market, says Shields. As new players joined in, it
got harder to charge high premiums. Natural disas-
ters in 2017 forced insurers to pay out a record
$138 billion, according to Munich Re.
Investment markets haven’t always been kind,
either. Greenlight Re’s portfolio declined 30.3%
last year, and Third Point Re’s investments man-
aged by the hedge fund fell 10.8%. This year,
Greenlight Re’s investments are up 7.8% throughthe end of August, and Third Point Re’s hedge
fund holdings recorded an estimated net return
of 11.4%. As Greenlight Re seeks a new path, it says
it will stash a majority of its investments in cash
and short-term Treasuries. Third Point Re ended
up shifting some bets into fixed-income assets.
Greenlight Re and the Greenlight hedge fund
declined to comment.
Loeb isn’t giving up. He says he’d like to see
Third Point Re, which has a market capitaliza-
tion of about $918 million, become a $5 billion to
$10 billion company in the next 5 to 10 years. “I’m
fully prepared to put more capital into this busi-
ness to make strategic acquisitions,” he says. The
original plan was to seek relative stability while get-
ting upside from Loeb’s investment bets. Now the
company is working to shift its underwriting strat-
egy to higher-margin types of policies.
Hedge fund reinsurers aren’t alone in being
scarred by the business. In 2011, Buffett admitted
Berkshire didn’t really succeed until the arrival of Ajit
Jain, now vice chairman for insurance operations.
How long did it take Berkshire to find its footing?
Fifteen years, Buffett said. —Katherine Chiglinsky○ Einhorn○ Loeb