The billionaires buying for a turnaround

Hard work, perseverance, a high tolerance for risk. These attributes are all common among wealthy entrepreneurs. But a fourth ingredient – and perhaps one of the most important – is timing.

Knowing when to buy (preferably when asset prices are cheapest) and when to sell are the keys to building a sustainable fortune. And the rich have an uncanny knack for picking the market.

In 2005 and 2006, a host of rich entrepreneurs, including James Packer (Nine Network), John Van Lieshout (Super A-Mart retail chain) and Lang Walker (extensive property holdings) realised they were probably never going to get a better offer for their assets and headed for the exit.

For much of the GFC, entrepreneurs were content to sit on their cash, emerging only when they could snare assets at bargain prices. But in the last few months, some big names have emerged to start buying up again.

Chief among these in Australia is James Packer. After a period in which Packer sold down his side investments – including stakes in Challenger Financial Services, cosmetics group Jurlique and tourism group Living & Leisure – Packer has waded back into the role of angel investor in the last 12 months

In April last year, Packer’s private equity vehicle Ellerston Capital invested an undisclosed amount (believed to be about $10 million) for a stake in online retailer Deals Direct.

A month later, he pumped $40 million into one of Deals Direct’s biggest competitors, Catch of the Day, in a deal that valued the group at $200 million.

Last October, Packer emerged on the registry of MOD Resources, a junior exploration company which is looking for gold in New Zealand.

He’s been active in the first two months of 2012, too. In mid-February his private equity vehicle invested $5 million into online shipping company Temando, grabbing an undisclosed stake in the Brisbane-based company that is now planning to head overseas.

Last week, Packer sprung another surprise, grabbing a $123 million stake in Treasury Wine Estates, the wine business spun off by Foster’s last May.

The investment is notable for a few reasons. Firstly, it represents the first large-scale investment Packer made outside of the media and mining for some years.

Secondly, it appears to be a genuine bet on a turnaround story. The outlook for the wine sector has been decidedly poor in recent years as a global glut of grapes and weakness in consumer spending in developed economies pushed prices down.

But the problem of oversupply is slowly sorting itself out. Packer isn’t saying, but this would appear to be a punt on a recovery.

Packer is not the only one buying in industries that appear to be on the slide – Warren Buffett’s Berkshire Hathaway has also made a series of recent purchases in sectors that have been under increasing pressure in recent years.

In January, Buffett’s investment giant emerged with a larger stake in British supermarket giant Tesco, lifting its shareholding from 3.21% to 5.08%. The share purchase came a day after Tesco told the market that its 2012-13 trading profit would be flat.

Like many retailers around the world, Tesco is under some pressure. But as Buffett has made clear, his outlook on the global economy is relatively bullish and a giant like Tesco will benefit from an improvement in consumer confidence.

Another sector waiting for a turnaround is media. While we have seen long-time media investors like Lachlan Murdoch and James Packer playing in the industry, we’ve also seen many looking to get out – John B Fairfax is the best example of that.

But Buffett, a long time investor in The Washington Post, continues to believe in the sector. Earlier this month Berkshire Hathaway emerged with an increased stake in cable television group DirecTV and added a new holding in Liberty Media, the company run my media billionaire and former Rupert Murdoch sparring partner John Malone.

The buys are believed to have been orchestrated by Buffett’s new stock picker Ted Weschler, who invested in the stocks at his previous employer. But there’s little doubt Buffett would have signed off on the investments.

Other good examples of wealthy entrepreneurs who have invested in sectors hoping for a turnaround include John Singleton, who has been buying up pubs and bargain-basement prices for about 12 months, and Richard Chandler, the New Zealand billionaire who is in the process of taking a large stake in struggling timber group Gunns.

But a salient lesson in the patience needed with turnarounds was provided this week by Clive Palmer, who moved to dump hotel operator Hyatt as the manager of his resort in the Sunshine Coast town of Coolum.

Palmer bought the resort last year for about $80 million and said at the time he was betting on a turnaround in the Queensland tourism market.

The high Australian dollar and poor weather mean that turnaround hasn’t come and clearly Palmer wants to make some changes. As well as trying to get rid of Hyatt, he made a series of extraordinary claims against Hyatt, alleging the group had siphoned off $60 million from the resort during the 20 years it had managed it.

Hyatt denied the claims and managed to get a Supreme Court injunction blocking Palmer’s attempt to have it removed.

This is one turnaround that is going to take some time.