Transition planning @ Berkshire Hathaway

A Dark Horse in Buffett’s Stable of Successors
On Tuesday October 26, 2010, 8:50 pm EDT
By THOMAS KAPLAN

When Warren E. Buffett announced on Monday that Todd Combs had been chosen as the heir apparent to manage the investments at his company, Berkshire Hathaway, the reaction was: Todd who?

“I’d never heard of the fellow,” said Meyer Shields, an analyst with Stifel Nicolaus who follows Berkshire. “I don’t mean that as a negative; I just literally had never heard of him.” Mr. Shields was hardly alone. By Tuesday morning, Mr. Combs’s name was one of the hottest searches on Google. Yet there was little to find on the Internet about the 39-year-old hedge fund manager who is poised to assume control of a “significant portion” of Berkshire’s more than $100 billion portfolio. By late Tuesday, not even a photograph of Mr. Combs had emerged.

It appeared that Mr. Buffett had made a classic Buffett move: he looked where others had not.

For the last five years, Mr. Combs has been running Castle Point Capital Management in Greenwich, Conn., a relatively modest hedge fund with about $400 million under management.

“What was clever about this is he’s clearly not an investment superstar yet – but none of the superstars are going to take this job,” said Bruce C. Greenwald, a professor of finance at Columbia Business School who taught Mr. Combs a decade ago. “If you’re a very successful investor, who needs the meshugas of following Warren Buffett and being compared to him?”

The hiring of Mr. Combs lends some clarity to what for a half a decade has been the biggest question mark regarding Berkshire’s inevitable changing of the guard – who would wind up managing the company’s money. But questions still remain over the exact make-up of the next generation of Berkshire’s management.

Mr. Buffett, 80, does not intend to appoint a single person to succeed him. Rather, he has said that his chairman, chief executive and chief investor responsibilities would ultimately be split among multiple people.

Mr. Buffett’s son Howard G. Buffett, a farmer and philanthropist, is expected to serve as nonexecutive chairman, where – as the elder Mr. Buffett once described it – the son would be a “a double protector of the culture” at Berkshire.

That remains the plan. “My dad has said to me what he would expect, and I think I can do it,” Howard Buffett said in an interview with Bloomberg News two weeks ago. “My job is to make sure Berkshire doesn’t change. And that’s about all he’s said to me.”

Warren Buffett’s other responsibilities would then be split among a chief executive and a chief investor. The former position, which deals with Berkshire’s strategic acquisitions and the operations of its businesses, has presented less of a mystery. Mr. Buffett has said that he has three internal candidates who are both sufficiently talented and young enough to take the reins as chief executive.

According to Buffett watchers, the front-runner is David L. Sokol, 54, who runs the Berkshire subsidiary MidAmerican Energy Holdings Company and was also installed last year as the chief of NetJets, another Berkshire subsidiary.

Another name often mentioned is Ajit Jain, the head of Berkshire’s lucrative reinsurance business. In his annual letter to shareholders in February, Mr. Buffett instructed that if he, the Berkshire vice chairman Charlie Munger and Mr. Jain “are ever in a sinking boat – and you can only save one of us – swim to Ajit.”

How these businesses have performed of late will become known on Nov. 5, when Berkshire reports its results for the third quarter.

Berkshire’s board, meanwhile, will meet in the next few weeks, and at least half that meeting will be spent discussing succession planning, Mr. Buffett said in a telephone interview on Monday.

He also cautioned against characterizations of Mr. Combs as his de facto successor who would inherit the Berkshire empire. “The C.E.O. role is the most important,” Mr. Buffett said.

The position of chief investment officer, on the other hand, appears to have been harder to find candidates for. Mr. Buffett wrote to shareholders in 2007 that as far as succession was concerned, Berkshire was “not as well prepared” on its investment side as on its business side, and he and Mr. Munger have been looking for one or more managers to groom as a possible chief investment officer ever since.

Before Mr. Combs emerged, the Chinese hedge fund manager Li Lu was the most discussed candidate for the position. Mr. Munger went so far as to tell The Wall Street Journal in July that it was “a foregone conclusion” that Mr. Li would someday manage at least a big part of Berkshire’s investments.

But Mr. Li instead decided to remain at his own fund. He was said to be only one of several better-known fund managers who decided not to entertain the Berkshire position. That apparently opened the door for Mr. Combs.

His fund, Castle Point, focuses primarily on financial services companies. As of June 30, it had big holdings in U.S. Bancorp, MasterCard and Western Union, among others. One of Mr. Combs’s significant selling points was that the fund made it through the financial crisis relatively unscathed in spite of that focus, said Jay Gelb, an analyst with Barclays Capital.

“Over time Warren Buffett focuses as much on risk as return, and this track record gives an indication that Mr. Combs thinks about investing the same way,” Mr. Gelb said.

Still, one of Mr. Combs’s main virtues, according to Mr. Buffett, was that he was “enamored with Berkshire.”

That could be guessed from Mr. Combs’s resume: he is a 2002 graduate of Columbia Business School (Mr. Buffett’s alma mater), where he participated in the value investing program (where Mr. Buffett, the greatest value investor of all, looms as a sort of living deity).

Before business school, Mr. Combs worked for the Florida banking regulator and at the Progressive insurance company. It was at Progressive where Mr. Combs met Charles A. Davis, a Progressive director who is chief executive of the private equity firm Stone Point Capital. They kept in touch, and in 2005, Stone Point seeded Mr. Combs’s hedge fund.

Mr. Davis described Mr. Combs as a “private, humble, shy guy” and a dedicated family man – and, of course, someone who lives and breathes investing (Mr. Combs has recently lectured before an applied investing course at Columbia, for which Professor Greenwald gave him a rave review).

“He’s one of those rare people in finance who just really enjoys the process,” Mr. Davis said. “He really wants to find the truth, and what is the value of a company. He’s not a person who wants to delegate that to someone else or not do his own work.”

Mr. Buffett said he thought Mr. Combs would be a good fit at Berkshire, which required a certain type of manager – given that the pay there was not of the mind-boggling sort that a manager of a big, successful hedge fund could pull down.

“I think what Mr. Buffett said, he’ll find is true,” Mr. Davis said. “Todd’s not a glory hound. He just really loves what he does.”

Andrew Ross Sorkin contributed reporting.

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