David Tepper is hedge fund manager and founder of Appaloosa Management, which specializes in distressed debt. Tepper is among the very few hedge fund managers who has performed consistently well since the 2008 financial crisis. Once regarded as one of Wall Street’s brightest stars, Tepper remains a highly regarded investor with brilliant strategies.
David Tepper comes from humble beginnings. His parents were working class folks in Pittsburgh, where young David grew up and graduated from high school. His father dabbled in investing, which is how David developed his affinity for it. In fact, when David was in college at Pitt, he got his first investments from his father – Pennsylvania Engineering Co. and the soon-to-bankrupt Career Academies.
Despite the inauspicious start to investing, the younger Tepper was hooked. After Pitt, he worked at Equibank as a credit analyst, but it was unfulfilling. Thus, in 1980, Tepper enrolled in business school at Carnegie Mellon University where he got a Master’s in Industrial Administration.
In 1982, after finishing graduate school, Tepper went to work for Republic Steel before going to work in 1984 for Keystone Mutual Funds. Though his previous jobs had been in finance, the position at Keystone was his first-time foray into financial management. He did well enough that, in 1985, Goldman Sachs recruited him to work in their newly-formed high yield group. Within six months, Tepper was their top trader, and he stayed until 1992, focusing on bankruptcies and special situations. After getting passed over for partnership again at Goldman Sachs, Tepper left late in 1992 to make his own name.
Armed with his years of experience at Goldman Sachs for making money from seemingly untenable situations, David Tepper founded Appaloosa Management Hedge Fun with an initial bankroll of $57 million (it now manages around $4 billion).
Tepper’s investing specialty is mainly distressed equity and debt investing. He identifies and goes after companies in trouble – the more dire, the better. He will invest at any time in any class or type of company on the brink of bankruptcy anywhere in the world. He holds a company’s debt until it matures, or keeps the stock until the company recovers, and then he sells it for incredible profits. He favors companies that have high revenue and believes that investing in public utilities is not only lucrative but also safe. He’s convinced that a government won’t let these types of companies fail since it’s in the public’s best interest for them to stay afloat.
Examples of his early prominent successes from the mid-to-late 1990s include the purchase of Argentine sovereign debt, betting on the future of the Korean won, investing in AIG debt, and the 60% return he made the year after he bought up millions in Russian debt.
Appaloosa’s Meteoric Rise
After the run of successes to end the 20th century, David Tepper continued Appaloosa’s streak into the new century.
In 2001, Appaloosa had a 61% return, mostly from investments in distressed companies, including investments in two public utilities that drew special attention. Both Pacific Gas & Electric and Edison International were near bankruptcy when they came onto Tepper’s radar. In fact, their credit ratings were low enough to classify them as junk status, which was right in Tepper’s wheelhouse. He bought millions of shares in both utilities at a low price, and, when California bailed both companies out, Tepper made a fortune as share prices rose nearly $10 per share for each company.
Another famous Tepper deal is from 2002, when he bought $1 billion in debt from Enron, then in a quagmire of trouble before it eventually went bankrupt. Once Enron reorganized and got back on track, Tepper sold the debt and made another fortune.
Other notable successes that Tepper and Appaloosa have brought in for their investors include buying into distressed companies like WorldCom, Conseco, MCI, Mirant, and Marconi. In 2003 alone, returns of 148% were generated from distressed debt companies, and, in 2009, Tepper’s investment in Bank of America shares more than doubled after he bought over 47 million shares.
Amidst all the successes are a few notable clunkers. In 2000, David Tepper shorted the NASDAQ, which was overvalued at the time. However, he eventually covered his short due to his investors’ complaints. A short time later, the tech bubble collapsed. Another big hit came in 2002, when he lost 25% after the high-yield debt market collapsed.
Overall, David Tepper has performed impressively for more than two decades. Appaloosa has realized gross annualized returns of 36% and net returns of 28% – and these include lackluster performances in 1998, 2002, and 2008, when the fund lost 20% or more each year. Yet, Tepper has not become complacent; he not only relocated his family to Miami, he also moved Appaloosa down south after spending 20-plus years in New Jersey.
Although Tepper has mostly away from Pittsburgh for the past 30 years, he still keeps close ties to his roots. Among his many philanthropic efforts through the years, he’s made two donations totaling more than $125 million to Carnegie Mellon, given millions to Pitt, and purchased a 5% stake in the Pittsburgh Steelers in 2009.