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5yrs ago Hedge Fund hfm.global Views: 1.2k

An investment in vaping paid off big for Mudrick Capital Management last month, helping lift performance at the hedge fund known for its active involvement in bankruptcies.

Mudrick’s stake in the e-cigarette maker NJOY contributed gains of 14.5% during the third quarter, according to a letter sent to investors yesterday. Mudrick’s $1.5 billion flagship strategy returned 12.9% during the three-month period, putting it up 20.7% for the year.

The gains followed a period of booming popularity for e-cigarettes, which deliver nicotine while simulating the experience of smoking. The industry leader, JUUL, has drawn criticism for allegedly marketing its products to minors, causing some investors to avoid the companies.

Last month, NJOY raised close to $50 million of equity that can be converted to common shares at a price of $100, 10 times what Mudrick originally paid for its shares. The firm sold a portion of its stake at more than $66 a share, according to the letter, resulting in the windfall.

Mudrick’s gains also followed a benign period for hedge funds investing in bankrupt companies. The Absolute Return Distressed Index rose 4.14% through September, lagging its 2017 performance.

Jason Mudrick, the firm’s namesake founder, declined to comment.

In 2013, NJOY was the biggest company in the e-cigarette market and on track for an initial public offering. Venture capitalists including Sean Parker and Peter Thiel had invested in the company at a valuation of more than $1 billion.

But competition from the tobacco industry and the failure of a new disposable e-cigarette product combined to push the company into bankruptcy in 2016. After eliminating the company’s debt, Mudrick emerged as its majority owner the following year.

Mudrick worked to expand the company’s retail footprint following the bankruptcy, according to the letter to investors. The hedge fund also hired a new suite of executives and reorganized the board of directors

NJOY projects $50 million in annual sales, more than triple its sales rate during bankruptcy, according to the letter. The company plans to expand its retail distribution in the coming months.

Mudrick’s investment also benefited from the rising popularity of e-cigarettes, which are used both recreationally and as a smoking cessation tool. Tiger Global Management recently invested a reported $600 million in JUUL through its venture capital funds, giving the company a $16 billion valuation.

“We believe that as large health organizations, and the population more broadly, begin to recognize that e-cigarettes are a safer form of nicotine consumption, a meaningful portion of the hundreds of billions of market cap associated with big tobacco companies could migrate to e-cigarette companies, such as NJOY,” Mudrick wrote in the letter.

The U.S. Food and Drug Administration recently announced plans to clamp down underage use of e-cigarettes. Earlier this month, the FDA seized more than a thousand pages of documents from JUUL’s headquarters in a probe of its marketing practices.

“We are in the process of trying to work with the FDA to help formulate a set of guidelines and practices for the industry, which will both prevent underage usage and allow adults to consume nicotine in a safer manner,” Mudrick wrote in the letter.

Vaping boom fuels double-digit Mudrick gains on Absolute Return.


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