Warren Buffett is bullish on Canadian real estate. He's even more bullish on Canada.
Just don't ask the Oracle of Omaha where house prices will be in 12 months. The legendary value investor said he made a potential $2.4-billion debt-and-equity investment in Home Capital Group Inc., the country's largest alternative mortgage lender, "with no specific view on whether home prices are going to be up 10 per cent or down 10 per cent in a year's time. No one knows that."
In a deal that combined the folksy charm and financial acumen that has made him one of the world's wealthiest men, the chairman and CEO of Berkshire Hathaway Inc. said in an interview with The Globe and Mail that he first considered backing Home Capital, which came close to collapse in early May, after getting an e-mail from a Bank of Montreal executive who occasionally passes along interesting opportunities.
That note was a seed landing in fertile soil. Mr. Buffett's warm feelings for Canadian investments date back to his childhood – he owned shares in miner Noranda as a 13-year-old. The upbeat outlook was reinforced in May when Mr. Buffett listened to Prime Minister Justin Trudeau and Finance Minister Bill Morneau speak about Canada's prospects at a Microsoft-sponsored CEO summit in Seattle.
"I always have been enthusiastic on Canada generally, but I felt even more so after talking to them," Mr. Buffett said, adding in a can't-make-this-up moment that he was impressed by the country's Prime Minister after watching Mr. Trudeau "win that prize fight" – his famous charity boxing match with Senator Patrick Brazeau in 2012 – on YouTube.
The attraction of Home Capital was simple, to hear Mr. Buffett tell it. This was a solid company facing a lapse in confidence and a run on the bank. Mr. Buffett said: "Financial institutions trade on confidence, and we believed Berkshire could bring something in terms of confidence, to improve an already secure situation."
Home Capital's clients are folks who can't borrow from banks, including immigrants and the self-employed, and Mr. Buffett said he and his colleagues were impressed by company's ability to lend to home owners who pay back mortgages and avoid deadbeats.
Berkshire also sees an opportunity to expand Home Capital's business, potentially through acquisitions, in a fragmented market for alternative mortgages.
"A lot of people who don't fit the cookie-cutter approach to borrowing are perfectly decent credits," he said. Mr. Buffett, who is famously paid just $100,000 (U.S.) to run Berkshire, added: "I'm not sure whether I'd qualify very well on loans, when you get right down to it … if you look at my salary."
While Mr. Buffett's thesis for investing in Home Capital started with an optimistic view of Canada – with a strengthening economy and inflow of immigrants – and a positive take on the company's credit culture and prospects, it was Berkshire's ability to make quick decisions that sealed this deal.
More than 70 suitors looked at Home Capital's books after the Toronto-based lender was effectively put up for sale in May. Berkshire's team went from a first meeting to a handshake deal in three short days, warp speed in deal-making terms.
"Our style is never to really haggle over price," said Mr. Buffett, who can draw on the deep financial resources within Berkshire to fix balance sheet woes at Home Capital – the conglomerate has some $90-billion (U.S.) in cash. "We've bought a lot of businesses. … We've got our way of doing things. Hopefully, our batting average is decent over time."
Mr. Buffett's batting average at Berkshire has turned a theoretical $1,000 investment when he arrived at the company in 1964 into a stake worth more than $10-million today. For Berkshire, the Home Capital transaction is a small one – but it should nevertheless enhance that track record. Assuming all parts of the deal close, he has already turned a paper profit of $360-million on the Home Capital shares he has agreed to buy.