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2~16 YEAR-E"i''lJ LETTER

Copyrighl@ 20/7 The Baupost roup, L.L.C. This teller and the information herein is confid~:tltial and is provided to you only in
your capacity as a Limited Pari Jer, a representative of a Limiled Partner, or an advisor fo a Limited Parlne1, m1d 1101 for further

Feb 7 20 17 9:06:44 AM
The Baupost Group, L.L.C.
10 St. James Avenue, Suit 1700 Boston, Massachusetts 02116 Phone: 617-210-8300 Fax: 617-451-7333

January 20, 2017

Dear Limited Partner, ~

Baupost poste high single-digit gains across all partnerships for the year ended
December 3 I. Detailed uarterly reports for this period, including investment returns, largest
individual position gain and losses, and portfolio allocations, as well as our 10 largest positions
as of December 3 I, will lb e posted on our website in early February.

20 I 6 In Review: "Before"

20 I 6 was decide!l ly a tale of "Before" and "After." The first 44 weeks of 20 16 -

"Before: the presidentia electio~ - amounted to a c?ntinu~tion,of the prevailing tr~nds: tepid
econom1c growth, absur ly low mterest rates, Washmgton If'. todlock, and a long-m-the-tooth
bull market characterizeq by rich valuations and relatively. IQW VOJatjlity. The election proved to
be an inflection point, a~d the final eight weeks of20 16- tbe 'After" - were a radically different
story. Optimism over thf possibil ity of a rejuvenatea economy drove a protracted post-election
stock market rally, with ~peculators guessing winners''and losers based on expected policies of
the incoming Trump administration, Fixed inc4wc .u.arKets sold off. Fortunately, Baupost was
able to find pockets of o~portunity in both o_erfo1fs ac.ross equity, debt, and private markets, even
as we harvested gains in fully-priced holdings, ill the while maintaining significant hedges and
healthy cash balances. I
"Before" was dorpinated by a continuation of the quantitative easing and near-zero
interest rate policies tha~ave been implemented s ince the 2008-2009 financial crisis. "QE is
here forever," said a Ba of Engtand deputy governor in September. Inflation, and expectations
regarding future inflatio . rematued well contained. In early July, the I0-year Treasury hit an
all-time record low yiel5 :'>ill s'?vq. As of mid-August, $13.4 trillion of debt worldwide (largely
sovereign) traded at4.H~gapve".lnterest rates, a mystifying and unprecedented circumstance in
which bondholdcrswillJrtgly dbligate themselves to pay interest to issuers for the privilege of
tying up their capital tot f significant interval while still bearing the risk of default. The topsy-
turvy madness spread beyond sovereigns. Over the summer, for example, Danes were able to
procure sho11-term home mortgages at negative interest rates (the bank pays them to live in the
house), while a few corp rate issuers in Europe were similarly blessed.

After a sharp sell-off early in the year, the U.S. stock market recovered and then gained
ground as investors cont+ued to look beyond fixed-income for returns. Shares of high dividend
companies were widely Jught. One observer pointed out that, in a twist, in 2016 investors were
buying equities to get inc me, and buying bonds for capital gains. Through October 31, the S&P
500 and Russe11 2000 ha each gained approximately 6% (inclusive of reinvested dividends),
while those irrepressible ANG stocks (Facebook, Amazon, Nettl ix, and Google) were ahead by

Copyright 0 2017 The Baupost Group, L.L. C. This Iefier and the infonnatioll herein is confidential and is provided to you only in
your capacity as a Limited Part11e , a representative of a l.imited Partner, or WI advisor to a Limited Parlner, and not for further

Feb 7 2017 9:06:44 AM

an average of 14%. Commercial real estate- another asset class which continued to attract yield
seekers- also had a strTg year in 2016.

An August artie~ in The Wall Street Journal headlined, "It's Getting Scarily Quiet in the
Stock Market," warned not only of complacency in the markets but also complacency about
central banking. Invest~s have become accustomed to the oversized role of central banks in
markets and the tendenc of their policies to buoy the prices of marketable securities. Central
banks themselves have ontinued to hoover up financial assets, and now control a whopping $25
trillion of assets worldw de, more than double the 2008 amount. In 2016, the European Central
Bank extended its mand tc to include corporate bond purchases, the Bank of Japan's ownership
of the Japanese TOPixt dcx grew to more than 2% of the index's market cap, and the Swiss
National Banl<'s pOiifoli of U.S. stocks swelled to over $60 billion. It's evident that the
propensity of this gener tion of central bankers will be to continue to err on the side of
intervention in markets, eemingly without concem for the moral hazard of their actions.

The magnitude td duration of distorted secmities .Pitcmg ~esulting from the outsized
role of central banks in co nomic life may be unprecedente.c:r. 1 tte world is so awash in low cost
debt that almost every d y in 2016, The Wall Stre_et .Jow:lla'k01' ;he Financial Times routinely
reported another market excess. By way of illustratlon. amearly October headline proclaimed:
"Yield-hungry investors snap up Italian 50-year bonos . .t,itmt for returns outweigh bank fears."
The article explained thlt the 2.8% yield on: thyse "Methuselah" bonds (i.e., they last almost
forever) was deemed att active compared'tl'\ the negafive-yielding issues in other jurisdictions.
Investors were willing t overlook lo9Jfttn1? ,tJolitical uncertainty and a slow-motion banking
crisis in Italy, including he real prospect ot a i:.uro-skeptic political party taking control. Days
later, tranchcs of Saudi lrabian debt, i ncluom~ a 30-year offering at 4.5%, were even more
oversubscribed, despite n oiiJiJ>ir.e slump that has devastated the Saudi economy and upended
its fiscal situation. And he rf~llowine week, Austria (Austria!) floated a 70-year issue that was
gobbled up despite a pal1y l.S;o/

. . Thc~e top-of-ma~l<e't..bonc offerings posed numerous risks that investors seemed _to be
tgnon ng. FHst, whenev1 Interest rates return to more normal levels, these bonds are gomg to
trade down price: At\ one who _bet on "low~r for longer" will have lo~ke~ in "inadequate for
longer," an msuffictent r -turn not JUSt for a wh1le but for a career, for a ltfet1me. The mark-to-
market losses from a me~c 50 basis point rise in rates would be equivalent to more than three
years of coupon paymen s for holders of 30-year Treaswys. Second, a pick-up in inflation, or
even in expectations of 1ture inflation, would render the meager yields on these fixed-rate and
sometimes very long durption instlllments inadequate, causing them to sell off further. Because
bonds have been in a 35-oyear bull market, few investors active today have any experience
navigating a sustained stular increase in interest rates and inflation, which from these levels,
under the best of circum tances, would make for an exceptionally jolting ride.

Finally, over the ourse of time, the credit risk of these priced-to-perfection obligations
will almost certainly looQ1 larger, with bondholders again potentially taking it on the chin.
Despite the miniscule interest rates, a record number of sovereigns were downgraded in 2016.

Copyright 2017 The Bauposl roup, L.L.C. This letter and the information herein is confidential and is provided to you only in
yo11r capacity as a Limited Par/11 r, a representative of o Limited Par111er, or (Ill at!l>isor to a Umited Partner, and not for further

Feb 7 2017 9:06:44 AM

For years, sovereign de9t-to-GDP ratios have been increasing in a number of countries. When
low-rate sovereigns nee~ to be refinanced, higher rates may savage national budgets, potentially
necessitating debt restructurings for marginal issuers. The sheer amount of outstanding debt,
$152 trillion worldwide,! should have triggered investor concerns. The IMF warned in October,
for example, that debt le~els posed a mounting threat to the global economy.

"Brexit" also fig red prominently in this period as an ominous harbinger of rising
populist sentiment. Brits voted to leave the Emozone on June 23, despite polls that suggested
"Bremain" would win. fhe
vote jolted U.K. markets; ovemight, sterling plunged 8% against the
U.S. dollar, and fell ano er 5% over the following two weeks. Prime Minister David Cameron
was forced to resign, an his successor, Theresa May, is still working out the details ofBrcxit.
Incumbent politicians arpund the world detect blood in the water - the blood is theirs and the
sharks are circling. Inve~tors have been put on notice that voters are eager for change, no matter
the price. I
2016 In Review: "After"

Then, on Novem~er
8, the U.S. electorate.basioally gave me middle finger to the
cstablislunent and the st~tus quo by narrowly elettm~ Oouald J. Trump to the presidency of the
United States. Like stru~tural plates deep b.elow the et~i1th s surface gradually grinding against
one another until the pre~sure builds and atrearthquar..t:lbecomes the natural release, the election
of 2016 involved a tectm~ic reckoning ofpolttical, economic, sociological, technological, and
culhlral forces. Nationally, Republican!i swept illt0 power, hitting an executive and legislative
branch trifecta that supporters believe wir break the gridlock in Washington, D.C.

Stock futures slu~ped on. election night, but by morning equities had reversed direction
to jubilantly celebrate Trumr's v1r.tory; bonds, in turn, sold off sharply. "The Trump Trade
Takes Over," exulted a ff(all Street Jr>trmal headline on November 11 . The market rushed to
price in the likelihood that Trum!J would propose sharply lower individual and corporate income
tax rates. Ensuing animal"'8bints Jrove U.S. stocks to repeated new highs, especially shrues of
those companies ex,-nectfll~ to Mhefit most from lower taxes, expanded infrastructure spending,
and deregulation. The "tussell 2000 Index rose for 15 straight days ( 12 of them post-election),
the longest such rally smee 1996. While the rally lost steam right at year-end, the S&P 500 rose
12% for the year while tHe small-cap Russell 2000 surged 21% higher (in both cases inclusive of
reinvested dividends). 1
Meanwhile, post-ylection, interest rates jumped and bonds slumped in anticipation of
policy changes and an acreleration in economic growth, but perhaps also from fears that
expected measures could ~rove inflationary. The yield on the two-year Treasury hit a seven-year
high. Longer dated bonds dropped sharply in price. The Mexican peso plummeted to a record
low, while higher U.S. in{erest rates put pressure on the Chinese yuan. After the Fed raised rates
in early December for thd first time in a year, signaling stronger U.S. growth, the dollar soared to
a 14-year high against the euro. The Fed also indicated that it intended to raise interest rates
three times in 2017. The barket's post-election gyrations are emblematic of what markets do:
Copyrigh1 0 2017 71te Bauposl Group, L.L. C. Tins feller and the information herein is conjidenria/ and is provided to you on~)' in
your capacity as a Limited Parl11e , a represe11tative ofa Limited Partner, or attadvisor to a Limited Partner, and not for further

Feb 7 2017 9:06:44 AM

they attempt to forecast he future and reflect it in daily securities p1ices. But markets are hardly
efficient; they frequentl~overshoot. As Barron's columnist Kopin Tan pointed out in late
November, "the stock m rket is behaving as if Trump will fulfill only the campaign promises it
likes but conveniently beak all those promises it doesn't like."

The new adminitation will have a decidedly pro-business bent, which will be a breath
of fresh air after the last~ight years. As Jamie Dimon, CEO of JPMorgan Chase, noted in
December, "Business is a huge positive element in society. But for years it's been beaten down
as if we're terrible peopl~." Corporate profits are likely headed higher on the back of Trump tax
cuts and fi scal stimulus. lA
relaxation of regulations is expected to boost the banking industry,
among others, while stimulating corporate merger activity. And an outsider perspective could
potentially help conjure tp fresh solutions to festering problems.

The steady drum eat of stock market gains (the S&P 500 lndex closed at record highs on
eight different occasions between the election and year-end) casts a spell on market participants
-no one wants to miss tliis ticket to paradise. As they pitM~lt. investors were largely ignoring
perilously high valuation~. Goldman Sachs noted that the S&R 500, in aggrcgale, recently traded
at the 85'11 percentile of i~ historical valuation over the, last fli!J rt:ars, while the median company
in the S&P 500 had reacl ed the 981h percentile ofwuruutor. Respected investor Jeremy
Grantham calculated this market as the third mosJ 6xot:mswe of the last century, behind only the
markets of J 929 and 200p, both of which endep disa"J'busly for investors. David Rosenberg, the
respected chief economi~ and strategist at 'Gluskm Si\eff, a leading Canadian asset manager,
noted that the U.S. stock market in earlv DMemhP.r was pricing-in a whopping 30% earnings per
share growth for 2017.

Exuberant investL have focused on the potential benefits of stimulative tax cuts, while
mostly ignoring the risks1frotn America-first protectionism and the erection of new trade barriers.
President Tmmp may be able to ~emporariJy hold off the sweep of automation and globalization
by cajoling companies t0lkeep job's at home, but bolstering inefficient and uncompetitive
enterprises is likely tn nnly ~emnotarily stave off market forces. While they might be popular,
the reason the U.S wnf! ~go abandoned protectionist trade policies is because they not only don't
work, they actually lt.e1v'e society worse off.

The anticipated fifcal stimulus and protectionist policies amidst sub-5% unemployment
could prove quite infiatiopaty, which would likely shock investors (who, for decades, have not
had to contend with the srourge of relentlessly rising prices). Furthermore, the Trump tax cuts
could drive government 9eficits considerably higher. (The large 2001 Bush tax cuts, for
example, fueled income inequality while triggering huge federal budget deficits.) Rising interest
rates alone would ballooJ the federal deficit, because interest payments on the massive
outstanding government (bt would skyrocket from today's artificially low levels.

TIUmp's erratic pronouncements- about tatiffs, corporate actions, the cost ofF-35s, a
nuclear weapons buildup, and whatever else- are unusual and unsettling, to say the least. The
big picture for investors i this: Tmmp is high volatility, and investors generally abhor volatility

Copyrig/11 <CJ 2017 The Bauposl Group, L.L. C. ThL1 Ieifer and 1he informalion herein is confidemial and is provided 1o you only in
your capacity as a Limited Por/ne . a representative ofa Limited Partne1~ or a11 advisor to a Umited Partner, and not forfurther

Feb 7 2017 9:06:44 AM

and shun uncettainty. N~t only is TtUmp shockingly unpredictable, he' s apparently deliberately
so; he says its patt of his plan. He's also, at times, contradictory, giving one the perpetual feeling
that just about anything could happen. Predictability in govcmment policies, like predictability
in business results, is imrortant to investors. Amidst rapid-fire and tumultuous change, it's
going to be that much ha dcr for investors to make assumptions, model business performance,
and reach intelligent dec sions.

Personally, I'm tt1oubled by Trump. I was asked last August, in the aftetmath of his
statements about Judge Gonzalo Curiel, Khizr Khan, and the election being rigged, to publicly
express my views on the,presidential election. I've taken the view that each of us can be
bystanders, or we can be upstanders. 1 choose upstander. So despite my preference to stay out
of the media, I chose to xpress my views publicly. Here is what I said about T rump : "His
words and actions overt e last several days are so shockingly unacceptable in our diverse and
democratic society that i is simply unthinkable that Donald Trump could become our president."
Obviously, he won, and his presidency shou ld be judged by hi~ actions and perfonnancc in the
months and years ahead, but nothing he has done or said since then has changed my mind.

As a student ofh~'tory,
1 know that democraci.0Stare n:ague and cannot be taken for
granted. Democratic not s are crucial for the perp~tuatton of democracy. Political stability
depends on the mle of Ia and adherence to prec~tlent.

Investors must take into accmmt that ) Ur worJtl bas become increasingly complex and
interconnected. Danger! ever-present! rogl!e actors and failed states, weapons of mass
destruction, cyber threat , and seemingly m;econctlable national interests and agendas.
Challenges are everywh e: pressures from gl6balization, economic interdependence, rapid
technological advancement an9 :he consequent industry disruption, the threat of climate change,
growing economic inequhlity\ pop11l!ltion migration, and an increasing number of people falling

These challeqges~tnat<e ::~ne teadership more important than ever. A good leader
demonstrates intellt~~nu , cut1t0'sity, patience, self-discipline, consistency, humi lity, and self- .
awareness. He or she li plays an abiding respect for facts, maintains a nuanced view of issues,
and forms judgments ba:-~ed on a careful assessment of the whole picture. He readily
acknowledges mistakes and sttives to learn from them. A strong leader is measured; she offers a
clear and consistent message and says the same thing again and again, both in public and in
private, in every form oJonununication, to every constituency. If new facts or a considered re-
assessment of a situation causes her to change her mind, she communicates this, too, and
explains her revised thin ing. She isn't focused on winning at all costs while ctUshing her
opponents; she seeks wi -win outcomes and common ground. She meets her obligations and
commitments; her word is gold. The erratic tendencies and overconfidence in his own wisdom
and judgment that Donald Tnnnp has demonstrated to date are inconsistent with strong
leadership and sound derion-maldng.

Copyright C 2017 1/1e Baupost Group. L.L. C This letter and the information herein is COI!fidemial and is provided to you only in
your capacity as a Limited Parh'r a representative ofa Limited Partuer, or all adviso1 to a Limited Partner, and nat forfurther

Feb 7 20 17 9:06:44 AM
In the immediate aftetmath of the most vulgar and vitriolic election of our lifetimes, both
the winning and losings des shifted to the kind of reassuring rhetoric that should accompany a
democratic transition of ower. The media busily engaged in a notmalization ofDonald Trump,
as did many Republican . But no matter how well he may perform as president, I know I won't
forget the hate-filled ran s, threats to democracy, and simple lack of decency that accompanied
his campaign. The end even winning the presidency- does not justify those means.

Post-election, Tr mp has been an enigma. He has walked back many of his most
controversial stances ("d n't lock her up," "build a wall with doors," etc.), but on others, such as
a "Muslim registry," heJas been silent. He has nominated campaign loyalists to cabinet posts,
but also some who didn' back him; appointed a number of hardliners but also a few moderates;
selected several Washin ton novices but also some experienced hands. Having military or
Goldman Sachs experie ce on your resume was clearly a plus. Trump has failed to create a blind
trust for his assets. But f..1 early December, TIUmp formed a Strategic and Policy Forum, and
filled it with a highly res ected, bipartisan group of business J~aders. He also met with a who's
who of tech industry lea ers, few ofwhom backed his candil1al';. What will President Trump
actually do? During the ampaign, The Atlantic's Salena 'Ztto inS'l.gbtfhlly observed of Donald
Trump that" ... the press akes him literally, but n0t se.~<ioust<yJt ':ns supporters take him seriously,
but not literally." How re we to take him? The c<mntrv.lndeed the world, is watching.

Strikingly, the t eeting has continueci,j.ttcluanag patently false claims and personal
attacks that have no plac in a serious adffiilllstratr~ We know from the seminal work of
behavioral psychologist aniel Kahnernan, aufhl>r. 0f"Thinking, Fast and Slow," that when
addressing a problem, th first thought that' comes into our minds is often not the best answer we
will ultimately arrive at. OLU' ''fast" brain comes up with its best approximation of the answer to
a problem, but our "slo "braid' often has the last laugh. This raises the question of whether it
makes sense to tweet. .. nything. isoecially for a president. In a job where words matter and
nuance matters more, tw etint: ts..nof ~ ~ommunication tool, it's pure indulgence.

Worryingly, Tt:u ,- p-~defemnea Vladimir Putin against CIA allegations that Russia hacked
the election to helr. 1-lun in, while slamming the U.S. intelligence agency that would soon be
reporting to him. 'tn~am nusual post-election phone conversation with the president of Taiwan,
Trump broke with 37 ye ,s of diplomatic protocol by threatening to upend America's one-China
policy. New Yorker wri r Evan Osnos says of this, "It wasn't clear how much he intended to
abruptly alter geopolitic , and how much he was incompetently improvising." After being
widely criticized, Trum tweeted, "Interesting how the U.S. sells Taiwan billions of dollars of
military equipment but I should not accept a congratulatory call." Days later, Chinese bombers
made several passes ove the South China Sea, and China scooped a subsea U.S. drone out of
international waters.

Why write so m ch about the recent presidential election in an investor letter? Because
elections matter, and Tn mp is anything but business as usuaL Much is about to be reshaped for
business and the econon y, potentially creating investment opportunities but also increasing
uncertainty and elevatin risks. Tax cuts, deregulation, and infiastructi.U'e spending have both

Copyrighl 2017 The Bauposl roup, L.L. C. This feller and the informmion herein is confidelllial and is provided 10 you only in
your capacity as a Limited Part1 er, a representative of a Limited Partner, or an adviso1 to a Limited Partner, and /loljvrfltrtlzer

Feb 7 2017 9:06:44 AM

macro and micro ramific tions. Economic growth could be higher under Trump, as could
interest rates and in.flatiol1. The hard work for us will involve assessing the impact of policy
actions on the value of specific businesses and assets, work that began for us the day after the
election. And, of course1a trade war or international crisis would be highly dis111ptive and costly
for business and, more importantly, it would have a wrenchjng impact on people's lives.

Also, investmenJ depend on more than tomorrow's cash flows; ultimately, they can only
be as sound as the integrilty and stability of the system in wh ich they operate. Market confidence
is threatened when the nqnns of a democratic society are under attack. We cannot take for
granted that investors wi~l always regard America as a safe haven, a tranquil port amidst the
world's stormy seas. Th~ Tnnnp presidency could, in the best case, mark a point of renewal for
free market fo rces. The pro-business ti lt of the cabinet is unmistakable, though the melange of
backgrounds, viewpoints) and, in many cases, limited Washington experience do not suggest
consistent policy directioj1. lf things go wrong, we could find ourselves at the beginning of a
lengthy decline in dollar hegemony, a rapid rise in interest rat~:~:; and inflation, and global angst
about the stability and wifdom of American leadership.

Our best guess is 'hat politics nationally (and globauv' w11l remain tumultuous. In
America, voters are angry and frustrated on both SILft:~ of lbe atsle, and many were willing to try
something decidedly diffqrent. It's hard to see th,is settling down anytime soon. Economic
stagnation and growing inequality, job outsourP-ing, acctelerated technological change, gtidlock in
Washington, distrust of p9liticians, and a'bacl<.lasllclgamst elites as well as political correctness
likely all played a role in tw16. PeopJe .vere7 ea~Rr. for change, and many resented the soft-
power, "leading from bel~t?d" style ofPre&u1ent Obama, as well as his own broken promises.
Racism and xenophobia, f hipped up by alt-nt!nt media, may also have contributed.

One of the really 'iaanme .:~e.velopments of 20 16 was the proliferation of "fake news."
Columnist Steve Chapma wrvm. m tne Chicago Tribune, "There is now a bustling industry of
websites and Twitter ac:cor nt~ who~e chief~roduct is fi ction masquera~ing as ~act. .. Our system
of government rests on~the iss~.uyptton that m the long run, the truth w1ll prevail over fa lsehoods.
We have yet to cooS'JOer ~hat:lto do if our faith in the tmth turns out to be false." A commitment
to objectivity and'imeltectual honesty is critical at every level of proper decision making,
whether it be making w1s,~ mvestment choices here at Baupost, legislators and regulators
fashioning effective policies, or, most importantly, every citizen wisely exercising his or her
ti"anchise. The cynical ex~loitation of fake news is a threat against which we must all remain
vigilant. I
Our deepest conce ns are in accord with those expressed by Harvard government
professors Sleven Levitsl<~ and Daniel Ziblatt, who recently penned a New York Times opinion
piece entitled, "Is Donald Tmmp a Tlu-eat to Democracy?" They note that the institutional
safeguards designed to prqtect our democracy from the potential danger of Trump's apparent
authoritarian inclinations rhay be less effective than we think. "Among the unwritten mles that
have sustained American jemocracy are partisan self-restraint and fa ir play. For much of our
history, leaders of both pa ties resisted the temptation to use their tempormy control of

Copyrig/11 0 2017 The Boupost Gr up. L.L.C. This Iefler and the information herein is confidential ami is provided to you only in
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Feb 7 2017 9:06:44 AM
institutions to maximum: pattisan advantage ... There existed a shared understanding, for
example, that anti-majo1~tarian practices like the Senate filibuster would be used sparingly (and)
that the Senate would dei[er (within reason) to the president in nominating Supreme Comt
justices ... Yet norms otlpartisan restraint have eroded in recent decades ... (T)he guardrails
protecting American derhocracy are no longer as secure" as they once were. In short, tail risk
has grown. Investors mt!st remain alert to opportunity, but also vigilant for actions that weaken
or unde1minc the very system that has made our country the leader of the free world as well as
the democratic, free-ent,.prise engine that drives the global economy.

A Constant Balancin A t: Protectin Ca ital While Pursuin Gains

How should Bau_wost invest capital in the face of the complex and unpredictable forces
and risks described here1 First, we need to acknowledge that increasing competition and the
inevitable opp01tun ity depletion from a nearly eight-year bull market have made our jobs harder.
The heightened unpredictability for companies and investors .from the change in administrations
widens the range of poteqtial outcomes. How will we navie:Ate'l We intend to stick to the tried-
and-true basics: bottom-up, fundamental-based value inv~strng\ We will remain cautious and
disciplined; we will do our utmost to separate reason from emnuon, relying on the former while
striving to recognize the ~atter and hold it at bay.

Last year, a frien~

asked us whether' Bannns <n"''n play offense and defense at the same
time. Our answer: we no only can, we muSt' <md ~:tt {(11 times. This is core to a value approach.
Investors can't observe t e market to tell wbere' t~ going. The market is often a tease. When
it's acting well is usually the worst time te uwest, and when it acts poorly is usually the best.
True investors don't cont nuously dart in an(1' .lUt of the market, they invest for all seasons. But
they still must calibrate betweelhoffense and defense, which is the hard patt. A value investing
~pproach is de~ensive by. rature, t:;f.'(l.Pha.sizing pres~rvation of capital t?rough the pur~hase of
mvestments wtth a margm of S.!ltetv. wur strategy IS to hunt for bargams, and we typically find
more when the market is,feak-..,
fP-W6W when it is strong. This is our way of going against the
grain, owning less <i'11s~:; u" 1 hunch or feeling about the market but when there is
observably less wotlth d<:>J g, ann owning more when there is clearly more to do. Calibration
remains essential, beu....., excessive risk takers eventually pay a high price for their folly, while
excessive caution also ha~ a cost that is measured in foregone returns. The pursuit of investment
gain always involves incu\-ring risk. Thus, to compound capital over time and do so safely, we
must multitask, combinin~ a strong defense with a nimble and versatile offense.

One of the keys to,long-term investment success is maintaining the conviction to remain
invested in down markets. We believe the often tmncated downside made possible by our
perennially conservative v~lue approach strengthens om resolve at moments of severe market
stress. In weak markets, we hope the consistency of our approach and resilience of our
perfmmance also helps clirnts maintain their conviction to remain invested. Lack of client
resolve at pivotal times is problem that plagues most investment fin11S and its relative absence
is a key competitive advan~age for Baupost. Similarly, in up markets, sticking with us and our

Copyrigl11 <0 20 I 7 The Baupost Or up. L. L. C. Thi.v lel/er and the information herein is confidential and is provided to you only in
your capacity as a Limited Partner, a representative of a Limiled Par111e1, or an advisor Ia a Limited Partner, and not forjiuthe1

Ft:b 7 2017 9:06.44 AM
disciplined approach to investing hopefully protects clients from getting caught up in fads,
delusions, and nonsense1 Our own clear-eyed thinking becomes theirs.

The alternative t a bottom-up, value approach would be to predict, from a top-down

perspective, what the ma kct might do, and then whip one's pmtfolio around frenetically to
conform to evety further hunch - futile random outbursts of greed/fear, buy/sell, bull/bear, and
long/short, ad infinitum. Attempting to outguess the sh01t-term direction of the market is a
common but flawed strategy based more on whim and guesswork than on any sustainable
competitive advantage 01!edge. Here's the problem: those who invest in top-down fashion need
to be right not only aboul market direction, but also about the magnitude, path, and timing of
each market trend. Whil~ the long term is, by definition, a series of short terms, paying too much
attention to the short ter1 inevitably means taking your eyes off, and risking never attaining, the
longer-term prize.

We are convince1 that it is far easier to be right about, tl1e value of specific assets or
securities (a bottom-up approach) than to make accurate macroeconomic assessments (a top-
down otientation). Even if we have a strong sense about1how a ~Urrency might move, or what
GDP growth or the inflatjon rate might be, experience tRlJsl U$ mat we are more likely to be
correct about whether a stock, a bond, a building, or. a ousmess is undervalued than about our
macro premise. Macro iJvesting is really hard. 11: ::.urrenuy can appear over- or undetvalued for
a very long time without porrecting. Policv stl}tememsl:md central bank actions can prop up even
the most egregious imbal~nces. Sovereign v~'il ci its-t:tl~ l seem destined to default sometimes find
ways to muddle tluough or get bailed ci'l1t. W nat looks like a trend can turn out to be a head-fake
or blip on the screen.

T he difficulty oftop-down investing is nicely illustrated by the stock market's response

to the 2016 election result. Before Rl~ction Day, the market generally rallied when polls were
strong for Clinton, and fe~l wh~h Tnn~l''s chances seemed to improve. Thus, those who forecast
a Trump win could reasQllablv have expected an accompanying market sell-off. But a sharp rally
ensued instead. In rnacr~j"roxeca::;tmg, investors must be eoneet not only about tbe anticipated
event, but also about no .. the-market will react to it.
Many investors ate1 now
being tempted to make top-down bets based on guessing where
the Tmmp administration[will take the economy. We understand the temptation. When you can
see a wave coming, why not ride it? If massive stimulus is on the way, why not bet on it?

However, if you 'f.n see this, others can too, and maybe it's already reflected in securities
prices. It's incredibly harp to develop an edge from such top-down viewpoints. Also, President
Trump himself likely onl~ has a very general sense of where he's heading, or whether everything
he hopes to do will be en cted. Moreover, it's difficult to assess what the secondary effects and
unintended consequences will be, wherever he takes us. Finally, it's hard to predict how other
cow1tries might react to new U.S. policies, or what initiatives rival nations may be cooking up on
their own. I
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Whatever macro~onvictions an investor may develop, the fervor with which they express
those beliefs ultimately atters even more. This is crucial because macro views have a way of
being right some - but n ' tall - of the time. We sec macro developments as the true random
walk. What happens wh n you're wrong is everything in investing. You must construct a
portfolio to survive thos times.

Almost daily, we read articles about one investor or another on a fabulous winning
streak, flying high with ~ins from a successful bet on a macro trend. Good luck is sometimes
made out to be skill, and genius is falsely atttibuted and mistakenly celebrated. Then something
unpredictably changes in Jthe markets or the economy, someone else becomes the savant dujour,
and yesterday's hero becbmes today's goat.

Wall Street is a pJace where highly confident people go to work. Unfortunately,

overconfidence makes it ~ard for many to hold on to the possibility that they might be wrong,
with potentially painful consequences. At Baupost, we practi<>.._ humility and moderation, aware
of how much we don't anfi can't know. We strive to neve:r lt>.f d(.)w.n our guard. Prudently
diversifying, avoiding recpurse leverage, maintaining povtfolin\ neoges, and remaining true to
bottom-up value investin1:p principles all serve to .,fl houblc.

Successfullong-t~rm investing requires wrenrtnrg lard work, great patience, and strict
discipline. There is limitlfss infmmation a\? tolb'~ sorted, examined, and weighed. No one
can process all of it. Inve~tors must dem<>nsrrate ao ':ibiding respect for the talented, hardworking
competitors who are si mi~arly searchip.g fOr.oupm;runity in a competitive world. We watch our
competitors' actions in or~er to learn. It would oc foolishly arrogant to always assume that
we're right and they're wijong. We strive to'butld self-awareness, the ability to recognize both
our own skills as well as dur limitations. We consistently attempt to learn from our mistakes and
draw enduring lessons. V\fe;oeveJ forget that in the macro, we only have hunches; in the micro,
we can develop justifiably, deep ~onwn10n.

Process is'ln ~mpurfant in investing. Beyond unde1taking rigorous fundamental

analysis, an invesh~~~nt'lllryn rr:'list create an environment of debate and truth-seeking. Open
discussion must be tuen11raged, and behavioral biases actively resisted. Positions must be
constantly re-evaluated 101 the face of new facts and new prices. At Baupost, all ideas go through
the same meat-grinder of~ocess. At the end of the day, our goal is to reach the same
investment decision on Th rsdays as on Tuesdays, in July as in January, whether we're down or
up year-to-date, and inesp ctive of our own performance relative to the market. Given the
pressures that weigh on m st money managers, this turns out to be considerably more difficult
than it sounds. I
One key investmen~ insight is the awareness that a decision is best judged not on how it
turned out but by the validlty of the thinking that went into making it. Michael Lewis, in "The
Undoing Project," refers t~ the counterintuitive and path-breaking tllin.king of Daniel Kahneman
and his colleague Amos T lersky: "They would learn to evaluate a decision not by its outcomes -

Copyright 0 2017 The Baupost Groftp, L. L. C. This letter and the information herein is confldemial and is provided to you only in
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Feb 7 2017 9:06:44 AM

whether it turned out to e light or wrong - but by the process that led to it. The job of the
decision maker wasn't be right but to figure out the odds in any decision and play them well."

Entering 2017, ~at's what we think we've done: applied good process, figured out the
odds, and played them well. We like our portfolio but are cognizant that the risks to investors
loom large. The market js historically expensive, and the current bull market is one of the
longest on record. Interest rates remain historically quite low, thus bonds could still have a long
way to fall. Inflation co~ld be kindled by policy choices. No one should think that the supply
and demand for stocks, bbnds, and real estate cannot change swiftly and dramatically. There is
no way to accurately for~cast the magnitude or timing of such upheavals. And the new
administration is a wild card, to say the least. As long-term value investors, we will continue to
search bottom-up for oppp1tunity and commit capital when we find it. We will factor our macro
perspectives into our hedging strategies, but we will not let them determine our cash balances,
which are solely the delt~ between the fruits of our hunt for opportunity and our ongoing
disciplined approach to seWing. This is the approach we have/followed throughout our 34 years
in business, one that we believe positions us well for the futtt re! 00 matter what scenario(s) may
unfold. I
The Com etitive Landsc c in 2017

The chase for attr ctive investmentaetljmc: he.., hecome increasingly frenzied in recent
years, with hordes of competitors seeminglv f.i.ghtlrtg :>ver scraps. Obvious mispricings are
increasingly rare. Nevert~eless, the n;aucets have not become efficient. Skilled investors can
still earn alpha - excess rltums above thoseo avaifable from simply owning the market - through
unique insights. Reliable alpha generation comes through the development of one or more
sustainable competitive e ges

One reason the mJkets are nuv. and never will be, efficient is that the search for alpha is
n?t like an ~aster egg hWJl. wh.en;; (h~ number of.eggs i~ fmitc, and .the h~nt is over when the l~st
h1dden egg IS found. ln..tmanc1a markets, alpha IS contmuously bemg se1zed by the most adr01t
searchers, but new JoM ;~ rt~t1arly being created as a by-product of investors' herd-like
emotional oveneactron/), dognitive biases, institutional constraints, or unwitting mistakes. The
resultant securities mispn fngs inadvertently leave behind alpha for others to uncover.

In a highly compe~tive environment where obvious alpha is quickly competed away, the
remaining sources of alph~ are typically obscmed, lmking below the radar, or cloaked by the
blinders of emotion or sti~ma. While alpha can be generated through a new and better
interpretation of business or economic fundamentals, it often results from a savvy assessment of
others' behavior. Successful alpha generators tend to have a divergent perspective, alternative
view of the futtue, steadfa~tness in the face of others' personal or portfolio exigencies, or
differences in risk toleran9e, time horizon, and portfolio restrictions. Decisions that leave behind
alpha for others to find arep't necessarily made by people who are irrational or foolliardy; they
are simply made by peopl , making decisions in the face of necessity or constraint.

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Feb 7 2017 9:06:44 AM

Amidst an ex pen ive market such as the current one, it's hard to be sure whether the
difficulty of finding inveftment bargains is the result of growing market efficiency - the efficient
market hypothesis at lon~ last approaching a reality- or simply widespread overvaluation.
Maybe it's some of both. In any event, for Baupost and for nearly all of om competitors, it has
been difficult the last sevcat years to earn historically strong rctums. But while the value
cupboard has, for the moFt part, been relatively bare, we aren't disillusioned. To the contraty,
we have focused our eff9rts on building and strengthening our team, sharpening our skills,
improving our processes~ and growing our network of valuable external relationships. In other
words, we've been work~ng hard to build and buttress our edges. Inevitably, though, the
competition has also been advancing, growing their teams, AUM, and capabilities.

While we think of ourselves as a value~oriented investment partnership, mu primary

competitors are hedge fuhds, a categ01y we sometimes get lumped into. There are today almost
10,000 hedge funds, and while they are often viewed as a monolithic asset class, the primaty
commonality is charginglan annual performance~based fee. Ht..Jge funds vaty greatly in size,
follow many different strategies (absolute return, long-short: gr,owth, quant, country or industry
specific, etc.), and operate in different geographies and rn":trKets. Amidst a steady influx of
capital and tal~nt, howevrr, hedge. funds have in~reasingl? -~taJ!ted to look and a~t more alike~
w1th few secmmg to pos~ess sustamable competmve 'lldvantages and many holdmg overlappmg

At Baupost, we fj llow a value approh tlllll.eeks out undervalued investments with

catalysts for value realization. We differ from other funds as a result of our steadfastly long~
term, risk~averse orientatllon, very limited 3-xoostlre to short selling, involvement in both public
and private markets, will ngness to hold cast~-<Hl the absence of immediate opportunity, and 34~
year record of strong per orma(lce. We refuse to enter Wall Street's ubiquitous short-term
performance derby. The eeponaer:ance of our holdings are very different from those of most
other funds. However, UJ:ere a)IZ".llOW :t' number of hedge f1mds that follow a similar investment
approach as Baupost ancl ~nvestig<Hdsome of the same potential opportunities as we do:
securities with a catalv.-.t;l::;ec.unn,((s or assets that are inexpensive on a fundamental valuation
basis; securities thaf.'l'lr<;> JlighiV ~omplex; and, securities or assets facing financial distress.
Today, more capitalloan.f ver is chasing opportunities across the markets in which we operate.
Competition can be prehJ .i'ntense when your competitors play like they can never get hurt.

These days, capital flows more rapidly than ever to take advantage of perceived
opportunity. For exampll in 2015 and 2016, institutional investors rushed into newly~fmmcd
funds targeting energy in estments in the wake of a collapse in oil and gas prices, committing
huge sums into both opp tunistic credit and private investment vehicles in this space. This
massive influx of capital, }ronically, has prevented much of the expected dislocation from taking
place. This sort of behav,or has led to a market where almost everyone has wanted to reflexively
buy the dips, where the market's highs have been higher, and the lows higher, too.

Competition is el9vated in another dimension. It has become increasingly easy over time
for investment analysts to!start their own investment firms. Barriers to entry in the hedge fund

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Feb 7 2017 9:06:44 AM

industry have historical! been low and in many ways still are. (Although the dramatically
increasing demands of th regulat01y environment and the operational complexity of holding
certain investments have Jcreatcd a countervailing trend.) With many of the premier established
funds closed to additional capital, some institutional investors have been willing to bet on new
entrants without track redords or proven organizations. In addition, a significant number of
vehicles have raised subs antial capital with the specific goal of incubating new hedge funds.

The hedge fund "~ndustry" has grown massively, recently hitting $3 trillion in AUM,
almost triple the 2005 Jcv!e~1. As a result, competition has become more intense. With any asset
class, when substantial n w money flows in, the returns go down. No surprise, then, that as
money poured into hedge funds, overall returns have soured. From January 20 I 0 through
December 2015, the HFR;r [hedge] Fund Weighted Composite Index shockingly gained only
23% compared to 108% for the S&P and 138% for the Nasdaq Composite. In 2016, the same
hedge fund index retume4 roughly 6%, again significantly lagging the market. (And it's worth
noting that reported hedge fund index returns may be biased u~:~ward because of the index's
reliance on self-reporting ~y funds.) In 2015 and again in 20 rt5\:.~nany prominent hedge fund
managers posted particularly large and headline-grabbinPJ.!o~ses, putting an unfortunate
exclamation point on wha~ has been a protracted Q.erio.d .:r!.'disnial performance for the hedge
fund industry as a whole. Taking all this into ac~ounc. u 111av have been a greater
accomplishment for Baup st to earn a high singl~ itigtt' 1et return with quite limited risk in 2016
than it was for us to have earned higher retl.Hnsdn onon years.

After the last sevelal years of diaaon<tmttnent, many institutional investors have
concluded that hedge funds, in aggregate, ~r.e no panacea. To many, hedge funds have come to
seem like a failed product~ and the financial'm~dia have increasingly and rightfully fixated on
hedge fund fees and returns. Aggregate data suggest that capital flows have started to reverse.
Hedge funds experienced pu.tflows ~xceeding $50 billion over the course of 2016, and in the
third quarter more hedge funds .:>lose'?"l ~'fhan opened. Moreover, several prominent bellwether
institutional investors ha.v~ a~ounMd plans to scale back their allocations to hedge funds. If
this trend continues and tffeJ.indu~try contracts signitlcantly, the markets could become more
inefficient and av(lilhbte a~ha P-'ould be split across fewer competitors, leading to enhanced
returns for the most caP'"' Or

Ironically, as the ~arket becomes increasingly expensive, hedge fund fever has waned,
and investors have gottenjxcited about market-hugging index funds and exchange traded funds
{ETFs) that mimic variousrarket or sector indices. At mid-year, 11.6% of the S&P 500 was
held by index funds and inpex ETFs, up from 4.6% a decade ago. This hend away from active
stock piclcing, if anything, ~ccelerated in 2016. ETFs now exceed $3.2 trillion in assets and are
changing the financial landscape. Over the last 12 months, while $131 billion has flowed out of
all U.S. mutual funds, $249 billion has flowed into U.S. ETFs. Meanwhile, five of the world's
seven most heavily-traded quity securities are ETFs.

But ETFs are not wjthout their own risks. According to the Financial Times, "Because
the securities they hold are Joften not as liquid as the ETF itself, there are risks of mismatches and
Copyright 0 2017 Tlte Baupost Gro 1p, L.L.C. This letter and the inform{// ion herein is cOJif/demial and is provided to you only in
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Feb 7 2017 9:06:44 AM

forced sales." Large co centrations of ownership in a small number of ETFs has left corporate
ownership increasingly ioncentrated. And because of the high volume ofETFs, short-tenn
trading has become even more dominant. John Bogle, the founder and retired CEO of Vanguard,
points out that 12% of a ypical stock turns over each year, compared with 880% turnover for
ETFs. Similarly, Nikolabs Panigirtzoglou, a global markets strategist at JP Morgan in London,
warns that the inflows into ETFs w ill make markets more brittle, susceptible to more severe
crashes, and less efficienf.

One of the perve a~e effects of increased indexing and ETF activity is that it will tend to
"lock in" today's re l ativ ~ valuations between securities. When money flows into an index fund
or index-related ETF, the manager generally buys into the securities in an index in proportion to
their current market capi~alization (often to the capitalization of only their publ ic float, which
interestingly adds a layer of distortion, disfavoling companies with large insider, strategic, or
state ownership). Thus t?day's high-mu ltiple companies are likely to also be tomorrow's,
regardless of merit, with less capital in the hands of active managers to potentially correct any
mispricings. Conversely with money pouring into marketitloH~es, stocks outside the indices
may be cast adrift, no lonper attached to the valuation grit! ottt 'increasingly off of it. This should
give long-term value investors a distinct advantasze. 'the..aunerem irony of the efficient market
theoay is that the more pepple believe in it and corres.oonat;ngly shun active management, the
more inefficient the mar~t is likely to become.

Given this conflu nee of competirtve torces, vnat can we say about the outlook for
Baupost over the next se~eral years? N'A mauer what, we will have to work hard and remain
focused yet agile. Fortun~tely, our goais '}lrP. rmrercnt than those of most other investors.
Founded as an expanded ramily office, we see ourselves as long-term stewards of capital with a
focus fi rst and foremost op
the hrP.servation of capital, and only thereafter on earning a return. If
competitive forces make ~t harae -.~ e'lm a return, you won't see us reaching for yield or
ramping up risk. We intepd to .n~ima.J H our focus on downside protection, and we will wait as
long as necessary for bat~airt!'l 'o ar.1se.

To outperform mt.~r
ume, managers must find edges that enab le them to earn excess
returns. We believe wt have real edges as a firm, such as our truly long-tenn focus and flexible
investment mandate (in"'L,rling the ability to hold significant cash balances). In today's fienetic
marketplace, these edges seem more enduring than ever. Most of our competitors feel intense
pressure from their client~ to generate shOLt-tcrm performance and have trouble maintaining a
truly long-term perspectiv'f., whether in bad markets or good. They also operate with partnership
structures and cl ient base\that restrict their investment mandate. Our ability to stay the course
and move in a decisive anr concentrated way into the most attractive areas of opportunity was
en01mously impotiant dunng the 2008-2009 financial crisis, as many of our competitors pulled
back from making new int estments after sustaining significant losses. We, by contrast, were
able to consistently add to positions that were becoming increasingly attractive. We expect that
this same value discipline rnd long-term focus will help us avoid getting caught up in market
bubbles that most competitors simply cannot resist, while serving us well in future pockets of

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Feb 7 201 7 9:06:44 AM

Investment edge are not constant. Each firm's edges (if they have any to begin with)
can grow or sllJ'ink as co petitive forces and markets evolve. Some of our own edges have
diminished or disappearqd over time. For example, a willingness to invest in "special situations"
is no longer a reliable edge for a fund like ours. Widely ignored several decades ago, many of
these formerly below~th9~radar situations are now widely resea1ched and mostly picked over.
Tluift and insurance company demutualizations are similarly no longer routinely interesting. On
the other hand, we have worked hard to build new edges for Baupost: for example, we have
established a global netJ.ork of sourcing and operating pattners who generate a fairly steady
stream of interesting opp~rtunitics fo r us to evaluate. Another more recent edge is our growing
reputation as a reliable, Jeep-pocketed, decisive, and long-term oriented investor who can
flexib ly and quickly stru ture transactions to provide solutions for sellers of assets.

Despite the inten e competitive forces outlined earlier, financial markets are still far from
efficient. This is, in part,lbecause so many investors have narrow mandates but also because
many investors and their nvestment managers are as short-term oriented as ever (and arguably
becoming even more .so). Many seem allergi~ to buying.inv.estt:nents in the ~ace of ex~ected bad
news- even when pnces 1<We fallen to bargam levels - 1t t)rat't'leWs seems hkely to dnve the
price still lower. In a senre, many investors will keen,ttWJtfg "osatisfy short-term (and ultimately
irrelevant) objectives, even at times when bargains~e wta!:'sprcad. After all, securities can
always trade lower befor~ they move higher. Try.itlg tbjdetttify the absolute low is a fool's
errand. Even if our competitors were not in'clip.ed to'Watd short-term performance considerations,
many have clients who plrce unrealistic oress.ure o11 f.he~ for immediate results. So~e pension
fund and endowment con ultants furtp~mtHtm~ tjte unwmnable short-term expectatiOn game.

While industry reJ:rns have clearly stltfered from greater competition, as well as the low
return nature of the overa I matket environment, the emotional swings of human nature virtually
ensure that markets will a wa,ys be oefficient. T he efficient market hypothesis has always
appealed to academics, b t it has, nev~ described the real world. As Michael Lewis noted in
"The Undoing Project," r1fetdn1! to psychologists attempting to explain human behavior,
"Everywhere one tumect Ol'le rot,tid idiocies that were commonly accepted as tmths only because
they were embedd P..{I m 'w~heO'IW' to which the scientists had yoked their careers." The more
others believe in marKt<t efficiency, the more inefficient the markets will eventually become. At
Baupost, the more other'-~~estors rush to one area to tap into opportunity, the sooner we are
bound to redirect our effot ts away from that area to somewhere else more fruitful. We remain
strong in our conviction tl~at
Baupost has had and continues to have significant and enduring
(and in some cases new a~d growing) edges that should allow us to continue to produce good
risk-adjusted returns over !he years ahead.

Organizational Update: Ctkation of the Role of President

One of the ways e1upost maintains an edge over the competition is by maximizing the
effectiveness of our team. jThe whole of Baupost has always exceeded the sum of its parts. We
believe strong managemenlt, steady process improvement, and a culture of collaboration help us
be at our best. j

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Feb 7 201 7 9:06.44 AM

To this end, in a clition to his current responsibilities, I have asked Jim Mooney to take
on the role of president Baupost. Jim has proven himself as an exceptional leader, and his
new position will strengthen the investment organization while allowing me to focus even more
of my time on our investrents, investment process, and people. Jim will continue to head the
Public Investment Group, maintaining his active role in the investment process. Tom
Blumenthal and George"_Rizk will remain co-heads of the Private Investment Group, working
with Jim to ensure that tHe investment teams function collaboratively and at their highest level.
will remain portfolio ma1 ager and CEO of the firm, and the role of president will report to me.

The president will ultimately be responsible for:

ensuring and ovelreeing that, in line with the investment strategy set by the portfolio
manager, the pub~ic and private investment teams are effective, consistent, and
responsive in their approach to the investing environment and opportunity set (i.e.,
business planning~;
identifying additi~nal areas for collaboration and harfh(>.uization between the private and
public teams (e.g. j structming and resourcing);
managing and developing the professional skillS-Ol~Qur~team (e.g., staffing/recruiting,
performance revidws, compensation, promo'ti(!5n);
implementing operational priorities and acoouncabwty for management of operational
risk within the in+.stment teams; and
maintaining close fnvolvement in 'n\V.c.: ._,..;h""uecisions in order to be able to
communicate effeftively to c l ~ehJs a$"\Vell ,as provide backup to the portfolio manager.

As I've frequently stated, I intend to -r.1Jntinue to lead Baupost and oversee its investments
for a long time to come. hari~!! the load Will undoubtedly enable me to extend my tenure. My
plan is to continue to dele~a~ mot>esesponsibilities to the people around me both to challenge
and develop them and a l s~ to &ehievc ilie best result for the firm. In carving out the role of
president, we have also.ISfab'li-" hed;a' IJOSition of authority separate from mine that will advance
Baupost on its path towara( Jpng-.~erm organizational progression and permanence.

The Baupost Team

I'm f01tunate to s'1 at the helm of a deep and exceptional team of contributors. Led by
our partners in the Public ~nd Private Investment Groups, our investment teams worked together
tirelessly to navigate challenging market conditions, energetically somcing, analyzing, and
selecting new investments! and capitalizing on opportunities to monetize existing ones. Our
investment teams' talent ahd passion for investing continued to shine through as we pursued
opportunities across diver~e asset classes and volatile markets. These teams once again
demonstrated patience, discipline, determination, and focus in fmding truly compelling bargains
while exiting a number of ery successful investments in 2016.

Jim Mooney, as m~ntioned, continues to ably lead our Public Investment Group. Jim's
efforts regularly raise everyone else's game, both in the Public Investment Group and throughout

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Feb 7 20 17 9:06:44 1\M

the fi rm. Along with Ji1, partners Rob Bralower, Greg Ciongoli, and Josh Greenhill, and
managing directors Rich Carona, James David, and Michael Sperling remain key contributors to
our public markets invesqment effort, working closely with and managing our analysts in
developing, researching, and analyzing investment ideas. Rob also leads our Portfolio Risk
Committee, working acr9ss the investment teams in close coordination with me, Jim, and others
to identify specific hedge~ both fo r individual investments and at the portfolio level. Effective
Januaty 1, 2017, Patrick rcKee was promoted to managing director in the Public Investment

T om Blumenthal, Jwho is focused on international real estate and private investments, and
George Rizk, who is focused on U.S. real estate, setve as co-heads of our Private Investment
Group. Both are partners in the firm, and Tom is a member of Otll" Management Committee.
Their team, which pursue opportunity globally across all types of real estate and private equity,
produced healthy profits again in 2016.

Under Tom and Gle orge, the Private Investment Grotfp~nt;x:getically

continues to add new
operating partner relation hips to our roster while sourcil1)Vhteresung transactions throughout
the U.S., Europe, and beyond. Sam Plimpton, paunerLementus; continued in his role of
developing investment opporh.1 ~ities~ training analy~t:~~and the team. Ably supporting
Tom and George are the rhanagmg dtrectors on tbe.>Prfvateteam: Ntek Azrack (Real Estate), Bob
Berlin (Private Corporate~, Gianpaolo BuriJto (Sourcmg), Hunt Doering (Real Estate), David
Drubner (Sourcing), and ~rian Zilla (Asset" ,..,_anagement).

Effective January ~, 2017, Mark F~0canos was p romoted to partner of the firm. Mark has
been a strong contributor to the private group ;mce he joined Baupost in 2002, providing a deep
knowledge of real estate, toth fto_rnestically and globally, across all property types. He bas also
become a strong manager :and within the group. We are pleased to welcome Mark to the
partner table! In addition, Da~tci..Fretp!mm (Real Estate) and Bill Musto (Asset Management)
were promoted to manap:it g iirectox m the Private Investment Group.

Our Lona,u..ron tueJrerrr;t1ns a hub of investment sourcing, relationship building, and

research under the Jmut..leadership of Josh (public investments) and Tom (private investments).
We have maintained stroll~ collaboration and cultural consistency between Baupost London and
Baupost Boston. The Lonbon office again drove a number of new investment opportunities in
2016, and the European pipeline remains full.

During 2016, one J ew analyst joined the Private Investment Group and several more
have agreed to join the pu~lic and private teams in 2017. We believe our ab ility to rec1uit and
retain exceptional people tlemains a significant competitive advantage for the firm.

Our Trading GrouJ, led by managing director Scott Haig, efficiently implements buying
and selling decisions, whi9h have become more global and increasingly complex over time.
Effective January I, 2017, ISean Walsh was promoted to principal.

c~~>yright 2017 "171e /Jaupost Grlp. L.L.C. This leuer and the information herein is confidential and is provided to you only in
your capacity u.1 u Limited Partner, a representative ofa Limited Partner, or uu advisor to a Limited Partner, and not/OI"/1111her


Feb 7 20 17 9:06.44 AM
Our general counsel and partner, Fred Fogel, manages our consolidated legal, compliance
and transaction structurittg functions. Over his first year and a half at the firm, Fred has had a
significant impact on Ba}tpost. Fred joined Baupost's Management Committee effective Januaty
1, 2017. Directly reporting to Fred are our chief compliance officer and senior regulatory
counsel Scott Stone, assif,ant general counsel Rosemary McCormack, senior investment counsel
Collin Beecroft, and seni r tax counsel John Harvey; overall, 14 people work across our legal
teams. Scott Stone, who sctved in numerous roles in legal and compliance at Baupost for nearly
two decades, will retire if the first half of 2017 and we are currently searching for his successor.
Baupost has always been deeply committed to maintaining the strongest possible culture of
compliance. Under Fred we continue to build this function and expand our focus amid an
increasingly complex re!flatory environment.

Our exceptional Operations team continues to be led by Elaine Mann, chief operating
officer, and Barbara 0 'Cpnnor, chief financial officer, both pat1ners and members of the
Management Committee1_, Our highly complex investment poJfolio places significant demands
on the firms' Operations ~epartments. We are fortunate tn hav~a t,alented and committed group
of leaders under Elaine a?d Barbara who work wit? theirtt~a"in~ to pu~sue operati?nal excellence.
Om department leaders are: James Conz, Informahon..a;echtltll~gy; Dtana DeSocto, Corporate
Communications; Jason <Gorer, Private and Tradmg.;.~peru~tJOns; Jen Lin, Custody and TreasUty
Operat~ons; Beth Mills, Ipvestor Servi~es; Jason }!nce~omolio Valuations, Accoun~n~, an~
Reportmg; Frank Seybotl~, Tax Reportmg l .u(}VJsnUka, Human Resomces and Admtmstratlve
~ervices; and Joh~nna. Wrrd, M~nagemenC@nmoan.yJAC~ounting a~d.Rep~tting. Also w?rking
m close partnership wtth the semor lefiders pn Kev,operatlOnal, adrrumstrattve and strategtc
projects are Adam Halper, Linda Hoyt and..DaV1d Monis.

In early Decem be , we ,again held a company breakfast to honor those employees who
have achieved milestone ~nniNers?"ies. For each employee who reaches his or her l 01h
anniversary with Baupos ~ w_e ~or::~'fS'S'IOn. a professionally drawn caricatt~e to displa~ o~ the
wall of our lunchroom here,Hl!BOStbfi. Thts year, we added seven new cancatures, brmgmg the
total on the wal.l to 40~~~~Qf. m~se veterans have clocked. more than 20 yea~s at Baupost!

We are m1mense1y proud of our firm's culture, whtch attracts exceptional people, many
of whom choose to buili'ltnt:ir careers at Baupost. We believe it serves the interests of our
clients as well as our em~oyees to remain intensely focused on the long-term continuation and
preservation of the firm .. ~ccordingly, Baupost has two paramount and interdependent
objectives: to be a great investment manager for many generations to come; and to attracl,
develop and retain excepttonally talented employees to serve our clients.

We know how fortunate we are to work in a business that offers the potential for
substantial remuneration (or our skills, and we believe tbat those who do well in society have a
strong moral obligation td help others who are less fortunate. Our values lead us to strongly
support local community endeavors through our volunteerism and philanthropy, both as a
company and individual!~.

Copyright 0 2017 11Je Baupost Gf up, L./,.C. 1l1is letter and the infol'llwtion herein is confidemial and is provided to you only in
your capacity as a Limited Partne, a repre.\'l!lltutlve of u Limited Partner, m 011 advisor to a Limited Pa/'lner, and notforfurtiler


Feb 7 20 17 9:06:44 AM
At Baupost, we a(e proud to have a diverse workforce where we all come together to
serve our clients. In the ace of growing intolerance dming and after the recent presidential
campaign, we will stand vith evety Baupost employee who faces discrimination or hostility.

With Our Appreciation

We continue to benefit from the wise counsel ofBaupost's Advis01y Board: Baupost
Founders Bill Poorvu anHoward Stevenson; Paul Gannon, former chief operating officer of
Baupost; Bill Helman, p rtner at Greytock Partners; Jay Light, dean emeritus of Harvard
Business School; Jane M ndillo, retired president and chief executive officer of Harvard
Management Company; and David Swensen, chief investment officer of the Yale University
Endowment Fund. The ~oard has a wealth of experience, and the insights of its members
regarding investment ani business matters continue to benefit Baupost and its clients.

We also apprecia~e the ongoing long-term relationshios that Baupost enjoys with Ropes
& Gray LLP, our c01por te counsel; Ernst & Young LLP. Oth"lfuditors and tax professionals; and
with organizational cons Itants from Podia Consulting ar(d;the\Center for Applied Research.

One of the greate~privileges for us at Ba'upo~t Is t0 serve as stewards for the assets of a
limited number of fine fa ilies and highly regarqed irrn-trt.Utions. Our valued limited partners arc
truly long-term oriented. Were you not, it WO\}bi. bell'e.llrly impossible for us to maintain the kind
of investment horizon that we think is requtr~cl to'Capture good risk-adjusted investment returns,
especially in today's ehal~enging envi)'OnmeJft. ~our trust and steadfastness strengthen our
resolve and enhance our Ability to make Lh_,._ver/best decisions. For this, you have our sincere
gratitude. I
We remain aware iof<the lrft'\~?.rent fragility of investment organizations, and we are
determined not to fall victim to':the a1~J.igance, hubris, or complacency that sometimes bring firms
down. We will tirelessl~ strive to 1J11prove. We will also maintain our commitment to
intellectual honesty in .~bjservteeyofbu i lding investment firm we possibly c~n. for the
long-term benefit of. ell~ s afip'employees. We mtend to be around for a very long ttme.
We hope you nave/ll healthy and prosperous new year. We greatly appreciate your
confidence and support. lease let us know if you have any questions or comments.

Very truly yours,

Seth A. Klarman
CEO and P01tfolio Manager

Copyright C 2017 111e Brmpost G1 oup, L.L. C. This Iefier and the information herein is confidential and is provided to you only in
your capacity as a Limited Purine , a representative of a Limited Partner, Ol'llllltdvisor to a Limited Partner, and not forfiiJ'tiler


Feb 7 20 I 7 9:06:44 AM