Discerene Group: Long-Term Public-Markets Investing

This case discusses active investing based on fundamental valuations and price distortions created by market events, and whether contractual terms between investment managers and their investors can help align incentives between long-term investors and active managers. The case also develops an exercise valuation of a company to assess the fair value of its equity for investing purposes. In early 2024, Soo Chuen Tan, president and founder of Discerene Group, a hedge fund based on Stamford, CT, was considering whether to continue or exit the position the fund held in SLB (formerly known as Schlumberger), a global oilfield-services company focused on providing technological services to oil-and-gas producers. The fund had first invested in SLB in at the onset of the global COVID Pandemic in March 2020, after SLB’s stock price had fallen 70%. This was the only remaining investment of the many that the fund had undertaken in 2020 as Discerene identified securities whose prices had fallen well below their estimate fair value. The unique structures of Discerene’s funds made it possible for the firm to hold the stock for four years and could hold it longer if it so decided. Compared to other investment firms, Discerene placed more stringent redemption restrictions on its limited partners (“LPs”) to allow it to pursue its long-term investment strategy. Additionally, Discerene only called capital from its LPs when it found opportunities to deploy capital, so it did not need to sell one investment in order to fund another. Otherwise, contractual capital commitments made by LPs stayed unfunded, and (unlike typical private-equity terms) no fees were charged on such commitments.