Third Point LLC

390 Park Avenue

New York, NY 10022
Tel 212 715 3880

April 17, 2019

First Quarter 2019 Investor Letter

Review and Outlook

Third Point’s Offshore Fund gained 8.8% 1 during the First Quarter of 2019. Returns were
driven by strong performance in several activist and constructivist positions including
Nestlé (+18.9%), Baxter (+23.8%), United Technologies (+21.7%), and Campbell (+16.7%).
Single name shorts and hedges detracted from performance, while structured and corporate
credit made a small positive contribution.

By the end of the First Quarter, equity markets had mostly bounced back from Q4 2018’s
sharp decline. The dovish shift in Fed policy – which over the last six months went from a
three to a zero-hike baseline for 2019 and accelerated the end of its balance sheet runoff –
has primarily driven the rally. With this shift now arguably reflected in asset prices, further
equity uplift likely will come from improving global growth or re-positioning. The balance
of evidence today suggests a rise from these levels: global manufacturing PMI has fully
retraced its rise from early 2016 to its peak in late 2017; US consumer fundamentals like real
labor income and the consumer saving rate are strong; and renewed stimulus and a near-
term trade deal with the US are positive for China. Better Chinese growth should help the
Euro Area and eventually, the US. The case for a gradual acceleration of US growth is
straightforward: the current drag from financial conditions is at its peak and should offset
waning fiscal stimulus. Improving growth should boost cyclicals, which have recaptured
little of their relative decline since mid-2018.

A key issue is the durability of the Fed's shift. Despite evidence of a tight labor market, core
inflation has remained low, and rates markets are predicting that the Fed will remain on hold
for at least this year. The range of outcomes for the Fed Funds rate is wide. If US growth fails
to pick up, signaling heightened recession risk, the Fed could cut swiftly. On the other hand,

1 Net performance fee based on modified high water mark calculation.

markets could price in a return to hikes if we see above-trend growth coupled with core
inflation moving towards its target and an unemployment rate resuming its decline towards
a 50-year low after a temporary rise in participation. What the consensus may be missing
here is that a patient stance by the Fed, which means fewer hikes now, may mean more hikes
later. Outside of Fed policy and direction, we are closely monitoring the impact of trade
negotiations and their related effects on inventory builds, input costs, tax refunds, and
European economic conditions.

Quarterly Results
Set forth below are our results through March 31, 2019:
Third Point
Offshore Ltd. S&P 500

2019 First Quarter Performance* 8.8% 13.6%

Annualized Return Since Inception** 14.7% 8.1%

*Through March 31, 2019. **Return from inception, December 1996 for TP Offshore and S&P 500.

The Value of Good Governance

Since 2000, Third Point has engaged in 45 active or constructive investments, won 24 board
seats, and favorably resolved each of the nine proxy contests we initiated. This strategy has
generated a +21% annualized return since 2011, when we resumed activist investing after
several years where our attention was focused primarily on credit securities, with
cumulative returns for the same period in excess of +300%. 2 Today, such investments make
up approximately 40% of fund exposure. We believe that our track record and process for
making successful activist and constructivist investments provide us with a competitive edge
in financial markets.

We typically engage in conversations with the management teams of companies in our

portfolio. Much of this dialogue is simply part of our due diligence process, where the

2 These figures are calculated as gross returns.

2
purpose is to gain a better understanding of a company and its prospects. Sometimes, we
see discrepancies between a company and its competitors in areas like growth rates,
margins, or capital allocation practices. Most management teams are aware of where they
are falling behind and work toward closing these gaps.

In a small number of companies, management teams seem satisfied with the status quo and
are unwilling or unable to make changes. There are many reasons for such recalcitrance:
sometimes the CEO’s incentives are misaligned with shareholders because of an incentive
plan based on revenue growth irrespective of returns; or a CEO is most interested in status
and perquisites, or most enjoys hobnobbing on the world stage in Davos or pontificating on
TV; while some CEOs may simply find themselves in over their heads and without the
managerial skills to effectuate change and improvement. In all these cases, the company’s
board must be held accountable for allowing such antics to persist.

Boards of poorly performing companies have their own reasons for inaction but generally
they can be traced back to a lack of alignment of interests with shareholders or
incompetence. Few board members have much “skin in the game,” having been awarded
free stock and a nice stipend simply for joining the board. As a result, they often make
decisions to preserve their status and income stream rather than to drive shareholder value.
Most directors have little actual experience in capital allocation yet are asked to make
decisions on the topic at virtually every board meeting.

Each activist investment we engage in begins as constructive and many end there, with
collaborative idea-sharing with management. As a result of our discussions, we sometimes
learn that our ideas are impractical; sometimes, management adopts some of our
suggestions; and sometimes, we can agree to disagree on a few points if we feel the company
is moving in the right direction. We always prefer diplomacy over conflict and do our best
to remain behind the scenes. Occasionally, however, we are left no choice when a CEO is
inept, or a board is unwilling to fulfill its fiduciary duty to shareholders. In such cases, we
take steps to influence the board and key decisions around strategy or capital allocation.

3
Fundamental to our activist approach is the system of public company ownership, founded
on principles of shareholder democracy and rooted in securities laws designed to protect
owner’s rights, which holds management teams and board members accountable to
shareholders. Each activist investment is an opportunity for value creation driven in part by
improved governance and advocacy for shareholder rights.

Our guiding principles of activist investing are: 1) every activist campaign is predicated on
thorough research, strong fundamentals, and asymmetric outcomes with very limited
downside if we are unable to make the change we seek; 2) we only engage in activism where
the activity is aligned with creating long-term value for the company; 3) our engagement
must improve each measure of the targeted company’s value algorithm, positively impacting
growth, margins, and return on capital and thus, the company’s valuation; and 4) improving
governance is not just a talking point, but a means to meaningfully improve a company’s
trajectory.

Based on our hard-won belief that governance matters, we are currently developing
methods to systematize our governance practice, including by adding data analytics to our
research process. An example of an important governance-related metric is CEO pay.
Performance-based incentives now account for greater than 60% of CEO take-home pay and
closely studying how boards remunerate their management teams through short, but
especially long-term, compensation is key.

4
 S&P 500 - Average Components of Pay

Salary
Option Awards (LTI)
(13%) (11%)
Non-Equity Incentive
(STI)
(19%) Stock Awards (LTI) Bonus & Other
(25%) (10%)

Bonus & Other

(17%) Non-Equity Incentive
Stock Awards (LTI) (STI)
(47%) (19%)
Option Awards (LTI)
(24%)
Salary
(16%)

2007 2017

SOURCE: THIRD POINT, COMPANY FILINGS

A focus on financial returns (e.g. ROIC, ROCE) is what we look for in the long-term incentive
plans (“LTIPs”) of management. LTIPs have become increasingly core to many large US
companies, however, not all LTIPs are created equal. Our analysis shows a material
difference in excess annual stock price performance over a rolling medium-term horizon
(e.g. three years) when the focus in LTIPs includes a form of Return of Capital metric versus
other incentives like Total Shareholder Return (“TSR”) (+150 bps), EPS (+180bps), and
revenue targeting (+215bps). Among others, we also look at factors like: a) the amount of
stock owned by the CEO and, if holdings are substantial, whether TSRs become double
counted; b) if TSR is an incentive metric, is R&D or Capex spending stunted?; and, c) will a
management team paid on ROE be more likely to buy stock than one tied to TSR, who would
rather issue a dividend?

Whether as passive investors in high-quality companies or activists in companies that can

improve, we want corporate management to solve for value creation, not security price. We
believe certain governance factors and incentives are useful to evaluate management skill
and thus, company quality. More carefully and systematically studying governance is giving
5
us a new analytical lens and validating our conviction that good governance makes good
companies, and vice versa.

Business Updates: Capital Markets

We are pleased to welcome Chris Rich as Head of Capital Markets, where he will lead
coverage of new and follow-on issuances and work with our team to invest passively in high-
quality companies early in their lifecycle.

Previously, Chris was a portfolio manager at Castle Hook Partners, where he led both the
Global Equity Capital Markets business and Financials equity investments. Before that, he
was a Strategist at Soros Fund Management, also focusing on capital markets and financial
sector equities investing. He began his career at Goldman Sachs as an investment banking
analyst in the Financial Institutions group. He graduated magna cum laude from Quinnipiac
University with a B.S. in finance.

Sincerely,
Third Point LLC
_____________________
All performance results are based on the NAV of fee paying investors only and are presented net of management fees,
brokerage commissions, administrative expenses, and accrued performance allocation, if any, and include the reinvestment
of all dividends, interest, and capital gains. While performance allocations are accrued monthly, they are deducted from
investor balances only annually or upon withdrawal. The performance results represent fund-level returns, and are not an
estimate of any specific investor’s actual performance, which may be materially different from such performance depending
on numerous factors. All performance results are estimates and should not be regarded as final until audited financial
statements are issued.

All P&L or performance results are based on the net asset value of fee-paying investors only and are presented net of
management fees, brokerage commissions, administrative expenses, and accrued performance allocation, if any, and
include the reinvestment of all dividends, interest, and capital gains. The performance above represents fund-level returns,
and is not an estimate of any specific investor’s actual performance, which may be materially different from such
performance depending on numerous factors. All performance results are estimates and should not be regarded as final
until audited financial statements are issued.

6
While the performances of the Funds have been compared here with the performance of a well-known and widely
recognized index, the index has not been selected to represent an appropriate benchmark for the Funds whose holdings,
performance and volatility may differ significantly from the securities that comprise the index. Investors cannot invest
directly in an index (although one can invest in an index fund designed to closely track such index).

Past performance is not necessarily indicative of future results. All information provided herein is for informational
purposes only and should not be deemed as a recommendation to buy or sell securities. All investments involve risk
including the loss of principal. This transmission is confidential and may not be redistributed without the express written
consent of Third Point LLC and does not constitute an offer to sell or the solicitation of an offer to purchase any security or
investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential
offering memorandum.

Specific companies or securities shown in this presentation are meant to demonstrate Third Point’s investment style and
the types of industries and instruments in which we invest and are not selected based on past performance. The analyses
and conclusions of Third Point contained in this presentation include certain statements, assumptions, estimates and
projections that reflect various assumptions by Third Point concerning anticipated results that are inherently subject to
significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative
purposes. No representations express or implied, are made as to the accuracy or completeness of such statements,
assumptions, estimates or projections or with respect to any other materials herein. Third Point may buy, sell, cover or
otherwise change the nature, form or amount of its investments, including any investments identified in this letter, without
further notice and in Third Point’s sole discretion and for any reason. Third Point hereby disclaims any duty to update any
information in this letter.

Information provided herein, or otherwise provided with respect to a potential investment in the Funds, may constitute
non-public information regarding Third Point Offshore Investors Limited, a feeder fund listed on the London Stock
Exchange, and accordingly dealing or trading in the shares of that fund on the basis of such information may violate
securities laws in the United Kingdom and elsewhere.
_____________________