A New York hedge fund is expected to earn billions in a surprise jump in shares of Avis Budget, the struggling car rental company that jumped as much as MIM after executives discussed adding electric cars to their fleet.
SRS Investment Management, chaired by Karthik Ramakrishna Sarma, has a potential gain of more than $5 billion from Tuesday’s stock move, according to Financial Times calculations. Sarma is an alumni of Chase Coleman’s Tiger Global Management hedge fund.
Avis stock initially jumped more than 200 percent after executives told analysts on Tuesday that they were considering electric offerings. Joe Ferraro, chief executive, said the company would be “more active” in electric vehicles.
The discussion came after car rental company Hertz said last week it had ordered 100,000 Tesla Model 3 electric sedans, in what was seen as a groundbreaking announcement for the industry. Late Monday, Tesla CEO Elon Musk questioned the deal.
SRS, the little-known hedge fund that Sarma founded in 2006, is the largest shareholder in Avis with a 27.7 percent stake. That position was worth about $10 billion on Tuesday morning after shares in the car rental company topped $545 in early trading.
In addition to the 18.4 million shares it owns, SRS has exposure to another 11.3 million shares through cash-settled equity swaps that are equivalent to 16.3 percent of the shares, according to filings. The fund has used major brokers including Nomura, Jefferies and UBS for its recent swap deals.
The fund first bought shares of Avis in 2010 and became active in 2016, using extensive swap purchases to build a significant stake and seeking representation on the company’s board of directors. When SRS began increasing its position in January 2016, Avis stock was trading at around $28.
Stock swaps allow investors to have exposure to shares without directly owning them. These derivative contracts have come under scrutiny since Bill Huang’s investment firm Archegos Capital Management lost billions of dollars in swaps tied to a small group of companies.
Regulatory filings showed that with car rental stocks plummeting during the coronavirus pandemic, SRS made several purchases of Avis stock. In February 2020, the fund reached a standstill agreement placing three of its nominees on the Avis board of directors.
Given her representation on the board, the standstill agreement between SRS and Avis prevents the hedge fund from selling its shares during blackout periods, which are usually lifted soon after earnings are released.
Avis did not immediately respond to an email seeking comment, while SRS declined to comment when contacted by phone.
“SRS has been an important long-term partner for Avis. We are pleased to have reached a new collaboration agreement with them that we believe is in the best interest of the company and our shareholders,” Bernardo Hayes, Avis President and former CEO of Kraft Heinz, said in a 2020 press release.
Hees owned nearly $300 million of stock in Avis at Tuesday’s high.
Shares in Avis are already up more than 300 percent this year as investors are excited about the return of travel and the shortage of new cars globally. The company on Monday reported a 96 percent year-over-year increase in third-quarter revenue and a sharp increase in net income from $45 million to $674 million. By Tuesday afternoon, Avis stock was 95 percent higher on the day at $335.05.
While Avis executives have said they are pursuing electric vehicles, the company has not announced any major orders. “At Avis, we realized that electrification of vehicles is ultimately not just going to our industry, but the entire mobility ecosystem,” said Brian Choi, CFO, in a call on Tuesday.