Wolfe: We are doing everything in our power to provide an investment platform that seeks to achieve outsized returns by focusing on an asset class that provides great risk/return profiles that has very few participants. We invest in a concentrated manner with only 5 to 10 core names at a time and a small number of other starter positions.  We believe the world doesn’t need another small-cap diversified portfolio of 80 names that hugs the benchmark. We are value investors first but seek to enhance our strategy by using a constructive activist approach. The microcap universe provides many companies that need change and we can be the catalysts for that change.

Hortz: How do you deploy constructive activism in this investment universe of stocks? What tools or methods do you have in your activist toolkit?
Rendino: Every company is different.  As a value manager, we are looking to buy assets for pennies on the dollar. The companies we identify are being valued at pennies for a reason.  We ask ourselves, “What is it going to take to get a company’s share price from a depressed price to a place, where it is, at a minimum, properly valued?” There is never a time where we are not deploying some level of activism. Activism starts with us “having an opinion” on why a company’s stock price is out of favor with a compressed valuation. It is the sharing of our views with the company that starts the conversation.

We are not corporate raiders. Our ultimate goal is to engage constructively with existing boards and management teams to unlock value through:
• Resolution of capital structure or other overhangs that we believe inhibit growth of shareholder value
• Realignment of financial performance to achieve growth of operating profits, not just revenues
• Improvement of investor relations strategies and outreach
• Evaluation of strategic options including mergers, acquisitions, sales and divestitures
• Identification of complementary talent and expertise
• Introductions to what we believe are value-add resources and capabilities
• Alignment of interests with, and support from, large shareholders

Wolfe: While not our first choice, we are not averse to pursue change through other routes including private and public shareholder communications, proxy solicitations and/or joining boards of directors of our portfolio companies. We have yet to need to run a competitive proxy solicitation, primarily because we have generally built positive and constructive relationships with the management and boards of our investee companies.  That said, all of our efforts and decisions are grounded by and based on our fundamental research and diligence.

Hortz: Are there different levels of activist engagement you can deploy depending on the management challenges present?
Wolfe: As Kevin mentioned before, every company is different, and their needs and challenges are different. So, we do have different levels of activist engagement that we take as needed by the portfolio company. First off, no matter what the level of engagement is, we are bottoms-up oriented investors and spend all day long researching and maintaining coverage of our universe of portfolio companies.

Level 1 engagement is most often our initial level of engagement. These are investment opportunities that we believe do not require substantial time or involvement. Our approach is to identify what we believe are quality, deeply undervalued companies with strong management teams in the process of executing a turnaround. Our constructive activism here includes introductions to our institutional investors and/or individual investors that own or have owned 180 Degree Capital's stock and leverage our general knowledge of the public markets gained over our collective 50+ years of experience for advice and value-add introductions.

Level 2 engagement are with investment opportunities that we believe, or have come to believe, require time and involvement, but not yet a substantial commitment. Our approach is to identify what we believe are quality, deeply undervalued companies with strong management teams where we believe small changes can result in increased value, and management is interested in engaging constructively. Our constructive activism here is where we actively suggest changes to Investor Relations strategies and/or messaging and actively suggest changes in business related primarily to financial performance improvements.

Rendino: Now Level 3 engagement is where it can get very interesting.

Level 3 engagement results from our determination that we need to become deeply involved in the company to help to build or unlock shareholder value. Our approach is to identify what we believe are opportunities in which our capital and strategic involvement will result in immediate and long-term value appreciation. Our constructive activism here is to work directly with managements and boards to remove value overhangs and evaluate strategic options. We can even take seats on boards and leverage ownership and control to drive increases in shareholder value.

Hortz: What is your process in finding and determining the right companies to target for your strategy?
Rendino: Few investors are willing or able to spend the time and energy identifying, conducting due diligence on, and actively engaging with such companies to unlock their intrinsic value in this asset class. We believe the opportunity for value creation in U.S. micro-capitalization publicly traded stocks exists because management and boards often:
• Prioritize revenue growth over operating profits
• Favor the status quo rather than change
• Lack understanding of “buy side” investors and the workings of public markets in general
• Expend capital resources on perceived long-term opportunities at the expense of near-term results
• Do not appreciate the impact of flawed capital structures on shareholder value
• Entrench themselves to protect their jobs and positions

Wolfe: We screen for companies based on a specific series of criteria:

Initial screening—out of the micro-cap universe of over 250,000 companies, we focus on the approximately 3500 US-based companies under $500mm in market cap that are exchange traded and select OTC opportunities looking for fundamental value and screen for the following valuation measures: 1/2 market price to book, 2/3 market price to earnings, 2/3 market price to cash flows/EBITDA, 1/2 market price to revenue, above average dividend yield.