Fundamental research—we narrow down from our initial screen of 300–600 companies through secondary financial screens on financial health, low concentrated ownership and evaluate their franchise within their industry. This usually brings us down to 100–125 companies that we have initial management conversations; review their recent presentations, shareholder calls and SEC filings; do catalyst identification and validation; then initial financial modeling.
Plan development—narrowed to 30–40 companies we continue discussions with management; have initial conversations with board members; review existing customer, shareholder, sell-side analyst calls (if any); back-channel diligence on management teams and boards; do deep industry and financial modeling; and then do competitive analysis/risk analysis company visits with management.
Execution—Establish initial position with 10-15 companies, identify path to build >5% position if investment thesis holds, develop strategies to improve financial performance, attempt to work with management/board to affect change, join boards of investee companies (if applicable), actively monitor risks, and, if required, issue private/public letters, proxy contests, etc.
Hortz: Can you walk us through an example or two to illustrate how this direct engagement with company management works? Why would they listen to you?
Rendino: As far as examples of activism, we were interested in TheStreet.com because of its assets, its new management, and the depressed valuation of its share price. We invested some capital in the open market to establish a starter position. It was clear to us that the overhang causing the shares to be depressed was a bad balance sheet. The company had a $50+ million senior liquidation preference preferred stock soaking up the majority of the capital structure. For years, the company had been unsuccessful in retiring this preferred stock instrument. Given that we know how to value preferred securities from our history of managing private holdings, we worked with the management team to raise $20 million, both from TheStreet.com’s balance sheet and ours; and retired the preferred stock with this cash and issuance of TST stock, thus removing the overhang on the equity. Coincident with this, we took a 17% stake in the company and agreed to join the Board of Directors. I soon became the chair of the strategic alternatives committee and we sold the business for a nearly 150 % gain in less than two years.
We did a similar thing with Turtle Beach when the stock was $4.00, although we felt the business was performing well and we did not need to go on the board. We achieved a nearly 400% return in less than three months. Turtle Beach listened to us because of our success with remaking the TheStreet.com’s balance sheet and subsequent share appreciation.
Wolfe: Most companies listen to us because: 1) we have over 50 years of investing and market experience, 2) we are the adults in the room, 3) we show up usually taking a 5 to 15% stake in a company making us a first page, top five shareholder that wields influence, and 4) we run a public company. The last point is a key differentiator between us and other investors. We understand what it means to talk to investors and the delineation between public and non-public information. We use the way we run our company as an example for our investee companies. We can also relate to the demands of investors and use that knowledge to frame how we work with our management teams. We believe it brings us a level of credibility that few other investors have to our approach to constructive activism and engagement with management teams and boards.
Hortz: How do you recommend that advisors work with and integrate investment activism strategies into their clients’ portfolios?
Rendino: Simply put, we offer a differentiated investment process, proven out over its tenure, that we believe is not only suitable but should be desired for client portfolios. We seek to minimize risk because, as value investors, we focus on paying a low price for the businesses we are buying. Since we are differentiated from other funds in terms of our investment style, in terms of our level of concentration and our activist approach, the correlation of 180 relative to the rest of the market (which feels like one gigantic ETF) is low. Client portfolios need differentiated diversification. And they need outperformance. We believe we provide both.
The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors—Ultimus Fund Solutions, NASDAQ, FLX Distribution, Pershing, Fidelity, Voya Financial, Advisorpedia and Charter Financial Publishing (publisher of Financial Advisor magazine).