Jeff Ubben, founder of ValueAct Capital, also makes for a worthwhile subject. He’s had his share of news coverage, both recently (Valeant) and over the years (Microsoft). He became the subject of a high-profile and potentially precedent-setting antitrust lawsuit. He’s also been the subject of extensive profiles, which provide all manner of interesting detail about his career and firm.
What we haven’t see yet is an analysis of his investment strategy. We reviewed his 82 activist projects since founding ValueAct in 2000, from the invaluable SharkRepellent database, to develop some insights.
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We find an activist investing hedge fund that acts as much like a private equity fund as any other we’ve seen. ValueAct orchestrates deals behind the scenes, with targeted board membership through substantial ownership positions in portfolio companies.
Jeff Ubben is a pure investor and portfolio manager, with little operating experience.
He apprenticed with Peter Lynch at Fidelity and Blum Capital. He started ValueAct in 2000 with two partners and a few hundred million dollars of AUM. Its very first activist situation in 2000, at a $100 million market cap company, yielded a BoD seat with no public plan.
By 2002, ValueAct disclosed $450 million in AUM with its first Form 13F. It hit a high of $19 billion in mid-2015, falling to over $14 billion today after both market declines and specific portfolio hits, mostly Valeant.
ValueAct delivered superior performance all along. Even after an inferior 2015, the fund averaged a return of over 15% per year since inception, compared to less than 5% per year for comparable indices over the same time period.
The fund does not specialize in one or another industry segment. It seems to concentrate most of its investment in three segments: manufacturing, healthcare, and information technology, with a few investments in financial services, business services, consumer goods, and some others.
ValueAct invests only in activist situations. It maintains a highly concentrated portfolio of 10-15 names, with most of these becoming a public activist project at some point. It averaged over five such projects per year since inception.
Like many others, ValueAct started with smaller companies. For its first five years, across 18 activist situations, the market cap of its activist projects averaged under $450 million. Since then, as its assets have grown, it continues to invest in mid- to large-cap, rather than very large-cap companies. In the past five years, excluding its investment in Microsoft, the market cap of its activist projects averages a little over $10 billion. The average market cap for all of its activist projects is just over $5 billion.
Its concentrated portfolio, along with the size of its investments, means that ValueAct acquires a substantial stake in a company. In almost all situations it has at least 5% of the outstanding shares, filing a Form 13D. It might have up to 20% of the shares. This stake allows significant clout.
Quiet but Visible Influence
Like a private equity investor, ValueAct advocates for specific changes at portfolio companies:
- ?new executives, including aggressive exec comp programs
- ?deals, including divestments, acquisitions, and straight sale of a company
- ?balance sheet restructuring, including share repurchases, equity offerings, tender offers, and many other financial engineering moves.
It will support or oppose announced deals. In at least 13 situations, it appears to have orchestrated one or another deal. On several occasions, ValueAct used its ownership position as a starting point to acquire an entire company, just like a PE investor.
Unlike most PE sponsors, ValueAct does not get involved in basic operations. It rarely promotes a detailed plan for a company’s business, and avoids debates, at least public ones, about one or another process or expense.
Just a Couple of Board Seats
ValueAct clearly seeks and needs influence. It files a Form 13D so it can engage directly with the BoD and management of portfolio companies. It rarely spells out its ideas there, and over the years filed almost 50 Form 13Ds with no disclosed plan. However, it has done so only twice in the past five years. Clearly, as it engages with much larger companies (American Express, Baker Hughes) recently, it can’t fly quite so far under the radar.
It almost always works alone. It formed a group in only two situations.
ValueAct manages to avoid proxy contests. We can find only one, at Acxiom Corporation in 2006. It represents a legitimate threat to do that, otherwise, companies would not negotiate so readily with it. And, because it does not pursue proxy contests, it need not disclose extensive analyses of its portfolio companies. It no doubt prepares these, but just doesn’t publicize them.
Instead, it grabs board positions, for Ubben, his partners, and a few trusted independent directors. In half of its 82 activist projects, ValueAct gained one or more board seats.
For a quiet firm, it does tackle its share of controversial situations. It worked Martha Stewart Living Omnimedia through its founder’s problems. It evidently helped push Steve Ballmer out of Microsoft. It now faces high-profile antitrust litigation. And, of course, it has navigated through the wreckage of Valeant. A very active role on a BoD sometimes leads to this.
The private equity approach isn’t for everyone. It demands extreme patience, detailed and thorough analysis, and willingness to spend significant time on a portfolio company BoD. It works well for ValueAct, and can for others that adopt that patient, disciplined, involved philosophy.