WHEN: Today, Friday, April 27, 2018
WHERE: CNBC’s “Closing Bell”
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with ValueAct Capital CEO Jeffrey Ubben and CNBC’s Kelly Evans today, Friday, April 27th. Following is the video of the interview on CNBC.com:
Pros And Cons Of Tail Risk Funds
Editor’s note: This article is part of a series ValueWalk is doing on tail risk hedge funds. The series is based on over a month of research and discussions with over a dozen experts in the field. All the content will be first available to our premium subscribers and some will be released at a Read More
All references must be sourced by CNBC.
KELLY EVANS: Jeffrey Ubben, thank you so much for joining us today.
JEFF UBBEN: Good to see you again.
KELLY EVANS: Appreciate your time. Some big news today that you're stepping down from the board of Fox, after spending what now, almost three years on it? Why the timing? Why now?
JEFF UBBEN: Well-- I love the Disney deal-- champion of that deal for sure. The-- the work from here is pretty much regulatory work, so you know, to a certain extent I feel like my job is done now. The news of this week is interesting.
KELLY EVANS: Well, 'cause Comcast still is making and offer for Sky and--
JEFF UBBEN: Right. As the--
KELLY EVANS: --and would like to--
JEFF UBBEN: --proxy-- as the proxy noted that they were apples and oranges. That-- that the bids, one took regulatory risk and one did not. So, I would-- I would-- I would expect that things change. The board will exercise its fiduciary duty. And obviously it's a board I-- I trust, having worked with them for three years.
KELLY EVANS: But you feel like this is pretty much a done deal. Fox is-- and the Disney tie-up is gonna happen. It includes Sky. That there's not a role for Comcast in any of that.
JEFF UBBEN: I-- I think that-- Disney's a fantastic deal for this-- for Fox. You know, when you look at Amazon and how they do Prime, none of of us really expected that they would give away video. It's like the toaster to the bank that gets-- tries to get you to open -- open a deposit. So – because what they want is the $4,000 retail spend. So-- so the-- the idea that we're a toaster sucks. And-- and so my view on this is that you need the Disney flywheel. You need the content to drive the-- the parks, that drives the retail, that drives the content that drives the parks.
KELLY EVANS: So, you don't think you can be a standalone content provider?
JEFF UBBEN: I mean, I-- I just think-- I think-- I just the flywheel is-- is really, really, really, really important. And it-- it's-- it makes Disney different and strategic.
KELLY EVANS: What does that mean for Netflix though? Because they are still-- even though they're the new content provider, that's all they fundamentally are as well.
JEFF UBBEN: Netflix is a high-wire act. And it, you know, it may very well work. The price point right now is so low and the customer experience is-- is good-- that as long as they're allowed to lose $4 billion a year-- and keep the price point low and-- and burn cash-- they may get to the point where they have so -- so much-- so much subscriber and so much pricing power that they'll-- they'll make it through and they'll be another studio.
KELLY EVANS: Oh, do you think Netflix will be?
JEFF UBBEN: It already is.
KELLY EVANS: Right. They've -- they're already producing movies, maybe gonna own a movie theater. And it feels like where--
JEFF UBBEN: Yeah. Yeah.
KELLY EVANS: --that's going. Why did you get involved with Fox in the first place? ValueAct is the kind of company that, for 18 years, has hold-- held 12 names at any given time. What was it that attracted you to that story and what is the story today?
JEFF UBBEN: I mean, content is king. Premium content-- it turns out that the public markets, you know, didn't really want to acknowledge the value of Sky or the value of Star India or the-- the value of the -- Ava-- -- the-- Cameron movie that's coming down the-- down the pike-- Avatar. But Disney does because they're thinking long, long term. And that's the stuff that we saw. You know, it's must have content. And ultimately-- it surprised me how-- how much money came into long-form video between Netflix and Facebook and Amazon and-- and-- everybody else.
KELLY EVANS: Each one of those spending upwards of--
JEFF UBBEN: So that's--
KELLY EVANS: --$5 billion in a year.
JEFF UBBEN: Yes, exactly. So, that's-- that was-- a new challenge. But-- but the strategic value, the must have, the uniqueness, the ability to product really high-value content, and especially sports-- gives it a scarcity value that-- that really was realized when-- when-- when Rupert and-- and family decided that the right thing to do was sell the company.
KELLY EVANS: So, you're stepping down from the board now. Does that free you to get involved with other media companies or other investments in general, where you guys have always--
JEFF UBBEN: Well, we look forward--
KELLY EVANS: --emphasized that –
JEFF UBBEN: --to owning the-- the Proforma company. It's a $2 billion investment. We really look forward to owning the Disney Fox combination.
KELLY EVANS: Are you gonna have a seat there at the table?
JEFF UBBEN: Haven't talked about that.
KELLY EVANS: Yeah. And what-- so but now that this does free up a chunk of your time-- how are you gonna spend that time?
JEFF UBBEN: That's a good question. It's-- can-- can I do a little-- a quick little history of ValueAct?
KELLY EVANS: Sure.
JEFF UBBEN: Yeah, so we started this firm 18 years ago. We had Act in our name. We-- we really-- we-- at our core, we believed in the inherent effectiveness of shareholder directors-- had a big owner in the room. You know, Warren Buffett's been talking about that forever. If we were gonna be good-- good governance partners, we better govern ourselves. So, I did-- put in place this-- succession plan in 2007. And--
KELLY EVANS: This is highly unusual, by the way. So, for an investment firm as big and successful as yourself to actually have you hand over the reins to somebody else has not happened that often with all that much success. Why was it so important for you to set that in action while you're still pretty young and--
JEFF UBBEN: Yeah.
KELLY EVANS: --could continue what you're doing?
JEFF UBBEN: Again-- if we're gonna ask our companies to-- to do succession well themselves, if we're gonna ask them to-- to compensate themselves on long-term shareholder returns, we better do that to ourselves-- to-- to us. So, I really committed to this. I thought by doing so, the politics goes away and you can just make good decisions. We-- it forced us to really invest in Mason -- and frankly all seven investment partners-- to the point where-- and they're all with us today-- to the point where all eight of these people are on board-- their own boards. And now we basically are partner analysts supporting Mason as portfolio manager. Mason's a star. I mean, John Thompson, the chairman of Microsoft, said Mason is the best director he's ever seen.
KELLY EVANS: Wow.
JEFF UBBEN: So, I mean, I got lucky. He was my first hire.
KELLY EVANS: I was gonna ask, has this--
JEFF UBBEN: Yeah.
KELLY EVANS: --been easier for you than other firms because you did get lucky--
JEFF UBBEN: I got lucky, yeah.
KELLY EVANS: --with your successor here.
JEFF UBBEN: For sure.
KELLY EVANS: Would this-- would that have made it more of a challenge if it-- there wasn't a guy like Mason waiting in the wings, who has worked with you since day one--
JEFF UBBEN: Perhaps.
KELLY EVANS: --and been the obvious inheritor of--
JEFF UBBEN: Perhaps.
KELLY EVANS: --the throne?
JEFF UBBEN: And-- and you know, because we worked together for 18 years-- I still have a role as-- as his confidante. But I do-- I do feel like there's another role for me-- which is to evolve our—our governance role-- in corporate America. You know, that shareholder engagement, director engagement didn't really exist 20 years ago. And now it's mainstream. The-- the lines are wide open, the communications--
KELLY EVANS: Is it too mainstream? Is there such a thing?
JEFF UBBEN: That's a great question. So, I-- I do think that-- that the-- the pendulum may have swung too far into-- into the shareholder need.
KELLY EVANS: Meaning?
JEFF UBBEN: Well, I mean that the incentives are short-term, right? The asset owners expect liquidity from the public market managers because they have these other privates. And the public market manager is complicit because in exchange for providing liquidity, they get to get paid every year on a market to market basis. So, that's-- that-- that short-termism, that-- that profit maximi-- profit maximization, I think is creating a less sustainable company. You know, we-- you know-- supply chains are more extractive than they should be as the planet gets more constrained. I think the well-being of customers and-- and workforce is sometimes secondary rather than primary. I-- I'm a profit max-- profit maximizer myself frankly over the years. And-- and it takes one to know one. But-- I'm trying to learn from those experiences honestly, and to try to grab the long term back. That's-- that's where I want to go with-- with my time and with-- with the ValueAct brand.
KELLY EVANS: And you have a new fund, the Spring Fund, that is focused on sustainability. The interesting thing to me about it is this isn't just one of those kind of "greeny" funds that trendy and popping up all over the place. You're actually-- I mean, your first big investment was in a coal company.
JEFF UBBEN: Right.
KELLY EVANS: Explain that.
JEFF UBBEN: Right. So, there's-- there's so much enabling technology-- that if companies were just allowed to investment and deploy the technology, the very companies that are part of the problem, that-- because they're stressing society or stressing the planet, they can become part of the solution. You just need the ability to invest, right? And-- and so when you look at AES, I mean three or five years ago they were a leveraged coal play to a certain extent. But they-- they've got this technology storage, technology that has been inside this company for ten years because they're in the business of generating base load power. They've been doing renewables for-- for a long, long time. And so, the idea that they can decarbonize while becoming tomorrow's growth company-- is exciting. I think you know, what-- what tends to happen is the coal plants pay the dividend, and so you see a lot of companies that maybe hug-- hug the coal plant because its investors want-- want the near-term dividend. But you have to-- you have to-- you have to-- you have to want to future-proof your business. I think that's the whole--
KELLY EVANS: Which may mean giving up some of that near-term dividend.
JEFF UBBEN: Well, maybe. I mean, you know, the-- the-- it's a huge market to replace all the coal and all the nuclear all over the world, which we-- I think we should do because the technology is there. Storage is a threshold technology that's relatively new and you-- can allow us to-- to time shift, you know, so gas becomes less interesting frankly. And that was--
KELLY EVANS: Natural gas.
JEFF UBBEN: Yeah, natural gas. So-- maybe, but the-- there's so much growth there, and we have infrastructure in place-- that-- you-- you see-- you see companies that actually are future-shocking their company. They're-- they're-- they're-- the-- they're returning cash to shareholders. They're shortening the duration of a long-duration asset. I don't know what they're afraid of. I think they may be afraid of business risk. But what-- you know, what-- Kelly, what happened to compounding? What happened to that? It's, like, gone.
KELLY EVANS: So, who else do you think is doing this right? Who-- where else do you see those exciting opportunities?
JEFF UBBEN: I mean, you know, so what I'm-- the way I view sustainab-- sustainability is a solve for short-termism. And so-- where you go with your-- where you can go to-- to basically part of-- be part of the solution is you have to go where the problem kind of is. You have to go into the supply chain, you know. So, you can green-wash your company all day, but that doesn't really do much in terms of cleaning up the planet or making your customers healthier, right? So-- supply chain is an infrastructure sort of business. There's a lot of new technology in renewables, recycling, and reuse-- sustainable farming. And we're-- we're going into all of those. We have now already public market investments in those-- in those places. There's a demand-supply imbalance, so you can make some good money. There's gonna be more demand for renewables than I think the capacity to develop. There's gonna be more -- demand for recycled product than the capacity to recycle. I think there's gonna be more demand for organic produce than there is organic farms to-- to make it. So, all that is an opportunity. It's a little bit balance sheet heavy for me, you know, because you can only-- when it starts to really take off, the big balance sheets can come in and-- and compete the returns down over time. So, you have to balance that against high-content companies. So, a couple idea-- a couple of ideas that a couple of companies we're investing in that I call content companies in the New Fund-- Strayer communication-- Strayer Education, rather.
KELLY EVANS: The for-profit education--
JEFF UBBEN: That's for-profit education. So, the industry went from $50 billion in market cap to five.
KELLY EVANS: Wow.
JEFF UBBEN: Yeah, student outcomes were poor for most of the industry. I think Obama was largely right, although he took it maybe a little too far. But-- Strayer obviously has been around a hundred years. They came out the other side fine because they deliver good student outcomes. But the interesting thing is-- they've taken their tuition down. So-- so while they may have been-- while there-- while there definitely was, you know, a question around online education and is it efficacious, Strayer's been takin' their tuition down to make it more affordable. That's the big problem in education, is affordability. And-- and they've been investing in artificial intelligence-- to the point where their-- their margins have gone from 30% to 10%.
KELLY EVANS: Wow.
JEFF UBBEN: So, they've been investing--
KELLY EVANS: Which should be unattractive for a lot of investors but--
JEFF UBBEN: --and making their product affordable.
KELLY EVANS: But still, Strayer is not the kind of name you expect to find in an-- a sustainability fund.
JEFF UBBEN: Exactly, right? So-- exactly. That's-- but it's counterintuitive because they have that incumbency, they have the students, they have, you know, the brand to a certain extent, but they have the technology. And so, what's happening is students are going on to-- to take the Econ 101 class and because we can insert answers real-time while they're taking the course or the test, you know, the professors are pre-recording 2,000 answers.
KELLY EVANS: Wow.
JEFF UBBEN: And so, the chat-bot in-- inserts in-- and the student is having a better experience. The customer experience is-- is actually h-- higher than in the-- in the class, where you're just listening to a lecture.
KELLY EVANS: And how long might you stay invested in a company like that? What's your target?
JEFF UBBEN: The idea is ultimately, and it's 25% of the business today is to-- is to keep the tuition-- to use technology to keep t-- the tuition-- to the point where it could be a corporate benefit and pretty soon we're educating-- we're educating, you know, the masses in a sense on the corporate--
KELLY EVANS: Dime.
JEFF UBBEN: --path because it's good for the corporations. Their retention rates go up when they provide a corporate benefit. Th-- there's a lot of news on CNBC about Kroger and Starbuck's. And-- and-- I think Strayer's been working with Verizon for, like, a hundred years--
KELLY EVANS: Wow.
JEFF UBBEN: --in terms of providing a corporate education benefit.
KELLY EVANS: You know, let's talk about size for a second. How much capital have you-- has ValueAct returned to investors now over the last couple of years?
JEFF UBBEN: $3 billion.
KELLY EVANS: Wow, that's quite a sum.
JEFF UBBEN: Yeah.
KELLY EVANS: So-- as people look out there today and see companies like Amazon getting even bigger, why is it to you that the opportunity set is in-- is-- is away from those big-cap companies? Why is that you guys could sell a name like Adobe at $90, watch it go to $220 as one of these, you know, mega-caps, and feel like, you know what, there's a different place where we want to be right now?
JEFF UBBEN: I mean, I think that funds flows, the-- the passive money is going into big caps. And so, the big caps are structurally expensive. I think, you know, to be an active investor in big-caps-- is hard. I mean, Microsoft may have been a flyer. You know, it was ten times earnings.
KELLY EVANS: Would you say that's your most successful investment?
JEFF UBBEN: You know, we-- it was-- it was groundbreaking in the sense that-- that we could actually go in the board with-- with a 1% ownership. It was mostly because the shareholders and the directors were talking and the directors were being informed by the-- by the shareholders, not just by us. And so they felt like they could act and move the company in a different direction. And then you know –
KELLY EVANS: It must be gratifying to have seen that played out.
JEFF UBBEN: Yeah, it was. It was. But it was-- it-- it may have-- it may have encouraged others to go do big-caps. It's nice to manage a lot of money and to be able to deploy it. And what could be better than to get on a board, own 1% of the company, and basically be really liquid when you want to sell, right? So, that-- that model makes sense. I just don't think big-cap active investing is-- is-- is really-- it's not really available. The companies are too complicated. The--
KELLY EVANS: 'Cause there are some big campaigns out there, including Procter & Gamble, the biggest ever.
JEFF UBBEN: Yeah.
KELLY EVANS: And that's-- that's like turning the Titanic.
JEFF UBBEN: Yeah, so we have-- gotten smaller to-- to make our-- our target set more-- more in the $5 or $15 billion range. We couldn't really replace Microsoft and Adobe with another high-return, big-cap opportunity.
KELLY EVANS: And are there opportunities-- there now? I noticed that you guys, for example, have added Citigroup. Are the financials someplace where you think you could see the kind of returns that you actually found in-- in tech going back years ago now?
JEFF UBBEN: You know, I-- I-- I'd rather not get too deep into that. We're gonna be talking to our LPs about, you know, some of our new investments. It-- it-- we are largely-- we are much more financial than we ever have-- have been, partly because we think the industry structure changed-- and as companies have coalesced around franchises—
KELLY EVANS: But you see real growth there?
JEFF UBBEN: You see-- you see the-- you see s-- to a certain extent, price is everything. You see good franchises that have 15% return sustainable-- that are way over capital-- capitalized. And they trade at, you know, book value. That-- that is not sustainable. That's-- but time will tell.
KELLY EVANS: Yeah, that's-- becomes an attractive opportunity set--
JEFF UBBEN: Yeah.
KELLY EVANS: --for you guys. So-- you're still looking at holding between the two funds, a small number of companies, correct? I mean, this is not-- a way of expanding the portfolio all that much, is it?
JEFF UBBEN: No, I mean-- we're not asset-gatherers. We're-- you know, we're-- it's all about returns for us. This is the-- this is the thing on the-- back to the Spring Fund. We need to prove that this sort of investing is a high-return proposition. Because the only way we're going to get companies to make the sort of investments that future-proof their business is to prove that there is a sustainability premium to your stock price if you do so. And that's the way-- that's really the way-- if we can do that, that's really the way we change corporate behavior. Like-- like good governance has changed corporate behavior already-- and which I feel like we're a part of. So, I want to take it to the next 15 years-- and try to-- and try to influence corporate behavior. I don't want to just send out press releases and tell companies that they should, you know, make people use their product less. There-- there's no-- there's no return there.
KELLY EVANS: What-- I want to ask if there's any lessons you've drawn from the whole Valeant experience, from the success that company had initially, to the troubles that they've gone through. They're still trying to turn things around. But again, to your point about learning as you go, what do you take from all of that?
JEFF UBBEN: We-- we're really excited about the management team. We-- we definitely-- our goal is to leave companies better than where we found them. And we don't-- and we stay with the job and we-- there's a lot of companies where we were on the board for ten years that we could talk about. Interestingly enough, when you look at-- and you talked about it, when you look at our-- our companies, they compound at a high rate after we sell them.
KELLY EVANS: Do you think you sell too early, in general?
JEFF UBBEN: Yeah, maybe. When interest rates went to 2% and stayed there, clearly PEs went further than I thought. But-- but-- and-- and-- and you know, that's where we are with Valeant. And I think we're gonna be proud of where—where we are in-- in the next, you know, two or three or four years. It would have been easy to capitulate, to cut and run—to, you know, I-- I do think that the idea of investing in the ecosystem, there's industry relations, there's government relations, there's academic relations, there's workforce relations-- workforce relations. You know, I did learn some stuff about not investing enough in some--
KELLY EVANS: In those areas?
JEFF UBBEN: In some of those areas.
KELLY EVANS: So, does that mean when people look today at the amount of lobbying spend that Amazon or Google or Apple has in Washington that they're barking up the right tree?
JEFF UBBEN: That's like-- I don't know, there's so-- so many layers to that question. I don't know if-- if-- if they would lobby for an algorithmic task force that allows somebody to actually get inside privately and look at them, then I would say fantastic. But I'm sure they're not doing that with their lobby efforts.
KELLY EVANS: And finally, do you have any personal views on social media and technology as it relates to your own usage of it? Kids, family, societies?
JEFF UBBEN: I mean, I think the-- the ad-driven model, where you centralize the Internet on a single platform-- where-- dopamine that you can generate through distributing polarized messages to sell more ads because you stay online longer is-- just a disaster frankly.
KELLY EVANS: And so, what should the companies do about it?
JEFF UBBEN: They could shut it down.
KELLY EVANS: Themselves-- shut themselves down?
JEFF UBBEN: They won't, but –
KELLY EVANS: You-- I don't think you're joking. It doesn't look like it. We'll leave it right there.
JEFF UBBEN: Okay.
KELLY EVANS: Jeff, thank you so much for your time today.
JEFF UBBEN: All right.
KELLY EVANS: I appreciate it. I appreciate it very much.
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