Q&A: Ken Squire
When Ken Squire decided to start a research service analyzing the securities filings of hedge fund managers in 2006, the strategy he planned to cover—what we now call shareholder activism—was a tiny niche in the hedge fund world.
But activism would soon take off, and Squire was there to watch it explode.
The idea, suggested to him by a friend who worked at a hedge fund, was to analyze the filings of hedge fund activists who’ve amassed more than 5 percent of a company and want to lobby management for changes, called 13Ds.
Squire, who’d helped craft 13Ds in his prior life as a corporate lawyer at Weil, Gotshal & Manges, decided to give it a go. He launched the company from a leather chair in his Manhattan apartment that now sits in a corner of his swank midtown office at Carnegie Hall Tower, roped off with red velvet in a tribute to those early days.
“I’d go through the 1,500 13Ds every year and send out reports on what we thought the material activist situations were,” he says. “It took me about a year and a half to feel comfortable as an expert on activism, but it took about a week and a half for the media to think of me as an expert.” Soon Squire was appearing on CNBC and writing a column for Barron’s, which gave him entre to all the major activists—Carl Icahn, Bill Ackman, Dan Loeb, Nelson Peltz, Jeff Ubben and Jeffrey Smith, to name some of the most well-known.
“Now the activists are calling. I get to know them, I know their business thesis better, I know how they think, their philosophies, their habits, their styles, and it made my commentary that much more valuable,” he says. While his product, called 13D Monitor, started as an idea generator for hedge funds, it now counts huge institutional investors, pension funds, most of the major investment banks and most major law firms among its clients.
In 2012, Squire took his business to the next step, launching a mutual fund to invest in the 13D activist situations of the top players, known as the 13D Activist Fund, which has about $350 million in assets under management. He now serves as the chairman, chief investment strategist and portfolio manager at 13D Management.
His firm also produces a yearly conference on activism every April at the Plaza Hotel in Manhattan. Among other activist luminaries, the line-up for this year’s conference, on April 16, includes three of the top players: Ubben, founder of ValueAct Capital, Jonathan Pollock, co-CEO and co-CIO (with Paul Singer) of Elliott Management and Pershing Square Capital’s Ackman.
Worth recently sat down with Squire to discuss the current state of activism.
Q: Shareholder activism exploded in recent years. Along with the big names—Carl Icahn, Bill Ackman and Dan Loeb, for example—a lot of new people came onto the scene. What accounts for that?
A: The success of these few people was high profile, and successful strategies get money.
Is it still the hottest strategy attracting new money?
It peaked in 2015, when Valeant happened, which was bad advertising for activism. Valeant [the high-flying pharmaceutical company whose stock collapsed in scandal] was really the black swan event, because two of the top three or four activists [Ackman and Ubben] were 13D investors. People were taking all their money out of activism. There was a Darwinian effect on activism.
So why did it affect the newer players?
A lot of people were doing activism on a one-off basis. They were never activists before—but it was a badge of honor to file a 13D and keep management’s feet to the fire.
Are you saying they weren’t successful? Why not?
There are a lot of really smart investors that can’t be activists. You need a defined skill set. Other than being a good investor, you need to have thick skin, you need to have conviction, you need to be articulate, you need to be able to be persuasive, you need to be able to sit in a boardroom and command a room of very experienced, accomplished executives and tell them your plan is better. And you have to be willing to be out there in the public. Not a lot of investors can do that.
In the past year or two, some of the big activist plays have not done well—like General Electric or Campbell Soup. (In 2017 Nelson Peltz’s Trian Management got a board seat on GE, and Dan Loeb’s Third Point convinced Campbell’s to add two independent directors last year.)
A year is somewhat of a short-term sampling. There are some years where the activists just do a better job than other years. You really have to look at it through a whole life cycle of activism. For instance, our fund was down 13.5 percent last year. The year before, we were up 24 percent. The year before that we were up 20 percent.
Another trend that I’ve noticed is that over the last couple of years at least, the activists that have been going to proxy fights have been underperforming.
A lot of times the best performing activism is the stuff that you don’t write about. The stuff that’s not on CNBC, the stuff that’s not in the Wall Street Journal. It’s when a good activist takes a seat on a good company and says to the CEO and management, “Keep doing what you’re doing. You guys keep generating the cash flow, we’re going to sit here on the board and we’re going to figure out the strategy and the best use of the cash flow.”
When does the company just give them a seat on the board?
That happens with ValueAct all the time. It will go on the board of a company that’s generating tons of cash flow, and they’re saying, “OK, we could use this money to buy back shares, we could use this money to buy a company, we can use this money to modernize, we can use this money to hire more people.” And they have these teams of analysts that run models on the best use of the money to create shareholder value and come back and tell the board, “This is the return of investment on each of our options.” It’s very helpful to a board. And that’s why that type of activism works well.
But what about the really contentious situations?
That’s where an activist comes in, takes a majority on the board and changes the entire culture of the company. That is probably the most rewarding activism you can do from a social perspective and from a return perspective.
Let’s talk about Campbell’s, which Loeb tangled with last year. He wanted to replace the whole board but ended up settling for two seats. That company needs something, but it seems almost unfixable. It seems that sometimes activist investors go into companies that are almost unfixable.
That’s called a value trap. Campbell’s could be a value trap. I don’t know, but from an activist and a corporate governance standpoint, you’re dealing with a 40 percent shareholder base comprised of the company’s heirs, which is too high of a threshold to overcome in any proxy vote to change the board. It might not have been the most well advised proxy contest.
Are these proxy battles becoming a thing of the past?
The data shows a lot more settlements last year than the year before. But in general, you can count on one hand how many proxy battles any activist has done, whether it’s Bill Ackman or Nelson Peltz. The proxy fights that have gone to a vote, I don’t think there’s any activist out there that has more than three or four. They’re not a thing of the past, because they really weren’t even happening in the past. They just get so much publicity that people think there are more of them.
Activism at large companies is like turning around an ocean liner.
The bigger companies and the bigger battles certainly get a lot of media exposure.
It helps the activists draw attention to the issues. Activism at large companies is like turning around an ocean liner.
So why are activists going after those types of companies?
They raised so much money and an activist can only do two or three, four situations a year. So if your assets go from $4 billion to $8 billion, you don’t go from doing four situations to doing eight situations a year. You have to do double the market value and you need to do bigger market cap companies.
Are activists overreaching? Is part of the problem that these bigger activists with more money under management are looking for bigger companies to go after and finding a good target among those elusive? Is a lot of the juice out of activism because big, sophisticated companies are now being very proactive with things like share buybacks and so forth, to keep the activists at bay?
There is some truth to that, but there’s always going be a bottom 10 percent. U.S. activists maybe engage with 4 percent to 5 percent of companies every year. There’s always going to be 5, 10, 15 percent of companies in the bottom that will be poorly managed, with poor capital allocation and strategic issues, that the activists can go to.
In some recent proxy battles, we’ve seen activists reaching out to retail, or individual, investors as well as institutions like BlackRock or Vanguard to make their case and get their vote. What is driving that trend and what does that mean?
In some cases—like Peltz’s proxy battle for a board seat at Procter & Gamble, for example—it was such a close proxy fight that you needed to reach out to the retail investor. But generally the big institutional investors are going to be the ones that carry the day. Retail investors are interested in it because it’s an understandable strategy.
How else can individual investors get to play the activist game?
The mutual fund I started is really the only investor vehicle that allows retail investors access to the strategies without having to put in a $5 million minimum and lock it up.
And what is the advantage of that versus going into a hedge fund?
You have daily pricing transparency so you know how much your investment’s worth each day, and you can take it out on a day’s notice. Also, you’re diversified amongst Nelson Peltz, Bill Ackman, Jeff Ubben, Jeff Smith—all the best activists. Since 2012, the fund outperformed pretty much all of the major U.S. activists.
Is that because the fees are lower?
That’s one thing. It’s not because I’m smarter than the activists. These guys, what do they do better than anything? Activism. But their activist returns get diluted by their passive investments. We are 100 percent activist. Also, we’re a little bit more agile. We’re not locked into these things like they are.
But you only get in after they’ve established their positions.
Yes, there’s no doubt about it. I did a study before I launched the fund on the average one-day bump on the types of positions that our fund is in, $1 billion-plus market cap companies and premium activist investors. The average one-day bump was 2.65 percent, and the average holding period was 15 months. So over that 15-month period, the average activist play via 13D returned 15.2 percent after the bump, versus negative 0.9 percent for the S&P 500 over the same time.
Activists have been through a tough time recently. Last year, Hedge Fund Research reported that its activist hedge fund index fell by 11 percent—which is worse than the decline in the S&P 500. What is your prediction for the future for this strategy?
Activism is a differentiated strategy that has historically worked. It’s an understandable and a repeatable strategy. It kind of has an ESG component. What activists do a lot is invest in the worst corporate governance companies and turn them into the best at corporate governance. That is better from a societal perspective and from a value perspective.