ValueAct Capital is a San Francisco, CA headquartered privately held hedge fund sponsor, founded in 2000 and led by three partners; Jeffrey Ubben, George Hamel, Jr. and Peter Kamin. The firm was initially formed to manage the capital of its three founders and a limited number of outside investors. With its second office in Boston, MA, ValueAct today manages more than $5 billion in assets for some of the world’s biggest institutional investors including foundations, endowments, funds-of-funds and high net-worth individuals and families.
Jeffrey Ubben is the chief executive and chief investment officer of ValueAct and has a BA from Duke University and an MBA from J.L. Kellogg Graduate School of Management at Northwestern University. He joined Fidelity Investments in 1987 and by 1991 he was running the Fidelity Value Fund. The Fund grew from $500 million to $5 billion when he left in 1995. His next stop – Blum Capital Partners, was an early practitioner of the “strategic-block” investment style where investors acquire large stakes in challenged public companies and work with the management for a turnaround. Jeffrey sits on the board of several public and private companies including Gartner Group, Inc., Sara Lee Corp., and Misys Plc.
George Hamel, Jr. is the co-founder and chief operating officer at ValueAct. He has a BA from University of Wisconsin at Madison. Prior to founding ValueAct, George was a partner at Blum Capital for four years and was responsible for business development, client services and reporting. He worked for four years at Private Capital Management (PCM) and was responsible for trading, administration and client development, compliance and reporting before joining Blum Capital. George was the president of the investment subsidiary of Signet Banking Corporation previously and was a financial consultant at Merrill Lynch.
The firm aims to invest in companies that it believes are fundamentally undervalued and tries to acquire significant stakes in a limited number of companies. ValueAct Capital typically makes three to four new investments in a year with an average holding period of three years and is holding about 20 different equity investments in its portfolio. The investment size usually varies between $50 and $500 million and the firm acquires significant stakes either through open-market purchases or negotiated transactions. Market capitalization for a target company rarely exceeds the $15 billion ceiling and the company never shorts a position.
ValueAct research team screens companies to identify potential multi-baggers that may be temporarily out of investors’ favor, or may be undergoing significant restructuring. Such companies tend to be mispriced for a variety of reasons including changes in management or ownership, perceived unfavorable business conditions, poor financial performance or other factors. The firm believes these conditions drive valuations lower for fundamentally strong companies. ValueAct seeks to engage the company’s board and implement strategies that would unlock shareholder value in future.
The firm is usually one of the largest shareholders at each of its core company investments and at any point in time the portfolio consists of ten to eighteen core company investments. ValueAct differs from typical ‘activist’ investors that often try to bring changes by acting in a hostile manner. Rather, the firm believes in building consensus among the management and board members to bring in the desired changes to maximize shareholder wealth. Between 2000 and 2010, Jeff’s fund had returned 13.5% annually, net of fees.
“What’s most fun is the intellectual challenge of figuring out what the other guy is missing from an investment-opportunity standpoint. But marrying that with real-world stuff like moving a board to action or helping a new CEO lead a company – that’s where we’ve added the most value,” he said in an interview to Value Investor Insight.
Talking about his investing style, he attributes his success to Dick Blum of Blum Capital Partners – the originator of the strategic-block investing idea. In every company the firm invests, it focuses on simple things that can be done to create value irrespective of market conditions and then approach the management and board for active participation. The firm looks for a minimum free cash flow “coupon” of 10%, i.e. EBITDA minus incremental working capital minus real capital expenditure, divided by enterprise value, combined with a 10% growth rate. Then the fund makes projections for three years and expects an annual unlevered return of 20%. The difficult part is to find companies that can sustain 10% growth, which often leads them to mature companies with recurring revenue streams, he noted. However, Jeff is willing to sacrifice the growth rate if he’s able to find higher coupon.
The fund focuses on industries that are evolving slowly and are duopolies or have three primary players, and tracks companies with solid fundamentals. Jeff prefers companies with great intellectual property and business services, and avoids technology risk, which possibly leads them to software or instrument companies that have a significant service element in them.
Explaining the fund’s exit strategy, he said the fund does consider the option of selling the business before getting involved heavily since it’s a question of protecting their investments, though it may not be the primary driver. Jeff believes in free cash flow generation capability of a business and any asset worth its value should be able to generate sustainable EBITDA and ultimately free cash flow for active investment consideration.
Talking of risk mitigation, he said their style of investment is low risk since it isn’t exposed to external shocks such as union actions or cyclicality. Apart from investing in quality businesses, the firm ensures there’s reasonable amount of diversity in the portfolio. There can be a couple of bad quarters, but over the years they have managed to protect capital quite well. Since he’s there for the long-haul and a typical investment horizon can last three to five years, the firm tries to arbitrage the public market’s time horizon. Most big players like mutual and hedge funds are not willing to suffer short-term pain for long-term gain since money can move fast if performance falls. As a result, most big players are focused on low volatility rather than long-term capital appreciation. However, once Jeff latches onto a target, he’s not worried about headline risk and keeps accumulating at every dip because he’s focused on the end game.
SHAREHOLDER LETTERS
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MEDIA
Misys CEO departure cuts chance of rival deal (Reuters – February 08, 2012)
ValueAct Holdings LP Holdings in 3rd Quarter: 13F Alert (Bloomberg – NOvember 15, 2011)
After L-3, activists drool over Textron (Reuters – June 28, 2011)
Valueact Holdings LP Holdings in 1st Quarter: 13F Alert (Bloomberg – May 14, 2011)
ValueAct Holdings Largest Holdings in 4th Qtr: 13F Alert (Bloomberg – February 15, 2011)
Sara Lee Disarray Costs Shareholders About $1 Billion (Bloomberg – February 07, 2011)
Drugmaker Biovail to buy Valeant in $3.3 billion deal (Reuters – June 21, 2010)
Q&A: Activist Interview (The Street – February 12, 2006)
VIDEOS
QUOTES
“Much of what you see today is ‘buy shares today and tomorrow throw a hissy fit.’ The focus is on shortening time horizons by being your own catalyst.”
“That’s a problem for me, because that style is transparent and could discredit all activists. Boards can say activists are just worried about making their quarterly or monthly performance numbers, and there’s something to that, frankly. Writing a nasty letter is going to lose the pop it has now – the activism is going to have to have more integrity than that. Activists are going to need the capital base, experience and credibility to follow through – by buying the company or going on the board to help fix it – if steps aren’t being taken to address their concerns. You’ll need to be more than a yeller and screamer whose biggest asset is that you don’t care what anybody thinks about you.
“Our idea of activism is to get really involved and help new or current management lead the business and extend the run of a successful investment. The more of our portfolio we can have in great assets with great management where we’re helping control the capital decisions – that’s nirvana. It’s obviously not always a lovefest – we’re trying to generate 20% returns, so we have to challenge every company we own with new ideas or they’re not going to stay on that 20% curve.”
(On his decision to fight Acxiom’s board): “I approached the board in the spring of 2005 with our concerns about management’s ability to run the company and made a case for why it made sense to have a shareholder in the board room. They came back and said they didn’t think it was right ever to have a large shareholder on the board. I knew then we were in trouble. It told me this was an entrenched, founder’s board that was not going to make the transition necessary to avoid being a structural underperformer. I had no recourse at that point but to offer a premium for control that would allow us to bring in a new management team and realize the potential of the business.”
(On leadership of a target): “Intellectual honesty is probably first. I want the person who is going to address the elephant in the room. It drives me crazy when you meet with management and there are real issues and they act like they aren’t there. Also important is a contrarian bent, a confidence to go against the prevailing trend. You generally don’t want people who are saying this is what we should do because this is what others are doing. You want people who are spending when others are not, and taking chits off the table when everybody else is putting them on.”
