Episode #316: Dianne McKeever, Ides Capital, “My Entire Career, I’ve Been A Value Investing Focused Shareholder Activist”
Guest: Dianne K. McKeever is Co-founder and Chief Investment Officer of Ides Capital, a deep value investment advisor that constructively engages with companies to improve corporate governance and implement operational, strategic and capital changes that drive long-term shareholder value. Launched in 2015, Ides takes its name from the Roman-era word portending dramatic change and has been cited as the “only” woman-led activist fund “shaking up U.S. companies.”
Date Recorded: 5/5/2021 | Run-Time: 1:25:09
Summary: In today’s episode, we’re talking all about activist investing. Dianne shares how she went from a Berkshire fan to becoming an activist. She shares the ins and outs of the process, from sourcing names to engaging with management teams. Then we talk about how ESG fits into her activism campaigns.
Of course, we walk through a few names in Dianne’s book and hear the story of her campaign with Boingo.
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Links from the Episode:
- 0:46 – Intro
- 1:27 – Welcome to our guest, Dianne McKeever
- 4:20 – Starting out as an engineer and then transitioning to finance
- 6:51 – Dianne’s initial reaction to the Berkshire Hathaway letters
- 7:54 – The path that eventually lead to activist investing
- 11:37 – Her time spent at Barington Capital
- 15:16 – Dear Chainman: Boardroom Battles and the Rise of Shareholder Activism (Gramm)
- 17:23 – Memorable activist investments at Barington
- 21:13 – Common CEO reception to activist investor conversations
- 23:39 – Research process for finding companies to invest in
- 24:47 – Insights and experiences that lead to building Ides Capital
- 33:16 – Sponsor: Bitwise
- 35:47 – An inside look at what Ides does and where they invest as change agents
- 37:59 – A central focus and attention devoted to diversity and ESG
- 44:50 – Why activists nominate non-diverse candidates
- 46:40 – Other aspects of Ides’ framework and process
48:18 – Opportunities on the horizon amidst a 10 year bull market and the pandemic
- 49:40 – A case study on activist investing analyzing ACA
- 1:00:10 – Ides’ holding time horizons and selling framework
- 1:00:59 – Interesting case studies
- 1:06:34 – Analysis of Ruby Tuesday and Boingo
- 1:13:47 – Why the proxy process is seemingly so antiquated
- 1:16:15 – How Ides Capital was affected by the pandemic
- 1:17:20 – What Dianne is thinking about as she looks to the horizon
- 1:18:47 – If she could change anything about the industry, what would it be?
- 1:21:59 – FAQ on Share Buybacks for Lawmakers, Journalists, and Investors (Faber)
- 1:22:46 – Dianne’s most memorable investment
- 1:24:13 – Learn more about Dianne; email@example.com
Transcript of Episode 316:
Sponsor Message: Today’s episode is sponsored by Bitwise, you’ll hear more about them later in the episode.
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Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: What’s up, everybody? Amazing show for you today. Our guest is the co-founder and chief investment officer of Ides Capital, which has been cited as the only female-led activist fund. In today’s show, we’re talking all about activist investing. Our guest shares how she went from being a Berkshire fan to becoming an activist. She shares the ins and outs of the process from sourcing names to engaging with management teams. And we talk about how ESG fits into her activism campaigns. Of course, we walk through a few names in her book and hear the story of her activist campaign with Boingo. Please enjoy this episode with Ides Capital Dianne McKeever. Dianne, welcome to the show.
Dianne: Hey, it’s so great to be here. Longtime admirer.
Meb: You know, I was just downloading or trying to download a bunch of old-school retro video games this past week. I have a child who’s 4 so I should probably not be admitting this, probably get publicly shamed. But was trying to download a bunch of classic games, “Pac-Man” and the like. You got “Pac-Man” as your Twitter background, “Miss Pac-Man,” I should say. Is that just an old-school video game reference or you grew up playing games? What’s the reference there?
Dianne: I am definitely a gamer, grew up playing games. Grew up, you know, going to arcades. I would say “Miss Pac-Man” is my favorite but, you know, remain a gamer to this day. I think that that’s not necessarily an uncommon interest of many investors I know. Video games or other types of games, that, you know, competitive streak seems to be something that many investors have.
Meb: It generated a random memory for me growing up. We used to go to a tiny little beach, I like to call it fondly, you know, Little Redneck Beach in North Carolina with my family. And there’s a little pier, the Sound Pier where we’d go fishing as a child and they had “Galaga” in the bait shop, right. And so I didn’t care about fishing, I just wanted to play “Galaga.” But to try to help me along my way as a terrible fisherman, my brother would give me a quarter and I’d go and play “Galaga.” And then, of course, he would hook a fish and then run in and say, “Meb, you got a fish.” And I would come out and reel in and usually lose it by the time it got back. Again, had really no interest, and toss it in and go play “Galaga” again. Has nothing to do with anything.
Dianne: Well, I’m a big “Galaga” fan too. I mean, actually, I would say that there is a jewel “Miss Pac-Man Galaga” retro game that is, you know, kind of, often in arcades, and sometimes I think should I get that? But I never do, I leave it in the arcade. And every once in a while, I allow myself to go play.
Meb: You know, it’s funny, my brother, we were back home for Christmas one of the holidays, and he’s about seven years older, and another one that’s older than that. And we had found an old Atari and plugged it in and put in one of the games. I think it was “Adventure” or something. And it was as if he had just played yesterday. He went through like a 50-level, you know, memorization that…
Meb: I was like, I don’t even know what’s happening right now, this is incredible. Anyway.
Dianne: That’s amazing. I miss…
Meb: It taught me a lot of lessons as a young boy gambling because I would just lose all my money to him. And my parents said, “The rule is you can’t bet more than a quarter.” And then they would leave and I would lose $5 in the next Atari baseball game, okay. You’re also an engineer, right? Tell me your origin story? We’re going to get to all things activist investing in a minute, but you start out as a fellow nerdy engineer, is that right?
Dianne: That is right. And I did notice that you were a fellow engineer. I grew up in Indiana. I grew up in Indianapolis, Indiana, but my family actually…my parents were both born and raised in New York. And I always knew I was going to move to New York, loved it from, kind of, my childhood. And went to NYU. And when I went to NYU, they had a dual degree program. And I chose chemistry and chemical engineering, which was actually through Stevens Institute. So certainly had that quantitative background, and I mean, I’d love to hear what you think about it. For me, I think it’s just an added benefit, you know, in the way that I think about and analyze companies, I think it’s just incredible preparation, but definitely not necessarily the most common route.
Meb: I think I probably took different lessons, lessons in humility, and pain, and perseverance would probably be chemistry. Chemical engineering was a hard one. Chemical and electrical, I took the easy path. But yeah, I think it was…
Dianne: What were you?
Meb: Well, in Virginia, they had one called systems engineering. And originally, I was interested in aerospace and ended up by the end in biomed. But that was almost like…it wasn’t like an intentional filter, it was like, a process of natural selection. They’re like, “Well, Meb, you’re incapable of doing this, this, this, and this, so here you are over here.” All right, you started out in…what was the transition from engineering to finance?
Dianne: You know, I was really fortunate, I grew up with access to the Berkshire Hathaway letters to investors. So I grew up reading those letters. In college, I think I bumped into Ben Graham during my later college years, and I loved value investing. I loved the idea that, you know, I could sit down, I could read, I could learn about a company, I could learn about an industry, I love that. And it was definitely interesting just because, you know, from an engineering standpoint, you know, there were actually at the time, certain people looking to go into the investing world, but it was definitely more on a quant path, which was something I enjoyed.
Within my studies, I actually, kind of, preferred you know, P chem, physical chem, and everything that was really quantitatively driven, and that was really my area of interest. But I couldn’t get away from you know, this, kind of, just stepping back and sitting, and reading, and learning about different businesses and different industries and I really love that. And so for me, you know, kind of, as I got on through my engineering training, I did think, you know, I think I’m going to be ending up in investing, and it’s exactly what happened.
Meb: So tell me where, what was the start? By the way, I mean, amazing having the Berkshire early…the inoculation of the value concept. Did it take? Did you have an immune response to it? What was the initial reaction? Buffett loves to talk about, you know, certain people take to the value concept immediately, and others, not so much. And I like to then extend that to other areas and everyone finding their own personality, whether it’s trend-following or something else, quant. Did it take to you at all, or was it more of a process?
Dianne: It did. I mean, I think who likes the idea of overpaying for something? I don’t think anybody likes that idea. So, you know, it certainly resonated I think in a way that it might resonate with most. But I also grew up in a family that, you know, ran small businesses and, you know, was very exposed to that at a young age. And really understood I think, you know, the difference between you know, the income statement, and generating cash flow and keeping, you know, the lights on and the business running. And so, you know, when you grow up with that, and then you’re reading the letters, there’s just a real crossover there. That made a lot of sense to me.
Meb: All right, so give me the path. What was next?
Dianne: The path. So I was fortunate, I think I highlighted I went to NYU. And because I was at NYU, while I was on this path of chemistry and chemical engineering, you know, I was fortunate. Stern is just a tremendous center for all things business, including investing. And got to hear just a number of talented investors speak. And you know, some of the investors that I heard were, you know, investors that were focused on value investing.
And I happen to meet two people that were starting a fund, Jim Mitarotonda and Ron Gross. And they were starting a fund called Barrington Capital Group. They’d actually just started it, I think, the time I heard them first speak. And you know, it was fascinating because they were talking about value investing, that they were value investors, kind of, first and foremost and last and always. And that was something that you know, resonated with me, I understood it. I had, kind of, this reading my whole life learning about value investing.
But then they were talking about shareholder activism and that was something I really knew very little about. I mean, I’d read Carl Icahn, I’d seen his name, but I didn’t know much about it as a strategy. But, kind of, circling back to that you know, growing up in a family that operated businesses, that idea that, you know, we’re owners of businesses, you know, were shareholders, but we don’t just own this, kind of, small piece of paper we’re really the owners of the company. And rather than just sit on the sidelines, you know, we could get involved. We could look at a company, we could think about how could this company, you know, deliver better performance in the long term?
And so that really appealed to me, and I knew nothing about it. But I was really fortunate that they created an opening for me. And it was a tiny fun when I joined, we had $5 million in asset management that we’re overseeing, I should say, and you know, that was great because there really wasn’t red tape. I joined and I had, you know, just tremendous exposure to every aspect of the investing process. So I guess I can say that my entire career, I have been a shareholder activist, a value investing focus shareholder activist, and a small company, mid-cap focused shareholder activist.
Meb: Interesting indoctrination. I mean, you get thrown right into the fire right out of the gate into a small and growing company. I mean, there’s really no better scenario with probably, I imagine, getting to wear all the hats at a firm. And I can speak from experience where, you know, everyone here tends to have five different jobs. Any memorable stories, memories from that time, lessons learned, any campaigns you guys worked on that were particularly successful, or not, that come to mind during that period? And by the way, give us a timeline, this would have been, kind of, ballpark, what timeframe and markets?
Dianne: So I actually started working in September of 2001. I think it was the last few days of September. So it was truly, you know, baptism by fire in many respects, not only, kind of, my first job, you know, first time as an investor, and then, you know, going into that scenario an incredibly, you know, tragic moment for New York, one that certainly impacted the markets. Nevertheless, it was an incredible learning experience.
And I would say yeah, I mean, I’ve got a lot of war stories, which I think with activism is always, kind of, some of the fun may be in hearing those. But you know, certainly the time at Barrington for me and for my partner and I, it’s Rob Longnecker, who’s just a tremendous investor, somebody you should also have speak on this show, those are the foundations for what is today Ides. You know, it was those experiences, it was the opportunity to, you know, really learn value investing, you know, in real life through both Jim and Ron. And to learn about activism and to think about, you know, ways to augment the strategy that those seeds were planted during my time at Barrington.
Meb: Tell us a little bit more about your time in Barrington.
Dianne: Right, so Barrington, you know, great firm, doing, you know, some activist investing to this day. And it was a really interesting moment. And I think there’s, you know, a lot going on now, there’s bits that remind me of that moment because it was also right after the burst of the tech bubble. And you know, many of our earliest investments at Barrington were actually companies with negative enterprise values, very significant negative enterprise value. Companies that had just, you know, raised capital through, you know, public offerings and didn’t necessarily have a business that could sustain, you know, over the long term, losing a lot of money in. So we actually got in very, very quickly and stopped the bleeding.
And those were really some of the earliest investments that the firm was making that, you know, I myself found and put into the portfolio and, kind of, then moved on. And we were, you know, investing in lots of different businesses, lots of industries. Did quite a bit on the consumer side, which I think is always fun just because there’s a lot of awareness of consumer brands. So a lot of, you know, interesting war stories there.
But really full-fledged activists and Barrington, you know, Jim and Ron were really ahead of the curve in what has become a renaissance of shareholder activism, you know. And really focused on small companies, which is what we’ve chosen, you know, at Ides to stay focused on. These are the companies where we could really have a tremendous value add, where we could bring to them, you know, director candidates, where we have, you know, access through our networks of, you know, world-class best in class operators. And so that was something I think, you know, Barrington did and does, you know, well focusing on that smaller end of the spectrum where, you know, an activist can truly be helpful.
Meb: And when you say activist, I imagine a lot of people listening…and this is one of the most fascinating parts of the entire investing world to me, partially because it involves so much detailed work. I mean, you read some of these books. There’s an old book I talked about on the podcast before, and I’m again blanking on the name of the book, but it was about Carl Icahn and the Marvel Universe, the Marvel stock at the time, which I think was going through bankruptcy, and the complexity and all the various people involved in different interests and different structures between the debt, and the credit, and the stock, I mean, just on and on and on. And it’s just absolutely fascinating to me.
And you have…for those listening, when you just say activist, it doesn’t really do justice to the description of the entire space. Because on one end, you have like, early-career Dan Loeb, right, you know, writing very caustic confrontational letters. On the other end, the like warm, fuzzy Mr. Rogers, sort of, activist, that’s just like, “I’m here to help.” Where did Barrington fall in, sort of, that spectrum? Were you guys coming in, sort of, almost corporate raider style, or were you guys a little more of the, “Hey, we’re like a consultant, let us help a little bit, we’re on your side?”
Dianne: No, at Barrington we were definitely on that, I’d say, more aggressive end of the spectrum, but always with, you know, an eye towards…it’s in no one’s interest to have to run a proxy fight. I mean that’s just not the best use of anybody’s time. But you know, we were certainly on that more aggressive end of the spectrum. And you bring up Dan Loeb, you know, Dan Loeb was actually in…it was a great investment for Barrington. It was actually one that at Barrington, you know, I was quite involved in. We took private along with Starboard who was also an investor, they were actually internal to Arrhenius but an investor directly in Barrington. It was a company called register.com.
And you know, I think it actually goes to, you know, some of the real significant shifts we see in activism today. We showed up in that and in addition to Barrington as a shareholder, Dan Loeb was a shareholder, Carl Icahn was a shareholder, and Mark Cuban was a shareholder. And this was, you know, a couple hundred-million-dollar company and nevertheless, you know, we had a lot of firms in there really looking at it and investing and creating a lot of value. But we certainly were on that more aggressive end of the spectrum, but never egregious, never there to, kind of, shout for shouting sake, always with an eye towards really, kind of, long-term interest of the company.
Meb: You know, I have an entire bookshelf at home of Patrick O’Shaughnessy and friends’ books that have been recommended over the years. Anytime I see an interesting book on Twitter some friends, I will just order it and worry about it later.
But there’s a classic, sort of, not necessarily activist but in that, sort of, genre. “Dear Chairman” by Jeff Graham, which I’ve never read and has been sitting on my shelf for I don’t know how long. But the activist space with Elliott and … and value act and you mentioned Starboard and Icahn, such a just fascinating world. Is that, sort of, like one of the definitive books in the genre? Are there any others that, kind of, capture the essence of what you guys are up to?
Dianne: So I’m going to plug Jeff. Jeff is actually a good friend, and his book is excellent. I think it really is one of the best in terms of capturing what activism is, the foundations of it to, you know, kind of, more recent history, and just, kind of, a breadth of different types of activists and how they run their campaign. So I actually…that would be the book that if you asked me, you nailed it, that would be the one I would recommend. And we’ll get into it but, you know, I think what we’re doing at Ides is quite different. I mean, it encapsulates everything that we did at Barrington, but we’ve really expanded the toolkit in terms of, you know, the types of opportunities and risk factors that we focus on with our portfolio companies. But I’d say probably as we get more into Ides there’s probably a lot to cover there before we get there.
Meb: We’re going to get deep. Before we leave your time at Barrington, this was, sort of, early, mid-2000s. So you had this, sort of, progression of the Internet bubble bursting, you mentioned September 11th. And then, you know, a pretty expansionary period for equities in general in the U.S. ’03 to ’07 there were some various cross-currents. You mentioned Register, any other names that come to mind or experiences during that time that were particularly memorable?
Dianne: So many. So many incredible investments, you know, I think…
Meb: What was, like, the portfolio size? Did you guys own like 5 names, or was it like 50, or like 500?
Dianne: I don’t think there are any activists that own 500. You know, we were concentrated as most activists are and I think you need to be. And there are reasons beyond being an activist that we like concentration and why we are concentrated at Ides. I’d say at any point in time, it was probably around 10 names that were in our portfolio, give or take, could be fewer or less. And you know, we had just, kind of, tremendous success as I highlighted, I think within the consumer space.
A lot of my earliest investments were consumer focus, Nautica, Vans. Rob, you know, my partner in Ides, we had a really interesting engagement with Steve Madden. And so there were tremendous, kind of, opportunities on the consumer side. Obviously, did a lot with tech. But we did certainly industrial companies and just, kind of, generalists. And that’s, again, something we’ve taken with us at Ides, we really get that opportunity across different market cycles to see where the opportunity set exists and where it’s the largest. And that was definitely, you know, a key aspect to what we were doing at Barrington as well.
Meb: What was the biggest scar from that period? You know, where either it was like the CEOs were like, “No, you guys can just beat it, we don’t want to…no interest in these despicable hedge funds that are just trying to take advantage of us.” Or one where you thought had major opportunity that just went, kind of, south, anything come to mind?
Dianne: No, we had…I mean, first of all, I think the market…investing keeps you humble, right, so certainly lessons learned. I mean, that was a big part of Barrington. It’s a big part of, you know, every moment of my investing career. You know, I think yeah, certainly companies entrenching that is something that, unfortunately, some companies do. I don’t think…I would not advise it but it’s something that happens. And I often found that I was, you know, even within the Barrington team, that person who was kind of able to reach over the line and begin those dialogues.
And that’s definitely a big part of what we do at Ides and how we think about the strategy. I think in a little bit different and bigger way and in terms of also how we execute it. But you know, I think a great example, and I guess it would count as a bit of a war story as activists go, was Barrington had an investment in Dillards. And you know, this was certainly, you know, it’s a department store very much Southern focused within the U.S. And they were not, unfortunately, calling us back. And you know, understandably, I mean, they had a big ownership stake in a company, it was a family business, there were many family members involved with the business.
And it was actually the instigating moment for the dialogue to begin between, you know, the Dillards who mainly, truly was the Dillard family. And Barrington was…I found out that they were doing a makeup and opening of a new location, and a ribbon-cutting ceremony. And so I went down to Texas and showed up, and they were doing the ribbon-cutting opening. And I said, “Hey, I’m Dianne, I’m from Barrington, you know, we really like a lot of the things you’re doing with your company, and we’d like to begin a conversation with you. We’ve been reaching out to you, we’ve been investors for a long time.” And you know, I think that that kind of humanizing moment was really important and that was really what began that open dialogue with the company.
Meb: You know, from someone who’s been in it…you know, I’m a quant so I haven’t had this experience. But from an outsider’s view, I don’t understand why traditionally CEOs and people running companies…I mean, look, I have my guesses, big egos, empire-building, etc. But if I was running a company, and we have shareholders and they were incentivized for growth and things to go well, why not at least be receptive? You could say, “Hey, look, we’ll listen to your ideas, we’ll hang out, but you know, we’re not going to do this, or this just isn’t, you know, our path.” But I don’t understand why just the steel door down gate like we’re not going to talk to these…I mean, what percentage of the time is that the reaction? I mean, is it the majority, is it the minority? Are most of the CEOs actually fairly open to these discussions?
Dianne: That is a minority, you know. And I think that as activism has, you know, again, this renaissance and much more, kind of, established strategy and I think broadly as the institutional investor base has really embarked on investment stewardship in, you know, a much bigger way, and shareholders are much more frequently reaching out to companies, and actually, the reverse is happening, I think it’s less common, but it still happens.
So, you know, I think that, kind of, in my earlier days, it happened a little bit more often but it’s pretty rare. I mean, you know, there’s very few companies that don’t at least take the call. You know, I think that especially now, they’re sophisticated enough to know that they need to take the call whether or not they actually engage, that’s another matter. And that’s what the activism toolkit, you know, is there to drive is really that engagement, you know. I mean, it makes sense in some ways. I mean, it’s human nature, nobody likes to be told that there’s a better way that they could be doing their job.
Meb: Yeah, you know, and then you also start to get…I mean, in some cases, one of the reasons that these companies show up on the radar is they are mismanaged or poorly managed. Or in some cases, you know, it’s a lifestyle, sort of, business where it’s not necessarily run for shareholders as much as the people who are in charge of it, or the family. Dillards brings back certainly a lot of fond memories from a guy that went to high school in North Carolina. I certainly remember Dillards very well.
All right, so how did you guys find these names at the time? Was it looking through 13Fs and saying, hey, here’s what Singer and Danone…or was it quantitative screens? Was it looking through the Ks and the Qs and T’s now the footnotes? What was, kind of, the process?
Dianne: You know, I think this is a conversation my partner Rob and I have all the time when we look back. You know, we were certainly following smart investors and we were looking at what…especially value investors where they were finding, you know, opportunities, you know, from industry use or even specific companies. But I think screening when we started our careers, was more fruitful than maybe it is today. I mean, we look back and we look, kind of, at the valuations of some of the companies that we invested in and I mean, these were companies that, you know, truly had pristine balance sheet. No debt, a lot of cash, were trading, you know, at five times EBITDA and decimated EBITDA. And I think, you know, that’s something markets are efficient, they continually become more efficient and so, you know, that’s a shift. And we have different mechanisms, we still run screens but we certainly have different ways that we look for value today.
Meb: Yeah, makes sense. Are we ready to move on to Ides, what do you think? Anything left from Barrington that you’d love to talk about, whether it’s mentors, lessons learned, or anything else? Or can we talk about your evolution?
Dianne: You know, I think yeah, we’re ready to shift towards Ides. But I think what’s important is to understand, you know, Ides was born out of our experience at Barrington and some very specific aspects of our experience at Barrington. And really, what does that come down to? Well, you know, certainly, unfortunately, activism and investing broadly, it’s not necessarily, kind of, the most diverse of environments. And so there weren’t many diverse activist managers. I was, you know, and remain, unfortunately, one of very few women in the space. And you know, similarly, on the corporate board and C-suite side, you know, diversity was and remains a challenge, although I think there’s a lot of positive change happening there.
But you know, many of our experiences at Barrington, you know, it’s truly the foundation for the opportunity that is Ides. And you know, again, going into corporate boards, and realizing these boardrooms are not diverse. And there are some, you know, very specific stories that I can share around that. I think for me, and for my partner Rob, one of the really eye-opening moments was an investment in a chemical company, a plastics company actually, something we probably wouldn’t own now at Ides. But you know, they had a board and it was a very dysfunctional company, but nevertheless had a lot of opportunity.
And we went in, and we met with the board. And what was fascinating, we were meeting, kind of, one on one with the directors, and after meeting with them, a pattern emerged and several of them have identified that there was, you know, a particular subset of directors that were very clearly and very obviously to many not pulling their weight. And they’ve been there for years. And so you know, we circled back with the directors that were, kind of, also unanimously voted as the strongest and really leading the company, and we said, “You know, you all highlighted these underperforming directors, why are they still there? Why, haven’t you changed and added some different people?”
And the answer we got was this, “Well, all of our wives are friends and if we get rid of Joe, or Bill,” or whatever the person’s name was, “then it’s not going to end there. I’m going to have to hear about how, you know, ‘Oh, my goodness, so and so’s wife is so upset they’re no longer on the board.'” And this was a true country club board. This was a board where we actually dug in I think, you know, if you want to play in, for instance, like charity tournaments in golf, you have to track your handicap. And so that’s actually publicly available information. And so we knew that the managers and the board were playing golf all the time, sometimes two times a day during the week. I mean, this was truly a country club board.
And it was just, kind of, that aha moment of, you know, this is a social club, this is not a group of people that are here to have, kind of, robust conversations and really provide, you know, that oversight and really that voice of skepticism. And to hear that, you know, the reason that, you know, they weren’t eliminating people were, kind of, these outside relationships and it was really their wives, I mean that was just an aha moment for my partner Rob and I. Hey, I mean, diversity, when you start diversifying boardrooms, you’re breaking up those dynamics. And so, you know, that was one of, kind of, the aha moments for us.
And understanding as activists, it’s a change agent role, we’re change agents. And we focus on all types of changes, we focus on operational opportunities, we focus on capital allocation enhancements, we focus on strategic outcomes for part or maybe an entire business. There’s this whole other area of change of practices and policies that absolutely have material impact to companies and we’re uniquely positioned to change, you know, those practices as well. And what a huge opportunity that is. And so, you know, that was an aha moment. But you know, it was played out many times over, kind of, similar situations. And I think, obviously, it probably wasn’t a surprise that it hit me because investment management is not diverse. Although I will say, you know, coming from an engineering background, unfortunately, that…
Meb: Yeah, this is old hat for you.
Dianne: …was not diverse, too. So for me, I probably didn’t notice it maybe as quickly as others might have. That was, kind of, unfortunately, the standard I’d been around for quite a while, you know. But that was that aha moment that we’re change agents and there are all types of policies and practices that impact these companies we invest in so let’s expand the toolkit. And while we were having these experiences, and I was living it also…you know, serving as a public company director in each case, the first diverse director to have served in that boardroom. And I was often brought in by my colleagues at Barrington, again, like the Dillards example, but there were many to really initiate that conversation.
So seeing, you know, the benefits that could be inherent in diversity, we started to notice some really interesting developments on the, kind of, broader institutional investor side. So as an activist, you know, you’re always hoping to avoid the proxy fight. But you know, you are in a place where, you know, if you’re filing a proxy, you’re soliciting shareholder support, and you’re meeting with the broader investment community to get that support. And what was fascinating was that we were starting to see the emergence of corporate governance practices and investment stewardship practices at the biggest asset managers.
And that was fascinating because, you know, in many cases, these were, you know, ETFs where they were replicating indices. Or they were quantitatively driven, you know, firms like Dimensional, which owns, you know, many, many small-cap companies. And so we were routinely having to meet with the individuals that voted proxies, and we were seeing them build out these in-house governance practices. And that was an incredible moment because, you know, Rob and I were living how important these changes could be, and what risk factors could be presented by, you know, deficiencies and governance. And now, it’s brought into, you know, environmental and social deficiencies.
But we were seeing that, you know, these biggest of institutional investors, even though they had, you know, very different approach, it’s not, kind of, this bottom of deep-dive fundamental analysis work that we’re doing as activists and value investors. They’re seeing merits and real importance around these topics as well. And they’re dedicating resources to it. And they’re developing policies and voting policies around these practices.
And so really for an activist, what’s more powerful than that? Knowing that these changes are incredibly important to companies. And knowing that the broader shareholder base is seeing that as well. You know, with the wealth of information that they have with the exposure to…you know, again, we’re concentrated. They’re looking at thousands of companies and seeing how these practices play out in real life and how they impact corporate performance and dedicating resources.
And so, you know, that was really I think the foundation for the inception of what is Ides. It’s what we were, kind of, living, understanding that the role of an activist is that of a change agent. And that we could drive lots of change beyond what we were currently focused on and understanding that this was important to the broader investor base as well.
Meb: Man, there’s a lot in there to unpack…
Dianne: There’s a lot.
Meb: …boards, proxies, conflicts of interests, inertia. What was the inspiration for the name? We’re here on…recording this, listeners, on Cinco de Mayo. So I wish I had a margarita but it’s a little early on the West Coast. Ides, is that a reference to the March reference from years ago or something else?
Dianne: It certainly captures that, absolutely. I think, you know, as an activist, it’d be hard to dodge the most famous reference of all. But it actually hit our radar in…you know, there was an article that we were reading, and I forwarded it I think on to Rob and it was talking about Cicero. And he apparently wrote quite a bit about the Ides and discussed the Ides. And it was really revered as a time for change. The Ides does not just occur in March. It’s really a midpoint of a lunar cycle that was an indicator of change. And we liked that idea. We thought that that really captured, you know, what we stood for as activists that we wanted to be that positive force of change.
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So, what was the deciding moment? You know, I often talk to friends who are launching investment management business and I say, you know, it takes a lot of confidence, a little bit of naiveté. I just murdered pronunciation that. Being a little bit naive, but also the audacity to, you know, compete against the Vanguards, and Blackrock’s, and State Streets, and Elliott’s, and Third Points of the world. Tell me a little bit about the origin story for Ides. You guys decided to split off, said we can do this with a little bit different angle, inspiration, what was that moment?
Dianne: You know, it was that recognition that this was a huge opportunity and I think it’s not different from any product, not just an investment firm, but any product that comes to market that addresses a need that’s not being fulfilled. We saw this opportunity to not only, again, focus and to be clear. Our foundations are in, kind of, the traditional areas that activists focus on, those operational improvements, capital allocation enhancements, strategic outcomes. So it’s not that we’ve abandoned that, we’ve just expanded our toolkit because we felt that there wasn’t anybody that was focused on these changes.
And you know, we are SMID cap at Ides. And I can tell you that the value-add that we can bring to companies across the board, but I think even on the ESG front, focusing on these long-term themes that are so important that really drive sustainability and value within companies, there wasn’t anybody that was focused on it. And so in that way, it’s no different from just a product that comes to market that’s addressing a need.
Meb: So let’s talk about the framework. You know, you guys, is it a broadly similar concept to Barrington with an added focus on this, sort of, ESG umbrella? Give me a more accurate description of kind of what you guys are doing.
Dianne: Yeah. So you know, I think that was the biggest breakthrough was this notion of ESG and sustainability and that we’re change agents, we can address these opportunities, these shortcomings, these risk factors, we can address these as well. But we had many lessons learned from our time at Barrington. And so I think, you know, there are some differences in terms of what’s, you know, inappropriate and, kind of, prototype Ides investment.
We’re value investors and you know, I’d say for Rob and I both really one of the greatest honors is that Chuck Royce, the small-cap value investing legend, is an investor and he is a strategic partner at Ides. And what’s been interesting is our, you know, working relationship with him has evolved is that one of the greatest lessons learned for us during our time at Barrington is that companies can be inexpensive. But even as an activist, no matter how much heavy lifting you do, there are certain types of businesses that are never going to command a really great multiple, they’re just not great businesses.
And going back to that, kind of, foundation of Berkshire Hathaway and the wealth of knowledge contained in their letters. Rob and I, you know, at Ides what we’re really seeking to identify are what we call franchise opportunities. And that comes straight out of the 1991 letter, a breakdown of, you know, two types of enterprises you can own. And one is a franchise and one’s just a business. And we want to own franchises. We want to own great businesses, we want to buy them at very, very reasonable prices.
I think something you hit upon, you know, we’re often buying them…Chuck calls it a moment of illiquidity. I think, you know, it’s that moment where maybe something’s happened in the business and the stock has had a setback but it’s nevertheless a great business. And that’s what we really want to own. And so, you know, a big lesson learned from our time at Barrington that we’ve brought into Ides is that quality factor, we’re value investors, but we want to own these great franchise-like businesses.
Meb: All right, well, let’s dig in then. I’ll let you find the jumping-off point on specifically if you want to talk a little bit more about the ESG component. You know, the governance one sounds often a little like blocking and tackling, and to some it may be boring, but just like a good data point…I mean, early, I remember, we were looking into the Twitter analytics where an advertiser or someone else, and they asked us to give the profile of the audit. And it’s not like 50/50, it’s not even like 60/40, it’s like 95% male. And like, even if you just had some random bots that, you know, signed up, you know, 50/50, male, female, I figure like it would bring those numbers back towards 50/50 but it makes it even worse.
But it seems so obvious, in my mind, to think about diversity not just as a box check, but as something that really helps to add a little creative destruction to just a mono way of thinking about the world. And is that a reasonable intro or thought to, kind of, how you guys approach this? What’s the…I know you look at a lot of academic studies and have quite a bit of research that supports some of the ideas you guys promote. Talk to me about it.
Dianne: Yeah, I mean, I think, you know, we get a lot of focus and attention based off of, you know, diversity, I think there’s a lot of reasons for that. And you know, very clearly it was one of the earliest considerations within this broader framework of ESG that hit our radar going back to our time at Barrington. But you know, for us at Ides, ESG is very holistic, it’s robust, we’re really focused on each one of those three verticals. And something we haven’t touched upon yet, but you know, it’s worth highlighting, you know, right away is that you brought up we’re doing deep dives, and we have to because we’re going in to companies and we’re saying this might be a better way to think about running at least this aspect of your business. And so we certainly need to be well informed.
And a big part of that for us, in fact, I’d say the biggest part of that work is meeting with best-in-class operators. And best-in-class operators for years, and even going back to our time at Barrington, what’s really amazing, and often they’re private owners, people that have built their own businesses, they would touch upon themes that are now, you know, ESG, and very much financially material ESG. And it is a huge part of the way they describe…you know, when we asked them, what made you so successful? What were the most important decisions that you made that drove your business’s success?
They turn…I mean I will tell you, the number one answer that comes up, I mean, almost 100% of the time is, “My people, my employees, they are the most important part of my business.” And we have that feedback it’s consistent, everything from, you know, advisors who have said, “You know, my Glassdoor rating, in many cases is my greatest asset or my greatest liability. If it’s positive, I can attract and retain talent often at a better rate than my competitors can because people care about the environment that they’re working in. And if it’s negative, I’ve got problems,” you know.
So that’s on one hand, kind of, going down the path into compensation. We had someone who…we have an investment in auto service business, and we spoke with a management team that, you know, became self-made billionaires building out a similar business. And when we asked them, you know, what are some of the most important things that you did that drove your business? The answer was, “We made sure that every single employee, every team member had an aspect of their compensation that looked like equity, that behaved like equity.”
And you know, this is a social good, I mean, this goes straight to the heart of employee experience, employee well-being. That is absolutely, you know, the S within ESG. But you know, they’re not thinking about it like that, but we’re certainly thinking about it like that. And we’re communicating that to the companies we invest in, you know. So these topics…and this again, was a big part of Ides and the opportunity to launch Ides, the best-in-class operators, they are thinking about these topics. And they’re a big part of what drives their business and their success. And we wanted to bring that to the companies that we invest in through our platforms for driving, you know, value and long-term sustainability.
But you know, you brought up diversity, you’re, kind of, going all over the place. It’s a big part of what we do. And it is a component of governance, it’s a component of oversight for a number of reasons, it falls within S. But our approach is broad-based, we’re looking at the E, we’re looking at social, we’re looking at governance, and we’re coming up with, kind of, holistic platforms for change.
Meb: I mean, are there even any other comparable firms that are doing what you guys are doing?
Dianne: You know, it’s been interesting, we’ve been around now for about five-and-a-half years. And you know, when we started talking about this, you know, I think people were kind of, what does this mean, is this a trade-off? I mean, that’s something that, you know, still gets asked. Is ESG a trade-off for returns? No, it’s not. I mean, you know, there’s study after study now that establishes, you know, strong and robust ESG policies and practices, drive performance, they absolutely…we see price ratings now for the PE multiple ratings based off of strong ESG policies and practices.
They can also represent bad policies and practices are tremendous risk factors. There’s tremendous value destruction, you know, in avoiding implementation of best policies and practices. That was the opportunity to launch Ides. And at the time, yes, people weren’t talking about this at all. In fact, you know, from an activist standpoint…and I think this probably remains true to this day, although I haven’t seen fully updated numbers, activists are actually worse than issuers themselves at nominating diverse slates. So the companies that they’re targeting, their slates are less diverse, you know.
So this was something that was certainly not on the radar of activists but now you’re starting to see change. And you’re seeing, you know, even activists that aren’t necessarily talking about these issues, they are nominating slates that are more diverse. There are certain groups out there that are touching upon long-term themes of sustainability. But I think in terms of, you know, how we think about our strategy that we are full-fledged activists that, you know, it’s always our goal, and we’ve been quite successful in almost exclusively working constructively with the companies we invest in. We are always prepared with anything we invest in to provide shareholders with that opportunity to have a voice for themselves.
And so we do…kind of going back to our roots as Barrington, we do exist on that nevertheless potentially more aggressive end of the spectrum where we do run proxy fights if needed. But fortunately, with Ides, we’ve actually only had one in five-and-a-half years one full-fledged proxy fight, although we have walked down the earliest stages of the path a few times behind the scenes.
Meb: You mentioned that the activists also tend to nominate non-diverse candidates. Why is that? Is that just because they have their roster of, you know, people in the queue? Or is there a reasoning behind that?
Dianne: I’d say ask them. I don’t know. I mean, what’s interesting from our perspective…you know, I think being an activist is certainly a strange job. I mean, I think, you know, one of the things that Rob and I will talk about is that, you know, you have to have I think a strange comfort level of walking into a room and, you know, there’s a bit of tension there because the other side…we’re actually all there to work together, but the management team, and the board, the fiduciaries of the company we’re coming in as outsiders. And so you, kind of, have to have that comfort, which I think is not the norm walking into that situation.
Something that’s been really fascinating, and it was not really part of our thesis but it’s something that we’ve seen play out over and over again in terms of the, you know, directors that we’re, you know, bringing to corporate boards, and they’re almost always diverse, is that they’re especially effective in that dissonant role. Because for them to, you know, get to the point in their careers…again, the diversity element is not the only thing they’re bringing, and it’s not even the most important thing that they’re bringing to the board.
They are bringing, you know, missing skill sets, missing experience, educational working, you know, expertise. They have navigated that outsider status for their entire careers and done so very successfully and very effectively. And so something that we found that I’d say has been a surprise, a bit of a serendipitous surprise, is how effective diverse directors are in this, kind of, dissonant role in going into that boardroom because it’s again something that they’ve successfully navigated over their entire careers.
Meb: Yeah, makes sense. I want to get to some ideas or case studies of what you guys are up to. But before we hop over, is there any more, kind of, general discussion on the framework we should cover as part of y’all’s process, or, kind of, what sets y’all apart that you think you don’t want to skip over?
Dianne: You know, I think, basically, you know, what is Ides? What are we there to do? You know, we are there to preserve and grow our investors’ capital. And that’s something we highlight, we’re there, kind of, first, last, and always. I think when, you know, people hear ESG and sustainability, is that a trade-off? It’s not a trade-off. In fact, we think, and I think there’s much evidence that supports that on a forward-looking basis, companies need to be paying attention to these issues. If they’re failing to, it’s going to be more costly, it’s going to be a greater liability and destroyer of value. And if they’re doing a great job, it’s an opportunity, you know, one that gives them tremendous competitive advantages.
So it’s not a trade-off but everything that we do is in furtherance of that goal. You know, we’re not a nonprofit, we’re for-profit and so, you know, the work that we do, whether it is on the ESG side, whether it’s focused on operational improvements, focused on strategic outcomes or capital allocation enhancement, it’s all with that objective to, you know, follow the two great rules of money management, you know, don’t lose money, and don’t forget the first rule. And that’s really what we’re seeking to do. We want to identify companies that maybe they’ve hit a bump, but they can really become tremendous generators of cash and can deploy that cash, you know, for superior rates of return over the long term, long-term compounders. And we’re going to work.
Meb: Any of those still out there or is it like after this, I don’t know, 10-year bull market with a few fits and starts in between, a pandemic thrown in, still any opportunities out there to mix it up a little bit?
Dianne: I mean, at Ides, we’ve highlighted we’re concentrated. So we’re not investing in the economy, we’re not investing in the market, we’re not even investing in the small-cap space. We own, you know, at any given point in time between 15-ish to maybe up to 17, 18 names. And so we’re really identifying, you know, this really small subset of companies that can outperform. So for us, there’s always just a ripe opportunity set. And we are really excited we’ve made three additions to the portfolio this year. And we’ve actually had a lot of our companies bought out this year. In the first quarter, I think we had 3 of…coming into the year, we had 13 positions so 3 of 13 were acquired.
Dianne: Yeah. Which goes to…
Meb: That’s a lot.
Dianne: I would say that’s something that we focus on. I mean strategic desirability, that’s a must-have for us at Ides. You know, if we’re going to own companies, we want to own things that strategic is within the space they want to own as well.
Meb: I mean, there’s always thousands of choices out there, you know, like I mean, even if you are in a romping-stomping bull or the depths of bear market, there’s always companies that screen on some of these variables and that could use a little activist intervention. All right, so do you want to talk to me about either some of the ideas or some of the ones that have been in the portfolio as a good case study for how you guys approach the world?
Dianne: Sure, happy to. You know, one of our positions we’ve owned it for about two years now and I think it’s, you know, just a prototype Ides investment in so many ways is a company called Arcosa, the ticker is ACA. And you know, we talked a little bit about how do ideas hit our radar. We’re looking…you know, first and foremost, we’re turning to the fact that my partner and I have looked at the small-cap space for over 20 years. So we have, you know, really tremendous, kind of, monitor lists and that’s really the first source of names.
But in this particular case, it was a spin, it was a spin-out of Trinity. And it was a company when it spun out of a much larger conglomerate…it itself was a conglomerate. And that’s something that’s a recurring theme at Ides, you know, we tend to own a lot of conglomerates. As an activist, we’re uniquely positioned to, you know, do that deep dive to garner that informational edge, that informational advantage. And what is for many investors a complicated story that it’s going to hit their desk, and they’re going to look at it and say, I don’t know what to do with this thing, there’s too many drivers, there’s too many different businesses, and put it aside.
And so you know, this business spun out of Trinity just over two years ago, and it’s spun out with three core segments. It has an engineered support segment. One of the largest domestic producers of wind power components, as well as products and services supporting, kind of, grid hardening and grid resiliency. Which, you know, themes we love, space that, you know, tremendous, kind of, secular tailwinds behind it. And also strong environmental tailwinds behind it which for us is always a positive. They actually have a quasi-monopoly in the inland barge business. So for both liquid and dry inland barge, that’s another segment that they have.
And the third business is an aggregates business. You know, aggregates is a business that Rob and I have followed for years. It’s business, and that across cycles, they can push through price increases. And you don’t come across businesses that can do that very often. But certainly, something we’ve always wanted to own an aggregates business, but trade at very, very high multiples, and we’re value investors, we’re very disciplined on the buy-in. And so that was really exciting to us, we see this conglomerate come out, it’s got these three really interesting segments, including aggregates.
But aggregates actually from, you know,, kind of, an overarching, ESG and sustainability standpoint, you know, it actually could be considered a bit of an outlier, an ESG outlier. It’s quarries and you deal with, you know, issues on land management, on water management. And so we wanted to really wrap our heads around that because we’re really looking to identify those companies that we could own forever, that are going to be sustainable long-term performers across the board and really long-term compounders of capital. And so we wanted to dig in. And what we found was a great opportunity.
First, Arcosa has a great management team, they do a great job running their businesses. But they were very focused on, you know, the environmental issues that can often surround aggregates that water usage and land management, and they were very proactively focused on it. Two, this was a company with just a pristine balance sheet and a company that generates tremendous cash. And so we started to dig in and understand what is the aggregate space, what is, kind of, that opportunity within the aggregate space on a forward-looking basis?
And what we found was that there was a new focus on recycled aggregates that at the time, Arcosa when it spun out, they really didn’t have this business but the bigger peers were building this up. So the Vulcans of the world, Vulcan was building internally, this recycled aggregates business. And for people listening who don’t know, I mean, recycled aggregates, they literally send a portable crusher to demolish a road or a structure. And they can often take that actual material and, you know, it can be reused right on that site for re-construction of that road.
And so it’s just, kind of, this environmental and financial win-win where, you know, this is materials that would have been in a landfill, they would have been driven to the landfill. So you’re talking about energy usage, emissions, the portable crusher can go out, break it down, and it can be reused. And it’s something that is a better value for customers with the same kind of margin for the supplier. So this is, kind of, that…you know, this is exactly what we’re seeking to identify, this true and environmental or ESG sustainability and financial win-win. And they had the balance sheet to do it.
And so, you know, we really liked this. Again, it’s a conglomerate so for us, as activists, we’re uniquely positioned, we can shine a value, a light on the value proposition inherent in a company like Arcosa. And we noted that there was a huge opportunity on the transparency side. And for investors, you need that transparency, you need it to, you know, understand the business segments, you need it to understand the financials, and you need it to understand ESG and sustainability practices. And so, we saw, you know, these great businesses, tremendously undervalued, definitely a sum of the parts story, secular tailwinds across each segment, perfect kind of story for us. Strategic desirability highlighted that, you know, absolutely these are businesses that the bigger strategics would love to own. And so everything lines up.
Meb: And so do you establish a position then approach the company in this case, or most cases? How does the whole, kind of, timeline work? Or do you reach out to them ahead of time? What was the kind of…? It’s a beautiful chart, by the way, that thing is just like a little stair step up from 2019 to now.
Dianne: It’s been a great investment and it’s still one of our largest positions. So, you know, that tells you what we think about it from, again, that long-term compounder opportunity. We reach out to management teams I think in the same way that any traditional value investor would. I mean, our conversations start, you know, almost invariably before we own a single share as part of our diligence. You know, understanding, calling up, what’s this balance sheet item, give me more information here. I mean, it’s truly…those are the first conversations that we have 99% of the time. And then the conversation progresses from there.
And I can tell you, you know, again, with Arcosa…and this goes to, you know, Rob and I and our constructive…I mean, we always want to be constructive, we always want to work side by side, you know. Any opportunity or any victory that the company creates, that’s theirs to own. I mean, they’re the ones doing the work. And the team in Arcosa, they’re incredible, they’ve been great, we have a great dialogue with them. So it truly is that most constructive of engagements. And they’ve made…just across the board in really every category that we seek to enhance, they’ve made strides. I mean, they’ve…going to that recycled aggregates opportunity, they’ve got this pristine balance sheet.
Over our whole period, they’ve made two acquisitions. They’re now the market leader in the U.S. for recycled aggregates. I mean, their business is now bigger than, you know, some of those larger companies, and they’re internally driven efforts. They have initiated incredibly robust sustainability reporting using the SASB framework. We’re members of the SASB Alliance, I think it’s a great resource. And so they’ve just done a total almost 180 in terms of the disclosures that they’re putting out there, and that’s great. And I mean, what gets measured gets managed, and that’s important work that they’ve done. They’ve set, you know, incredible goals on both the diversity side as well as on employee wellbeing and safety and they’re making progress there. And then on the governance side, they’ve taken a number of steps. Most recently, they began the process to destagger their classified board, which is something, you know, we focus on, you know, companies that have classified board. So they’re just taking great action across ESG.
But then, again, from a strategic and operational standpoint, the operational execution has been incredible. The strategic acquisitions that they’re doing, most especially on the aggregate side of the space, are I think transforming this business. They’re great allocators of capital. We see an opportunity, I think it’s one that they’re well aware of to streamline the portfolio even further and just make it, you know, that much of a clearer capital allocation story. But it’s a company that, you know, it’s been great working with them and, you know, we look forward to owning it for many, many years.
Meb: Yeah, what were, like, the main suggestions that you guys made? Was it operational, or was it more, kind of, governance structural? How receptive? You mentioned sounds like they were pretty receptive. But what was the main stuff where you said, “I got my checklist, and here’s what we think?”
Dianne: So the checklist is always an evolving checklist. I mean, we start off with what we see as the biggest near-term opportunities, and then those keep changing over our whole period. And we are long-term. I mean, we’ve been around for, you know, over five years now, and our average hold period is over three years in our portfolio. So we really…you know, again, kind of, some of the differences, you know, I think activists and some justifiably come under scrutiny for being short-term, and many are very short-term. You know, we’re the antithesis of that, we really do you want to buy something that we could own forever.
You know, our priorities were certainly…this transparency opportunity was one of the biggest that, you know, sustainability reporting, we’re very much at the mindset that, you know, this is a growing capital and asset base that wants the sustainable investment opportunities but if you’re not putting that information out there, they cannot own you. And so that transparency opportunity was very significant and they’ve just done a tremendous job on that.
And it’s not only from, kind of, disclosing, you know, metrics and, kind of, where they are today but also forward-looking goals. And then really, they’ve done a great job hitting those goals, which is maybe the most important aspect of all. And you know, dialing down into, you know, sustainability and ESG there were specific areas that, you know, we’ve been most focused on within ESG vertical. And then from the capital allocation standpoint, that was a big part and remains a big part of our engagement with them. We do want them to be allocating their capital to those crown jewel business segments and, you know, think that there is that long-term opportunity to streamline.
We don’t like fire sales we want people to get great prices for great businesses. But we do think that there’s a long-term opportunity to really streamline the portfolio and take away any questions that, you know, is the board going to allocate capital to the best opportunities? Are they going to maybe direct it towards, you know, a lower return business? When you streamline the portfolio, those questions go away. And so that’s something that I think remains an outstanding opportunity for them on a forward-looking basis.
Meb: How do you guys think about selling? Is it a pretty traditional framework where it’s just valuations, its catalysts? What’s the…you know, you mentioned that three years is the time horizon. Is there, sort of, a main framework to think about it?
Dianne: So three years is our average hold. I would say we look at a time horizon between two to five years so it can be even longer. All of our decisions are valuation-driven. That’s from the buy, you know, augmenting positions and exiting positions. We really stick to consistently updating our valuation work. We look at, you know, kind of, a…we call it a risk-adjusted IRR that we’re looking to achieve and that is case weighted with, you know, as things stand, as things could be if X, Y, & Z happened and it’s positive and a downside case. And you know, same as the buy decision, that is what drives our sell decision.
Meb: All right, so you mentioned conglomerate, which you know, kind of, harkens back and spin-offs, all that, sort of, hard work, the old Joel Greenblatt book. Any other names in the portfolio you guys have that you think are particularly interesting or good case studies that you’d like to chat about?
Dianne: Sure. I mean, you know, we’ve been adding some new names which I think, you know, they’re, they’re still positions we’re growing so maybe that’s a follow-up conversation. But one of our bigger holdings is a company called Graphic Packaging. And this is a company…you know, we follow the packaging space, we like rational businesses, we like, you know, businesses that are not particularly cyclical, and we like cash cows. And this is a business that is absolutely a cash cow business. And it really is benefiting in a very under the radar way they supply fiber-based solutions for consumer product companies and food service companies, and truly, kind of, the most blue-chip of blue-chip customers.
And really, what’s amazing…and again, this goes to that whole theme of transparency and, you know, shining a light, sunlight is the best of disinfectants. They are flying under the radar but they really are, I think, the market leader in providing fiber packaging solutions that displays plastic and foam. And so, you know, what’s amazing is you’ve got, you know, the very biggest consumer products, consumer food companies out there making these, you know, important and commitments to fully circular packaging, to fully recyclable packaging, to less waste, and certainly to less usage of plastic and foam. And Graphic Packaging is, you know, uniquely positioned to deliver those solutions.
You know, from our standpoint, when we bought in, you know, very interesting, kind of, moment in the company’s history. They had actually purchased a business out of International Paper that allowed them to really vertically integrate. And they’ve made some really, I think, incredible investments that are driving, you know, productivity as well as product offering. And their cash flow generation is great but it’s, kind of, getting better by the day. And so it’s, again, one of those just tremendous, kind of, long-term compounders that we love to own. And we’ve owned it now for a couple of years and it’s outperformed. And we continue to see that opportunity on a forward-looking basis.
Meb: So when you picked up the phone, I guess the modern equivalent is shoot them an email or text, no longer a fax letter, what did you tell them? You said, “We want to get involved with you guys, we like your stock, but here’s some ideas?”
Dianne: Again, I think in this particular case, the transparency, the reporting was one of the biggest opportunities. You know, you looked at, kind of, the sell-side coverage that was very focused. I mean, packaging is just, kind of, a very natural sustainability theme. And you know, they weren’t showing up, they were, kind of, not listed anywhere. And we saw their story and we thought this is the best story on the street. This is the company that’s going to be providing the solutions on a forward-looking basis.
And so, you know, they’ve really ramped up that tremendous sustainability reporting, but also importantly, by doing a great job on emissions, on water usage, on energy usage, they’re making progress on each one of those fronts as well. They’re doing a lot of work around diversity, equity inclusion, which, you know, we think is something that’s incredibly important for most companies, but it’s particularly important in this company. And then, you know, we have I’d say some of the, kind of, more traditional activist agenda items on the operational front and on the capital allocation and strategic opportunity front that we’re speaking with them as well.
Meb: You know, part of having just a low stock price in some cases is not having that institutional, or certainly retail too, narrative to where people realize what the story is, and it’s just, sort of, underappreciated. So that’s what you mentioned like transparency and discussion around what they’re doing. Now, eventually, it flows through to the cash flow and earnings at some point, you know, but often that is, sort of, you know, people have their heads down, they’re operating, and often, some of these CEOs, and I’m not speaking to this one because I don’t know them, you know, they are operators or maybe great at certain things, but are totally lacking in others, whether it’s capital allocation, whether it’s marketing and branding, but unlocking some of that value. And certainly just attracting other investment companies too to get the story out there.
Dianne: Absolutely. I mean, that’s something that we see all the time. And for us, I mean, that’s a great moment that we could get in before there’s, you know, that real dissemination of information. But you know, for many investors, they don’t have that time to do that, you know, deep dive to really understand what that forward-looking opportunity looks like. And we can shine a light on it. But you know, there’s a number of things that companies do, including, you know, enhanced reporting themselves, but also increased outreach to their own investors, and also, you know, increase sell-side coverage. And that’s something that, you know, we also get involved with, and it’s absolutely happened with this company, and it’s great. And we happy to see those, kind of, price targets just ticking up as the company really consistently is delivering on their strategy. And that cash flow generation, which is an inexpensive stock. So it’s one I highlight people look at.
But that reporting and transparency, and I can tell you, can’t go into the name right now., but you know, it’s something we do see in the small-cap space. One of our recent additions is a company that doesn’t even host earnings calls. So the transparency opportunity within the small-cap space cannot be…I guess there’s just a tremendous amount of work to do there.
Meb: That’s old school. Interesting. You know, I love going through your presentations, they’re really detailed. And we’ll see if you’ll let us put them on the show note links. Investors, maybe, if not, you can email Dianne and ask pretty please. But there were a couple of companies that made me smile on there, and feel free to talk about either of them. One was something that I don’t think I’ve interacted with since probably high school, which is Ruby Tuesday. And the other is Boingo, which I think I haven’t interacted with in about two years but there’s a good chance I pay a monthly subscription to and…
Dianne: Still playing.
Meb: …aren’t even aware of it because of my old plane flying days, which, you know, could be returning, we’ll see. You want to talk about either, neither of those?
Dianne: I can talk about both of them. I think Ruby Tuesday is interesting because I think if you see the title on that presentation slide, it says lessons learned or something along the lines of that. And I think, you know, that was a company that…you know, again, we’ve done quite a bit in the restaurant space over our careers. You know, had an investment in Lone Star Steakhouse that was tremendously successful and ended up being bought out.
And you know, we saw Ruby Tuesday, it was a stock that continued to suffer, we dug in, and they had, you know, significant real estate holdings. So you know, they had that hidden asset. And it was something we started to buy, we bought a very small position. But then we really were digging in, and we were digging in, you know, operationally with potential operational teams that we thought would be…if we’re going to move forward with this investment, they’d be the team that we would go to, to, you know, assist the company with, you know, a very much necessary turnaround.
And then we were digging in on the real estate side. And we ultimately got some feedback that, you know, I think it’s the lesson learned for investors, you can’t be married to your ideas. And I guess I’d say…I mean, I’ll adjust the phrase, but it’s the willingness to leave the fiancé, I’d say, at the altar I think it’s important, you know, and having a partner, Rob, for me, and I believe I for him, is an important check against confirmation bias.
I mean, a big part of the work that we do, we have a process called the bull and the bear. It’s something we started back in our days at Barrington where, you know, the principal who has found the idea and is ostensibly, of course, thinking about risks but is the proponent of the potential idea is the bull, and the other principal is the bear and their entire role is to, you know, poke holes in the thesis and provide that devil’s advocate exercise, you know, to really check and make sure that we’re not putting anything into the portfolio that could cause, you know, a permanent loss of capital. I mean, that’s the ultimate, you know, we can’t do that.
And so, Ruby Tuesday was a lesson learned, it was something we held for a very short amount of time. And, you know, I think it speaks to you’ve got to have some of those in your portfolio if you don’t, you’re not probably acting aggressively enough. But when you get the information that changes the thesis, you’ve got to be unemotional and willing to move on. And that’s exactly what we did. And it was the right move in that situation. You know, we had a very small realized loss there, but it could have been a much bigger one. So that was on the slides for that reason.
And then Boingo, I mean, I’m happy to talk about. I mean, it’s, kind of, interesting, you know, Boingo is to date at Ides the only full-fledged proxy fight that we ran. And that was, you know, back…we started buying it right at the beginning of our, you know, inception as a fund, which was the very, very end of 2015. And the proxy fight was actually that spring. And it’s an interesting story. Again, it goes to transparency. I mean, this was another conglomerate. And to your point, it is one that I think many people had a negative maybe brand connotation with as Wi-Fi at an airport that maybe didn’t work that well at times. Or they have a subscription, as you pointed out that, you know, was maybe still on their credit card, but they weren’t really using.
When we really rolled up our sleeves, you know, that was very much…it was the original business, but a legacy business that wasn’t part of the value proposition anymore. And what we found was a company that had, you know, two really stellar businesses, one called DAS distributed antenna systems. It’s, kind of, a small cell business that effectively is putting, kind of, high density, you know, arenas and transportation hubs that boosts signal to your cell phone. And just a great business very long-term contracts.
And then they had another business it’s, kind of, like a broadband business, but they’re really the, you know, first in the space, a military business. Where they provide something that looks, kind of, like broadband access to soldiers, but it follows them bases as they move around the world. And you know, just again, great other party on the other side of that contract. So these two are just a real sum of the parts. And they had some other…you know, as we looked at them, kind of, options, a business called Carrier Offload, it’s a lot to get into now. But just a real sum of the parts story but incredibly confusing.
I think when we first came across it, they weren’t breaking out, maybe they had revenues, but there was no, kind of, profitability or asset breakout. You really didn’t know what these businesses, what they looked like. And so for us, that was the edge we could dive in and build that model up ourselves. And I think Rob did, you know, 75 to 100, Freedom of Information Act requests to get as many contracts that they had bid on, which I think gives you a sense of the level of work that we’re doing with every opportunity that gets into our portfolio. But you know, we saw huge opportunities there, and really a very entrenched board, and one that, you know, we hoped that we can work with. But it was that rare moment where we did move forward with a proxy fight in that case.
And ultimately, I think it came down within a day or two of the shareholder meeting, but the numbers were coming in and we were poised to win, and we did strike a very positive settlement with the company, you know, which was a great outcome for all. And I think that what’s really interesting about this story is we ended up doing tremendously well in that investment, you know, two-and-a-half to three times our money on that in just a couple years and had exited, I think it was probably 95%-plus of our investment.
But they actually went and did what was the best price convertible offering that we’ve ever seen, and went out and then bought a business that, you know, it was just okay. And so the stock tanked. And we actually built our position back up again. And I think that speaks to, you know, your point on the exits and the entry, we’re price disciplined, we’re selling because evaluation, you know. We want to own things as long as we can but if the valuation moves and it’s not on a forward-looking basis, going to meet our hurdles, we have to move on. And that’s what we did with Boingo but that doesn’t mean we stop following those companies.
And so another opportunity arose and we built up the position again. And we actually, kind of, early last year, we did stay with a company, you know…I think it could be that these businesses might be better assets in the hands of a larger strategic owner. And shortly thereafter, they did announce a strategic process. And I mentioned that we had three acquisitions in our portfolio in the first quarter. Our second round of Boingo was one of those acquisitions, it was purchased just earlier this year.
Meb: Were they like, “Oh, God, here comes Dianne again, she’s just getting back into the process?”
Dianne: I think they might have been.
Meb: Why is the proxy process so antiquated? Like, it’s…I talk to my crypto friends and I’m like if you guys want to figure something out to modernize, my god, this proxy, it’s like living in the 1920s. It seems so old school that could use a modern just refresh. Has that been your experience? It’s such a pain in the booty.
Dianne: I mean, I think that absolutely blockchain technology for, kind of, that chain of ownership could be really useful because I mean, you know, we have…in the U.S. system, there are record dates, and you know, you’re a shareholder of record at that date. But anything you own subsequent to that date, you’re not necessarily voting, you know. And there’s ways that, you know, a new owner can work with the seller that they purchase shares from to influence that vote.
But I do agree with that. I think there’s something to be said for that. I mean, you know, I think there’s movement around proxy access, there’s movement around shareholder proposals. I mean, you know, I would say…and this goes back to some of the earlier themes we touched upon, the opportunity to even launch Ides, you know, the biggest institutional investors, building out this incredibly robust and just true expertise in investment stewardship, we’re seeing a rise in participation of shareholders in terms of, you know, their engagement with companies.
And from our standpoint, it is a tremendously positive development. Because as activists, you know, we effectively are stepping in to correct, you know, either an agency problem where there’s, you know, a delineation between the shareholder and stakeholder interests and those of the fiduciaries and collective action problems, which is, you know, disengaged shareholder bases, companies that have shareholders with very disparate holding periods and financial objectives, and you know, it may not be worthwhile of any one of them to, kind of, step forward and engage.
But you know, I would say that overarching, we’re just seeing much more robust engagement from shareholders and I think that’s really positive. But I think that there’s definitely a lot that can be done to enhance that. To your point, the proxy process, you know, it’s cumbersome, and maybe it should be in certain cases. I mean, there are certain aspects. It’s expensive. I mean, it’s not just the money, it’s the time and the attention and it’s something that it really doesn’t need to happen.
Meb: What was the pandemic like for you guys? You know, was it something that opened up a number of opportunities? Was it more of a pause? Was it something that…you’ve said you’ve already had a lot of acquisitions this year as we’ve, kind of, come out the other side. Any general takeaways from the experience?
Dianne: You know, for us, it’s always an opportunity. I mean, we’re always looking through, you know, any movement volatility through that perspective. But you know, we’re conservative, you know, we see ourselves as we want to be long-term compounders, and to do that, you have to protect capital. And so we certainly buckled down and made sure that we were really comfortable with everything that was in our portfolio through a prism of, you know, a newer risk. And we did exit, you know, certain positions. And then we added. We had an opportunity to buy companies that, you know, we’ve looked at for years.
We had a healthcare company that we added, and healthcare doesn’t make its way into our portfolio as much as we would like it to because of the valuations. You know, we are very careful on the buy-ins. But we did have an opportunity to add just a tremendous healthcare business. And that was a product of, you know, the sell-off in the spring of last year.
Meb: As you look forward, what are the plans for you guys? You’ve been cranking on this since you said 2015. That was the inception date for Ides? When was it?
Dianne: It was.
Meb: Six years from now, man, get ready…
Dianne: November of 2015.
Meb: No longer a toddler on to a spirited adolescent. As you look forward to the horizon, 2021, what are you thinking about? What are you excited about? What are you concerned about?
Dianne: A lot. I mean, you know, I think for us, it’s you know, we’re growing our business, that’s tremendously exciting. You know, we’ve brought on some incredible investors, you know, Chuck Royce, kind of, more recently, it’s just been the honor of a lifetime to work for him. And you know, I speak with him every week and that’s just…I can’t even tell you how amazing that is.
Meb: He’s a legend.
Dianne: He’s a legend for a reason. He’s just incredible. We have another strategic investor in our business, Lisette Cooper, she’s truly the pioneer, I would say, in impact and sustainable investing. Founded a firm called Athena, was purchased by Franklin Fiduciary Trust, and she’s now the vice-chair of Fiduciary Trust. And so, you know, we’re excited, we’re growing our business, but you know, what does that mean? It just enables us to, you know, do more of what we always do, which is to identify, you know, these long-term compounder opportunities, and then to engage with these companies to make them sustainable on a forward-looking basis and, you know, just stellar performers.
Meb: Awesome. If you could rate the sort of progress we’re making as an industry on a lot of the factors that are important to you, what sort of grade are you giving the industry in general? And are there any main, kind of, muscle movements like, sort of, if you could just wave your wand and say look if I could make this happen, or add this policy proposal, or fix this, right this wrong, structural, whatever, what do you think it would be?
Dianne: You know, I would say that in terms of the work that we’re doing on ESG and sustainability, you know, the industry as a whole, we are in the earliest innings on this front. I mean, it dominates headlines, but I believe that, you know, we are just in the very, very earliest innings of where this is headed. And it’s just going to be as it has been over…I mean, I gave a presentation recently and I would say that, you know, we’ve been talking about these issues and opportunities for a very long time. Look at last year, I mean, you know, across the board with respect to each one of these environmental, social, and governance, kind of, verticals, I mean, you had events that went straight to the heart of the importance of companies thinking about these topics, and really integrating best policies and practices around them. And we’re just at the very beginning of that.
And what I really talk about is, again, investment stewardship. I mean, we as asset owners, we are sitting in, you know, privileged seats. And so I always encourage investors to think about that. How do you…you know, it’s one thing to just own a stock, but how do you really exercise the responsibility that comes with being an asset owner? How do you use your voice? How are you engaging? How are you ensuring sustainable outcomes of the companies you’ve invested in?
And the importance of that cannot be emphasized enough. I mean, as an activist, you know, we are only as effective in many ways on these topics as a company believes, you know, its broader shareholder base. And really, now it’s becoming stakeholder base, which I think is an important development, but you know, in many ways, remains very focused on the shareholder base. Do they care about these topics? And so, you know, for investors using their proxy vote, certainly not forgetting about it, but you know, using it and not just, kind of, auto voting for. Really thinking about, you know, are these directors doing a good job? Is compensation aligned to drive the company?
I mean, I’ll tell you one thing, as an activist that you learn, management teams are very, very good at ensuring they get paid. Compensation policy design is an incredibly effective tool to, you know, assure that the company is moving towards that sustainable long-term ability to be a compounder and to really serve broad stakeholder interests. And so, you know, for owners of companies to treat that with incredible importance, just the way that they do, you know, diligence the company’s financials, to use that vote, and to really let the company know what they’re thinking about, it’s incredibly important.
Meb: Well, you waited to the end of the show to unearth that gem, but that’s something we have long talked about. It gets mixed up, I think, in the capital allocation and buybacks debate and politicians. We have an FAQ post on the blog, it’s FAQ on stock buybacks and capital allocation for lawmakers and gurus and pundits. It’s got about 20 links. But we often talk about, I said, you know, so much of this is, you know, not everyone is looking towards the tools that the company use. But in reality, a lot of it flows through the board, you know, and the decisions they make based on compensation and how they structure it, you know, really has nothing to do with some of the actual implementation tools. But those are the boogeyman’s, and you know, finding out ways to have accountable, and legit, and diversified boards is really important.
Meb: Dianne, you probably mentioned it already, maybe, maybe not, what’s been your most memorable investment?
Dianne: You know, I’d certainly say Boingo would be. I mean, for Ides, that was, kind of, our first added investment and we were surprised that it ever went to a proxy fight. But I think what it established was, you know, the importance of the ideas that, you know, an activist or an engaged shareholder brings to the table. I mean, we were not large owners, and nevertheless, you know, we struck the settlement because we were you know, poised to win. And so what did that boil down to? It boiled down to the ideas that we were bringing to the table. And of course, there was tremendous…we have a very, very long white paper out there for anyone who’s interested.
You know, and you’ll see that, you know, the, kind of, traditional areas of activism are front and center. You know, the operational opportunity, the capital allocation opportunity, and the strategic opportunity that was you know, certainly not a focus at the time for the company. But also, you know, what we’re doing that’s different, you know, this focus on ESG and how important, you know, those types of policies and practices really are in ensuring that, you know, a company on a forward-looking basis is sustainable and is an out-performer. So to, you know, come forward and have that, kind of, I’d say resounding yes by the broader shareholder base was just a really powerful affirmation of the exact reason that we formed Ides.
Meb: You guys take individual investors, only institutions?
Dianne: We do both.
Meb: Awesome. Well, people can hit you up, Dianne, what’s the best place to find you for all these articles, presentations, wire instructions to send you a bunch of money, where do they go?
Dianne: You can look at our website, we have, you know, firstname.lastname@example.org, can always reach out there and, you know, email us and we will set that up and get up and get you the information that you need.
Meb: It’s been a pleasure. Thanks so much for joining us today.
Dianne: Thank you so much, such a pleasure.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at email@example.com. We love to read the reviews, please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.