Company: Envestnet (ENV)
Business: investment net provides wealth management services and software to the investment community. It has an excellent product with 90% retention and secular tailwind. Envestnet was founded in 1999 by Jud Bergman and Bill Crager. Bergman was the company’s chairman and CEO from 1999 until October 2019, when he tragically died in a car accident. Bill Crager assumed the role of interim CEO and was appointed permanent CEO in March 2020.
market value: $3.1 billion ($56.14 per share)
Activist: Impactive Capital
Percentage ownership: 7.20%
average cost: $72.65
Activist Comment: Impactive Capital is an activist hedge fund founded in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar. Impactive Capital is an active ESG (AESG™) investor, having started with a $250 million investment from CalSTRS and now has $2 billion at its disposal. In just three years they have made a name for themselves as AESG™ investors. Wolfe and Asmar realized there was an opportunity to leverage tools, particularly on the social and environmental side, to drive ROI. Impactive focuses on positive systemic change to build more competitive and sustainable businesses over the long term. Impactive will leverage all of the traditional operational, financial and strategic tools that activists use, while also implementing ESG changes they believe are material to the business and increase company profitability and shareholder value.
What’s happening?
On November 15, Impactive sent a letter to Envestnet expressing its disappointment with the company’s performance. Additionally, Impactive noted that if Lauren Taylor Wolfe, Impactive’s co-founder and managing partner, is not immediately appointed to the board, they will consider nominating a list of directors for the company’s next annual meeting.
Backstage
In many activist campaigns, it is difficult to determine who is wearing the black hat and who is wearing the white hat. Often the burden of proof lies with the activist that he is wearing the white hat. In this situation, it is very clear that Impactive wears the white hat and shareholders should put the onus on the incumbent board to prove them wrong.
Effective:
- Owns 7.2% of common stock
- Shareholder for 18 months
- Employed privately with the company prior to the IPO for a seat on the board
- Asked for only one seat on the seven-member board
- Wrote his first public letter in his history – a long, detailed, thoughtful letter
- Has a solid reputation as a friendly, respected and value-creating activist
Board of Envestnet:
- Owns less than 1% of common stock
- During the chairman’s seven-year tenure on the board, he underperformed the S&P 500 by 124%
- 243.5% worse than proxy peers over the same period
- Hasn’t had a new board member for seven years (as of the 2023 annual meeting) – apart from the new CEO
- Is a tiered board at a time when most companies are drawn to good corporate governance
- Paid the seven-member board $19 million over the past five years, during which they undercut the S&P500 by 65.5% and their proxy peers by 113.5%.
Now, Impactive find themselves in a position they don’t like to be in and probably didn’t anticipate – and are embarking on a proxy battle for board seats. They are rightly aiming for a full roster of three directors on the tiered board. Two of the incumbent directors targeted are a 22-year director and the company’s chairman. Impactive wants board representation to lead Envestnet to better align compensation with performance, refocus on capital allocation and strengthen long-term shareholder value.
This is one of the worst activist campaigns I’ve ever seen. Anyone who knows anything about Impactive, Envestnet’s performance, and the incumbent board of directors knows that Impactive is sure to get at least one board seat in a proxy fight. And that’s one of seven – it could be the chairman, who is elected from the board. Impactive offered one out of eight without an incumbent losing a seat on the board. Also, at a company like this, Impactive will likely get two board seats, maybe even three.
My guess is that Envestnet’s advisors have informed the board that Impactive has never started a proxy fight and likely won’t do so here either. Well, they couldn’t have been more wrong. I also expect that when the company hears from its major shareholders, it will see the writing on the wall and come back to Impactive with an offer of board representation, and this will eventually work itself out. It would be a tremendous waste of shareholder money and management time to arrive at an outcome that is somewhat predetermined under these facts and circumstances. The longer the company continues this fight, the more shareholders will align themselves with Impactive.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving portfolio companies’ ESG practices.
