1 year ago

Graham & Doddsville


Page 24 Simeon Wallis

Page 24 Simeon Wallis technology with a venture fund, named Dawntreader. It provided a very different experience in terms of analyzing smaller companies, where managing cash flow was critical and management had a “make or break” impact. However, I realized that I was not exclusively a venture investor at heart and chose to pursue my MBA at Wharton before returning to the public side of investing. After business school, I worked for Mario Gabelli ’67 covering autos, trucks, heavy equipment manufacturers, and the whole value chain. The value chain encompassed the parts suppliers, the global original equipment manufacturers, aftermarket parts distributors, and auto retailers. Autos and trucks were one of the first industries that Mario followed. I was literally 40 years behind him, and essentially, was challenged to win any arguments about the subject with him. From there, I joined Evercore Asset Management, which was a start-up launched by four ex- Sanford Bernstein buy-side investors, who had received funding from Evercore Partners to build an institutional investment management business. It was a very intellectually and analytically intense place in a great way. It was very thorough research. If we were three years earlier or three years later, it would have been a tremendous success, but when we launched the smallcap value and small- and midcap value long-only products in early 2006, the business timing was completely wrong. Because the timing was poor, the business never really got the legs underneath it, and eventually it was folded. It remains a lesson that randomness and luck, such as timing, can play a huge role not just in investing, but in careers. After Evercore, I moved to Cramer Rosenthal McGlynn, which is a more established value manager. There were about 20 analysts, and it was roughly $10B in assets under management when I joined. CRM was mostly long-only with a small long-short product at the time, and looked for businesses that were undergoing change. That change would be difficult to model, or may not have been appreciated in sell-side models, so these were neglected ideas. Often these were value opportunities, names that maybe didn’t screen well, but occasionally an analyst could find interesting angles to gather insights. “I was intrigued with how business and history intersected, and how history could translate into future investments. I learned that the context behind events deeply matters.” After a few years at Cramer Rosenthal McGlynn, I received an opportunity to work with a friend at a 40-year old firm in the Bay Area. This was a concentrated fund, 15 to 20 names. There were three investment professionals. I was the fourth, and assets under management were about $3B at the time and rose to $4B. It wasn’t a good cultural fit. My wife and I moved back to New York, where I worked on projects for several small cap managers—Wynnefield Capital, Candace King and Amelia Weir at Paradigm Capital Management, and Ken Shubin Stein at Spencer Capital—before connecting with ValorBridge, which was based in Atlanta. I joined in May 2013 and I worked remotely in New York for several years before relocating to Atlanta last summer. ValorBridge is a private holding company. It was started by accomplished entrepreneurs and operators who built successful private healthcare businesses. The operating companies generate excess cash that we use to make either investments in private healthcare companies where we feel we have some competitive advantage from our understanding of specific customers and pockets of opportunity, or we make longterm investments that would diversify away from healthcare into businesses with comfortable risk-reward profiles. We also invest in publicly traded companies, depending upon our projected return profile. We can move our capital back and forth between public and private markets because it’s all internal capital. We’re not a general partner to any outside investors, and there are only two situations where we are a limited partner in another fund. Over time, my role has evolved from being pure public markets within ValorBridge to straddling both, (Continued on page 25)

Page 25 Simeon Wallis and when need be, stepping into an operating role. We believe our differentiation is wearing several hats— operators, public equity investors, private market investors—where we take our knowledge in the private companies and apply it to public companies and vice versa. G&D: That’s a great overview. Could you talk more about the academic work you did regarding activism and the implications of that today? SW: A professor named Michael Jensen coined the term “the market of corporate control,” which is an academic way of saying the actions of corporate raiders and activists. He believed in the efficient markets perspective that all assets are properly valued in free markets, including corporate assets. My perspective was different in that I believed there were times when the market for corporate control and activism were beneficial to most stakeholders involved; however, in the 1980s, there were points when I believed it was detrimental. An example when it was detrimental was when corporate raiders used greenmail. Carl Icahn was known as one of the leading protagonists; greenmail was when a raider would buy a stake in a company, threaten a hostile take-over, and management would lever the company up in order to pay the greenmailer off to go away, all at a premium to other stockholders. What the remaining stockholders were left with was a highly levered business that had not been improved with all of the debt issued. It’s the worst of all worlds. In good situations— and there were many—an outside investor would come in and say, “You’re essentially in four different businesses. There’s very little synergy between any of them.” It’s a reflection of the conglomeration movement of the 1960s and into the 1970s. The company and its stakeholders were generally better off spinning off the assets or putting the assets into the hands of those who would value it more highly via divestitures, and use the cash to find one or two businesses to grow. In situations when activists came in with a mindset focused on capital allocation and longterm value creation, it was incredibly beneficial. In breaking up companies, the assets went to owners that either understood those businesses better, or you’re able to take capital and give it to those who can grow their businesses in healthy ways. I don’t believe one could definitely say that activism on the whole was good or bad. There were benefits and tradeoffs. I would argue that the good instances greatly benefitted the U.S. economy over the long term. G&D: Interestingly, there’s an adjunct professor at Columbia, Jeff Gramm ’03, who wrote a book about a lot of these same issues. SW: Was that Dear Chairman? G&D: Exactly, Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism. Could you walk us through the big lessons you learned throughout your career and how you apply those to public and private markets today? SW: Mario had a pool of fifteen to twenty analysts who would sit around a table every morning and he would Socratically ask us about our coverage universe. I followed the automotive value chain, the heavy-truck manufacturers, such as PACCAR and Navistar. I also covered heavyequipment manufacturers, such as Caterpillar, as well as agricultural equipment companies, such as John Deere. What unites that coverage universe was they shared common parts manufacturers. They had a common supply chain but different distribution. What I learned was there were a variety of business models within a specific industry. The business models had different margin profiles, different capital intensities, different growth opportunities, and therefore they needed to be valued differently. I started to think more horizontally about the nuances of understanding a different business model as opposed to the conventional wisdom of categorizing companies by industries. Mario’s known for his acronym “PMV,” private market value, which is a sum of the parts of a business based upon what an intelligent buyer would pay to acquire that business. In addition to thinking about the balance sheet, we looked for hidden assets or off-balance sheet liabilities, and put that all together to understand the (Continued on page 26)

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