Glad to have this mob on board as largest shareholder.

Chanticleer

This is how to make 16pc a year as an activist investor

Endeavour, Ramsay, Whitehaven, Magellan – there are activist spot fires breaking out everywhere. Viburnum Funds, one of the oldest Australian activist investors, tells us how it operates.

Oct 30, 2023 – 8.50am

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5 min

Calls for the chairman’s head, renegade board nominations, remuneration report strikes, criticism on strategy and mud-slinging. Lots of mud-slinging. Welcome to Australian equities, 2023-style.

In case you didn’t believe us that a wave of activism was coming, check out what has happened at Endeavour, Magellan Financial, Whitehaven Coal, Santos and Ramsay Health Care in the past eight weeks. Some of it is constructive, other situations are uncouth; Endeavour’s barroom brawl takes the cake for the most hostile and dysfunctional.

But it doesn’t have to be so public and outrageous, and is usually more effective when it isn’t, according to Viburnum Funds managing partner Craig Coleman, who runs a $600 million Australian equities fund and specialises in activist-type situations.

Viburnum managing partner Craig Coleman says his fund has gained 16 per cent a year for more than a decade. David Rowe

Need proof? Look at ASX-listed Mayne Pharma Group, which announced plans to abandon any M&A ambitions and ramped up its buyback and cost-cutting strategy.

Although the announcement came out of the blue on October 18, none of that happened by itself. It’s all counter-growth stuff, and the sorts of things that run against the grain of most boards and management teams.

But with some nudging from shareholders, including Mayne’s biggest investor Viburnum, which encourage management teams to think like owners, it happened. There was no board spill, public attack campaign or shareholders’ funds used to fight a proxy battle.

The result? Mayne Pharma’s shares are up 40 per cent in the past fortnight.

Strategy working

Coleman calls it “active ownership” or a private equity approach to public equities, although it looks and smells a lot like what most of us would call activism. It is all about a focus on capital – capital allocation, capital management, cash flow – and working with companies to think more like owners.

And it works. Coleman says his public equities’ strategy has returned 16 per cent a year (net of fees) since inception more than a decade ago, to beat its benchmark (the small cap industrials index) by 10 per cent a year.

Those sorts of returns numbers are why activist strategies are sprouting up around the market. They can make money. L1’s Catalyst, which is sponsoring the Santos break-up campaign, is one of the biggest with about $1.6 billion in capital.

Viburnum’s approach is a bit different. It plays at the smaller end of the market, buying big stakes in companies worth up to $1 billion and holding them for years.

Targeting smaller companies means Viburnum can typically be a company’s No. 1 or No. 2 shareholder, which gives Coleman and his team the ear of the chairman and management team, and a better chance of having its value-creation strategies heard.

Its holdings include 8.9 per cent of Macquarie Telecom, a 12.5 per cent stake in Infomedia, 19.5 per cent of 3P Learning, 8 per cent of Propel and almost 30 per cent of Coventry Group, according to Bloomberg data. Its investments are split between value creation/activist type situations and backing founder/managers.

‘Talking as owners’

Melbourne-based Coleman, a former ANZ executive, says board and shareholder do not always have to agree.

“It’s not personal for us, we’ll be there talking as owners. There can be friction, but it is much more powerful to be aligned and constructive than nasty,” he says.

It helps that Viburnum will typically hold its stake for five years or more, so cannot be easily dismissed as a fly-by-night hedge fund or an investor chasing a quick flip.

He says he turns over about 20 per cent of his portfolio each year and judges himself on a multiple of money or internal rate of return, similar to private equity’s metrics, using entry and exit prices. Exits are often via takeovers.

It is interesting to hear Coleman explain how he goes about it, given the number of spot fires across dozens of ASX-listed companies and his experience as an activist investor.

His approach relies on working with boards and management teams, which is a lot easier to do when you are the biggest shareholder (not that it has prevented the Endeavour brawl). That’s a high hurdle for the investors in top-100 situations such as Ramsay or Santos, which require more corralling of like-minded shareholders.

Introducing director-candidates to the board is clearly a big part of the activist’s toolkit. At Mayne, for example, the company has proposed appointing former Integral Diagnostics CFO Anne Lockwood as a non-executive director. Viburnum used to be an Integral Diagnostics substantial shareholder, which is helpful.

So it is worth remembering that this wave of activism isn’t new – activist investors have been in the market for years.

What is new, though, is the way generalist fund managers are piling more pressure on boards and management teams, in a bid to make a buck for investors. It’s tough out there, and working harder on existing holdings has become the preferred method for creating value.