Impactive Capital achieves unprecedented milestone at Envestnet

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Impactive Capital achieves unprecedented milestone at Envestnet
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Company: Envestnet (ENV)

Company: Investnet provides wealth management services and software to the investment community. It has a great product with 90% retention and age-old tailwinds. Envestnet was founded in 1999 by Jud Bergman and Bill Crager. Bergman served as the company’s chairman and CEO from 1999 until October 2019 when he was tragically killed in a car accident. Bill Crager took over as interim CEO and in March 2020 became permanent CEO.

Market value: $3.1 billion ($56.14 per share)

Activist: Impactive Capital

Percentage of 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 investor (AESG™) that launched with a $250 million investment from CalSTRS and now has over $2 billion. In just three years, they have made a name for themselves as AESG™ investors. Wolfe and Asmar realized that it was possible to use tools, especially social and environmental ones, to generate returns. Impactive focuses on positive systemic change to help create more competitive and long-term sustainable businesses. Impactive will use all the traditional operational, financial and strategic tools that activists use, but will also implement the ESG change that they believe is important to the business and that drives business profitability and shareholder value.

What is happening?

On November 15, Impactive sent a letter to Envestnet expressing disappointment with the company’s performance. Additionally, Impactive noted that they will consider appointing a slate of directors for the company’s upcoming annual meeting if Lauren Taylor Wolfe, co-founder and managing partner of Impactive, is not immediately named to the board.

In the wings

In many activist campaigns, it is difficult to determine who wears the black hat and who wears the white hat. Often the onus is on the activist to prove they are wearing the white hat. In this situation, it is very clear that Impactive is wearing the white hat and that the shareholders should impose on the incumbent board of directors the burden of proving the contrary.

Impactful:

  • Holds 7.2% of common shares
  • Shareholder for 18 months
  • Privately engaged with the company over a board seat five months ago before going public
  • Requested a single seat on the seven-person council
  • Writes its first public letter in its history – a long, detailed and thoughtful letter
  • Has a solid reputation as a friendly, respected and value-creating activist

Board of Directors of Envestnet:

  • Holds less than 1% of common shares
  • Underperformed the S&P 500 by 124% during the chairman’s seven-year tenure on the board
  • Proxy peers underperformed by 243.5% over the same period
  • Has not added a new board member for seven years (as of the 2023 annual meeting) – except for the new CEO
  • Is a staggered board at a time when most companies are moving towards good corporate governance
  • Paid $19 million to the board of seven directors over the past five years, during which time they have underperformed the S&P500 by 65.5% and their proxy peers by 113.5%

Now Impactive is in a position they don’t like to be in and probably didn’t expect to be in – engaging in a proxy battle for board seats. They are rightly opting for a full slate of three directors on the staggered board. Two of the outgoing directors who will be targeted are a tenured director for 22 years and the president of the company. Impactive wants board representation to enable Envestnet to better align compensation with performance, refocus on capital allocation and build long-term shareholder value.

This is one of the worst activist defense campaigns I have ever seen. Anyone with any understanding of Impact, Envestnet’s performance, and the incumbent board would know that Impective is sure to get at least one board seat in a proxy battle. And that’s one of seven – it could be the president who gets kicked out of the board. Impactive offered one of the eight with no incumbent losing a seat on the board. Additionally, Impactive is likely to get two seats on the board of a company like this, or even three.

I assume the advisers at Envestnet have informed the board that Impactive has never started a proxy fight before and is unlikely to do so here. Well, they couldn’t have been more wrong. I also expect the company to hear from its major shareholders, they will see the writing on the wall and come back to Impactive with an offer of board representation and it will eventually work itself out. Taking this to the vote would be a huge waste of shareholder money and management time to arrive at a somewhat predestined outcome given these facts and circumstances. The longer the company prolongs this fight, the more shareholders will rally behind 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 activist investments 13D. Squire is also the creator of the AESG™ investment category, an activist style of investing focused on improving the ESG practices of portfolio companies.

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