Activist investors can be a persistent thorn in the side of management teams and boards. While their demands can result in improvements to the company and shareholder value, the experience can also be stressful and demoralising. It can derail a firm’s long-term strategy, divert leadership from their priorities and compromise value. Knowing how to respond to such an event can help management teams and board members ensure the process is less disruptive, while increasing the chance of a more positive outcome.
Doug Smith is co-founder and managing partner at Blackmoor Investment Partners, a UK-based activist investor. The firm holds positions in several listed companies including Domino’s Pizza Group, Devro PLC and The Gym Group. Smith reveals which strategies the firm typically uses to enforce change and provides advice to management and boards on how to deal with growing activist pressure.
Can you describe Blackmoor’s investment strategy?
Blackmoor’s activist approach is very different to the classic US-style capital grab tactics of Elliot Management or Saba Capital, which is very boisterous and confrontational. Instead, we focus on long-term investing, sharing valuable information and having thoughtful discussions with our boards and executive teams.
We like to invest in a small number of companies at any one time, between 10 and 20. We aim to own 3-6% of the equity, which puts us in the top ten shareholders.
What criteria do you use when identifying a target company?
We never look at companies that are underperforming or in a weak market. Our focus is on interesting businesses that have a good market position but might not be firing on all cylinders. Maybe the cost of goods sold have become more expensive and margins are getting a little bit compressed or perhaps the team delivering the service or product has become a little less efficient.
We do not see ourselves as short-term disruptors there to make a quick buck. We aim to work alongside the company to help drive long-term change.
What’s your typical playbook once you’ve taken a stake in a company?
We do extensive research before we invest in a company. We always meet with the chairperson, the CEO and the CFO and we talk to our fellow shareholders as we enter into a new position. During this time, we look at all aspects of what drives valuation, from brand reputation and financial performance to attracting top talent. That means paying executives well and in a way that aligns with shareholder interests and value creation.
We’re very focused on the construction of boards at public companies. We like to make sure that board members and non-executive directors (NED) are there to provide value and support by dedicating more time to each role. They are not just there to check boxes, they are there to add strategic value and have skin in the game. Sadly, we’ve found this isn’t always the case at public companies. Here, boards often fail to hold the company to account.
There are two reasons for this. First, the information they use to make decisions always comes from the CEO and CFO, which can be biased. Second, they don’t spend enough time with these companies. Your typical board member and NED at a private company spends 35-40 days with management. Public companies are lucky to get 12-14 days.
What’s your typical investment timeline and how do you measure success in your engagements?
We aim to double the profitability of a company within 3-5 years, focusing on improving the fundamentals within a business: operations, management and market position.
In my view, success is measured by having a high-performing board of directors, attracting or retaining the best executive management and delivering on a value-creation plan. And of course, seeing that improvement reflected in the share price.
How do you prefer to engage with a company – through private discussions or more public activism?
We prefer to have private discussions where we work constructively with companies behind closed doors, even if there’s a disagreement.
Activist investors have a reputation for being very aggressive and confrontational, especially in the US. But these rapid, unpredictable and often very public campaigns can catch companies off guard. When people’s backs are up it leads to unproductive, pointless conversations.
A respectful shareholder is far more likely to contribute to the company’s long-term success. We’ve been in this market for 20 years and we’ve kept our nose clean by behaving sensibly. This is very important when it comes to winning the support of other shareholders too.
While we try to avoid public commentary, this isn’t always possible. A few years ago a private equity firm tried to steal one of our companies off the public markets so we went public and said we wouldn’t accept a share price below X. We got them to increase their price a little bit.
Can you walk us through a specific campaign where your involvement led to significant changes at the company?
We invested in The Gym Group, a low-cost gym chain, in the wake of Covid-19. Like many businesses, it had faced severe challenges during this period.
Both the CEO and the chair were former CFOs so they were very risk-management focused. While they had done a great job in battening down the hatches during the difficult years, it was pretty clear that the skills and the comfort level of the company was more about managing risks than taking advantage of growth opportunities. The company shared a growth plan with the market that was pretty uninspiring and cash-flow generation wasn’t looking particularly exciting. In this instance, we felt like there was too much of a CFO presence.
We bought a 4% stake in the company and shared our views on the market opportunity with fellow shareholders. From there, we proposed a refresh of the board and executive team. We ended up replacing the chairperson and hired a new CEO and CFO.
It has been a three-year engagement with this company so far. We have a weekly dialogue with the board and executive team and we think they’re doing a cracking job.
Did you face strong resistance from the board or management team? How do you navigate those situations?
There’s usually some form of pushback and that friction is healthy. It’s all about how you manage it. We approach any situation very openly, we share our research with the company and welcome any debate about the proposals we put forward.
We’re not seeking to tell anyone what to do and we’re always open to being told we’re wrong. But ultimately we’re sharing analysis that suggests things could be done better.
How should management and boards respond to and manage pressure from activist investors? What advice would you give them?
Number one, companies need to understand who their shareholders are because they all have different desires and abilities to bring value to the party. Ask your advisors: who are these people and what kind of reputation do they they have?
How much you listen and engage depends on the due diligence you do on the type of investors that are coming in the door. If they’re known for being short-term, loud and noisy, manage as such. Listen then say, ‘thanks very much and we’ll think about it’.
But if someone turns up with a well-thought-out analysis of the company’s market positions and opportunities and does so with the support of other shareholders, it’s worth paying more attention to them. There’s probably something to learn. Take advantage of the resources and knowledge they have at their disposal, whether that’s market research or competitive benchmarking. This kind of research is expensive so take everything you can get from them.
Where do you see activist investing heading next?
A lot of activists are moving away from large portfolios. Historically, they would invest in around 60 to 100 companies – now it’s more like 30 or 40. There’s also a shift toward less combative, more diplomatic activism. Many investors now prefer behind-the-scenes negotiation with management.
Activists nowadays are really getting into the weeds of operations. They’re pushing for long-term value, not just quick financial engineering.
Activist investors can be a persistent thorn in the side of management teams and boards. While their demands can result in improvements to the company and shareholder value, the experience can also be stressful and demoralising. It can derail a firm’s long-term strategy, divert leadership from their priorities and compromise value. Knowing how to respond to such an event can help management teams and board members ensure the process is less disruptive, while increasing the chance of a more positive outcome.
Doug Smith is co-founder and managing partner at Blackmoor Investment Partners, a UK-based activist investor. The firm holds positions in several listed companies including Domino’s Pizza Group, Devro PLC and The Gym Group. Smith reveals which strategies the firm typically uses to enforce change and provides advice to management and boards on how to deal with growing activist pressure.
