Impactive Capital takes an unprecedented step at Envestnet

Business: Envestnet provides wealth management services and software to the investment community. It has an excellent product with 90% retention and secular tailwinds. Envestnet was founded in 1999 by Jud Bergman and Bill Crager. Bergman was chairman and CEO of the company from 1999 through 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.

Stock Market Value: $3.1B ($56.14 per share)

Percentage Ownership: 7.20%

Average Cost: $72.65

Activist Commentary: 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 that launched with a $250 million investment from CalSTRS and now has over $2 billion. In just three years, they have made quite a name for themselves as AESG™ investors. Wolfe and Asmar realized that there was an opportunity to use tools, notably on the social and environmental side, to drive returns. Impactive focuses on positive systemic change to help build more competitive, sustainable businesses for the long run. Impactive will use all of the traditional operational, financial and strategic tools that activists use, but will also implement ESG change that they believe is material to the business and drives profitability of the company and shareholder value.

On Nov. 15, Impactive sent a letter to Envestnet expressing their disappointment in the company’s performance. Additionally, Impactive noted that they will consider nominating a slate of directors for the company’s next annual meeting if Lauren Taylor Wolfe, Impactive’s co-founder and managing partner, is not immediately appointed to the board.

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 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 shareholders should be putting the burden on the incumbent board to prove otherwise.

Impactive:

• Owns 7.2% of common stock
• Has been a shareholder for 18 months
• Engaged privately with the company about a board seat five months ago before going public
• Asked for only one seat on the seven-person board
• Written its first public letter in its history — a long, detailed thoughtful letter
• Has a strong reputation as an amicable, respected and value-creating activist

Envestnet’s board:

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

Now, Impactive is in a position they do not like to be in and likely did not expect to be in – engaging in a proxy fight for board seats. They are justifiably going for a full slate of three directors on the staggered board. Two of the incumbent directors who will be targeted are a 22-year tenured director and the chairman of the company. Impactive wants board representation to get Envestnet to better align pay for performance, refocus on capital allocation and bolster long-term shareholder value.

This is one of the worst activist defense campaigns I have ever seen. Anyone with any understanding of Impactive, Envestnet’s performance and the incumbent board would know that Impactive is sure to get at least one board seat in a proxy fight. And that is one of seven — it could be the chairman who is voted off the board. Impactive offered one of eight with no incumbent losing a board seat. Moreover, Impactive is likely to get two board seats at a company like this, maybe even three.

My guess is that Envestnet’s advisors advised the board that Impactive has never commenced a proxy fight before and is not likely to do that here. Well, they could not have been more wrong. I also expect that as the company hears from its large shareholders, they will see the writing on the wall and come back to Impactive with an offer for board representation and this will ultimately settle. Taking this all the way to a vote would be a tremendous waste of shareholder money and management time to get to an outcome that is somewhat predestined under these facts and circumstances. The longer the company prolongs this fight, the more the shareholders are going to side 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 activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.