Glenn W. Welling started Enaged Capital in 2012 after having worked since 2008 at the renown activist fund Relational Investors, led by Ralph V. Whitworth. At Relational Investors, Mr. Welling served as a Principal and Managing Director, having been responsible for managing the consumer, healthcare, and utility group. Since its foundation and until May 2016, Engaged Capital, which was launched with an initial investment of $85 million from GCM Grosvenor, posted an annualized return of 7.1%, according to Value Investor Insight.
After leaving Relational, Mr. Welling brought his expertise of increasing shareholder through activist investing to a new market segment: small-cap companies. Mr. Welling reasoned that smaller-cap stocks can also benefit from the involvement of shareholders, but big activists, like Pershing Square, Third Point, ValueAct, etc., don’t really get involved in them, due to their small size. However, there are much more smaller-cap firms and many of them have ineffective boards, little research coverage, and their management can be lacking the required skills sets. In this way, as Mr. Welling put it in an interview with Value Investor Insight, Engaged Capital can bring “large-cap-quality insights to small- and mid-cap companies.”
In the same interview, Welling said that their investment strategy focuses on stocks with market-caps between $300 million and $8.0 billion, but they exclude companies from highly-regulated, or commodity-based sectors, like energy, financial, and utilities. Engaged also excludes companies with two share classes, as well as those with high insider ownership (over 20%) and whose float has less than 50% of the outstanding shares.
Engaged invests mainly in firms that are performing well in their markets and have high returns on capital, generate good cash flow, and low leverage, and then delves deeper to understand the reasons behind the stock’s underperformance. The fund analyzes the financial information in order to identify the aspects that can be fixed in order to change the market’s perception, and then looks into the governance, and tries to get a sense of the shareholders’ sentiment, which can show whether other investors would be interested in changes.
Since its initial investment of $85 million, Engaged Capital has grown to around $374.29 million in regulatory assets under management. In its latest 13F filing, Mr. Welling’s fund disclosed an equity portfolio worth $673.77 million as of the end of June, which is significantly higher compared to $394.17 million a quarter earlier. The increase in the portfolio can be attributed to the fund increasing its position in five holdings and the addition of four new positions. At the same time, Engaged Capital closed its stake in three companies and trimmed three other holdings. Overall, the fund’s equity portfolio is relatively concentrated as it contains 15 positions, which are spread mainly across three sectors (as Mr. Welling avoids highly-regulated sectors): Consumer Staples, Consumer Discretionary, and Technology.
On the following pages, we are going to take a closer look at some of Engaged Capital’s largest investments and discuss the actions the activist took to push for changes at those companies.