The Exchanges

Q Why don't you take me through an example or two of particularly that ESG lens and how you would apply it to a business to sort of improve what you see as economics and returns for the long term?

A When you look at some other investment firms, they'll have, like, a dedicated ESG analyst. We don't have that impact of the ESG analysis is part of the DNA of the investment team, and so when we look at any investment opportunity, and we think about the activist levers to pull, we look at the same way that we would evaluate and measure, oh, this company should pursue the spin-out, or it should do this levered recap because of the profitability and value it can drive over the long run, we do the same thing for ESG change. Our first point of triage, so there are a number of tools and frameworks out there, but we really like the SASB materiality map, which breaks down environmental, social, governance, change, and leadership, human capital, and we look at the materiality map, which is based on industry and sector, and then we decide, do we agree with these items that SASB is saying is material for this business and this industry and this sector? And if so, if we agree with it, What is the highest level of priority in terms of the levers that we can pull to drive the highest return for that specific business? So another way to look at it is if you take a Venn diagram, and you look at all the potential ESG change that a company can pursue in one circle, and then all the positive MPV projects that a company can pursue in another circle, impactive focuses solely on where those two cir…

AI assessment note: “a good example... is one of our hotel companies, which is Wyndham Hotels and Resorts”

Q Why don't we just start with your background and how did you first get interested in investing?

A I grew up the middle of two brothers, so very much in the rough and tumble of boys. My parents were very traditional. My father was the breadwinner. My mother was a stay-at-home mom, and I think my father, who, you know, I loved dearly, was very much the typical father of that time who expected a lot from his boys and a little bit less from his girl, and I think that was one of the starting points of motivation for me, which was, and it's gone throughout the course of my career, just a series of underestimations, and it's just an Ever motivating theme of prove them wrong, and my friends like to joke with me, if you ever want me to do something, just tell me I can't do it, but the message there is if you're a dad listening, expect a lot from your girls. My first exposure to stock picking was a sixth grade stock picking competition, and I won by picking Procter and Gamble. I've always had a fascination with business. I led a business group in high school called DECA. I ran a business at Cornell, my undergrad university, Where I rolled up five businesses into one corporate umbrella. Just was always fascinated with how businesses can operate more efficiently and drive profitability and value over the long run. Right out of school, I was interviewing in the Purchasing online, and I went right into technology consulting. It was a firm called Diamond Technology Group. Really, McKenzie…

AI assessment note: “My first exposure to stock picking was a sixth grade stock picking competition”

Q Where do you find markets miss those types of businesses?

A I think a lot of it is around the time. So just to take us a step back, Impacted was put in business by Blue Harbor's largest LPA, CalSTRS, and we were very lucky. They backed us with six-year capital, which is unusual in the public markets, and that really allowed us to pursue what I think is one of the last areas of competitive advantage, which is our time horizon. So at Impacted, we have four key criteria that we look at in our investment strategy, They're all pass fail. So every one of the companies in our portfolio must pass this. It's quality, valuation, time, and activism. And so we just spoke a bit about quality. Valuation is we're looking to underwrite high teens, low, 20 IRRs. We generally like a three to one risk reward on entry. And I think what you're getting to is that everyone's looking for a high quality business at a very attractive valuation. How on earth are you distinguishing yourself? And I think it's because our time horizon, whereas there's so much short term is in the market today, we can look out over three to five year period and think about will this company be worth two to three X, or how can we help this company be worth two to three X? And so oftentimes our opportunity sets come where there's a very highly compounding business that there's a hiccup, and we're able to sort of pounce on that opportunity because we have a longer term time horizon. So …

AI assessment note: “oftentimes our opportunity sets come where there's a very highly compounding business that there's a hiccup”

Q I would guess quite low, but five percent or less? Maybe two percent? I don't know.

A It's about two percent. So two percent of auto mechanics are women, and what we know from any macroeconomic data, or even other industries like construction or health care, is that when women participate in the labor force at a greater rate, productivity improves, output improves, and so we thought about how can we investigate ways to get women more involved to solve their technician problem. And so we worked with the company. I think the company is the first publicly traded auto dealer to offer disability and paid maternity leave to mechanics. They're moving to a four day work week. They're going to flexible shifts. And this is very helpful, particularly for attracting women because the burdens of childcare and elder care disproportionately fall on the shoulders of women. So this all sounds good. And that investment in moving to a four day work week and offering special benefits, they also offer long tenured Mechanics. Equity opportunity. And this is the first time these professionals have ever been able to get equity in their business. It changes the culture of the business. It also has allowed them to attract and retain more technicians to their auto dealers. And importantly, what it's going to do is allow them to drive greater growth in the most profitable portion of their business that is capitalized at the highest multiple. And so you can look at Over a long period of tim…

AI assessment note: “It's about two percent. So two percent of auto mechanics are women”

Q And so what was your path there, you know, over a decade that you spent at Blue Harbor?

A It was an incredible experience, so again, I spent a decade there investing in all sorts of companies, so we were generalists at Blue Harbor, but I spent most of my time looking at consumer businesses, technology businesses, business and healthcare services companies, and learned a ton about building consensus, learned a ton about garnering influence with a management team and a board to pursue the ideas that you were proposing, and I learned a lot about backing really high quality Management teams and about distinguishing between high quality businesses and low quality businesses. And so I think one of the key takeaways and, you know, there were a lot of takeaways from Blue Harbor that informed how we structured Impactive, but one of the key ones was around making sure that we're always backing high quality businesses and high quality management teams.

AI assessment note: “I spent a decade there investing in all sorts of companies, so we were generalists”

Q You can put the same ESG, to some extent, lens on your own business, and something we had talked about when you were launching. What have you found about the positioning of your fund in the marketplace?

A I think there's skepticism, because in the past, what ESG funds were mostly inclusion exclusion funds. I'll only invest in companies that are solar or clean energy, or I won't invest in companies that do gaming or gambling or oil and gas, and naturally, when you limit your universe of investment opportunities, you're going to limit your return opportunities, and so we flipped it on its head, and we said, no, we want to We want to be the catalyst of change that we want to see, and we think we can drive returns by doing so, and so I think there was naturally in the market a negative predisposition to ESG funds because of that, and I think we're really just getting started. There's a tremendous amount of demand. I think sustainability funds demonstrating that they can outperform in times of volatility and over long term in the market is going to stand out, and I think In the US, at least in Europe, they're much farther ahead. But as I mentioned about the flows, I think we're going to continue to see tremendous flows that are interested in ESG and sustainability funds that are pursuing the strategies in a thoughtful manner.

AI assessment note: “I think there's skepticism, because in the past, what ESG funds were mostly inclusion”

Q A lot of times you think about activism as a discipline. You think about taking companies that are underperforming and trying to make them better. When you think of that ESG lens, how much are you trying to find good stewards of ESG compared to those where maybe they're not as good and you can get them better, or they're doing fine and you just find areas of improvement?

A Sure. So I think there's naturally a high correlation. The higher quality management team running the higher quality business tends to get the benefits of positive ESG improvements. And some of the things that we learned were where activists sometimes encounter pitfalls is when they invest in low quality businesses and pursuing some short term change. And that might work Sometimes, but usually they find themselves falling into a pitfall of having a highly illiquid position in a low quality business where time is certainly not your friend, and that overall can diminish the overall value of the portfolio. Now with ESG specific change, I would say we're in such early days, specifically we target small cap companies, so you don't find very high quality management teams and businesses that have perfect ESG scores. There's always opportunities for improvement, I guess, is what I would say. And especially since there's just, again, we're in the infancy of this type of investing, I think you're going to see more and more companies try to stand out and have high signal to noise in terms of the value that they offer.

AI assessment note: “There's always opportunities for improvement, I guess, is what I would say.”

Q So as you started the business, as you mentioned with the investment in CalSTRS, you had this unusual situation where you had a six-year horizon with your anchor investor. How do you think that's changed how you've gone about investing?

A We do a lot less. I know it probably sounds crazy, but we constantly remind ourselves we are in such a unique position. Again, so as a way of background, CalSTRS was the largest investor in our Prior fund, they had full daily transparency into the returns, and they knew which investment partner led which investment, and having that full level of transparency and knowing us individually and our character, they were able to develop high conviction quickly in underwriting us, and importantly, we're in their sustainability bucket, and so we had a lot of conversations with them about making investments for the long run and not being plagued by short-termism, and that's why having that Again, that six-year lock capital was so important. The vast majority of our other capital is in a three-year share class, and so what I think that has led to is patience, making sure that we pounce, but being able to be nimble. So Christian, my partner, and I, we're lockstep about a lot of things. We've worked together for over a decade, and you know, there's a lot of pushback about the dual PM or the co-PM model Someone that we both know may or not have written a book with a chapter about it, but what I would say is that when you think about Impactive's model, we're very similar to private equity, and the duration of our capital is not quite as good, but it is similar to private equity, and so it giv…

AI assessment note: “We do a lot less. I know it probably sounds crazy”

Q As you've emphasized these kind of factors in your analysis, these ESG factors in the analysis, what have you learned that might have been some misconceptions you had, you know, a couple years ago going into this?

A I thought it was going to be much harder to convince companies to focus on ESG change, and I think they really are adopting change In a much more rapid pace than we would have anticipated. And so I think it's easier to identify and ring fence the return opportunity associated specifically with ESG or sustainability investments. And I think companies are really taking them quite seriously. Absent, we started seeing this going into the, is we're certainly hunkered down and focused predominantly on cashflow and liquidity and showing up their balance sheet. So the conversation around sustainability and ESG, Never stopped. And the investments in these types of funds that cumulatively will generate value over a very long period of time. And I think if we fast forward 10 or 20 years from now, we're not reverting back. We're not going back to the time where, you know, the environmental and climate change is not going to be a focus. Our vision at Impacted is that while we might change one company because we can help it with Capital allocation and ESG in a way that allows it to attract and retain the stickiest customers, employees, shareholders will make it more competitive and make the most profitable in the industry. Over the very long run, multi-decade period, not only have you changed a company, but you've changed an entire industry because all the competitors have to follow suit, an…

AI assessment note: “I thought it was going to be much harder to convince companies to focus on ESG”

Q from working your way up as a consultant and early in investing and doing an exec ed at night and then getting married and having kids, that any of the sort of traditional thoughts of the role of a woman, as you said earlier, that childcare and elder care fall disproportionately on, on the shoulders of a woman, that that hinders at all the path and trajectory in the workplace?

A So I think in large firms, there's been a lot written about when they choose to have a family, you know, you see the promotion drop off, and there's this great, McKinsey did this great study, where you see, as you go through ranks within a large organization, it starts out pretty equal, and then somehow when you get to like the MD level, it dramatically falls off. And I think it usually coincides with the time that women decide to have families, and so I just think we need to completely rethink flexibility, and maybe the coronavirus and COVID pandemic is the trigger where women can work from home more. I think I'm a little bit unique in that I was raised with a stay-at-home mom, but I was always encouraged from both my parents that I can do anything I want, and so I've always thought, well, then, yes, I'm going to do everything I want, and so, you know, I sort of want my cake and eat it, too. I have Three wonderful children, and I also am pursuing my dream in business, but I do think that some of the unconscious bias and barriers in the workplace need to be pulled down, and then I guess for the female listeners out there, what I would say is there's a lot of empirical data written about this, which is a lot of men. I remember sitting, I was in the audience of a panel, and someone at JP Morgan was saying, you know, I have about 50% females reporting to me, and 50% men reporting …

AI assessment note: “when they choose to have a family, you know, you see the promotion drop off”

Q Where do you see the breadth of companies on their reporting abilities on ESG metrics?

A The reporting, frankly, is challenging because there's no standards. Again, we really like the SASB materiality map, but there's a great professor at Harvard. His name is George Seraphim, and he actually just put out research that demonstrated the more a company discloses about ESG factors, the greater the dispersion in ratings from folks like MSCI and Sustainalytics. So I'm very eager to participate. I think the industry has a lot to do in terms of setting certain standards, but I think as you think about Why these rating agencies are important. I think they will start to gel around the most important aspects of disclosing and tracking and setting goals around, for instance, carbon emissions, around waste, around air quality and water quality, around employee health and wellness and safety. And I think they will come to a more standardized level for measuring companies against one another. And once we have that, I believe you'll have, for instance, MSCI partners a lot with BlackRock to design a lot of these products. Once you have that, I think there'll be more clarity around which companies have access to be included in a lot of these various products.

AI assessment note: “The reporting, frankly, is challenging because there's no standards.”

Q Where do the conversations that you have with management teams run against resistance in this area?

A I think it's changed a lot over time. 10 years ago, I don't think management teams would have listened to you at all. For most activists, it was really when you break apart the environmental, social, and governance change, it was always a governance conversation, and today I think good corporate governance is simply good corporate hygiene, and so management teams get that. I think they're starting to listen now around the environmental and the social side of things. I would say I can tell you a story. One of our investments on our first meeting with the CEO, before we had taken any stake, before we could even introduce ourselves, he had a whole story prepared for us on why he was good for the world and why he was good for his society, and it's interesting because usually sometimes activists, when they meet with CEOs and managements of companies, there's naturally some level of guard that's put up, but what we've found is that because I think we have this moniker of this Good housekeeping stamp of approval for good ESG stamp of approval. We have a lot of management teams actually calling us for inbound requests on what can I do to improve my profile and what should I be focusing on? And I think a lot of it speaks to management teams and boards are waking up to the fact that they're going to be rated, and they're also importantly waking up to the fact that there are growing pools…

AI assessment note: “10 years ago, I don't think management teams would have listened to you at all.”