Active ESG investor Impactive Capital has multiple opportunities to build value at Envestnet

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Company: Envestnet (ENV)

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: $4.5B ($81.68 per share)

Activist: Impactive Capital

Percentage Ownership:  5.03%

Average Cost: $77.60

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 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.

What’s Happening?

Impactive Capital has reported a 5.03% interest in ENV for investment purposes.   

Behind the Scenes

Impactive has been a shareholder since the second quarter of 2021 when the company started to invest in growth, sacrificing short-term profits, scaring off short-term investors and creating a buying opportunity for funds like Impactive. The company spent $30 million more in 2021 than it previously signaled on new hires for future-looking projects, and that number has since been increased to nearly $50 million.

There are three opportunities here. First, the company’s growth plan can start working and result in structurally stronger and more profitable growth. Crager has said that “2022 is a year of execution for us,” so we should know soon whether his growth strategy is working.

Second, if the growth does not materialize, there is an opportunity to cut costs significantly and improve operating margins. This company should abide by the rule of 40 for software companies – its growth rate plus its operating margins should equal or exceed 40. Revenues grew by 19% last year, but operating margins were in the single digits. If growth stays at this level or declines, the company can stop investing so much in growth and focus on efficiency and get operating margins to the high 20s.

Third, there is a strategic opportunity to create value. Envestnet has reportedly considered selling or spinning off its Yodlee business (which could be worth over $1 billion) or sell the entire company. In fact, in February 2022 it was reported that Envestnet retained a banker to explore a sale of the company in an auction geared to private-equity firms. Just this week, it was reported that Advent International and Warburg Pincus were the final bidders.

Impactive always has an ESG thesis in their investments and looks for situations in which these improvements can drive value. This is a situation in which ESG value creation and economic value creation are completely aligned. As ESG becomes a more popular investment strategy, Envestnet has been focusing more on assisting its clients in ESG analysis and research and has been designing impact products like an Impact Overlay so advisors can invest more responsibly. In turn, this will make Envestnet’s products and services more valuable and generate more revenue for them as their clients increase their assets. As a company that has not historically focused on ESG and has had negative ESG attributes (staggered board, no sustainability report, lawsuit regarding collecting users’ data without customer knowledge), the impetus for ESG products is likely more economic than conscientious. But with Impactive involved, we would expect Envestnet to address these ESG shortcomings in due course.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

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