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Company: SLM Corp. (SLM)
Business: SLM originates and services private education loans to students and their families to finance the cost of their education in the United States. It also offers retail deposit accounts, including certificates of deposit, money market deposit accounts, and high-yield savings accounts. In addition, it serves students and families through financial aid, federal loans, and student and family resources.
Stock Market Value: $5.3B ($18.25 per share)
Activist: Impactive Capital
Percentage Ownership: 5.54%
Average Cost: $15.06
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. The firm 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.
Impactive Capital has reported a 5.54% interest in SLM for investment purposes.
Behind the Scenes
SLM is a unique, high-quality business in the financial sector with a niche focus on student loans. There is a very negative perception in the marketplace for government-backed or implicitly guaranteed loans. However, SLM has not made government-backed student loans since 2010. In 2014, the company spun off that entire business as Navient Corporation. Since 2014, SLM has been issuing private student loans that they underwrite and for which they assume the risk. As a result, they have a very healthy loan portfolio with 86% of the loans co-signed by a parent of the student, average FICO score of approximately 750 and a 1% loss rate.
Impactive has owned this stock since their very first 13F filed for the fourth quarter of 2019, and likely longer than that. This is an incredible core business and should continue to grow if management focuses on it and gets out of non-core projects. That is exactly what management is doing with a CEO who not only knows how to efficiently run a company, but really understands capital allocation and how that drives shareholder value. So, the company generates loans, sells the loan book for 105-109 cents on the dollar, and uses proceeds to generate new loans and buy back shares — rinse, repeat. This process is just going to increase annual earnings and shareholder return.
Impactive always has an ESG thesis in each of their investments and this is no exception. While this is not necessarily a situation where Impactive will take a board seat, we expect this to be a situation where Impactive is heavily involved with the company and one in which they will be able to implement AESG™ activism that is consistent with their investment thesis: using ESG to drive value creation and profitability.
By its very nature SLM is a high “S” company as it provides loans to students to get a higher education. But there is even more they can do working with this demographic and we expect Impactive to work with them on ESG initiatives. For example, many companies today, such as Warby Parker, have give-get programs where charitable contributions are made in direct relation to business generation. SLM presently donates to charity but can do more in a way that will help its business. For example, they could give a percentage of every loan they generate to a charity of the borrower’s choosing. This has obvious benefits to society, but also to the company. It is the type of thing that resonates with the demographic of the company’s borrowers, it will strengthen the relationship between the company and the borrower, and it will give it a marketing advantage over competitors who do not do this. Moreover, it makes the loans stickier as borrowers would be less likely to refinance, which makes the loans more valuable to the lender.
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.