After Envestnet rebuffed an ESG hedge fund's demand for a board seat, the fund managers sent a shrill, scalding letter in retaliation to force the issue
The Berwyn, Pa., firm invited invective by allegedly stiff-arming the startup ESG fund's request, even though it holds a 7.2% stake in the company.
7 min read- Envestnet faces public pressure from Impactive Capital after rejecting a board seat request.
- Impactive's letter criticizes Envestnet's financial performance and management decisions.
- Fund cites Envestnet's underperformance relative to peers and excessive spending.
- Letter's tone suggests a hostile approach to influencing Envestnet's strategy.
Brooke's Note: Envestnet is in the midst of a major rebuild of its company, its technology and its mission, and Wall Street somewhat grudgingly has given it a grace period to invest more like a private startup than a public cash cow. Its profits are off and its shares are down as it plows capital back into the company. Now a $2.7-billion AUM firm with its own challenges – namely a 2018 startup ESG hedge fund living through a down ESG market – is declaring the grace period over. A letter that reeks of wild disgust with Envestnet's approach to investing has the markings of a manifesto demanding a board seat – or else. It seems problematic whether the undisguised contempt will work with Envestnet CEO Bill Crager.
Envestnet recently rebuffed a startup ESG hedge fund from joining its board of directors and today it got a seething earful about its resemblance to SpongeBob and Kabuki theater.
The Berwyn, Pa., advisory absorbed the full force of a voluble and invective-spiced letter challenging its alleged short shifting a fund proxy's application to serve on the board.
Lauren Taylor Wolfe, co-founder and partner of hedge fund Impactive Capital, was the first signature on the letter along with co-founder Christian Alejandro Asmar. Her firm also paid GlobalNewsWire to blast out their concerns worldwide in a press release.
Envestnet (ENV) shares closed at $56.89 today, up $1.52 or 2.75%, but it's been a wild ride for the stock, which has bounced between a 52-week high of $84.58 and a low of $41.72.
Though the letter followed the blueprint of other activist letters, this one seemed determined to insult and taunt Envestnet's board and its CEO Bill Crager.
“We suspect even SpongeBob SquarePants and Mr. Krabs, who were engaged by the company to educate on an “Intelligent Financial Life” in a recent marketing campaign, would know better. Shareholders deserve better,” it said.
Boiling point
For investors who are not familiar with the pop culture references, the letter tore deeper with a more timeless reference.
“Management and the Board seem to have attempted Kabuki theater, and still forgot to put on their costumes before they went on stage,” it scolds.
Impactive was founded in 2018 – staked with $250 million of AUM from CalSTERS – to capitalize on the ESG trend. It took a major fancy to Envestnet and now claims to own an estimated 7.2% of its stock.
Bill Crager buys Wall Street patience by detailing how Envestnet can rent out brainpower, deliver 'wellness' and be rewarded with revenues at an astounding 40 basis points higher
It first invested in Envestnet shares in the second quarter of 2021 -- right when Wall Street was expressing its own concerns about Crager pouring $30 million a quarter toward a company makeover. See: Bill Crager buys Wall Street patience by detailing how Envestnet can rent out brainpower, deliver 'wellness' and be rewarded with revenues at an astounding 40 basis points higher
Though Envestnet is not known as an ESG company per se, it appointed Ron Ransom to head ESG investing last July, only to let him go and abolish the position in October. See: Envestnet just named an ESG head to meld 'wellness,' 'The Intelligent Financial Life' and 'sustainable investing' into a single nirvana -- that starts outside of the product realm
Eighteen months later, its disdain for Envestnet's management is boiling over.
“Envestnet [has] well-below market returns over multiple time periods relative to the S&P 500, S&P 400 and its closest peers, significant margin gap versus its closest peers and egregious spending with seemingly no accountability for returns,” the letter states. See: Envestnet leads $18.5-million 'A' raise to shore up the '40' in the $5-trillion -plus of 60/40 portfolios it adminsters for 108,000 advisors
Since current Chair James Fox joined the board in Feb 2015, the stock has underperformed the S&P 500 “by a staggering 124%.1,” the letter said.
Over the past five years, during which five of the seven board members were present and a sixth director served as the company president, “Envestnet returned a mere 2% while the S&P 500 returned 67%.”
Cold rejection
As much as Impactive finds Envestnet's management “troubling," its fury hit a fever pitch when it discussed its unsuccessful bid for a board seat.
Story Timeline
“We offered to meet with the head of the Nominating and Governance committee, but this was rejected,” the letter says.
“We offered to travel to Chicago to meet with Chairman Fox, but this was rejected.
"Our package included several references which we were assured would be reviewed, but none were called by any member of the Board,” the letter states.
It was the latter series of rejections that elicited the Kabuki reference.
Envestnet leads $18.5-million 'A' raise to shore up the '40' in the $5-trillion -plus of 60/40 portfolios it adminsters for 108,000 advisors
Envestnet declined to respond except with a prepared statement.
"The Envestnet Board of Directors and management team are focused on creating value for shareholders by executing our strategy to accelerate growth, and we will continue to take actions to achieve these objectives.
“As always, we welcome input from our investors with the common goal of driving shareholder value,” it said.
Assessing changes
The letter laid out three principal objections.
It raised “serious concerns about Envestnet's prolonged, significant stock price and operating underperformance, lack of shareholder alignment and poor board governance.
It said it was perplexed by the board's refusal to "add a single shareholder representative to the board, despite Impactive's large ownership stake and considerable effort to collaborate over the past 18 months.
And it said it was "troubled by excessive spending without ROI justification and declining profitability as management and board payouts increase. See: Envestnet go-private sale odds plummet after Bill Crager's answer to analyst's question over the possibility; stock craters, cutting chances of it happening to one-in-four, analyst says
The letter is unusually colorful but does have a point, says Tim Welsh, president of Nexus Strategy.
“I do think it has merit,” he says. “Envestnet has yet to integrate their many acquisitions, hasn't rolled out anything really new - other than to play Russian Roulette with Fidelity with their new custody offering. ” See: Bill Crager reads the room and commandeers State Street's old RIA custody unit for Envestnet with FNZ deal
“Mostly, they've just been rearranging departments and people on the Titanic, so I can see the frustration from Intrepid.”
Impactive is not being impatient, it claims.
“We are not short-term actors,” the letter states. “We have owned many of our portfolio companies since our inception and our current portfolio’s weighted average holding period is over two years.”
Envestnet can lower the temperature from Impactive's activism the hard way or the easy way, the letter concludes.
“While we are now assessing the magnitude of the changes required at the board ahead of the company’s upcoming nomination window, we remain hopeful that the board will see reason and avoid the unnecessary time, expense, and distraction associated with that process.”
As for all the literary flourishes?
“I wonder if they left these sarcastic sentences in just to see if anyone would actually read the entire letter?!?!” remarks Welsh by email.
Rely on RIABiz? Tell Google.
Naming us a preferred source puts our reporting first in your Top Stories and AI Overviews. Takes one click, and only you see the difference.