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

Business: Envestnet provides wealth management services and software to the investment community. It has a great product with 90% retention and age-old tailwinds. Envestnet was founded in 1999 by Jud Bergman and Bill Crager. Bergman served as the company’s chairman and CEO from 1999 until October 2019 when he was tragically killed in a car crash. Bill Crager took over as interim CEO and in March 2020 became permanent CEO.

Market value: $4.5 billion ($81.68 per share)

Percentage of ownership: 5.03%

Average cost: $77.60

Activist Comment: Impactive Capital is an activist hedge fund founded in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar. Impactive Capital is an active ESG investor (AESG™) that launched with a $250 million investment from CalSTRS and now has over $2 billion. In just three years, they have made a name for themselves as AESG™ investors. Wolfe and Asmar realized that it was possible to use tools, especially social and environmental ones, to generate returns. Impactive focuses on positive systemic change to help create more competitive and long-term sustainable businesses. Impactive will use all the traditional operational, financial and strategic tools that activists use, but will also implement the ESG change that they believe is important to the business and that drives business profitability and shareholder value.

Impactive Capital has declared a 5.03% stake in ENV for investment purposes.

Impactive has been a shareholder since the second quarter of 2021, when the company began investing in growth, sacrificing short-term earnings, 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 announced on new hires for future projects, and that number has since risen to nearly $50 million.

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

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

Third, there is a strategic opportunity to create value. Envestnet reportedly considered selling or divesting its Yodlee business (which could be worth over $1 billion) or selling the entire business. In fact, in February 2022, it was reported that Envestnet had hired a banker to explore a sale of the business at an auction aimed at private equity firms. Just this week it was reported that Advent International and Warburg Pincus were the latest bidders.

Impactive always has an ESG thesis in its investments and looks for situations where these improvements can generate value. This is a situation where ESG value creation and economic value creation are completely aligned. As ESG becomes a more popular investment strategy, Envestnet is focusing more on assisting its clients with ESG analysis and research and has designed impact products like an Impact Overlay so that 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 (laddered advice, no sustainability report, lawsuit regarding collection of user data without clients’ knowledge ), the impetus for ESG products is probably more economical than conscientious. But with Impactive involved, we 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 13D activist investments.