Q&A: 'Constructivist' Investors Unite To Build New Activist Strategy

Dec 12 2013 | 2:39pm ET

Jason Ader and Andrew Wallach met when the former was considering an investment with the latter. Instead Ader, whose firm recently fought a successful proxy battle, and Wallach, whose firm boasts a 40-year track record in activist and "constructivist" investing, decided to join forces.

Ader Investment Management, which is up 40.05% this year, and Cumberland Associates, which has generated annualized returns of 14.5% over its 43 years, have become SpringOwl Asset Management. FINalternatives Senior Reporter Mary Campbell spoke to Ader and Wallach, co-CEOs of the now-$225 million firm.

What is the origin of the name SpringOwl?

Jason Ader: We were struck by two literary symbols: the owl, which denotes wisdom—and Andrew and I have been around the block—and springtime, which represents renewal.

How did merger of the two firms come about?

Ader: At Ader, we created a seeding platform a little over a year ago, and in that process met with a lot of different managers. One of those managers that we talked to was Andrew. I knew of Andrew since the 1980s, when I came to Wall Street. Andrew was a well-known media analyst for Drexel Burnham, I used to read his stuff when I was 20 and 21—really young. When we reconnected, we were, coincidentally, in the middle of an activist proxy contest. The discussion developed into what Andrew wanted to do and where I saw opportunities, and what ultimately came out of many discussions was a potential business combination where I just merged my firm into Cumberland and formed a new firm targeting activist and constructivist-based investing. That was a business model that also very much appealed to Andrew and his investors.

Andrew WallachAndrew WallachAndrew Wallach: We have been value investors for literally 40 years at Cumberland—I wasn't there for the whole ride—and we see the activist or constructivist type of investing as a very natural adjunct to what we've been doing as value investors for all these years. We ourselves have occasionally gotten vocal with the companies we're involved with, but never in a public way, so this is a new set of tools that we can use to maximize value for our limited partners.

Jason, what was your first foray into activist investing?

Ader: When I had Hayground Cove, we had a few 13D positions, and activist stakes in a bank and another gaming company. I would characterize most of my activism as constructivist, where either I'd join the board, work with the board or work with the management team on an undervalued situation to set them on a path to unlock that value in a way that was quite amicable.

Andrew, you said Cumberland has not tended to be “vocal” in its activism. Do you foresee being more so in this new venture?

Wallach: Well, in my memory, Cumberland has only been involved in one actual proxy fight over the years—there may have been some before I came on board in 1990 but I only know of one. Most of the time we've simply written letters to management reinforced by lots of verbal conversations along the way. Usually, it's about share buybacks or spinoffs of particular entities, or in some cases the sale of the company when we think the it has reached the end of the road or is below its minimum efficient scale. That's what we intend to pursue as SpringOwl, by and large: constructive conversations with management. But every now and then you'll get to a point at which you really can't resolve your issues without taking the fight to shareholders. But generally, and I'm sure Jason would agree here, that's a last resort. We're much happier having a constructive engagement with a company without getting into a giant public relations war.

Ader: When we think about the strategy, that's really one of the biggest points of differentiation: We plan to hold 15 or so core positions, but they're not going to be passive and we're not going to hold anything in our portfolio where we're not engaged with the company. We're not going to just buy a stock because it's cheap and hope that things turn around. Every position will be active.

What criteria do you use to evaluate an investment?

Wallach: These are generally companies which have underperformed both the stock market and fundamentally for a sustained period of time. They're often companies with weak or ineffective management teams, they're probably trading at a meaningful discount to the intrinsic value they could have if they were either managed better or capitalized more efficiently. Often you have management teams which don't have meaningful share ownership, or other governance issues, which impedes value creation on behalf of the shareholders.

Do you intend to focus on particular sectors?

Wallach: Jason's name is almost synonymous with gaming on Wall Street, and my background is media, telecommunications and technology, general speaking, as well as consumer. These are clearly the areas that are most familiar to us and where we have the most industry contacts, so those would probably be the most likely areas of operation, but not exclusively.

Ader: Gaming is certainly one area, but more broadly, I've been an investor for over a decade in consumer and real estate businesses. So right now, for example, in our portfolio, we have two gaming companies, one restaurant company, one leisure company, one retailer and one energy company.

How long will you hold a position?

Ader: We want to engage with companies and build long-term shareholder value with them. So, in theory, we'd love to hold a stock as long as we can. But at the end of the day, we have an obligation to our LPs, so we set very disciplined price targets when we make an investment. My average holding period over the years has been anywhere from two to four years; in some instances, Andrew's had positions even longer. We're not in this for short term, we're in this to build long-term value with companies.

Wallach: I could not agree more. We literally have a company that we have held for 20 years. If you have a situation where value creation is continuing at a rapid pace, it's easier to stay with something that you know already and people that you know already than to try to reinvent the wheel. And obviously, it's much more tax efficient also to hold things more than a year. We've always prided ourselves on incredible tax efficiency.

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