Cevian Capital has one strategy and one fund, pursuing active minority ownership of public, European companies. The current fund, Cevian Capital II, has returned 260% from inception in 2006 to January 2018, versus 77% for the MSCI Europe index over the same period. Returns in 2017 and 2016 have also outperformed the index, according to an investor. Recent exits from Volvo and Danske both contributed to Cevian’s outperformance. Cevian’s stake in Volvo was, in December 2017, sold to China’s Geely for c. €3 billion, generating a profit of c. €2 billion including dividend income for Cevian, who had held the stock since 2006 and added to their holding in 2013, 2014 and 2015. This was reportedly the largest sale of a stake to a strategic buyer ever by an activist, and one of the most profitable activist investments ever. Cevian exited its Danske Bank investment in November 2017, making even higher annualised returns: a profit close to 300%, including dividends, over the six-year holding period. Returns came from both a recovery in profits and an expansion in valuation. Danske streamlined its operations by selling assets in Ireland and Finland, shutting branches and reducing headcount. Return attribution has been very consistent with a hit rate close to 100% on exited positions. There has only been one realised loss since Cevian started investing in 2003: Munich Re, on which Cevian lost c. €60m between 2007 and 2009, and which was sold to redeploy capital into other positions.
Europe’s largest activist manager
Assets around $15 billion in early 2018 make Cevian the largest dedicated activist manager in Europe, and the second largest dedicated activist globally, according to Lazard’s 2017 Activism Review, which tracks activist positions (some activists also have passive investments). Cevian’s managers have steadily expanded their geographic purview. Their first vehicle, Custos, focused primarily on Swedish investments. Their second, Cevian Capital I, widened it out to the Nordic region. Their third, Cevian Capital II, has, since 2007, also invested in Northern Europe and particularly the UK and German-speaking countries. “It is important to speak German in the region. Many board meetings are held in German, and we build better relationships and networks by speaking German,” says Cevian partner, Friederike Helfer, who has featured in both The Hedge Fund Journal’s Tomorrow’s Titans and 50 Leading Women in Hedge Funds reports. Helfer is Austrian (raised near the Swiss border) and Cevian also employs Swiss and German nationals in the Zurich office. France is the furthest south Cevian has been invested. In some other Southern European domiciles, the firm finds the environment is not conducive to its style of ‘constructive activism’. Amber Capital is the only activist we know of that focuses on Southern Europe.
Defining and identifying value
Helfer thinks that “US equity markets in early 2018 have generally high valuation multiples, but that is not the case to the same extent in Europe. Also, there will always be individual stocks that are mispriced and misunderstood”. Helfer is of the opinion that “low interest rates have inflated valuations, both for ‘bond proxies’ and ‘earnings compounders’, leading some firms to become ‘expensive defensives’. At the same time, many superficially cheap firms, such as banks and utilities in Europe, have proved to be value traps as they faced structural challenges”.
Cevian’s valuation metrics are based on bottom up, fundamental, analysis. “Free cash flow yields are important, as are EV/EBITA, and P/E. However, these metrics need to be cyclically adjusted to back out normalised, underlying profitability over the past 10 years,” says Helfer. Low earnings multiples alone are too narrow a way to define value investing. Indeed, Cevian has often found good long-term value in firms that have a relatively high current multiple because earnings are temporarily depressed due to sub-optimal operational performance. Cevian is looking forward to what multiples should be in 3-5 years, after operational and other advances have come through.
“We think that our style works more effectively than proxy battles in Europe.”
Cevian aims to double their money over a time horizon of three to five years, while limiting downside to 20% on a realised basis; mark to market drawdowns on some positions might be larger. “We have no problem with market volatility but pay attention to loss of principal or permanent loss of capital,” says Helfer.
On top of an attractive valuation and company, Cevian needs to see scope for significant improvement via its distinctive style of activism. Cevian is generally the largest or second largest shareholder in its companies, typically owning 5-20% stakes in companies with a wide range of ownership structures, including those with dual share classes that do not offer ‘one share, one vote’. Cevian has invested alongside the government in the case of Swedish telco Telia Sonera: a highly successful investment that generated absolute profits over a holding period including the 2008 crisis. Companies that have significant ownership stakes from foundations, such as Germany’s Thyssenkrupp and Switzerland’s Panalpina, are not excluded “so long as we understand the ambitions of the foundation and have a common basis and orientation for dialogue,” says Helfer. Cevian has also sometimes acquired stakes from family companies. Cevian has not invested directly into holding companies, but sometimes owns the same stocks e.g. Ericsson and ABB, where Sweden’s Wallenberg vehicle, Investor AB, is a large shareholder.
Cevian is currently mainly invested in manufacturing, industrials and financials. Some sectors are not suited to their value driven approach. For instance, very disruptive industries such as biotech and those that are highly sensitive to commodity prices. Financials would need to have a stable franchise, as Danske Bank did, rather than being more volatile investment banks.
Cevian’s concentrated portfolio of ten to twelve companies and long holding periods means that it typically makes only two or three new investments each year. Between two and five Cevian professionals work on each investment, which requires months of fundamental research and due diligence, including field trips and site visits. They can be helped by senior partners, such as UK Chairman and partner, Lord Myners. Not all investments reach full size; sometimes external factors change the investment thesis, or the share price appreciates too fast, before Cevian has a chance to build a full position, which can take weeks or months.
Cevian’s latest disclosed investment, announced on 1 March 2018, was a 6.9% stake of outstanding shares in the global #1 automotive safety group, Autoliv, based in Sweden. Cevian views the business as a beneficiary of active safety and autonomous driving trends and supports the spin-off of electronics unit, Veoneer.
The stereotypical view of activists as being aggressive might deter some women whose personality does not fit this mould, though some female activists, such as CIAM, have of course pursued very bold and public campaigns, including litigation, e.g. in relation to Eurodisney and Club Med. Still, we think that women are more acutely underrepresented in activist investing than anywhere else. Globally, we are aware of only a handful of women in senior portfolio management or analytical roles. In Europe, there is Helfer at Cevian; and Catherine Berjal and Anne Sophie D’Andlau at CIAM. In the US, there is emerging markets specialist Teresa Barger of Cartica Capital, Dianne McKeever of Ides Capital, and Tanisha Bellur of Blue Harbour Group. Lauren Taylor Wolfe has left Blue Harbour to start her own firm. We know of no female activists based in Asia (though Cartica invests in some Asian firms).
However, many activists, including Cevian, do not fit the stereotype, either. “We operate in a constructive way, behind the scenes. We are predominantly focussed on getting things done and are happy for the CEO to take the credit,” says Helfer. More generally, Helfer argues that “diversity of thought is critical to our success. We need to constantly challenge conventional wisdom and our own thinking. Team diversity in many aspects, including background, education, nationality, and gender, helps to achieve that goal, and avoids the danger of groupthink, or creating your own bubble”.
Helfer has found that “as a Nordic company, Cevian understands that family and work/life balance is important and offers the flexibility to take more maternity leave than the legal minimum”. After the birth of each of her children, Helfer took six months maternity leave (of which 14 weeks was paid, under Swiss law, with the rest at her own expense). Cevian’s Swedish staff get longer periods of paid maternity leave, with fathers also included, as per local laws. Cevian’s team of 25 investment professionals contains three women, including Helfer.
Defining Cevian’s style of activism
Cevian’s intention when investing is always to be a large, engaged and active owner; Cevian enters into a constructive dialogue with the company management and board, and its own professionals typically join the boards of portfolio companies. Currently, Cevian partners sit on nine boards in six countries. We are not aware of any other activist anywhere ever having such a geographic spread of boards, and certainly none in Europe has ever held as many seats.
Cevian has never had to pursue a proxy fight to win a board seat. Rather, “we rely on our ability to use past work as valuable references, our local networks, the support we receive from other shareholders, and our intimate understanding of corporate governance practices and laws in each jurisdiction we operate in,” says Helfer. In many jurisdictions that Cevian operates in, minority shareholders have more formal governance rights than the US. In the Nordics for example, the largest four shareholders sit on the nominations committee that reviews and suggests board members to the AGM. This guarantees a seat on the table and enables a constructive and behind-the-scenes discussion. “We think that our style works more effectively than proxy battles in Europe,” says Helfer.
“Cevian’s approach isn’t hostile, but that doesn’t mean it is always friendly,” says senior partner, Harlan Zimmerman. “The main thing is that we are working to make our companies more competitive and better in the long term. Thus, they become more valuable. This is the essence of constructive activism”. Cevian is proactive and assertive in communicating its views on how to make this happen. “The company will however hear our views directly, not read about them first in the press,” says Zimmerman.
Cevian does not write public letters or publish white papers in the way that many activists do, and seldom goes public. A rare exception was a recent, on the record, interview about Thyssenkrupp with German newspaper, Handelsblatt. Cevian is Thyssenkrupp’s second largest shareholder with an 18% stake. Lars Forberg criticised the operational performance and resulting share returns (negative total shareholder returns over the previous five years) and argued that a less complex structure would facilitate a step-change in the operating performance of the company, and allow the firm’s value to double. Cevian reportedly abstained from the vote discharging management at the last AGM but did not vote against management.
Empowering under-resourced boards
Cevian nearly always brings its know-how to bear behind the scenes. “We are responsible shareholders and exercise our governance rights. We can offer much experience, such as special situations and demergers, and contribute a lot. We have a strong understanding of best practices in the boardroom, what you can demand, and challenges the company faces. We are strong supporters of executives,” sums up Helfer.
Cevian is prepared to express some constructive, empathetic and generic criticisms of company directors. “Many boards are stale, sleepy and risk averse. We can often help to catalyse or accelerate change, by making sure the right things are discussed. We recognise that it is difficult to be a good board member. Boards meet 6-8 times a year but have many responsibilities, including, setting strategy, supervising management, and managing risks. Board members often do not have enough time to get familiar with all the details, as they may have many board mandates and other executive positions. It is sometimes surprising how little boards know about peers’ operational performance. Once we get onto the board, we have done our homework and are in a position to ask the right questions. For instance, if a company claims to have cut costs, but this is not apparent in the data, we can identify and challenge any misleading assertions,” explains Helfer. “We want to support members with a constructive, fact-based and rational dialogue. Our skin in the game and long holding periods make us credibly aligned. Our modus operandi is to understand the business and its dynamics better, set the right ambition level, and monitor the execution, but not to become the CEO or do a takeover,” she continues.
“Often, we invest in companies that are underperforming peers, show an incoherent strategy, have disappointed in recent results, and are therefore out of favour with capital markets. By the time we exit, management teams have clearer strategies, have developed a track record of execution, and are now respected by capital markets,” says Helfer. Indeed, Volvo and Danske demonstrate how companies that were ranked at the bottom of the peer group for performance, have climbed to the top. Cevian’s Lars Forberg sat on the board of Danske between 2013 and 2016.
The precise modus operandi is tailored to individual companies and countries. For instance, the specific committee Cevian might sit on, depends on local corporate governance norms and company-specific rules. Helfer explains: “it can be the audit committee, but it varies by jurisdiction. In some countries, non-independent board members are not allowed to go on some committees. At Valmet, I sat on the audit committee, and in 2012 focused on project and risk management processes to address project issues, to ensure that the executive team were aware of issues and estimates. Margin targets were another key focus, where the CEO was excellent, driving the change to create a higher ambition level, and not being satisfied with an average margin. This led to a lot of small changes being implemented together”.
Cevian invests significant time in board engagements and Helfer reckons that the firm’s edge comes partly from the level of resources devoted to each investment. Helfer estimates that she dedicated “c. 40% of her time to Valmet, including one board meeting a month, interactions about specific issues with management and board, and visits to company sites around the world”.
Being on boards naturally means Cevian is often restricted from trading during ‘closed periods’. While this does limit investment flexibility at certain times of year, the overriding advantages are “having a seat at the table, transparency on operational performance, and influence over big strategic decisions,” sums up Helfer.
“We want to make companies better and more valuable for all shareholders and stakeholders,” says Helfer. Cevian does not need to enlist the support of other shareholders in a formal manner, as they do not bring about change through shareholder votes, and for this reason it is difficult to objectively measure what percentage of other shareholders support Cevian’s initiatives. However, Cevian likes to forge a strong dialogue with other stakeholders, including shareholders, and anecdotally there are examples of other shareholders publicly supporting Cevian (including on Thyssenkrupp recently).
As credible, constructive activists Cevian has built up a strong rapport with institutional shareholders over many years. “Having long-term institutional shareholders support our initiatives makes us much more impactful,” says Zimmerman. Cevian has partly benefited from a general positive shift in the perception of activists, due to societal complaints about ‘fat cats’ and executive pay. Those activists who do pursue their objectives through shareholder votes will often find pension funds supporting resolutions on executive pay.
Making things happen
Having studied urban planning in her native Austria, followed by Real Estate Development at MIT, and a spell in management consulting at McKinsey, activist investing might not have seemed the most obvious next step for Helfer. Then again, Cevian’s culture is rather different from most activists. Co-founder, and Stockholm office head, Christer Gardell, also worked for McKinsey, as a partner, in Sweden and Australia. Gardell as well worked in private equity, at Nordic Capital, with the other Cevian co-founder, Lars Forberg, who heads up the Zurich office. The London office senior partner, Harlan Zimmerman, also worked in private equity (in addition to hedge funds) before joining the firm.
Helfer is very clear on why she made a horizontal career move from consulting to investing. “The lure was increased accountability, to put our money where our mouth is. The hurdle to recommend something is higher if you need to back it with a billion-dollar investment. There is also more freedom, so that we are not so much dependent on the client. Investors have more possibilities and rights to influence a company than does a management consultant paid by the client – who sometimes wants an outside stamp of approval for decisions already made”.
Helfer studied for the CFA charter and learnt a lot from colleagues in terms of Cevian’s particular investment style and engagement approach. “It was important to learn the language and style of communication to develop a constructive dialogue with management,” she says. The urban planning was useful in having developed a respect for different perspectives, such as government intervention versus private markets, and diversity of thought.
Helfer was hired as vice president, which at Cevian ranks above analyst and associate, with a clear perspective to become a partner of the firm. The firm has a relatively flat structure with only four levels of hierarchy. Within four years Helfer made partner. Over her decade at Cevian, the company has grown assets from $2.5 billion to $15 billion, and the team has swelled.
We touch on two case studies where Helfer has been strongly involved. The European sovereign crisis in 2011 threw up a number of opportunities for Cevian. One was UK-listed Cookson, which at that time was out of favour with institutional investors, after repeated rights issues. The stock was widely perceived as a consensus early cycle short with exposure to steel and electronics end markets. Cevian was however looking through that superficial assessment and saw a collection of strong businesses with sound leverage and scope for further value enhancement through structural and operational changes. Some of the changes Cevian advances can take years to be reflected in returns, but Cookson’s value-creating demerger occurred in December 2012, less than a year after Cevian had acquired a 20% stake and took a board seat in spring 2012. The demerger created two independent companies, and Cevian had board representatives and a 20% stake in each of them. The chemicals unit, Alent, performed strongly as an independent company, and was then taken over at a significant premium in 2015. Cevian remains a shareholder of Vesuvius – which reported strong results in March 2018. Cookson’s proforma total shareholder return over Cevian’s holding period, taking account of the demerger and takeover, was around 220% versus 80% for the MSCI Industrials, as shown in Fig.1.
Helfer reflects that part of the return did come from multiple expansion associated with eliminating a ‘sum of the parts’ discount, but also from improvements in operating margins (as shown in Fig.2) as Vesuvius has implemented operational improvements in its American and European manufacturing footprint. Helfer is confident that Vesuvius will improve further.
Valmet/Metso was similar to Cookson in being a very contrarian investment, involving both a spin off and operational improvements. Valmet, which designs, builds, and services pulp and paper machines, was perceived to be a dying business with margins of only 5%, while the other part of Metso, which makes mining machines, had much higher margins, in the mid-teens. Valmet, the ‘ugly duckling’, was starved of capital and attention within the bigger group. The demerger enabled Valmet’s newly formed board, including Friederike Helfer, and management to focus on its particular businesses, which turned out to be a ‘Cinderella’ story. Profits quadrupled within three years and the total shareholder return was 180%, versus 30% for the OMX, as shown in Fig.3.
“The biggest contribution came from operating performance and the standalone margin is now higher than ever, despite the extra corporate HQ costs. Though there is no perfect peer, margins are ahead of close peers. The firm has returned to growth and is ready to do a bolt-on acquisition and consolidate the industry,” says Helfer, who has now left the board of Valmet after Cevian sold its stake last year.
Alignment with long term investors
Cevian has been soft closed since 2012/2013, just replacing redemptions, and only fund investors are invited to participate in co-investments. Cevian aims to be fully invested and could return capital to investors if insufficient opportunities were identified, but has never done so.
Cevian’s investor base is 75% institutional – including pension funds, sovereign wealth funds, endowments and foundations – with 20% family offices and only 5% funds of funds. Publicly disclosed investors include US activist Carl Icahn and a number of large Canadian and US state pension funds. All partners of Cevian are also invested in the fund.
Investors are all in for the long haul. Some 90% of the capital base is in rolling three and five-year lock-ups, with the rest in one or two-year lock-ups. The liquidity profile is well aligned with Cevian’s own long-term style of investing, which has an average holding period of 3-5 years.
Helfer is looking forward to the next corporate rejuvenation challenge – and the equity market rout seen in early 2018 could increase the number of potential candidates.