Voce Turns Five: A Voice for Value

Always engaged, occasionally activist

Originally published in the July | August 2016 issue

Voce Capital Management’s strategy is distinguished from other activist managers principally in that its founder, J. Daniel Plants (pictured above), is a long term value investor who engages with all investee companies, but uses public activism (dubbed ‘vocal’ positions) more selectively. Voce is also differentiated from long only activists in that it has a short book within its investment strategy. Voce has succeeded in bringing about corporate change with far smaller shareholdings than most activists may feel are necessary.

Voce’s portfolio also looks different. It is amongst a number of smaller activist funds that, based on public filings, has avoided positions perceived to be ‘overcrowded hedge fund longs’ that may be present in the portfolios of some larger event-driven and activist funds. Other hedge funds comprise only about 13% of the shareholdings in its portfolio companies, according to Plants. A concentrated portfolio is one thing Voce has in common with many activists, however: there are typically 10-15 core long investments. This distinctive approach is working: Voce has passed its five year anniversary, and all four books – long, short, active, and passive – have made positive absolute profits. The strategy has profited in every calendar year, annualised in excess of 10% per annum, without using any leverage at the level of the fund (nor much at the level of investee companies).

Passive and active books
Since inception, roughly half of the strategy’s profits have come from public activism with the other half from traditional long/short value investing, though the balance varies between years; 2015 and 2014 for instance both saw more gains from the passive book. For Voce, the key draw for an investment is the value thesis, and investments start as passive positions.

Voce’s holdings can migrate from the passive book to the active book – and then back again – and this could happen more than once. For instance, “We were a passive and highly successful investor in Air Methods Corporation for four years before events necessitated us sending some public letters and appointing a director. Now we have entered into a cooperation agreement with Air Methods and are passive once again, although we remain highly engaged with the company,” Plants illustrates.

For long positions, Voce takes a multi-year view on companies and has owned some stocks since the inception of the firm, with 80% of returns each year coming from positions held for over a year. In contrast, some activists seek a specific ”event”, such as a tax inversion, buy back, or spin off, within a defined timeframe, and sell afterwards forcing them to begin hunting again for the next big idea.

Voce’s short book is the odd one out in that it seeks catalysts (usually in the form of earnings missteps) over a nearer term time horizon, with shorter average holding periods. Voce’s single-stock short ideas sound almost like serendipitous accidents. “We do not go looking for short investments. Our shorts are an outcrop of our fundamental research on the long side,” explains Plants.

Pan-sector perspective
In its fundamental bottom-up research process, first and foremost Voce seeks sound businesses that are undervalued, rather than deceptively cheap companies that could be stressed, distressed, or over-leveraged. Voce can invest in all sectors and this partly reflects Plants’ career. “I was a generalist investment banker, in the classic tradition, whereas today bankers specialise very early,” he observes. Ironically, though, the sector that Plants knew least about when he started Voce in 2011 has turned out to be the largest source of opportunities. Healthcare has thrown up a host of them, and Plants enumerates: “We like the defensive business models; the fact that most companies are profitable; they have strong balance sheets with more cash than debt; and there has been lots of M&A.”

Indeed, Voce has helped to put two healthcare holdings into play, resulting in bidding wars and takeover bids at significant premiums. Additionally, back in 2011 Plants recalls how “healthcare valuations were very attractive, but this is no longer as obviously the case, at least at the sector level.  That said, we continue to find plenty of compelling opportunities in healthcare.” Voce has also repeatedly used activism in the technology and financial sectors, too.

No-go areas
Voce does not include biotech under its ‘healthcare’ umbrella. “We prefer to avoid regulatory risk and binary outcomes,” explains Plants. Voce also avoids highly regulated sectors such as utilities, but has been willing to engage with companies where stock prices have been battered by regulatory issues. ITG illustrates how Voce has an appetite for fundamentally sound firms that have fallen foul of regulations. ITG has paid penalties to the SEC for market manipulation, but Voce saw the potential of the business to recover with new management, new directors, and divestments.

Heavily leveraged companies are also eschewed and indeed the most levered company in Voce’s portfolio today is Air Methods, which has debt of only twice its EBITDA (and only after helicopter leases are factored into the calculations). Voce also steers clear of penny stocks, including those listed on the ‘Pink Sheet’ or ‘OTC Bulletin Board’, and does not invest in private companies. Still, Voce can choose from a universe of around 1,000 US listed companies that generally have market capitalisations of below $5 billion.

Though Voce does not conceive an activist plan in every case, the manager wants to retain the potential freedom to pursue an activist approach when and if it is necessary. Therefore, from a governance perspective, other off-limits situations include those with controlling shareholders (insiders owning above 30% or golden shares) or special share classes conferring preferential voting rights. Voce also “avoids companies with mainly retail shareholder bases as it is hard to solicit proxies,if it comes to that, with a fragmented retail constituency,” Plants explains. But ‘poison pills’ are not necessarily out of the question and Plants has overcome them, as well as staggered boards, before.

Credibility critical
Indeed, plucky Plants is not afraid to tackle intransigent management and the question he fields most often is how Voce – with less than $10 million of assets at launch and owning well below 1% of target companies for its first six investments – succeeded in effecting corporate change, unseating directors and sometimes even helping to orchestrate sales to a new owner.

Plants’ first few years of experience confirmed a hypothesis he formed when launching Voce: “Ultimately other public shareholders do not care how many shares of stock you own, they care only about what you are going to do for the value of their shares. If your research is thorough, and you are compelling in your communication of your thesis and leadership of the campaign for change – this sounds so simple, but in practice it is by no means easy to achieve – then you have what you need to succeed, regardless of your size. We have proved that as well as anyone.”

The Hedge Fund Journal has encountered a few other activist funds, such as James Mitarotonda’s Barington (profiled in 2015), that have also helped to achieve corporate change without having stakes above notifiable thresholds, i.e. 5%. That said, Plants is now sometimes going above 5% and admits it is sometimes easier now to gain credibility more quickly. In 2015, Voce filed three 13Ds including ITG, FBR & Co. and Cutera.

Irrespective of position sizes, credibility partly comes from the breadth and depth of Plants’ experience. He spent 20 years as an adviser on Wall Street and in San Francisco’s financial centre, Sand Hill Road, starting as a lawyer at Sullivan & Cromwell and then becoming a senior investment  banker for Goldman Sachs and JP Morgan, before moving on to focus on small and middle market companies. “I enjoyed helping clients solve complex problems and find ways to unlock value, and engineered many intricate, value-creating solutions for them,” Plants recalls, and he sees recurring patterns of the same issues cropping up again and again. “Capital structure, capital allocation, strategic issues of scale and scope, and corporate governance,” often create large opportunities for value realization.

Yet only 11 of Voce’s 75 investments since inception have been public activist positions. This partly just reflects the difficulty of identifying companies that meet Voce’s criteria. It also speaks to Plants’ pragmatism – “Sometimes we anticipated the need for public activism but found management to be amenable to our ideas, and thus had no need to go public,” he reflects. But the reason for Plants’ moving from sell side to buy side was his occasional frustration at companies not heeding his advice – and his desire to be able to move swiftly and decisively, rather than having to wait on management to decide whether to act upon his recommendations.

Corporate governance
Broad themes have recurred with Voce’s public activist positions. Five companies have been encouraged to return excess capital (Harmonic, Intevac, Cutera, ITG and Oplink – which also increased its dividend). The Chairman and CEO were replaced at ConMed and at ITG, while the Chairman was ousted at Harmonic and the CEO was sacked at Solta; and a number of other Directors retired under pressure from Voce at ConMed, Air Methods and ITG. Three companies (Air Methods, ITG and Intevac) have appointed Voce nominees as directors, and at two companies (Destination Maternity and Cutera) Voce sits on the board. Voce ultimately drove the sale of three companies (Obagi, Solta andOplink) to strategic acquirors.

Though these 11 stories contained multiple ingredients, improving corporate governance has, so far, been common to all of Voce’s public activist positions, for various reasons. In one of his colourful letters to investors, the Voce Annual Review for 2013, Plants wrote that “The corporate governance issues on which we focus are neither academic nor the province of the gadfly. In our argot, corporate governance refers to the alignment of insider interests with those of shareholders: equity ownership through personal capital at risk; true independence; proper incentives; capital stewardship; and responsiveness to shareholder concerns. These tenets are the very essence of strong corporate governance and are at the heart of the fiduciary trust between shareholders and a company’s managers. But most of all, we obsess over these issues because it is precisely here that the rubber of corporate governance meets the road of shareholder value.”

In his Annual Review for 2014, Plants continued this theme: “The separation of ownership from management is deeply ingrained in western capitalism and the legal systems that implement it. While boards and managements are trusted to make choices in the best interests of shareholders, they have wide discretion in how they go about it and many of the decisions are never even noticed, let alone challenged, by the company’s rightful owners. As long as this regime remains in place, there will be persistent opportunities to profit from identifying, and remedying, the inherent gaps between the interests of the principals (the shareholders) and their unchecked agents (the professional managers who operate the company on the owners’ behalf). The problems manifest themselves in many ways and may morph over time, but it is ineluctably certain they will recur. The intersection of these complex agency issues – legal, economic and psychographic – is what we call corporate governance and it’s where we live.”

“Insiders may be ineffectual or face conflicts of interest, be misaligned with shareholders or not act in shareholders’ best interests,” Plants has seen. Additionally he is concerned that “objectivity can be compromised by over-tenured directors who grow complacent and do not challenge others enough. Long standing board members need to be held accountable and sometimes need to be replaced so that boards are refreshed with people who are not attached to previous decisions.”

Plants has nominated plenty of directors over the years, and has sometimes himself been a nominee on boards. Replacing directors can entail proxy contests. Plants thinks that directors in the US are generally paid well enough, and in some cases excessively paid, particularly in some smaller companies. Voce has sometimes criticised directors’ pay and succeeded in getting it reduced. Voce frequently takes exception to directors that have not purchased common stock alongside other shareholders, and particular ire is reserved for insiders who dispose of shares.

Team and institutional infrastructure  
Plants thinks that moving to San Francisco 10 years ago helped to give him the confidence to launch Voce, because the entrepreneurial California culture encourages start-ups. Voce is wholly owned by its employees as independent-minded Plants did not want to give away control to any seed or acceleration capital. After five years of hard grind during which time he also had to take on operational duties, Voce has been augmenting its team to free up Plants’ time so that he can spend more time on research such as reading 10K and SEC filings, adding a full-time Chief Operating Officer and a Head of Investor Relations within the past year. Voce is currently seeking additional research analysts for its team.

Plants has put in place institutional service providers, such as KPMG for audit; SS&C for fund administration; and Morgan Stanley, Jefferies and BTIG as prime brokers. Already Voce has an investor base including endowments and foundations, one of the largest institutional allocators, and family offices ranging from multi-million to multi-billion sizes, as well as high net worth individuals. Voce may at some point set up an offshore vehicle for non-US investors but Plants is adamant that it will be run pari passu with the main strategy. Plants has no desire to diversify into credit, real estate or any other asset classes or strategies. “We’re one team, one firm and one strategy,” he summarises. “Our sharp focus has always been the key to Voce’s success, and that will not change.”