Case study of the L1 Capital Catalyst Fund
L1 Capital has hired experienced M&A investment banker James Hawkins to head up a new fund – the L1 Capital Catalyst Fund – which will focus on unlocking company value through shareholder activism.
Hawkins says that whilst activist strategies are well established in the US and Europe, there are few Australian fund managers focussed on activism at the large cap end of the market.
Furthermore, Hawkins said that there is a growing gap, particularly in Australia, for investor-led stewardship in equity markets, as more money goes to passive index funds.
“The market reaction to the launch of the L1 Catalyst Fund, which is seeking to achieve private equity-like returns from the publicly listed space, has been very positive. This is in part because it is a differentiated strategy for Australian investors,” Hawkins said.
Reasoning and timing for launching now
Prior to launching the Catalyst Fund, L1 Capital conducted a detailed market assessment, which not only considered the potential demand for this kind of fund, but also evaluated the investible universe.
It is not a completely new strategy to L1 Capital, which has historically been involved in shareholder activism through its existing long-only and long-short funds. Whilst it can be a very profitable strategy, it is a time-consuming strategy, which is why L1 decided to build a new team and launch a dedicated fund.
“As we slowly come out of the COVID-19 pandemic, there are a lot of companies dealing with change more quickly than they would have had to under normal circumstances. For example, retailers, particularly those whose major market is in Melbourne, have been forced to accelerate the quality and diversity of their online capabilities due to lengthy lockdowns. We believe that such intense periods of change create opportunities for activist investors, making now an ideal time to launch the L1 Capital Catalyst Fund.”
The role of shareholder activism
Both retail, and particularly institutional, investors are becoming more and more focussed on Environmental, Social and Governance (ESG) investing, which can be a focus of shareholder activism.
“The L1 Catalyst Fund will seek to improve the governance outcomes of ASX200 companies, delivering on the ESG objectives of L1 Capital’s clients,” Hawkins says.
One of a kind
The unique combination of skills within the L1 investment team is one of the big differentiators of the Catalyst Fund. When considering activist opportunities at a company, it can draw on the knowledge and network of L1’s portfolio managers and analysts who have been covering large Australian companies for decades.
“Our existing shareholdings in listed companies through the L1 Capital Australian equities and long short funds mean that we get access to company management and chairs that we would not get access to if we were a stand-alone fund,” he says.
The fund is also being seeded with ideas from the L1 Capital Australian equities team.
“Over the years we have seen a lot of opportunities where activism can add value,” L1 Capital managing director and co-CIO Mark Landau said.
A historical example of L1 Capital’s activist work was when it had a 3.5 per cent shareholding in Iluka, which had a mining royalty stream arrangement with BHP.
“Iluka had a discount rate that was being applied to the entire business that wasn’t taking into account the lower discount rate that should have been applied to the royalty stream,” Landau says.
“L1 encouraged the management and board of Iluka that it was in all shareholders’ interests to demerge that royalty stream through a separately listed entity.”
And in November last year, Iluka divested that royalty stream as the listed company Deterra.
The demerger of Deterra resulted in a positive 22 per cent return for L1 Capital’s Iluka investment during a time when the market dropped by 7 per cent, creating a near 30% out-performance compared to the market.