San Francisco–based investment firm ValueAct Capital is raising money for a new tranche of capital that will have a five-year lockup.
The private-equity-like structure will allow the firm to draw capital over a three-year period, according to ValueAct’s third-quarter letter, obtained by Alpha. The move comes at a time when the firm’s flagship fund is struggling due to its big position in embattled drugmaker Valeant Pharmaceuticals International.
“We believe this structure provides additional flexibility to our capital base by having ‘dry powder’ to draw upon a market pull back and/or around a company specific event,” ValueAct says of the new structure in the letter. The firm did not respond to a request for comment.
The firm calls the structure a “win-win” for existing and new investors. “We are pleased to have the long-term confidence of the investors that will participate in this new tranche as we replace year-end redemptions,” the firm adds in the letter.
ValueAct likes to discuss with its investors the concept of a “triangle of alignment” as it moves to lock up investor capital for a longer period of time to match its investment time horizon of roughly three to five years. We have earlier reported that ValueAct typically keeps its core positions for 3.5 years, and 4.5 years when it holds a board seat.
ValueAct manages more than $19 billion. It is generally referred to as an activist investor, but firm founder Jeffrey Ubben and others dislike that description, since ValueAct takes a longer perspective with the companies it invests in and works closely with them as it tries to boost long-term value. ValueAct rarely looks for a quick payoff on an investment.
In fact, eight ValueAct employees now hold a total of 40 board of director seats at various companies. This is up from 36 in 2014 and 35 in 2013. Over the years, the firm has engaged in 33 management transitions, 15 major divestitures, 26 capital structure changes, 12 large-scale acquisitions and 19 company sales at the companies it has invested in.
ValueAct has caught a lot of attention this year for its investment in Valeant, as questions have been raised about Valeant’s pricing strategy, relationship with a specialty pharmacy and its disclosure policies. The stock, which ValueAct first bought nine years ago, has cost the firm badly in recent months. Valeant was down 20 percent in the third quarter and is now down about 66 percent from its high in August.
In the letter, ValueAct blames the stock’s big drop on “a combination of political candidates’ and elected officials’ public criticism” of the company’s pricing practices; short-sellers; the questions surrounding the specialty pharmacy, Philidor RX Services; “and the resulting media circus.”
Whatever the reasons, the ValueAct Capital Master Fund fell 8.3 percent in the third quarter, erasing what was shaping up to be another strong year. As a result, it is down 0.9 percent for the first nine months.
Valeant, however, was not the only stock that caused the pain. The hedge fund suffered losses of 10 percent or more with three other major holdings: Halliburton–Baker Hughes, Rolls-Royce Holdings and Twenty-First Century Fox.
Since its October 2000 inception, however, ValueAct has posted a 15.9 percent annualized return, roughly four times better than the 3.9 percent return generated by the Standard & Poor’s 500 stock index and the 3.8 percent performance by the MSCI World Index.
ValueAct now has 11 core public investments. They include Valeant, Microsoft and Rolls-Royce Holdings. The remaining holdings are referred to as “farm team positions.”
It also has one core private investment: Seitel, a provider of seismic data to the oil and gas industry.
ValueAct launched its first five-year investment tranche in 2009. “At the time, the market wanted monthly and quarterly liquidity,” the firm explains in the letter. “We did not capitulate and give the market what it wanted; instead, we moved to a five year lock-up because it was what was best for our business in the long run.”
The new five-year tranche will have a 1 percent management fee compared with 1.25 percent for the earlier five-year tranche. ValueAct also offers tranches in which investors’ money is locked up for one year with a 2 percent management fee and three years with a 1.75 percent management fee. All investors who put up a certain large sum can get a fee reduction. All of the investors pay a 20 percent performance fee but only at the end of the initial lockup period (year-end for the one-year investment period).
