Jeffrey Ubben’s San Francisco–based ValueAct Capital Partners is building up its cash balance.
The hedge fund firm now has about $2.75 billion in cash after disclosing that it sold more than 6.6 million shares of Motorola Solutions. This is up from roughly $1.5 billion at the end of 2015. This includes committed but underdrawn capital of $500 million in ValueAct’s private-equity-like vehicles, which don’t charge a management fee until the capital is actually called. The firm’s total assets now stand at more than $19 billion under management.
ValueAct’s current level of cash works out to something like 15 percent to 20 percent of the firm’s total assets. This is a lot for ValueAct, which is widely described as an activist firm (although the principals prefer to call themselves long-term strategic investors). ValueAct takes a longer-term perspective with the companies it invests in and works closely with them as it tries to boost value. ValueAct rarely looks for a quick payoff on an investment.
The firm’s high cash position does not suggest that ValueAct is preparing to pounce on a slew of potential bargains created from the market’s recent sell-off and overall volatility, however. Rather, it reflects the firm’s macroeconomic view, which is somewhat bearish.
In fact, Ubben says his firm has found only one high-quality investment that meets its valuation parameters in the past 12 months — Rolls-Royce’s wide-body engine business.
“We are in an earnings recession,” Ubben tells me in an e-mail discussion. “Does it turn into an economic recession as job gains reverse due to profit pressure?” He points out that the mergers and acquisitions cycle is in the “very late innings,” adding that “all the juice has been squeezed out of the lemons.”
The concern is that corporate profit margins and profits as a share of gross domestic product are at an all-time high. Ubben thinks the policy risk is that if the Federal Reserve raises interest rates further, this will eventually hurt the labor market and leads us into a recession, or higher labor costs will cut into corporate profit margins as labor becomes a greater proportion of GDP.
One stock ValueAct is not selling is Valeant Pharmaceuticals International, which is down about 35 percent this year alone. Ubben would not comment on this position, still his firm’s second-largest holding at year-end. However, in his fourth-quarter letter to clients, Ubben wrote that ValueAct “will continue to help the company navigate out of the storm of pundit criticism, short seller allegations, and management turmoil.”
And don’t expect ValueAct to bail on the company now that chief executive officer J. Michael Pearson has returned to Valeant from medical leave. Remember, ValueActinitially invested in Valeant in 2006, helping the company identify major cost savings and sell its pharmaceuticals pipeline so it could focus on its less volatile branded generics business. This enabled Valeant to slash its research and development budget, a move that has become a target of criticism in recent months.
In 2008, ValueAct recruited Pearson from consulting firm McKinsey & Co., where he had spent 23 years, to serve as chairman and CEO of Valeant. In 2010, Biovail Corp. acquired Valeant for $3.2 billion and then retained the name Valeant.
ValueAct has recently sold some of its positions in several other companies that have outperformed the market — Microsoft Corp., Adobe Systems and MSCI — which also contributed to its cash pile. However, it still owns about $2.7 billion worth of Microsoft, which remains its largest holding. ValueAct also still holds $1 billion worth of Adobe. In fact, so far it has made about three times its initial investment on Adobe and MSCI and roughly two times on Microsoft and Motorola.
