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Barington’s 15 Years of Value-Oriented Activist Investing Small cap US specialist has unique approach HAMLIN LOVELL


approach to activist investing” says Partner and Head of Marketing, CFA Charterholder Marjorie Kaufman, who was selected as one of THFJ’s Leading 50 Women In Hedge Funds. Since inception in 2000, Barington’s value-focused activist equity strategy has generated double digit annualised returns, net of fees, and outperformed both the S&P 500 and the Russell 2000 indices, according to an investor.


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The strategy primarily invests in the consumer, retail and industrial sectors, almost entirely in the US, and focuses on creating value by helping undervalued companies in its investment portfolio improve their operations, corporate strategy, capital allocation and corporate governance. Barington often finds value in micro, small and mid-cap companies that Kaufman thinks “are often overlooked by some of the largest activist funds”. Boundaries between micro, small and mid-caps are a matter of opinion, but Barington’s range has historically been from The Eastern Company at $100mm in market cap to Darden Restaurants at $6bn, with most holdings above $500mm in market cap, a median of $900mm and all NYSE or Nasdaq listed. Director of Research, CFA Charterholder George Hebard, who has previously worked for Blue Harbour Group and large-cap activist Carl Icahn, is enthused by Barington’s investment approach and the opportunities Barington is pursuing in smaller companies, including Ebix where he sits on the board. The most widely held stocks amongst larger activists and event-driven funds have seldom been present in Barington’s book.


Sometimes Barington blazes a trail followed by other activists and “that’s a net positive as it brings more pressure to bear on a company” says Barington Chairman, CEO and founder James A. Mitarotonda. For instance, Barington privately met with the management of Olive Garden owner Darden Restaurants, Inc. at its Orlando, Florida headquarters in June 2013 and shared with management its value creation plan; went public with its recommendations in October 2013 after it became evident that Darden Chairman and CEO Clarence Otis was resistant to change, and then Starboard Value made a Schedule 13D filing on December 23, 2013. Barington’s pressure on Mr. Otis led to his eventual resignation in 2014, while Starboard ran a successful proxy contest for control of the Darden board. Fast forward to September 2015 and Darden has significantly reduced expenses and entered into sale leaseback transactions and spun off properties into a Real Estate Investment Trust (REIT). Cutting costs and unlocking the value of Darden’s sizable real estate holdings were two key elements of Barington’s plan.


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he Hedge Fund Journal visited the New York offices of Barington Capital Group, L.P. (“Barington”), which follows a “differentiated


Fig.1


Poor corporate governance


Ineffective,


Passive or entrenched board


Corporate


structures that conceal value


Ineffective investor communication


Dislocation of price and performance


Misunderstood business


Multi-segment / Mismatched businesses


BARINGTON ACTIVIST


OPPORTUNITIES


Misallocation of capital


overcompensated CEO


Poor execution of business strategy


Bloated cost infrastructure


Yet Barington has had no trouble effecting changes on its own with smaller positions. “We do not need a large 13D stake to be effective” states Kaufman – indeed Barington and associates’ stake in Darden was approximately 2.5%. “Unique to Barington is our main focus on undervalued situations, where the critical part is identifying an undervalued company and having the skills to design and implement a plan to unlock its value potential” she stresses.


Most Barington investments have been negatively impacted by value destroyers that, if remedied, will help unlock their value potential, as shown below. Though targets may be deeply out of favour, and their share prices might have significantly underperformed their peers and the market as whole for many years, they are not distressed – a typical Barington investment has a strong balance sheet, positive free cash flow and high barriers to entry, all of which help provide downside protection.


Punching Above Its Weight When some activists argue that their size gives them more clout, and even aim to be the largest minority shareholders, how does Barington punch above its weight? “Our ability to influence boards is based on presenting a very strong, compelling and well thought out case. Experience and reputation also matters; we benefit from having a 15-year track record of partnering with companies to implement plans that have improved long-term value”.


Board Representation How labour intensive is activism? “Very,” exclaims Mitarotonda. “Our team spends months working to identify an investment opportunity and formulate a plan.” Barington staff, advisory board members or representatives from its network of industry experts also sit on the boards for the majority of its portfolio. For instance, Mitarotonda is currently a director of four outside boards: OMNOVA Solutions Inc.; The Eastern Company; Pep Boys - Manny, Moe & Jack (which recently announced it is being sold to Bridgestone); and A. Schulman, Inc.


While this hands-on involvement is a significant time commitment, Hebard argues that passive managers should be spending almost as much time researching their investments anyway. Mitarotonda finds “being on boards is productive time. It is better to be in the room shaping decisions for the company as this is all part of the process.” Having sat on boards of over a dozen companies, he is well qualified to judge the importance of acting from the inside.


Occasional Proxy Contests Holding board seats can be associated with various styles of activism. The aggressive, public and hostile activists make so much noise that we all know who they are. Some firms call themselves ‘collaborative activists’ whilst others would prefer to avoid the activist label altogether, calling themselves ‘constructivists’ or ‘engaged investors’. Barington


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