Potential Buyout/Activist Campaign – Upside TBD
Last week, rumors appeared that the CEO of an asset manager Westwood Holdings Group is looking to take the company private. The rumor came from an unusual source. Activist investor JCP Investment Management with an 8.8% stake has filed a 13D saying it learned that the CEO “has been contacting potential financing sources” in order to take over the firm. JCP said it will oppose any such attempts at depressed valuation, especially in light of the mid-2021 buyout offer at $25/share from private peer Americana Partners, which WHG board rejected as undervaluing. Interest from the CEO is not surprising given how cheap WHG trades compared to similar-sized active asset management peers. WHG trades at 0.8x EV/Revenues (with all revenues coming from management fees) compared to peer multiples of 2x. The financial rationale for the potential buyout seems to be clear, and the pressure from the activist might result in a bid at a premium to current prices. CEO privatization rumors might fall through and in such a case, the stock might trade down to pre-announcement levels (14% downside).
The main driver of WHG’s undervaluation relative to peers is the company’s entrenched management and outrageously high compensation. Management, together with the other WHG executives/directors own 10% of the company and the other employees own a further 18% of the stock. Management has already shown back in 2021 that it has no intentions to give up control of the company and that it can also quickly respond to any activism campaigns with a poison pill (previously the ownership threshold was set at 10%). So any offer from CEO probably would not be competitive.
WHG’s revenues are essentially comprised of management fees on AUM. WHG operates in the declining active asset management sector, which has been gradually bleeding AUM and losing market share to passive investment vehicles for multiple years now. Over the years, the company’s share price and valuation multiples have also suffered a substantial decline. The withdrawals from the active asset management vehicles were especially pronounced in 2018 across the whole sector – here and here.
Nonetheless, pretty much all other asset management peers trade at significantly higher multiples:
Notably, all of the peers above are significantly larger and more diversified, while some are also exposed to other, better-performing sub-sectors, e.g. alternative asset management (private markets, RE, resources, etc.). Hence, I think that probably the best two comps to WHG are DHIL and HNNA, both of which are similarly-sized pure-play traditional asset managers. DHIL trades at 1.9x EV/revs and HNNA at 2x EV/revs.
WHG’s employee compensation at 58% of revenues stands out from peer, it compares to 46% for DHIL and 28% for HNNA. This puts a significant burden on its profitability and has resulted in minimal or even negative WHG’s net operating income margin over the last 4 years. DHIL expenses are also quite high, however, it has had a much more stable AUM performance over the years. HNNA is way smaller than the two other peers and has also seen a similar AUM decline as WHG. However, its significantly lower compensation expenses allowed it to maintain high profitability and probably are the reason for the valuation premium.
JCP Investment Management is a small activist hedge fund with $250m AUM. It runs a fairly concentrated portfolio and WHG is the 4th largest position. The fund acquired the stake in 2021 at $16-$17/share prices and is sitting at considerable loss. Funds track record so far has been fairly limited – most of the campaigns seem to be focused on shuffling the board and injecting its nominees into the targeted companies. JCP was/is also present in WHLRD case covered by SSI here. The other major shareholders include an asset management giant Allspring Global Investments – 6.3%, investment manager DePrince, Race & Zollo – 6%, Renaissance Technologies – 4.9%, and GAMCO Investors – 4.9%.
The rumored buyer, CEO Brian Casey has been serving in senior roles at WHG since 1992 and was appointed as CEO in 2006. He owns 4.7% of the company.