Q&A With J. Daniel Plants Of Voce CapitalVW Staff
Mr. Plants founded Voce Capital Management LLC, a value-oriented, employee-owned investment advisor, in 2011. His two decades of experience prior to Voce featured leadership roles from Wall Street to Sand Hill Road, including executive positions in the mergers and acquisitions groups at Goldman, Sachs & Co. and JPMorgan. His prior career spans dozens of successful M&A transactions and more than $20 billion in public and private capital raising across a broad range of industries and market capitalizations.
Mr. Plants is an expert on corporate governance, having begun his career as a securities attorney at Sullivan & Cromwell and later having led the corporate defense advisory business at JPMorgan. He has implemented numerous shareholder rights plans and advised on both sides of many unsolicited and related party transactions as both a banker and lawyer; he is also a regular panelist in industry forums on investor activism. Mr. Plants is the Chairman of the Board of Cutera, Inc. (Nasdaq: CUTR) and is a member of the Council of Institutional Investors and the National Association of Corporate Directors.
Mr. Plants began his career serving a one-year appointment as a law clerk to the Hon. Alex Kozinski, Chief Judge of the United States Court of Appeals for the Ninth Circuit. Mr. Plants received a JD from the University of Michigan Law School, magna cum laude, where he won the Campbell Moot Court competition and was a publishing editor of the Michigan Law Review. He received a BA in economics from Baylor University, where he was elected Phi Beta Kappa; he was the National College Debate Champion in 1989.
eVALUATION (eV): Tell us a little bit about your personal background and career thus far, what sparked your interest in investing early on?
J. Daniel Plants (JDP): I have a somewhat less traditional background than your typical investment manager. I did not come from another fund or the trading desk of a big bank. I spent almost 20 years on Wall Street as an advisor to companies, mostly as an investment banker and a brief tenure at the beginning of my career as a lawyer Sullivan & Cromwell as a securities attorney in the mid-1990s.Shortly thereafter was recruited by Goldman Sachs where I was an M&A banker for several years before holding a similar role at JP Morgan, all in New York City. Later in my career I had the opportunity to round out my experience by working as an advisor to small- and mid-capitalization companies.
One of the patterns I observed was a company making poor choices because the board or management were not properly considering the impact of their decisions on shareholder value. Even worse, some insiders were deliberately acting contrary to the best interest of shareholders. Sometimes they didn’t have the right incentives, they were conflicted or they didn’t have the proper alignment with shareholders and it led them to make decisions that destroyed value or missed opportunities to create value. That seemed to me like a large and structural inefficiency that could potentially form the basis of a successful investment strategy for someone that could identify and remedy these situations.
There are a couple of other things about my background that also impact what we do at Voce. I was deeply involved in competitive academic debate throughout high school and college. As you may know, “Voce” is Italian for “voice,” and that’s part of the reason we selected it as our name. While debate certainly has an oral presentation and public speaking component to it, what many people don’t appreciate is that it’s heavily research driven. The type of policymaking debate I engaged in examined complex questions of economic policy and foreign affairs, which are resolved through the application of empirical, fact-based argumentation. The foundation of those persuasive speeches isn’t rhetorical flourishes, but the marshalling of evidence. That is quite similar to investment research when it is performed correctly – extensive inputs of data, observation and the objective evaluation of them – following the conclusions wherever they lead. We’ve had many investments where our initial hunch turned out to be very different from our ultimate conclusion – for example, a hypothesis that a company was a potential long investment and it turned out to be a profitable short instead. Or thinking that public activism would be required to unlock shareholder value, where further research convinced us management was already on the right track so that we didn’t need to push them publicly. That process of inquiry and objectivity that I learned through debate has had a large influence on our strategy.
The final thing I would allude to is that I majored in Economics with an emphasis on behavioral finance and organizational decision-making. My studies sensitized me to how organizations arrive at decisions and how incentives, and individual and group biases, can impact the outcome. Learning the motivations of key corporate individuals is essential to understanding the choices they make on behalf of shareholders. When we speak of “corporate governance” issues it is typically the presence of structural flaws, such as a lack of alignment or improper incentives, that directly lead to poor corporate choices.
eVALUATION : Tell us a bit about the background of your firm, Voce Capital, what propelled you to start the fund and could we dive into the firm’s strategy and investment process?
J. Daniel Plants: The inspiration for Voce stemmed from that experience I described earlier, in working with companies as an advisor to evaluate opportunities to create value for shareholders. I had seen too many situations where my team had done thoughtful work for clients and only to see the client fail to act upon it, and I wanted to be in a position where I could try to persuade others to act but to do that as a principal rather than an agent. Managing dedicated capital and being an owner of the company would allow us to become more active and try to effectuate changes, even if the management didn’t concur with our view. That was the driving force behind it – it was a desire to no longer be subject to the discretion or the whims of the corporate insiders that I had seen over the years not always make the best decisions in their capacity as representatives of the company’s owners.
I should also point out though that we don’t only engage in public activism. I like to emphasize that we are selectively activist, meaning it’s not something we shy away from but rather is a component of our overall investment strategy that complements our returns and mitigates our risks. Public activism has yielded approximately half of our returns since inception; a larger number of investments, and the balance of returns, have been comprised of traditional value-oriented investing with no public activism. Fortunately, we’ve been successful since inception with both styles of investing. Public activism, however, does generate all of our public persona just by its nature – proxy contests and public letters garner a lot of media attention.
Having said that, we also really don’t do anything that is strictly passive. Even when we are not involved in public activism, we are extremely engaged and hands-on with our companies and that is a critical element of our approach. For me that’s probably 80% investment philosophy and just 20% personality. I generally don’t stand around waiting to see what’s going to happen nor do I believe in luck. Even when we’re not doing so publicly, we believe we can generate returns by supporting our companies behind the scenes, sharing our analysis and research with them and catalyzing positive change from time to time. As an owner of the business, we have valuable insights about investor expectations, risk preferences, management performance, M&A opportunities and the like. If one is articulate and credible in communicating those views, whether it’s to management or to the board, it can influence them positively and create value. How far one goes in doing that and how public to be in communicating can vary. But we never buy stock and sit back with our fingers crossed just hoping for the best. We’re always going to be involved.
eV: How do you influence a company outside of a public activist situation?
J. Daniel Plants: It begins long before you purchase your first share. It’s the preparation and research so that we can pose probing questions when we meet that allows us. to begin testing hypotheses and compiling a composite of the management team’s motivations.
One of the things we hear from management teams is that some prospective investors will say, in the initial meeting, “I don’t really know much about your company, tell me about what you do.” I can’t think of a more insulting way to begin the relationship. If you have a chance to sit down with the CEO or CFO of a company, spend the time upfront so that when you are together you can fully capitalize on the opportunity. You may not be a shareholder yet but if you’re well prepared, have insightful questions and demonstrate real interest and enthusiasm for what the company is doing, it will go a long way in building rapport and trust. Most companies, even if they make mistakes, are trying to do the right thing. They may be misguided, but most want to create value for themselves and their shareholders. If you are upfront about why you have asked to meet with them, and are willing to share what you like about their business, it will smooth the transition to the parts of their story that you don’t understand or are interested in learning more about. By setting the stage correctly, most management teams will respond well even if you move on to some pretty challenging questions. “Why do you have so much excess capital? Why are you investing so heavily in this particular project? Or, why are your R&D expenses half of those of your competitors? How has your G&A been increasing faster than revenues?” Sometimes just asking the right questions and framing them with data/context can help a management team see where they have an opportunity to do better.
eV: What is the reason you’ve focused on the small to mid cap section of the market? Is that where you see the most opportunity? Do you see that changing in the future?
J. Daniel Plants: There are so many great opportunities in the SMID market. We have companies in our portfolio that span from $100 million in market capitalization on the low end to over $5 billion on the high end. We are invested in companies across that spectrum, with the average market capitalization of our companies right now at approximately $1.5 billion.
In these types of companies there are lots of trading inefficiencies, because their size and daily liquidity limits the number of investors that can accumulate positions in them. As a result, there are not hundreds of investors actively researching them the way they are much larger companies. And because of that, usually there’s a limited amount of sell-side research coverage, too. We also see managerial inefficiencies. Some SMID management teams are very, very good and probably should be running a much larger company. Others, not so much. And let’s face it - Goldman Sachs is not visiting these smaller companies on a weekly basis with its very best ideas on how to improve shareholder value. It’s just not their focus, so these companies are not receiving the same kind of external advice that a Walmart or General Electric might be.
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