Letter #73: Jon Pollock (2015)
Co-CEO & Co-CIO of Elliot Management | 10 Questions with Jon Pollock
Today’s letter is the transcript of an interview with Jonathon Pollock conducted by 13D Monitor for their magazine The Activist Report. In this interview, Jon discusses Elliot’s approach to and process for activist investing, opportunities in tech, getting board representation, engaging international companies, buying out companies, and more.
Jon is an Equity Partner, Co-Chief Executive Officer, Co-Chief Investment Officer, and Chief Trading Officer at Elliott Management, where he is responsible for global situational investing, global trading, and operations. Jon joined Elliott in 1989 as an Analyst and was promoted up to Senior Portfolio Manager. In 1995, he opened Elliott’s London office, and then their Hong Kong and Tokyo offices. In 2009, he returned to the U.S. to become Head of Global Situational Investing. In 2011, he was promoted to Co-Chief Investment Officer. In 2015, he was promoted to Co-Chief Executive Officer. Jon has been involved with a number of significant Elliot investments, including Delphi Automotive, Lehman Brothers, and Hess Corporation.
I hope you enjoy this conversation as much as I do!
Relevant Resources:
Other Activist Investors:
Transcript
13DM: You oversee Elliott’s $26 billion portfolio. How does activism fit into your overall investment strategy?
Jon Pollock: There is an activist element to many of the areas in which we invest whether it’s in equities, credit (stressed or distressed), private equity or direct real estate. In all of these positions we seek to hedge out as much market risk as possible leaving us exposed to the idiosyncratic risks of a given situation. These include both the risks we have identified through our due diligence process and those that we either did not or could not identify. Through direct involvement in our positions, we attempt to positively shape investment outcomes while minimizing our exposure to these idiosyncratic risks. Equity activism fits well with our strategy of deep involvement in our positions with the goal of driving returns.
13DM: Elliott has a very thorough process with respect to its activist investments. Tell us about that process.
Jon Pollock: Elliott has always been drawn to investments whereby “manual efforts” can both mitigate risk and create profitable outcomes. Activism falls into that category and, over the past decade, our U.S. equity activist team, headed by Jesse Cohn, has developed a process that we believe is unique and repeatable. The process is rooted in our detailed diligence effort and centers on a three-pronged test:
Value: Each prospective investment must have a clear path to create value. This means that there must be value in the business that is currently being obscured due to poor execution, corporate structure or some other reason, and that the value is sufficient to warrant the expenditure of time and resources.
Pathway: There must be a way for us to achieve the value result we see. This ranges from a conversation with a constructive management team to a proxy contest or even a bid for the company, but we must be able to draw a line from thesis to realization of value.
Case: There has to be some level of frustration or a general awareness that the company is missing out on the value opportunity.
Of these components, the value criterion is always required and it is nearly always necessary to have multiple paths to create value. We may evaluate opportunities where the pathway or case is less clear, but ultimately the optimal scenario contains all three.
13DM: Elliott has excelled at activism in the Technology sector. Tell us more about the opportunities that you see in Tech?
Jon Pollock: Technology has been an attractive sector for us and one where we continue to see significant opportunity.
We like technology because it is complex. Given the speed at which technology markets change and how winners and losers can be determined, it makes value investing with a long-term horizon that much more challenging. While every situation is unique and every technology subsector is being impacted by slightly different market and competitive dynamics, we do frequently see some recurring themes in our investments.
The most common of these is that the company we are investing in has often seen its growth rate stagnate due to competition, market saturation or some other force and it is desperately seeking to restart growth. Frequently this results in poor utilization of resources – whether R&D, personnel, M&A, etc. – that creates damage to returns and, often, to the company’s still valuable core franchise.
Within tech specifically, we have built out infrastructure that has augmented our ability to identify and facilitate change at the companies we invest in. Our team includes finance professionals, but we also have engineers and tech executives, as well as operators and operational consultants who we work with to help conduct due diligence on the products, markets and operations. This team works for extended periods of time to identify the value that can be unlocked through proper investment in the business, operational improvements and changes to the organization or corporate structure. We also buy companies which helps give us further insight into operations as well as access to executives who can help us with our public projects.
13DM: Elliott is consistently successful in attaining board representation at its portfolio companies but yet rarely needs to launch a proxy fight. Is this a reflection of your deep relationships with large institutional shareholders? What else do you attribute this to?
Jon Pollock: Over the past several years, we think that many institutional shareholders have invested in their teams and now have a strong understanding of which companies have underperformed and which boards can use better oversight. Elliott has maintained a good dialogue with large shareholders and we think this move toward greater accountability is a very positive development for shareholders and markets overall.
Beyond that, I think we’ve been able to identify situations where the facts suggest that change is actually needed. When a company consistently underperforms its peers and makes poor management and board-level decisions, we believe it is obvious not only to investors, but also to the company and its advisors. In situations like that, when the facts are laid bare and we can offer topnotch executives to serve on the Board and address the issues, we have found that our message resonates.
13DM: Unlike many activists, Elliott has an international activist footprint with current engagements in South Korea (Samsung), Hong Kong (Bank of East Asia) and Scotland (Alliance Trust). What are some of the challenges and advantages to activism in other jurisdictions?
Jon Pollock: The local legal, regulatory and cultural frameworks are important considerations in calibrating our chances of success. Does the company benefit from a significant “home court” legal advantage? Will local shareholders support change or does management benefit from a standing practice of domestic institutional and retail support? As with all of our investments, we evaluate it using the same consistent application of our framework: 1) is there value in the opportunity?; 2) is there a pathway for us to create the change we believe is needed?; and 3) is there a case to be made to our fellow holders that the change is needed? By taking our time and devoting the necessary resources to being diligent, we hope to get the analysis right.
13DM: Also, unlike many other activists, Elliott is prepared to, and often does, acquire portfolio companies at the right price. How has this worked out for you?
Jon Pollock: In certain cases, the changes a company needs in order to improve its business are best done in a private setting. In those situations, we frequently seek to play a role in taking the company private. And broadly, those situations have generated a very successful outcome for us.
13DM: Elliott is a very successful multi strategy firm with activism as just one of its strategies. How much of its capital is devoted to the activist strategy? Does this allocation change as the markets change and some strategies become more compelling than others?
Jon Pollock: While we have offices in different regions and employ many talented people with highly specialized skills, we do not allocate capital by asset class or geography. That gives us the freedom to be opportunistic. Capital follows the idea. If we see opportunities to invest in areas like equity activism we will allocate resources accordingly. If not we will look elsewhere. In addition to equity activism we have significant capital invested in areas such as direct real estate, private equity, commodities, structured credit and distressed investments.
13DM: In your activist investment in Hess, you offered to compensate your director nominees to the extent the company’s stock appreciated. This is not an unusual compensation structure for activist investors but a structure that has been criticized by others. Do you see any conflict of interest or other material issue from this compensation arrangement?
Jon Pollock: We think these structures can be appropriate for certain situations and we continue to think about the best way to implement them. The end goal is to get the absolute best board members for the company in question. In some cases, not a majority, the ideal board candidate wants to be compensated for the risk in being part of a dissident slate or for committing significant time and energy to turning around a struggling enterprise.
Sometimes, the compensation offered by the company to its directors is uncertain (in a dissident slate it is not guaranteed the candidate gets elected despite committing time and his or her name to a proxy contest) or insufficient (successful executives sometimes require higher pay for challenging situations). There has been some progress in the area and the discussion is ongoing, but the end goal is to make sure shareholders get the benefit of the most capable directors.
13DM: As a multi strategy firm, what is your view on activism and its recent evolution? Do you see activism as a trend? An asset class? The new normal? What do you see in the future for this strategy?
Jon Pollock: Though we are a multi-strategy firm, Elliott has been engaged in activism in both equities and debt for decades. The rise of the acceptance of activism has been a welcome development with more and more funds welcoming the presence of an activist and more boards and management teams realizing that they are accountable for their performance.
At Elliott, we do not think of activism as an asset class but rather as a tool in value-based investing. At its heart, activism in the equity space is value-based investing whereby the vast majority of the value is in properly identifying companies with hidden value – companies that have good products or good assets that are simply not being monetized or developed appropriately. This is the value prong of our three-pronged test and where we spend the most amount of time researching and confirming our thesis that there is, in fact, value to be realized.
Though we are pleased that activism has become more broadly accepted, we believe the majority of the opportunity set is still in front of us. Companies frequently remain undermanaged and boards are often poorly engaged or equipped to deal with the issues their companies are facing. Certainly, activist funds have cropped up to address the opportunity, but we have found that complex situations where we can conduct detailed work with a long-term view remain in ready supply and we believe will for the foreseeable future.
13DM: Where they trade now, what is your favorite position in your portfolio and why?
Jon Pollock: With a $26 billion book, I have a lot of favorites.
Wrap-up
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