Active ESG investor Impactive Capital has multiple opportunities to build value at Envestnet

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Company: Envestnet (ENV)

Activist: Impactive Capital

What’s happening?

Impactive Capital has announced a 5.03% stake in ENV for investment purposes.

Behind the scenes

Impactive is since the shareholder second quarter of 2021, as the company began investing for growth, sacrificing near-term profits, turning off short-term investors and creating a buying opportunity for funds like Impactive. The company spent $30 million more on new hires for forward-looking projects in 2021 than it previously announced, and that number has since increased to nearly $50 million.

There are three options here. First, the company’s growth plan can work out and lead to structurally stronger and more profitable growth. Crager has said that “2022 is a year of execution for us,” so we should soon know if his growth strategy is working.

Second, if growth fails to materialize, there’s an opportunity to cut costs significantly and improve operating margins. This company should follow the rule of 40 for software companies – its growth rate plus operating margins should be equal to or greater than 40. Revenue rose 19% last year, but operating margins were in the single digits. If growth stays at that level or slows down, the company can stop investing so much in growth, focus on efficiency, and achieve operating margins in the 20s.

Third, there is a strategic opportunity for value creation. Envestnet has reportedly considered selling or spinning off its Yodlee business (which could be worth over $1 billion). sell the entire company. Actually in February 2022 was reported that Envestnet hired a banker to review a sale of the company in an auction targeted at private equity firms. just this week, it was reported that Advent International and Warburg Pincus were the final bidders.

Impactive always has an ESG thesis in its investments and looks for situations where these improvements can add value. This is a situation where ESG value creation and economic value creation are fully aligned. As ESG becomes an increasingly popular investment strategy, Envestnet has become more focused on helping its clients with ESG analysis and research and has developed impact products such as an Impact Overlay to help advisors invest more responsibly. This in turn will make Envestnet’s products and services more valuable and generate more revenue for them as their clients increase their wealth. As a company that has not historically focused on ESG and has had negative ESG attributes (staggered board of directors, no sustainability report, lawsuit for collecting user data without customer knowledge), the impetus for ESG products is likely to be economic rather than conscientious. But with Impactive, we would expect Envestnet to address these ESG deficiencies in due course.

Ken Squire is Founder and President of 13D Monitor, an institutional research service on shareholder activism, and Founder and Portfolio Manager of 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.

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