Click here to oust the board— Inside the A.I. startup that’s transforming activist investing
Last year, Coast Capital was locked in a bruising trans-Atlantic battle with FirstGroup—the British operator of Greyhound buses as well as a fleet of 42,500 yellow school buses in the U.S. and Canada— before finally scoring a series of decisive blows in its activist investor crusade.
In May, the U.S. hedge fund, which holds a 10% stake in FirstGroup, persuaded the transportation firm to put its Greyhound bus business up for sale—a principal demand. Two months later, it forced out FirstGroup’s chairman. By the end of year, First Group agreed to appoint advisors to figure out whether or not to divest the rest of its North American business.
From his office in southwest England, Grant Fuller had been watching the back-and-forth blows with great interest. Fuller wasn’t involved in the Coast Capital-FirstGroup battle, but he saw the ordeal as an instructive one.
It takes equal measures of persuasion, tact and good timing to win over fellow outsiders in getting a board to abruptly change direction. And Coast Capital deftly exhibited all three in its fight, observed Fuller, a fintech entrepreneur.
Fuller is no ordinary observer of proxy battles. His company, Irithmics, has built a high-tech tool that he believes will help investors to replicate many of the skills seasoned activist investors deploy to win over their targets.
In recent years, artificial intelligence has transformed much of Big Finance, supercharging, for example, firms’ ability to manage risk, advise clients and improve trading returns. Now A.I. promises to automate and democratize a part of big finance that was off-limits to all but the most powerful corporate raiders: activist investing.
Coast Capital “knew exactly which buttons to push to disrupt those investors. What we have done at Irithmics is wrap that up into a product. Now everybody can do that,” Fuller, Irithmics CEO, said during a visit by Fortune to the company’s base at a former glove factory in the attractive Wiltshire village of Holt, two and a half hours’ drive west of London.
Neither Coast Capital nor FirstGroup are clients of Irithmics, but the company tracked the activist skirmish because it served as a useful “live” test case of the technology the British startup was developing.
Irithmics’ A.I. tool revealed, for example, that Coast Capital’s blistering attacks—delivered in various public statements and press interviews—on FirstGroup, were hitting home with investors as early as mid-2019. An Irithmics dashboard of sorts detailed the precise inflection points in which investors grew negatively disposed to news about FirstGroup, those moments when the shares were more vulnerable to short-selling.
The age of activist investing
This month, Irithmics will pull the curtain off this new tool, called “Investor Messaging” app. The tool works both ways. Activist investors can use it in their tussles with a public company. A company, meanwhile, can use it to spot where it’s most vulnerable to an activist attack.
Activist investing, in which an influential investor or group with a large holding in a certain company uses that sway to force the company to make big changes, is on the rise, particularly in the United States, Europe, and Japan.
News that renowned activist investors like Carl Icahn, Daniel Loeb or Paul Singer’s hedge funds, have bought a significant stake in a company can strike fear into the target’s management ranks and board. While activist investors can be a force for good, spotting inefficiencies and raising shareholder returns, companies often see them as meddlers more interested in short-term gain.
Often, activists want to appoint their own board members or oust the CEO. These fights can leave a company vulnerable to takeover.
No matter what side of the fence you stand on, it’s hard to quibble with the results activist investors get. Nearly one in four (23%) companies targeted by activists were ultimately acquired by another firm, recent research showed. Another report by the investment bank Lazard found that in 122 cases from a year ago, activist investors got their people (or themselves) board seats.
The leading activist investors in 2019 were the familiar names: U.S. hedge funds Elliott Management and Starboard Value. The latter pulled off one of last year’s highest-profile campaigns, pushing for eBay to sell non-core assets such as ticketing unit StubHub and its classified ads business. EBay’s CEO stepped down in September, and the company announced two months later it would sell StubHub for around $4 billion. In the case of FirstGroup, shares are up roughly 15% since the firm sold off its Greyhound bus business.
With concerns over climate change and board diversity front and center, we are living in the age of activist investing. It’s also the age of fintechs. And so it’s little wonder that algorithms are being built to help the most disruptive shareholders gain an advantage.
Irithmic’s “Investor Messaging” tool draws on 1.5 terabytes of data from publicly available sources such as regulatory filings, asset managers’ disclosures, brokers’ notes, shareholder registers and news headlines to compile a detailed picture of the trading habits of the world’s 250,000 institutional investors, and their likely stance towards a particular company. For example, an oil company under pressure by activists to come clean about its progress towards Paris climate accord targets—as happened recently in the case of Royal Dutch Shell, BP and Norway’s Equinor—could use the A.I. tool to determine just how widely held these views were among fellow shareholders, or how susceptible they were to falling under the activists’ sway.
“A very one-sided fight”
Fuller, 47, studied chemistry to PhD level at the University of St. Andrews in Scotland before taking part in research at Cambridge University on applying neural networks to public health and epidemiology.
He then moved into finance, working for the Bank of Tokyo-Mitsubishi and RiskMetrics before joining Bloomberg to help build and develop its AIM (alternative investment market) portfolio and risk management platform for hedge funds across North America, Europe, Asia and Australia.
Fuller caught the startup bug in 2012 when he co-founded Irithmics with Balázs Boros, 40, a Hungarian-born computer scientist. For a startup, Irithmics has deep ties to London’s financial center. Since 2018, the company has furnished London Stock Exchange listed companies with data on investor sentiment generated by its A.I. algorithms.
The Irithmics’ origin story is anything but conventional. In 2011, Fuller came across an article in the scientific journal Nature by Andrew Haldane, then executive director for financial stability at the Bank of England, and Robert May, professor of zoology at Oxford University. Haldane and May suggested that many of the systemic failures that had occurred during the global financial crisis could be traced in much the same way as epidemiologists mapping the spread of infectious diseases.
Fuller and Boros set about building such a model, one that could measure and track investor sentiment. Hedge fund investors caught wind of it, and bankrolled Fuller and Boros for several years as they applied the technology to understand “not what securities a hedge fund owned, but why they had bought them. As soon as you start understanding ‘why?’, you can begin to map this back into what is the strategy of the fund,” Fuller said.
The “Investor Messaging” tool is its latest effort, one that generated heated internal debate. The question of whether to market the new tool to both activist investors and to target companies wasn’t an easy one to resolve at first. In the end, they decided if they didn’t offer it to everyone, they’d be open to criticisms of weaponizing data to give one side an advantage.
“If only the activists have it, it is going to be a very one-sided fight,” Fuller said.
It helps the sales team, of course, to market a product to both corporate IR teams and to activist firms.
Irithmics’ system covers 16,000 listed companies—ranging from Apple to Royal Dutch Shell to Volkswagen—across North America, Europe and Australia. That amounts to roughly 1 million rows of fresh data—or 1.5 gigabytes—daily.
Fuller gave Fortune a sneak peek in early January when it was being beta-tested by prospective users. The app offers corporate investors a detailed view of a company’s performance broken up into 30 different metrics including financial performance, business complexity, executive pay and its ESG (Environmental, Social, and Governance) track record.
Irithmics’ algorithms rely on deep learning, machine learning and natural language processing to review, for example, everything that’s written about the company to grade the management team in specific areas such as corporate governance or business structure. The tool calculates whether those grades might ultimately sway investors to buy up more shares or bail on the company.
Dots on a graph highlight the specific dates where the views and expectations of investors began to measurably change on these issues. Elsewhere, the app indicates how sensitive a particular stock is to breaking news about the company or its sector, and whether that news flow could trigger short-selling.
Taken together, the tool allows activist investors to challenge management strategy. It does so by homing in on the target company’s biggest vulnerabilities—more to the point, which issues might trigger a shareholder revolt. It might be the company’s overly complex business structure, or a chronically poor performing unit in which the executive team has more faith in than investors.
Conversely, a company’s management might use the same tool to win over investors on difficult issues. If it has precise data, for example, that shareholders are more interested in growth, it can focus on this area in its communications to the market. Likewise, with a measure of investor concern about environmental exposure, it can adjust accordingly.
Activist investors have long employed big data, a team of quants and high-speed computers to find vulnerable boards to bully and cajole into changing strategy. A.I. appears set to obliterate this high-tech advantage, and some predict that could dramatically change the dynamics of these high-stakes campaigns.
If an activist investor says “we’ve got the statistics on your company—it says X, Y, Z—maybe this will be a stepping stone to corporates being more receptive, more engaging, rather than trying to constantly defend themselves,” says Peter Hamid, a senior consultant with financial PR firm Maitland/AMO. “A lot of the time activist investors are only trying to do one thing, which is to try to add value to what they initially bought.” Hamid has begun using Irithmics’ data in his work advising listed companies on how to present their story to investors.
Fuller said the new product is getting plenty of interest from activist investors, but he did not think it would drive a surge in activist challenges to companies.
“A surge of activist activity is happening anyway, just look at the numbers,” Fuller says. “What this will do is make it easier for people to understand how to criticize companies. But the reverse is true: the companies themselves now have a mechanism to defend themselves.”
The tool is aimed at institutional investors, activist investors and companies and is not designed for retail or day traders. The company does not disclose the price but says it costs less than a human analyst.
“What on earth are you going to make with that?”
Fuller admits to spending a lot of time trying to figure out what a single investment decision by a complete stranger reveals about her larger investment strategy. Away from the office, he’s that person who looks into your grocery basket to guess what you’re planning for dinner.
“For me, when you walk around the supermarket and you have a little peep into someone’s shopping cart, it’s always curious … You could find Greek yoghurt and cucumber and you think ‘Ah, you’re making tzatziki’ or something. Other times you think ‘What on earth are you going to make with that?’ For me, that is a really interesting exercise,” he admits.
Fuller is inspired by economist John Maynard Keynes’s dictum that “successful investing is anticipating the anticipations of others.”
“It turns out every company which Irithmics tracks has a unique fingerprint of how their investors will respond when you give them a particular pieces of news,” he says. “No two are the same, and they evolve over time.”
Back in the office, Fuller and his small team are looking at adding data on foreign exchange and commodities to the new product. Such an addition would shed light on how capital moves between countries and asset classes on a daily basis.
As for its own finances, Irithmics is not pondering an IPO—for now. Fuller is coy about the company’s funding beyond saying it’s backed by a Dutch private investment firm.
But there is a type of road show in the works.
Later this month, Fuller and Boros are heading to Australia, home to a host of companies that are particularly vulnerable to activist pressure over environmental issues. There they’re scheduled to meet with listed mining companies as well as hedge funds and other asset managers to demonstrate the new activist product.
Some of the firms on the calendar requested the visit, Fuller insists. “There is real interest in this.”
After that, a more arduous journey awaits. Fuller and Boros plan to move the Irithmics operations out of Holt and back to London—to be closer to developers, prospective clients and the city’s thriving fintech marketplace.
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