27 Jul 2018

Sell downs by founders. In June we saw the good the bad and the ugly.

We have discussed in previous commentaries (link here) about our investments in companies where the founders are still running the company and remain significant shareholders. This is true for our holdings in Wellcom Group, Vista Group, IVE Group, Swick Mining Services, Afterpay Touch, Michael Hill International, Corporate Travel Management, Redbubble and Kogan.com, which accounts for most of the equity holdings in the Ranger Fund and most of the active share in Trans-Tasman. 


This means that we often must deal with founders selling some of their shares. It is never a positive signal when founders sell shares in their company, but it is not necessarily negative. We understand that part of being a successful listed company is having a meaningful free float, which you struggle to have when founders continue to own the bulk of the shares on issue. We also understand that the investment bankers that handled the initial public offering will be in the ear of the founders to sell down further portions of their shares. Their angle will be it’s a win-win situation. The founders can cash in a portion of their holding (which is often where most of their personal wealth is tied up), increase liquidity, bring more shareholders on board and in due course move into the main index.  


What is crucial though is that the founder continues to have a very significant holding in the business. Over time their percentage of ownership will generally reduce but the value of their holding can still increase significantly. There are few better examples of that than Jamie Pherous, the founder and CEO of Corporate Travel. When we first invested in Corporate Travel in 2011 he owned 42% of the shares on issue which had a value of $48 million. Over the next 7 years he sold just over 6 million shares in several sell downs. Also, during that time, the company raised additional capital and made acquisitions by issuing new shares. The result is that Jamie Pherous has reduced his holding to 19.6% of the shares on issue. But with the increase in share price his personal wealth tied up in Corporate Travel has increased to over $550 million. From our point of view, he remains very committed to the long-term success of the company he founded, arguably even more so than 7 years ago, despite having sold some of his shares in the business. 


Last month we saw some different types of sell downs by some different founders. In our opinion, one was about as close to positive as a sell down can get. The “good” one was the sale of 2,500,00 shares by Martin Hosking, co-founder of Redbubble. He used money that he had donated to Three Springs Foundation, a charity that he and his wife set up, to buy those shares. This is clearly not a manoeuvre that sees Martin cash out of Redbubble. The vote of confidence in the long-term future of Redbubble is that he sees the best way to grow the assets of his foundation is to have shares in his company. We continue to own Redbubble in the Ranger Fund as we agree that the company has some excellent potential for long-term growth. 


The other end of the spectrum was the “bad” sell down by the co-founder of Pushpay, Eliot Crowther, which was unambiguously negative. During the month he sold every single share of Pushpay that he owned in block to institutional investors. Reasons were provided that explained why he was no longer willing to work full time and had resigned from the Board and the executive team. While it’s understandable that he would need to cash up some of his holding as he was apparently taking time out, selling every single share is not. In fact, selling out completely is, in our opinion, a clear indication that he did not see future growth that would justify remaining an owner of the company. This is concerning when it’s an extremely well informed and experienced executive of any company, never mind one that is hoping to be in the hockey stick stage of its growth cycle. Essentially, it’s an unequivocal vote of no confidence in that outlook. The Ranger Fund did not take part in the placement of Mr Crowther’s shares and has not held shares in Pushpay. 


Completing the trio of sell downs was the “ugly”, the sell down in Kogan.com that the two co-founders made during June. This one could best be described as clumsy and it ultimately saw the shares tumble 24% for the month. At the beginning of the month the two founders were looking to sell a chunky 10% of the company at around $10. When the market lacked appetite for that much stock at that price, they pulled out of a sell down. Then a week later they sold 5% at $7. That’s not flash work in anyone’s book and contributed to the share price dropping so much for the month. On the flip side though, the two of them continue to own 43% of the company, which means they still have $280 million invested in the future of the business. Before this unfortunate episode we had reduced our position in the company to 2.5% of the Ranger as the share price had started to reflect some of the growth that the business could deliver in the long-term. Overall though we still see enough upside to retain a position in Kogan.com.