Activist investors need a thick skin. It’s the nature of their business.

The Swedish activist investor Christer Gardell, for example, was called a “capitalist butcher” in the press. A former prime minister said he was destroying the fabric of Swedish capitalism.

What activist investors like Gardell do is buy up shares in what they perceive as mismanaged companies. Then they force themselves onto the board, and try force the companies to do things make the shares more valuable. In the process they tend to make enemies.

Activist have a narrow definition of “mismanaged”. All they care about is whether the companies are delivering the maximum possible value for shareholders. The share price, in other words. 

To an activist investor, a company might be considered mismanaged if it didn’t have enough debt, or owned too many buildings, or employed too many full-time staff, or owned a super-successful division which could be hived off. Activist shareholders’ definition of a mismanaged company would probably differ from that of the man on the street.

Employees often bear the brunt of activist investor campaigns. A 2013 study showed “employees of target firms experience a reduction in work hours and stagnation in wages despite an increase in labor productivity.” Employees get “a de facto but implicit wage reduction: productivity-adjusted per hour wages decrease by 6.1%.” 

It’s one thing for someone like Carl Icahn to do it in the States, where full-contact capitalism is the norm. But we’re not used to it in Europe, where business is a bit softer and more consensual. It’s easy to see why Chirster Gardell made waves in Sweden.

Now an activist hedge fund called Teleios Capital is building a stake in Ireland’s biggest house builder, Glenveagh. What’s it planning?

Two buckets

Teleios Capital launched in 2013, focused on European mid-cap companies. It owns 20 per cent of French retailer Maisons du Monde, where it’s currently recommending changes to the board. It owns 17 per cent of Pendragon, a UK car retailer. And in 2018 it forced through changes at SodaStream, leading to the firm being bought by PepsiCo for $3.2 billion. 

It’s understood Teleios has two buckets of investments. One are activist investments — investments in companies that Teleios wants to change. Others are passive investments, where Teleios is happy not to get involved.

The passive bucket is chosen on the basis of deep value. In other words, Teleios buys stakes in businesses that are cheap. Cheapness might be relative to earnings, dividends, or assets. 

It is understood that for Teleios, Glenveagh belongs in that second category. Teleios has no immediate plans to force through changes at Glenveagh. 

Might Teleios be pretending to be a friendly passive investor, the better to build its stake in the company? It’s possible. But that strategy only works once. Teleios’s reputation would precede it next time it tried the same trick.

It makes sense for Teleios to pursue two strategies. Value investing and activist investing go well together. Value investors buy assets that are cheap relative to their intrinsic value, and activist investors force companies to make changes to let the share price reflect intrinsic value. 

A deep value investment might easily flip into the activist category, if Teleios saw something it wanted done.

Glenveagh’s land bank is likely what attracted Teleios. Glenveagh owns €840 million worth of land, mostly around Dublin and Cork. That’s enough to build 14,500 houses. When you throw in cash and debt, Glenveagh has net assets of €866 million. That’s 97 cent per share. 

Teleios first showed up in regulatory filings in early March, when it crossed the three per cent ownership threshold. It now owns 11 per cent of the company. If it built up its 11 per cent stake between late February and today, it would have paid an average price of around 60 cent per share. So Teleios paid somewhere between €55 and €65 million for assets that are worth €95 million on paper. 

Even if Teleios were to elbow its way onto the board, and push the company to sell its land bank, could it get the full €840 million for it? It looks unlikely, for two reasons. One is that Glenveagh is big enough that it could actually move the market. Dumping 14,500 homes onto the market at once would value them at less than the sum of their parts.

The second reason is that the land was worth €840 million when it was last valued in 2019. What’ll it be worth this year?

Land in 2020

House prices in Ireland, and around the rich world, are holding up pretty well so far. The Irish Real Estate Alliance (REA) is reporting that regional markets in particular are strong. It says regional prices are up one per cent in the last three months. 

Of course, Glenveagh is not a regional company. Its land is in Dublin and to a lesser extent Cork. But the REA notes that house prices are up in Dublin are up too, by half a per cent this year. The REA also says the average time to sell has fallen from ten weeks, in June, to seven weeks, in September. 

The years of massive house price appreciation are probably over. But the following chart from Ronan Lyons’ Q3 report shows that Covid, if anything, jumpstarted the Irish housing market. The chart shows urban house price growth in dark pink, commuter prices in light pink, and all other house price growth in grey. 

Irish house price growth 2014-present

To be sure, the first Covid lockdown probably pushed some sales into the second half of the year, resulting in a temporary spike in Q3. But the idea that Covid will sink the property market doesn’t seem to be borne out in the data so far. 

What the founders want

With an 11 per cent stake, Teleios is now Glenveagh’s biggest shareholder. GIC Private, which is Singapore’s sovereign wealth fund, has 8.8 per cent. A hedge fund called Rye Bay capital has 8.5 per cent.

The founders — Stephen Garvey, John Mulcahy and Justin Bickle — are listed as currently having less than 2 per cent between them. However they’re entitled to 200 million shares between them, or 23 per cent of the market cap, in the run up to 2023, subject to certain performance targets. Once granted, half their shares can’t be sold for a year, the other half can’t be sold for two years.

The founders are the dog that didn’t bark in this story. In the coming years as their shares vest they will become the most important voices at Glenveagh.

So should Teleios want to, for example, flog the land bank, Garvey, Mulcahy and Bickle will have a huge say in the final decision.