Operational Improvements as Core Thesis with No Ops Background

How do you identify potential areas of operational improvements without coming from an ops background, specifically as a public side investor? 

I'm interested in either loan to own or public equity activist funds where turning around the core business strategy is a key part of the investment thesis, but I still struggle to see how you a) screen for and b) evaluate those bad business to mediocre business investment ideas. I get that you can run screens for margins, but how do you identify the areas of operational improvement and get comfortable that this will have a meaningful impact?

Assumes that I am 1-2 years out of banking with no access to industry channel checks or GLG.

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Comments (9)

  • Analyst 2 in IB-M&A
Apr 27, 2021 - 8:30am

I think I should have titled this "Elliott Distressed Debt Special Situations" instead, might have actually gotten a few views then

Apr 28, 2021 - 2:57pm

Isn't this the REAL definition of "private equity approach to public market"? (though a severely abused term used by all sorts of fast money funds claiming to be business-focused and long-term oriented). 

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

  • Analyst 2 in IB-M&A
Apr 28, 2021 - 3:33pm

Maybe? Like you said, that term is so abused at this point that it doesn't have real meaning anymore.

To be clear, I am not as interested in the activist strategy where you ask your buddy at THL what company he wants to buy, he gives you some names, and your genius idea is to force those companies to sell themselves to THL. 

I am more interested in being able to diligence and understand the key operational differences that is driving a company underperform vs its competitors in an industry agnostic manner and on a public basis. The end product would look something like Ackman's JCP deck (and yes, I am aware of the outcome there), but to have a defined diligence process for ideas across industries. Maybe the answer here is that it's just not possible, but I'm curious if there is a way.

I am also interested in loan to own funds that have the same strategy, though most of the loan to own funds i have worked with that allegedly have a LT business focus are almost always pushing for a quick sale after BK for a Company that was mispriced before filing. If they actually own private reorg equity for 3-5 years, it's probably because they haven't been able to find a buyer yet as opposed to implementing big changes to core business strategy.  

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Apr 28, 2021 - 5:36pm

Not a hedge fund guy myself but have been looking to get into the public activist space and from conversations I've had seems like operational improvement theses start at least somewhat with benchmarking. Start with your margin screens and then deconstruct that profit margin to get to what's driving the different expense line items to be higher than peers. Some of this is going to come from industry experts if you're in a seat with such access, but if not you have to map it out and see why the company that's underperforming is. Guys at some of the larger funds that I've been able to get in contact with say that the process of getting smart around an asset and developing that thesis on underperformance say that's like a 3-6 month process depending on how well covered the name / industry is

  • Analyst 2 in IB-M&A
May 2, 2021 - 2:48pm

Do you happen to have a list of activist funds by sector, especially those that focus on operational improvements? I know many that do this for retail companies, but know less for manufacturing / industrials, telecomm, and others.

  • Investment Analyst in HF - EquityHedge
May 2, 2021 - 3:50pm

For retail/restaurants, check out the activist decks on JCP, BWLD, DRI.

I recall Elliotts deck on ARNC being interesting as well. The only other industrial activist name that jumps to mind are some of the rail names but I don't recall if there was a deck or big letter there.

As another poster mentioned, benchmarking margin is a tried and true playbook. It's a lot harder to pinpoint solutions for weaker sales.

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