Introduction to WSD Capital Management
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WSD Capital Management is a value-oriented investment firm focused on improving public companies through activism and strategic engagement while emphasizing strong governance and operational efficiency. The firm employs a research-intensive approach to identify and develop undervalued companies, aiming for long-term value creation, which includes enhancing capital allocation and operational execution. Founded in 2014 by Ertan Enginalev, WSD Capital has significant experience in navigating complex corporate relationships and has a proven track record in driving shareholder value.
Introduction to WSD Capital Management
- 1. WSD Capital Management An Introduction to WSD Capital Management
- 2. I. The Firm 3 II. Strategy 6 III. Investments 10 IV. Engagement Strengths 12 V. Investment Criteria 17 VI. Benevolent Hostility 20 VII. Shareholder Activism 24 VIII. Activism vs Acquisition 27 IX. Risk Management 31 X. Portfolio Manager 33 2
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- 4. History • WSD Capital Management is a value-oriented investment firm that commits people, capital, and fortitude to help address the critical issues facing public companies. • First activist investor and global hedge fund management firm in Turkey. Leadership • 20 years of experience in financial markets, emphasis on mergers, acquisitions and special situations. • Participated in many significant investment transactions, including a number of landmark deals in Turkey. Approach • Research-intensive investment approach focused on investing in undervalued or underperforming public companies. • Engages management and boards to implement changes required to improve businesses. 4
- 5. Outside the U.S., there is a tacit consensus that minority shareholders should not have a say in the way companies are managed and are free to sell if they are discontented. Value investment principles are more applicable than in the U.S. since market is less efficient, need to unlock value is greater. Virtually all production growth is projected to take place in emerging markets where, for the first time, we also observe the fastest growing investment and consumption markets in the world as well. As global markets become more investor friendly, companies can take advantage of the market benefits of instituting improved corporate governance which drives lower costs of capital, higher margins, increased productivity and, in turn, higher multiples. 5
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- 7. Our investment strategy focuses on the discovery and development of companies and special situations with a compelling catalyst to enhance shareholder value and drive growth, navigating complex business relationships, corporate strategy, finance and operations. We seek to invest in companies that have not optimized profitability, working with management and boards to significantly enhance their long- term operating performance through: Improved operational execution Strategic redirection / stronger focus / more disciplined capital allocation Acquisitions / growth financings / recaps / restructurings 7
- 8. Invest in strong businesses with competitive advantages Take private equity investment approach to public markets Create value and drive outcomes by using activism when appropriate Concentrate portfolio in limited number of high conviction investments Conduct deep fundamental research Adopt long-term time investment horizon Invest opportunistically in dislocations, corporate transformations and special situations 8
- 9. Drivers of Value Creation Capital Structure Corporate Structure Business Composition Corporate Governance Revenue Opportunities Expense Discipline Tax Planning Capital Productivity 9
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- 11. Our investment team has developed extensive experience assisting companies in: Designing and executing strategic corporate initiatives, including acquisitions, divestitures, spin-offs, asset sales, joint ventures, strategic partnerships, and other transactions that can improve the overall value of the corporate enterprise. Enhancing capital allocation and efficiency, including share repurchases, special dividends, recapitalizations, going-private transactions, optimization of returns on cash flows, and the management of the overall corporate balance sheet. 11 We seek to invest in enterprises with sustainable competitive advantages & pricing power
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- 13. • Requires evaluating major shareholder value initiatives, both in the short- and long-term. Value Creation Mindset • Critical for minimizing execution risk at both pre- and post- investment stages. Domain Expertise • Provides important insights on the long-term viability of potential value- creating initiatives. Transactional Experience The key to our value-oriented investment approach is the application of the right mix of skill sets to discover and develop the right opportunities: 13
- 14. Internally Focused Initiatives Externally Focused Initiatives Hidden Shareholder Value We evaluate various key corporate initiatives that have direct impact on enhancing shareholder value, both in the short- and long-term. These initiatives are often similar to the strategic actions that private equity investors pursue after taking a company private. As a public markets investor, we avoid the control premiums and illiquidity of the private equity model. 14
- 15. Domain knowledge of our investment team is critical for minimizing execution risk at both pre- and post-investment stages. Industry-specific contacts and networks can accelerate collaborations via partnerships and strategic alliances. They can also be source of valuable industry insight for proactive thematic strategies. Present and future success calls for the conviction to take bold stands and to seek opportunities beyond conventional growth thesis and outside sectors that are the center of current deal-making activity. Our business and financial expertise allows detailed engagement, focusing on strategies to unlock hidden value and eliminate barriers to price discovery by addressing business challenges related to strategy, operations, capital structure and capital expenditure plans. 15
- 16. The traditional private equity model has four basic drivers of return. Each of these drivers of return requires certain risks and a certain skill set and environment to successfully execute. Our transactional experience provides insights on the long-term viability and implementation of potential value-creating initiatives. Leverage Valuation multiple expansion Revenue growth Improved efficiency/ higher margins 16
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- 18. High barriers to entry High and consistent returns on capital Structural pricing power and growth Hard asset backing Defensive businesses which are less sensitive to economic downturns Potential to transform Low valuations Strong brands Catalysts for value enhancement Misunderstood corporate governance risk 18
- 19. Investments that earn a return that exceed their cost of capital create shareholder value. In the absence of accretive investments, companies should return capital. Cost of Capital Return on Capital Shareholder Value Creation 19 and determines Cost of Equity Cost of Debt (Revenue – Expenses) Capital Employed Mix of Debt + Equity Profit
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- 21. Our unique position in the investment profession is built on our distinctive process of developing outstanding assets into outstanding companies through benevolent hostility. We provide patient, engaged, and productive capital, which encourages portfolio companies to choose performance over promise. Our constructively firm process is shaped by the fact that a collaborative, negotiated, or settled response to activist engagements tends to lead to higher excess value than a combative one. Enhancing value and overcoming the status quo requires support from multiple stakeholders. We help foster such coalitions through the quality of our analysis, our network of institutional contacts and the credibility of our reputation and track record rather than the size of our holdings. 21
- 22. Board involvement and engagement. Diligent analysis of enterprise and tenacious execution. Substantial strategic and financial expertise. Deep knowledge of capital markets, mergers and acquisitions and transaction processes. Deployment of highly capable professionals — many with prior top-tier operational, consulting, or financial experience — to devise potential for long-term improvement in corporate strategy, operations, and organizational structure. Not involved in day-to-day operations. Focusing on mispriced equities with barriers to price discovery. Demonstrating that management and board is not operating in isolation and are open to consider all ideas to maximize value for its shareholders. 22
- 23. Governance Changes • Ensure appropriately skilled, qualified and committed board composition • Strengthen management, if needed • Improve reporting and committee structures Strategic Repositioning • Identify and pursue acquisitions, dispositions, spin-offs • Evaluate and restructure capital expenditures Operational Improvements • Cost effectiveness & efficiency • Asset utilization • Revenue enhancement (pricing, new products, new markets) Financial Restructuring • Redemptions • Share buyback programs • Dividends • Debt restructurings Value Creation Mindset 23
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- 25. -25% 25% 75% 125% 175% 225% Sep 2014 Dec 2014 Mar 2015 Jun 2015 Sep 2015 Dec 2015 Mar 2016 Akfen Holding (IST: AKFEN) BIST Index 25 Source: Borsa Istanbul Data Our value-oriented activism requires significant capital, rapid execution and willingness to drive changes required to improve businesses. Purchase of Stock or Debt Promulgate Change •Engage with board and management •Proxy contests •Tender offers Unlock Hidden Value •Financial and balance sheet restructuring •Operational improvements •Strategic initiatives •Governance changes
- 26. 26 Akfen Holding (IST: AKFEN) Situation Overview • Akfen Holding is one of the largest industrial conglomerates in Turkey. • Despite favorable business characteristics and compelling growth prospects, the company underperformed both its peer group and the broader stock market since its initial public offering in 2010. Engagement Strengths • Our business and financial expertise allowed detailed engagement. • Our focus has been on strategies to unlock hidden shareholder value and eliminate barriers to price discovery. Strategic / Financial Initiatives • We pushed for improved operational execution, more efficient capital allocation and initial public offering of Mersin International Port. • Akfen management adopted significant operational and capital allocation improvements in strategy and execution. Result • Akfen Holding has been taken private and has delisted its common shares from the Borsa Istanbul Stock Market in April 2016. • The company generated a total shareholder return of 135% since release of WSD Akfen letter and publication of WSD ownership.(1) Source: WSD Akfen Letter https://wsd.li/akfen (1) Based on Akfen Holding tender offer price of TRY13.07
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- 28. WSD Capital Management Private Equity Investors Opportunity Set • Public companies • Buy opportunistically • Target best-in-class companies; high barriers to entry • Need willing seller • Auction process/winner’s curse • Limited pool of best-in-class; strategic buyers have advantage Valuation • No control premiums • Take advantage of market inefficiencies • Significant control premiums • Incentivized to deploy capital; tendency to overpay Risk Management/ Leverage • Focus on attractive risk/reward • Little or no leverage utilized • Employ significant leverage • Depend on capital markets Path to Value Creation • Operationally focused: “Sales up. Expenses down.” • Returns generally driven by financial engineering Liquidity • Highly liquid investments • Flexibility in exiting investments • Limited liquidity • Exits generally dependent on capital markets being open Due Diligence • Extensive due diligence • Detailed operational analysis prior to investing • Extensive due diligence • Access to inside information 28
- 29. Primary factors that motivate controlling shareholders to part with control in majority of private equity transactions: Primary Factors Significance Positive Motivation to Sell • Strong growth situation • Pre-listing clean-up • Geographic expansion • Minority • Minority • Minority Neutral Motivation to Sell • Generational change • Conglomerate focusing on core business, selling non-core • Privatization • Majority • Majority • Majority Negative Motivation to Sell • Distressed business • Distressed owners • Majority • Majority 29
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- 32. Risk mitigation is based on backing strong assets. We typically favor businesses that have below average earnings risk due to the defensive nature of their business models. We gain an additional margin of safety by investing in these businesses at significant discounts to intrinsic value. There is continuous re-evaluation of the size of positions based on expected upside and conviction. Our portfolio is invested primarily in liquid investments. We subscribe to the belief that liquidity equals value. 32 Permanent loss of capital is our definition of risk
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- 34. Ertan Enginalev, Founder & Managing Partner Ertan Enginalev founded WSD Capital Management in 2014 and leads portfolio management, risk management and research activities. He has 20 years of experience in the financial markets, with particular emphasis on mergers, acquisitions and special situation equities. Prior to forming WSD Capital Management, Mr. Enginalev founded The Warschild Group, a San Francisco-based private investment firm. Mr. Enginalev began his career as an investment banker specializing in mergers and acquisitions with Koç Yatırım Menkul Değerler and Global Menkul Değerler in Istanbul. He received a Bachelor of Business Administration degree and an MBA from the University of Miami’s School of Business. 34
- 35. GENERAL CONSIDERATIONS Past performance is not an indication of future results. WSD Capital Management, L.P. (the “Firm”) believes the information contained in this material to be reliable but does not warrant its accuracy or completeness. This material does not have regard to the specific investment objective, financial situation, suitability, or the particular need of any specific person who may receive this material, and should not be taken as advice on the merits of any investment decision. The Firm reserves the right to change any of its opinions expressed herein at any time as it deems appropriate. The Firm disclaims any obligation to update the information contained herein or otherwise provided to you. This material and the information otherwise provided to you has not been registered or filed with, or reviewed by, any federal, regional, local or foreign regulatory authority. Accordingly, the foregoing authorities have not recommended or approved this presentation or information otherwise provided to you or confirmed its adequacy or accuracy. NOT AN OFFER TO SELL This is neither an offer to sell nor a solicitation of any offer to buy any securities in any fund managed by the Firm nor shall there be any sale of a security in any jurisdiction where such solicitation or sale would be unlawful. The information contained in this material or otherwise provided to you does not recommend the purchase or sale of any security, is not complete and does not contain certain material information about any fund managed by the Firm, including important disclosures and risk factors associated with an investment in such funds, and is subject to change without notice. 35
- 36. Any offering is made only pursuant to the relevant offering memorandum, together with the current financial statements of the relevant fund, if available, and the relevant subscription documents, all of which must be read in their entirety. No offer to purchase securities will be made or accepted prior to receipt by the offeree of these documents and the completion of all appropriate documentation. To the extent of any inconsistency or discrepancy between the relevant offering memorandum and this material, the offering memorandum shall control. This material and the information otherwise provided to you is provided merely as information and is not intended as an invitation or inducement to purchase or sell any securities or investment and is therefore not financial materials as contemplated by Section 21 of the UK financial services act, nor is this material and such other information any form of investment advice to the recipients. CONCERNING INTELLECTUAL PROPERTY All registered or unregistered service marks, trademarks and trade names referred to in this presentation are the property of their respective owners and the Firm’s use hereof does not imply an affiliation with, or endorsement by, the owners of these service marks, trademarks and trade names. The "WSD" logo, "WSD CAPITAL MANAGEMENT", and "GROWTH THROUGH FORTITUDE" are registered and unregistered trademarks and/or service marks of the Firm or its subsidiaries and/or affiliates in the United States and elsewhere. This presentation may not be reproduced without prior written permission from the Firm. 36