“The Craft of Active Equity Ownership.” The Cevian Approach to Activism, with Managing Partner & Co-Founder, Lars Förberg.

25:54Lars Förberg:In parallel, there's a discussion. Our board member in the company would have a dialogue, a very close dialogue with the CEO primarily, but also with the chairman often. Can you give us an example of maybe something that's in your portfolio currently where this process has been going on and where it's relevant? I'll give you an example in ABB. I of course want to get to know all the other board members that I'm going to work with so I was sitting down with one of the board members after I had joined the board we're sitting in a vegan restaurant in a simple restaurant in Zurich and he's a great person a CEO of a big listed company global company out of the US and he said to me Lars what do you want me to do for the company and i said hey i want you to think about your board role here as if you're if you as if you own 20 of the company and you were the chairman of the company what would you do what would you do and then push for that and he looked at me and he's like wow you know and sadly thought for a while it was a pause of maybe 30 seconds or one minute and said like i would do x i would do y i would do z i said great i think that's exactly what we should do and we should i think there's some other things as well but then he looked at me and said like but lars i have a day job this is uh this is a transformation i can you know i can i can i can if you want to do this he said i want i'm going to support you i will support you but don't expect me to drive this and i think this shows how you know there's a lot of great people on boards of listed companies really really good people they're ceos that have great experience achieved a lot of things in their life or cfos or similar but it is their day job right they it's not their day job they have other things they want to do they fly in for meetings maybe six times a year they can spend a couple of days ahead of every meeting at best don't understand things i can spend this is my day job i have a team of two people following abb on a daily basis traveling the world meeting with the competitors with customers understanding technology development and so on giving me that information so it's like we have an upper hand in the boardroom but it should not be construed as an upper hand that we can sort of use in a, what should I say,

28:28Lars Förberg:in pushing our wish on others, but we can contribute in a different way. Also because, you know, for me it's super important that ABB is going to be a great success. It's maybe a 2 billion investment, 15 % of my fund. I'm really going to make sure that this company is going to thrive, right? Does private equity have an advantage in that it owns the entity typically outright and therefore its powers of execution are simpler? I think so, yes. Because you have a private equity approach to a portfolio of listed companies, even though your timelines are, you know, maybe they're similar, I don't know, maybe they're longer actually than the private equity world.

29:20But what I suppose intrigues me is when you meet resistance. And I'd like you just to talk a little bit about how you deal with it. And then there's a secondary issue where for whatever reason, it hasn't worked.

29:39Lars Förberg:Let's come back to private equity as well, because I think that comparison is interesting, but I'm not going to try and avoid your question here. If we meet resistance and it cannot be overcome by normal discussions, we think then there's something wrong. Something wrong with the people. That doesn't come up right, right? But that there's, and, you know, that's after a lot of discussion. We might think that, no, there should be a change of board. There should be a change of CEO. There should be a change of other people, right? And then we try to move ahead with that.

30:20Lars Förberg:But again, we do that not in this sort of American activist way of screaming and shouting and embarrassing people, right? It's done in a constructive way. It's behind closed doors. It's done. If it is change of management team, it's done collegially in the boardroom normally. if it's change of board members, it's something that we bring up with the governance committee of the company and move that forward. And we've been able to do these things without ever having a proxy fight. We have been on the board of the vast majority of the companies we've invested in. And without having a proxy fight, we've made changes to other board members without having a proxy fight or coming into the public domain.

31:07Lars Förberg:And I think that's a testament to partly our style and how we want to operate. It's a testament also to that the governance environment in most parts of Europe is actually quite conducive to our strategy. And it's a pretty good environment. But it's also a testament, I think, to our reputation that we've built since 1997 of always doing what we think is right for the company rather than something that's good short term for shareholders. That gives us a lot of credibility, which is important. So the situations where either you're deeply frustrated or your calculations haven't been right, talk a little bit about how you've responded.

31:56Lars Förberg:Well, I think the not being right happens. And this is a reason why when we think about our value creation plan, it should consist of say, you know, eight to 12 different important things, because we know that all of them will not be implemented. We might be wrong. It might be various barriers to doing something, but often we find a couple of other things we can do as well. So we sort of, but but that happens and that, you know, that, that, that, that will, that will be, that fact finding happens sort of with the dialogue in the boardroom or with the management team and, and the chairman But that means that we will not invest in a company with just one big idea.

32:39Lars Förberg:And if it works, it's great. If it doesn't work, it's not great. So it's like that's how we operate with the change program. So, of course, there are, you know, this is difficult. You know, it takes a lot of research. It takes a lot of work. And we don't always get things right. but we get our batting average in terms of our value creation plans is very high. And I think it's because of our research but also because we, I see other people that try to emulate us, trying to raise funds and maybe raising funds and I look at their change programs and sort of like hear about them and they sound like, you know, some things that would be great on a PowerPoint, in a PowerPoint presentation, but when that PowerPoint presentation hits the real world, it won't work.

33:33Lars Förberg:And I think this is one of the core secret sources of what we're doing. That is sort of implementable. It's practical. So you've had this terrifically high success rate, but where it has occasionally not worked, how long do you think you might give the opportunity before you say, okay, we have to you know move on we don't really do that uh we are incredibly determined um to to make it work and uh that has been a great benefit or we don't give up um and uh that culture is very strong in what we're doing it it might mean we we sort of compromise on something or we delay something or we do something else but we don't give up um that has actually been uh been in one situation a negative and the one investment we made that turned that sour um 13 40 years ago to St.

34:32Lars Förberg:Krupp in Germany we should have given up uh we should have given up and sold our shares actually at a gain we we lost money in that in that investment and um with too much tenacity in a sense in in and there was resistant political issues governance issues and other things that made it possible to drive through the chain programs at the speed and with the right measures. And a lesson learned for me from that situation was that, okay, our determination is great, but we should sometimes be, also be able to walk away from something. We haven't had to thereafter, but it can happen, of course, in the future.

35:18So I want to talk about exits, and this might give you your opportunity to come back to the PE issue that we haven't completely finished on. You own an asset at a company for a number of years. The change program is working. The market is recognizing. The valuation uplift is happening. What are the typical triggers for the exits? and I mentioned the private equity because of course one of the criticisms might be that a good company sits in a PE fund and then it's time to wind up the PE fund. Now we know we have all sorts of other mechanisms that are going on for continuation but primarily how do you think about exits?

35:59Lars Förberg:Mechanically, if you wish, the way it happens is through the forced ranking process I talked about where we have sort of new potential investments that knocking on the door and wanting to come into the new investments So it means that we don't have a set target in terms of time or share price or something like that. It's an ongoing process, that forced ranking process. And typically, the selling process is not problematic. And the reason is, and should be, that when we enter a company, we play a role. Like we're the catalyst. And that's also reflected in when we announce a position or a flag for us that the share price always goes up more than the market sale on average.

36:39Lars Förberg:around five, 6%. When we sell out, that doesn't happen. The same price effect in the other direction because we are and we should be superfluous at that time. We should, if we've done our job, we should be unimportant for the company. The company should have a great strategy, great management team, great board, great prospects. And that's our ultimate goal, of course. And then exit takes care. The exit takes care of itself if we're successful with the value creation plan. Okay. And the bearishness that perhaps presided in the beginning has now become bullishness. And, you know, bullishness stays until it doesn't work.

37:21Lars Förberg:Yeah, yeah, yeah. And of course, there's timing involved in terms of that, you know, the market might, you know, the market goes in, you know, there's a lot of herd mentality in the market. So it's not only this sort of value, the value creation is one driver, but the other thing is also sort of the overview of the capital markets of the company and industries we're in. Have I given you the chance to come back on private equity? You asked me about if that's a better governance model. In a sense, it is a great governance model because you can really, as an owner, you can influence the company. I think the, but, and we try to emulate that in the sense that we, you know, get the board together to, in a company's way to try and think less about quarterly reports, think about how the company's perceived and think about more what we want to be five, seven years from now and sort of really go for that target.

38:11Lars Förberg:But I think the advantage we have is that to private equity lies in another area is that private equity is now an incredibly competitive business where almost everyone in private equity is acting the same way. They look the same. They talk the way they think the same way. They have the same advisors and so on and so forth. Everything is similar. which means I mean if you've studied microeconomics everyone knows that if you have full competition and everyone there's no edge anywhere then you know you won't be able to outperform and I think that's a little bit where private equity is going of course there will be some private equity funds that are better than others but we have the benefit that we have not only a high value added strategy but also with very limited competition so bull and bear markets are part of the natural topography of the world in which we live.

39:02And so my question is about alpha and beta. You're trying to find the companies that you describe that will deliver material outperformance versus cash risk-free, the world index. What do you say to the question of how should you be benchmarked or judged?

39:25Good question. I think the way we think is absolute returns.

39:31Lars Förberg:That's how we operate, right? And I think it's a great way of working in the public markets. I, you know, as we talked about, there's a herd mentality out there. Sometimes one industry is in vogue, some kind of company is in vogue, and others are like, so we can use that to get into companies and industries at a time where they're out of fashion, if you wish. That can be used. But over time, of course, we need to beat the index, the market index. Otherwise, we're not adding value to our investors. But that is not, if we were thinking, how do we beat the market this year or next year or three years from now, we would be a Laos investor.

40:21Lars Förberg:I learned this very clearly in 1999 when, you know, 1999, and we had a Swedish-centric investment strategy then. The Stockholm Stock Exchange was up 60 % that year. And I remember walking through the city of Stockholm in the fall of 1999, I was thinking, like, how should I think about this? we were underperforming. I don't know how much. We were up quite a bit, but I mean, way below those 60 % maybe. And I got to the conclusion that we've been doing a good job. If we had been performing according to market, we would have done a bad job because we would have been highly speculative. So it was a great understanding in the middle of that underperformance to recognize that it's important not to have FOMO when you're an investor.

41:21Lars Förberg:And then, of course, we outperformed many, you know, the year, many, many years thereafter, all the years thereafter. And I'm betting that the reason you underperformed the index was you didn't have Ericsson, just as people in the UK who didn't have Vodafone. That's what I think. But it was the overall intimate problem, but that's true. Ericsson was one of them. But there were many other things in the market that sort of led to those 60%. In reading some of your papers, although you do not invest in the US, you were quite clear that Europe appears quite fertile and probably more fertile than the US.

41:54Can you explain if that is the case? And also, is it an easier climate in which to operate when you are discussing change with management?

42:07Lars Förberg:There's very parts of this question. One is valuation. I think it's, of course, great that European equities are under, you know, are cheaper than the US. If you look like for like, maybe a discount of 30 % or something, which is great. As an investor, if you buy something, you want to buy it cheaper. If you have a 33 % discount, that means if you can close that gap, it's a 50 % upside. That's an amazing amount of money. So it's attractive at this time for that reason. But the other part of your question was more, I think, governance related, if I understood correctly. I think Europe provides all the markets we're in in Western Northern Europe, with the exception of Germany, provide a very good governance environment for an engaged owner, for an activist to be involved.

42:55Lars Förberg:there's like true shareholder democracy in the sense that decisions are made at the shareholders meeting by way typically you know 50 50 majority which is also true for electing board members and they're typically elected on an annual basis not a staggered basis so it gives us the governance tools in in europe are very uh conducive to what we're doing when we started this conversation you gave quite a good description of the problems of the public markets which are not exclusively but in some, to some large degree, have not been helped by passive and the lack of investor interest. Just look forward.

43:33This is a non-Sevium question, but how might the, with the euphoria that surrounded private equity that is now being checked and the disappointment in some, you know, listed stock markets outside of the US, how might we roll forward here in the, I suppose, the influence of private versus public markets?

43:59Lars Förberg:I mean, I left the private equity industry in 97. I was a bit too early to think that it was going to be coming to a competitive, right? It's like, it's been up until maybe 10 years ago, quite an attractive market. I think it's less attractive now for sure because of the amount of competition. I also think maybe investors in private equity fool themselves when they think it's a more stable asset class because it's sort of marked in a different way than the public market especially since actually the private equity investments are typically geared much more than the public companies and so it's much more volatile and therefore can also but but it can sort of continue to do well for longer before problems are really seen because of of how things are marked.

44:48Lars Förberg:So I think it's a, it's, I would be a bit vigilant or close to paranoid if I invested in private equity and think about, you know, what's really underlying in terms of assets. We are, you know, we have no leverage. We have no shorting, no funny financial instruments. the companies we invest in we actually they're typically over time become better capitalized the net debt to ebda today of our portfolio is about 1.3 much more much better capitalized than the overall market we are as a firm very risk averse we want our return to come from astute investment decisions but primarily from the change programs of our companies right and we don't we want to be strong when others are weak that has helped us in many situations in the past as you say there's uh there are bull and bear markets and we survived many bear marks actually we thrived through those and made very good investment decisions in the bear markets and can utilize them and if you're if you're levered that's very difficult if you have money that's short term in your fund that's also very difficult so we sort of put our structure up in a way where we can be utilize those times when the markets are down.

46:13If I'd been in a lecture room and I'd listened to you reflect on your business, I suppose my question would be, why aren't more people doing it?

46:23Lars Förberg:Yeah, if you'd asked me 20 years ago, I would think we would have many competitors. I'm a bit surprised myself. I mean, every year there are some people that start funds or try to start funds that are similar to us. But, you know, there's an issue, a little bit of chicken and an egg issue. To be successful in what we do, you need to have a lot of capital and you need to have it tied up. And you need to have a reputation, sort of good reputation, a solid track record, both in order to raise money, but also especially to raise long-term money. And it's a chicken and egg thing. It's very difficult to get there.

47:02So Lars, I'm going to move towards some concluding questions, but two things have sort of stayed with me is that you've been at this for 20 years. The environment's changed, as evidenced by that survey I mentioned early on. Activism, as you practice it, would have been quite alien when you started out. How would you describe the landscape and the responsiveness of investors since you began?

47:27Lars Förberg:It's changed quite a bit. for sure. I mean, we were talking, actually when we started with the strategy, this was a few years before Sevian even, so this is 96, 97. It's almost 30 years ago. And we were the new kids on the block. We were coming into public companies. This was started in Sweden. And these guys are coming in and saying that this is not good enough. Things should change. And of course we had to prepare immensely for this in order to win those battles win those discussions and have people support us because if you're a minority investor as we are you have five ten fifteen percent in the company um you basically the power comes from three different things right one is you have to identify the problem of a company there has to be a problem but you also have to have a solution that works and that means that for and then you have to have credibility these things you need to have in power i mean it's politics it's but for our strategy as well as so we had to do very very deep research on identifying the problem of a company and very very deep research on making sure that we found the solutions that would really work because we We were, as I said, we were new to the game.

48:58Lars Förberg:Yes, we were experienced in some ways in private equity and consulting and other things, but not in that role. And I think that was great for us to have this sort of very tough bar to get to because it made us really work incredibly hard to find answers to these questions, the problem and the solution. And the credibility came then as a consequence of our handle too. And over time, of course, 70 investments since, the credibility part is much easier. It doesn't mean we become sloppy with the other research, but the credibility is easier because we've been working for the benefit of all stakeholders, as we talked about the entire time.

49:38Lars Förberg:But it was tough at the outset. And, you know, I remember there's also, of course, working. I remember a couple of the first investments we made in continental Europe. And one was Panalpina. Another one was Munich Reef. Panopina, Freight Ford in Switzerland and Munich Re, the leader in reinsurance in the world in Munich. And in both these cases, and we had, you know, as we talked about, I interacted with management a lot beforehand and so on and so forth. And then our stake was announced. And then in the case of Panopina, the CFO, Marco Godola, a really good guy, he called me and said, Lars, it's very interesting.

50:19Lars Förberg:I'm getting all these investment banks calling me and they're sending me a lot of presentations on you guys and how problematic you are and why they need a defense advisor. But he said, we know each other. We don't need a defense advisor, do we? And I said, no, of course you don't. And they said, actually, Lars, I'm going to send you these reports. And so he sent me those reports that the defense advisors had sent to the company to try and get their business, right? And of course, painting us as a, you know, problematic or short term or something like that, in order to sort of try to create some tension, the same way that journalists did at the outset of our business as well, saying that there's tension, the interests are not aligned, and so on and so forth.

51:01Lars Förberg:But we're past that phase. Actually, the same thing happened with Jörg Schneider, the CFO, also a very good guy at Munich Re. He said, I have all these defense advisor talking to me do can we talk about some things and then we flew to uh zurich the same day we met we had dinner together and we hashed some things out and and fine we had a very good cooperation so the final question uh that i want to ask you is uh thinking and listening to what you said today and if i just jogged back to the case of abb i remember reading the essentially the case study i think you took their margins and over that period you know helped them get their margins doubled, evaluation followed, and it was a terrific uplift, you know, across the board.

51:43There would be an argument that some of what was done and can be done can be helped courtesy of AI. To what extent is AI useful or even a competitor to your approach?

51:59Lars Förberg:How would it be done by AI, do you mean? Yes, because if you're diagnosing the problem of a company, you know, if I put it into Claw, well, my margins are 11%, I need to get them up to the industry standards. Yes, yes. But I mean, that's the very superficial thing that anyone can see. I mean, actually, this is interesting. The companies we identify, other people also see that they're underperforming, that things should be done, that strategies should be different. It's just that they don't have the business model or the bandwidth to do the work or to get into it or be the catalyst. That's not part of the strategy.

52:31Lars Förberg:So these are not sort of, so the difficulties, of course, to identifying what exactly should be done with the business. What is the root cause of the underperformance? It's not sufficient to understand that there's underperformance. You have to understand the root cause and what are the operational, strategic and structural things, people things that you should change in order to make that a great company. And AI is not going to be a competitor in that. AI will help us and help many of our companies, but will not be a competitor of what we're doing. Very clear. And we're doing a series right now on how AI is changing investment process.

53:05So we may be extracting those two sentences and fusing them. So thank you very much indeed. A couple of general questions. Sweden, the great sporting nation, as well as a sort of a producer of so many extraordinary entrepreneurs. What's the one sporting event that you haven't been to in the world that you would love to attend?

53:26Lars Förberg:A sporting event I'd like to attend? hey, I think that's probably going to be something where I participate. I was thinking about starting doing trail running. So maybe I should do trail running this summer in the mountains of Switzerland. And I'd rather do it than watch. Right, right. Well, we just did an interview with the head of Saudi sports and they're backing all sorts of sports like triathlons. Trail running wasn't one of them, but who knows? And finally, how would you in 10 years time like to be judged? Business wise. Yes. Okay. I think if I look forward, it's quite interesting. I mean, it's quite amazing.

54:15Lars Förberg:We've been able to have the same strategy for 25 years. The same kind of team setup, the same geographical area, the same kind of companies. And we still have a situation where we have a lot of high value added and low competition in the business we do. And I think that's going to continue that way. So I think over the next 10 years is continue to refine, do the same thing. And if we can continue to help catalyze changes in companies and help them to become better, that will be a great benefit for we'll continue to make very good returns. But it will also be good for society and the companies.

54:54Lars Förberg:That's what I want to achieve. Well, I typically sum up, and one of the things that struck me as I've gone through the research process or listening to you now for a while is that with the caveat that past performance is no guide to future performance, is that if I'm an allocator, our industry has sort of driven us into thinking about public equity and private equity and there's certain buckets and, you know, nomenclages. and you probably sit between buckets, which shouldn't matter if after all as an allocator what you really care about is return. And so I'm struck that your unorthodoxy is a bad reflection on our industry that wants to badge things.

55:37Lars Förberg:It was a horror when we tried to raise our first fund. It was like, I tell you, that was a lot of hard work and very difficult to get it done. But we're quite happy that we're between buckets because it makes it more difficult to copy what we're doing. And normally we speak on a CIO level to get with our investors and get them where they decide, even though we don't fit one of their buckets, they want to invest. And the other two conclusions is that whilst we all exist and have to perform in a relative world, you really think about the absolute requirement and expectation when you make these investments.

56:14And that secondly, that the lack of, and it's not the lack of owners in the public market space, it's the lack of voice of those owners so often is doing a disservice to other shareholders. And when we talked about that secondary effect at the beginning is that firms like yours that are going to work, there are further benefits that come from the flywheel when it works.

56:41Lars Förberg:Yeah, I think there's the other shareholders of companies are investors. They're not owners. I mean, technically, it's the same thing, right? You own shares, but they're not acting as owners. And that creates a void. And that void is even getting bigger, you know, with the index funds and other things that are happening in the market. So actually, the environment for us is just getting better and better in terms of there's this void we can fill as a real owner, where there are very few that act that way in the public markets. The second thing is that we can build on the reputation, the network, the contacts we have to be better, faster in implementing the changes we want in implementing companies.

57:21Great. Well, Lars, it's taken us a little while to get you over from Switzerland into our studio. You've been somewhat elusive, I have to say, but I've been looking forward to it. And thank you very much for being here today.

57:29Lars Förberg:Thank you so much, Simon.