OTPP and AIMCo Sell Glass Lewis to Peloton Capital

Alicia McElhaney of Institutional Investor reports that Ontario Teachers’ and AIMCo have sold Glass Lewis to a private equity firm:

Private equity firm Peloton Capital Management and Canadian financial entrepreneur Stephen Smith have acquired proxy advisory and research firm Glass Lewis & Co., according to an announcement Tuesday.

Peloton and Smith bought Glass Lewis from the Ontario Teachers’ Pension Plan Board and the Alberta Investment Management Corp., known as AIMCo. Terms of the deal were not disclosed.  

The acquisition comes less than six months after Deutsche Börse said it was acquiring a majority stake in a Glass Lewis competitor Institutional Shareholder Services from its private equity owner Genstar Capital.   

“We see that proxy voting has become more important, as ESG topics become front and center for institutional investors,” said Peloton managing director Steve Faraone by phone on Tuesday. “We see Glass Lewis as well-positioned to serve that client base.” 

Peloton has ties to Ontario Teachers’: two of its founders, Mike Murray and Faraone, were managing directors at the pension fund before they struck out on their own to start the private equity firm in 2018. Smith, who is co-founder and chief executive officer of Canada’s First National Financial Corp., launched Peloton alongside them.

In addition to investing in Glass Lewis through Peloton, Smith invested alongside the firm, as the deal was larger than one Peloton would normally execute, Faraone said.  

Glass Lewis was acquired by Ontario Teachers’ in 2007. In 2013, AIMCo acquired a 20 percent stake in the proxy advisory firm, according to an announcement from Ontario Teachers’ at the time. Faraone said Peloton liked that Glass Lewis had been owned by the same investors for such a long time.  

“We like that stability and see an opportunity to continue the trajectory they have been on,” he added.  

A spokesperson for AIMCo said via email that the company is “proud of the role it has played since 2013” in helping the company “realize on its commitment to uphold strong corporate governance.” 

“We believe our stewardship of Glass Lewis has helped contribute to the advancement of good governance practices and healthy capital markets globally,” a spokesperson for Ontario Teachers’ added via email Tuesday. 

In 2019, Glass Lewis co-founder Kevin Cameron returned to the company and assumed the role of executive chair. He left his role as president in 2007, although he remained on the firm’s advisory council during his time away from leadership, an announcement from Glass Lewis at the time shows.  

“He’s helped to add to the team and recruited some additional people,” Faraone said of Cameron’s return. “We’re seeing a lot of investment in the research area.” 

Faraone said that this, along with Glass Lewis’s decision to open offices in London and Tokyo, made it an attractive investment option.  

“Peloton Capital Management and Stephen are committed to long-term, sustainable value creation through good governance,” Cameron said in the announcement on their purchase. “This aligns strongly with the core values we have established at Glass Lewis.” 

This is Peloton’s fourth portfolio investment, and first in the financial services sector. The firm is working on another deal — one that Faraone said is going a bit more slowly than the Glass Lewis acquisition. He did not share details on the target company.  

Peloton is still raising its first fund, which is targeting long-term capital. It plans to hold portfolio investments for seven to ten years, Faraone said.  

“For the right businesses and time frame, this strategy can lead to less distraction for management,” Faraone said. “It allows the business to focus on growth over that time frame.” 

This caught my attention earlier today and I read this press release on Glass Lewis' site: 

Peloton Capital Management and Stephen Smith have acquired Glass Lewis from Ontario Teachers’ Pension Plan Board (Ontario Teachers’) and Alberta Investment Management Corporation (AIMCo). Glass Lewis is the leading provider of independent global governance solutions. Its unbiased research reports that provide analysis and recommendations on every proxy vote, including M&A and other financial transactions, along with its industry-leading proxy vote management solutions drive value across all governance activities for institutional investors.

“Peloton Capital Management and Stephen are committed to long-term, sustainable value creation through good governance. This aligns strongly with the core values we have established at Glass Lewis,” said Kevin Cameron, Executive Chair at Glass Lewis. “Together, we can advance our mission to help our customers drive value across their governance and stewardship activities.”

“Capital markets participants have become increasingly focused on environmental, social, and governance (ESG) factors as they build their business strategies. Glass Lewis is very well positioned to provide solutions to address the global demands generated by this shift,” said Stephen. “Glass Lewis has built a venerable brand and we look forward to helping them deliver important governance solutions to the marketplace.”

With teams located throughout the United States, Europe, and Asia-Pacific, Glass Lewis offers customers global reach with a local perspective on important governance issues. With the support of Peloton Capital Management and Stephen, Glass Lewis can expand to new markets with new solutions while continuing its long-standing reputation of exceptional customer focus.

“Investors and public companies across the globe depend on research, insights, and technology from Glass Lewis to run their governance programs. With climate risk and deep social changes at the forefront of conversations across boardrooms, Glass Lewis’ solutions have never been more critical to sustainable business success,” said Steve Faraone, Managing Partner at Peloton Capital Management.

Lazard acted as financial advisor and Torys LLP was legal counsel to Ontario Teachers’ and AIMCo. Perkins Coie LLP acted as legal counsel to Peloton Capital Management and Stephen Smith. 

About Glass Lewis: 
Glass Lewis is the leading provider of independent global governance solutions. We enable institutional investors and publicly listed companies to make sustainable decisions based in research and data. We cover 30,000 meetings each year, across approximately 100 global markets. Our customers include the majority of the world’s largest pension plans, mutual funds, and asset managers who collectively manage over $40 trillion in assets. Our core solutions include Proxy Paper proxy research and Viewpoint proxy vote management platform. More information available at www.glasslewis.com.

About Peloton Capital Management: 

Peloton Capital Management is a private equity firm that utilizes a long-term investment philosophy and sector-focused strategy to partner with founders and management teams to help build exceptional businesses and create attractive returns for our investors. PCM’s primary focus is investing in services businesses within the Healthcare, Financial, and Consumer verticals in North America. Headquartered in Toronto, Canada, PCM was founded and is led by a team with extensive private equity experience. For more information please visit: www.pelotoncapitalmanagement.com.

About Stephen Smith:

Stephen Smith, one of Canada’s leading financial services entrepreneurs, is the Chairman, CEO and Co-founder of First National Financial Corporation, Canada’s largest non-bank mortgage lender with over $115 billion of mortgages under administration. He is the Chairman and a co-owner of Canada Guaranty Mortgage Insurance Company; Chairman and a co-owner of Duo Bank of Canada, formerly Walmart Canada Bank, whose subsidiary Fairstone Financial Inc., is Canada’s largest non-bank consumer finance lender; and is the largest shareholder in Equitable Bank, Canada’s Challenger Bank™. In 2015, Queen’s University announced the naming of the Stephen J.R. Smith School of Business at Queen’s University in honour of Mr. Smith and his historic $50 million donation to the school.

Recall, I wrote about Peloton's differentiated approach exactly two years ago when I did a brief stint at KPMG.

Basically, my boss knew Mike Murray, one of the founding principals at Peloton and asked me to cover their launch and I did because I found their approach interesting and they were two former OTPP managing directors who ventured off on their own.

Of course, it helps that they got the financial backing of Stephen Smith, one of Canada's most successful entrepreneurs. 

Anyway, I haven't spoken to Mike Murray or Steve Faraone since then but I'm happy their PE fund is on its fourth deal and the acquisition of Glass Lewis definitely fits well in their portfolio and in their long term approach.

Let's go back to the press release in 2013 when OTPP sold a 20% stake to AIMCo:

Ontario Teachers' Pension Plan (Teachers') today announced the sale of 20% of its ownership in proxy advisory firm Glass, Lewis & Co. (Glass Lewis) to Alberta Investment Management Corporation (AIMCo). Terms of the transaction are not being disclosed.

Teachers' acquired Glass Lewis in 2007 and the company operates independently as an indirect wholly-owned subsidiary.  No changes in the operations of Glass Lewis will result from the transaction.

"Glass Lewis has delivered strong revenue and client growth since Teachers' acquired the firm," said Wayne Kozun, Senior Vice-President, Public Equities, at Teachers'. "While we remain committed to maintaining a long-term stake in the company, we believe diversifying the firm's ownership with like-minded investors will bring valuable new perspectives to the next stages of Glass Lewis' development. We look forward to working with AIMCo, a longtime advocate for improved corporate governance, in supporting the positive role of independent proxy advisors."

"AIMCo is pleased to partner with Teachers' in the ownership of Glass Lewis and trusts in the long-term potential of the organization given the changing landscape of investor engagement," stated Leo de Bever, Chief Executive Officer, AIMCo.  "As an institutional investor responsible for the assets of 27 clients, upholding strong corporate governance is critical to our ability to add value; and Glass Lewis plays an important role in ensuring that integrity exists in the market for all investors."

"Teachers' stewardship of Glass Lewis over the past six years has been key to the success of our global expansion strategy," said Katherine Rabin, Chief Executive Officer, Glass Lewis. "We are very pleased about the diversification of ownership and the additional insight that AIMCo will contribute as we continue to bring to market important, independent engagement-support solutions."

OTPP bought Glass Lewis, the shareholder advisory firm, in 2007 from Xinhua Finance for $46 million:

The move comes just a few months after Xinhua - the Shanghai-based financial-information provider - bought Glass Lewis for $45m, a price that was considered steep at the time.

Shortly after that acquisition, two Glass Lewis executives, including the former chief accountant of the Securities and Exchange Commission, suddenly resigned.

The proxy firm subsequently lost several more employees and clients.

Fredy Bush, chief executive of Xinhua Finance, said in a statement on Friday: “While Glass Lewis has continued to build on its reputation as a leading provider of independent proxy research as part of Xinhua Finance, both companies agreed that its business could best thrive under independent ownership outside the public markets.

“We believe this transaction is in the best interests of both Xinhua Finance’s shareholders as well as Glass Lewis employees and clients.” The Ontario Teachers’ plan, which has $106bn under management, has become known for taking big stakes in companies, operating more like a private equity firm than a traditional equities and fixed income manager.

And since then, Glass Lewis has grown tremendously under the guidance of Teachers' Private Capital.

I wouldn't be surprised if Steve Faraone worked on that deal along with Jim Leech and he and Mike Murray know the company very well.

Although financial details weren't released, there's no way OTPP and AIMCo didn't make a killing on this deal. 

Last year, Deutsche Börse AG, Institutional Shareholder Services Inc. (ISS) and Genstar Capital LLC  announced that Deutsche Börse acquired a majority share of approximately 80% in ISS, valuing ISS at USD 2,275 million (EUR 1,925 million) for 100% of the business (cash and debt free). Genstar Capital and current management will continue to hold a stake of approximately 20%. The transaction is expected to close in the first half of 2021 subject to customary closing conditions and regulatory approvals.

Institutional Shareholder Services Inc. (ISS) is a lot bigger than Glass Lewis but they are the two most prominent proxy advisory services in North America. Because institutional investors sometimes hold hundreds or thousands of different stocks at a point in time, they tend to need assistance in voting their shares come annual meeting time. This is where ISS and Glass Lewis come in:

Both firms have created models of what they think good governance looks like. And both use various algorithms to determine whether a given company is deserving of a “yes” vote on Say on Pay, and whether individual board members should be supported. Many institutions follow their recommendations, while others subscribe to the services yet also employ their own staff to determine how they should vote their shares. The most interesting thing about these firms is that their business model requires them to change their guidelines on a regular basis. After all, if they had a straightforward set of rules and all companies adopted them, there would then be no need for ISS or Glass Lewis to exist.

As a result, both firms tend to move the goalposts on a regular basis, and this results in that most popular boardroom conversation: “What does ISS think about that?” This has also led to a homogenization of boardroom practices, as more and more companies come into compliance with the latest edict from ISS and/or Glass Lewis.  

There's no doubt about it, proxy advisory is big business, now more than ever with the advent of ESG, so I expect both these companies will grow over the next ten and twenty years and their new owners will make great returns.

Why did OTPP and AIMCo sell? Because they held on to Glass Lewis for a very long time and wanted to realize on their investment and move on to something else. It's that simple.

By the way, yesterday I read that Buffett's Berkshire opposes shareholders' climate change, diversity proposals:

Warren Buffett's Berkshire Hathaway Inc on Monday urged the rejection of shareholder proposals that annual reports be produced about its efforts to address climate change and promote diversity and inclusion.

The proposals were disclosed in Berkshire's annual proxy filing, ahead of the Omaha, Nebraska-based company's scheduled May 1 annual meeting.

Berkshire also said Buffett's compensation in 2020 totaled $380,328, comprising his usual $100,000 salary plus $280,328 for personal and home security.

Though Buffett's salary is low for a chief executive of a major company, his 16.2% stake in Berkshire was worth about $98.2 billion as of Friday.

Vice Chairmen Greg Abel and Ajit Jain, who respectively oversee Berkshire's non-insurance and insurance operations and whose pay Buffett sets, were each awarded $19 million, unchanged from 2019.

Berkshire's dozens of operating businesses include the BNSF railroad, Berkshire Hathaway Energy and Geico car insurer, and the smaller Brooks running shoes and Fruit of the Loom clothing.

Citing its decentralized model, Berkshire said the climate proposal from the California Public Employees' Retirement System, Federated Hermes and Caisse de Dépôt et Placement du Québec was unnecessary, and that many businesses' climate decisions already made "great sense" for the environment.

The company also cited its business model and Buffett's record of "opposing efforts, seen or unseen, to suppress diversity or religious inclusion" in opposing the proposal on diversity from As You Sow, a nonprofit shareholder advocate.

Berkshire said its businesses "represent dissimilar industries" operating around the world, and it was "unreasonable to ask for uniform, quantitative reporting" to compare them.

Buffett controls 32.1% of Berkshire's voting power, and shareholder proposals he opposes normally fail by big margins.

Berkshire's annual meeting will be in Los Angeles, allowing Vice Chairman Charlie Munger, 97, a Californian, to join Buffett in person to answer 3-1/2 hours of shareholder questions.

Looks like the Oracle of Omaha isn't on the same page as some of his big investors on these proposals but nobody is going to tell Buffett how to run his business.

Anyway, Stephen Smith isn't Warren Buffett but he's done very well for himself and he knows how to buy and transform companies. With the help of Steve Faraone and Mike Murray, they will grow Glass Lewis very nicely over the next decade, that I'm sure of.

You can read more about Peloton Capital Management here. If Steve Faraone has anything to add here, I'll be glad to edit my comment.

Below, Kern McPherson, Senior Director, North American Research at Glass Lewis, discusses the future of shareholder engagement from an analysts' perspective at the Engagement & Communication conference in New York (2018).

And Andrew Gebelin, Senior Director of Research, EMEA & Latin America at Glass Lewis, discusses the future of shareholder engagement in the U.K., Middle Eastern, and Latin American markets at the2018 Shareholder Engagement & Communication conference in London (2018).

Great insights, listen to their comments and know this, shareholder engagement is critical and it's only growing as large global investors incorporate ESG into all aspects of their investments.