How the institutionalisation of activist short-selling benefits the market and provides checks and balances
By Ben Axler (pictured), CIO and Founder of Spruce Point Capital Management – When I started my investment management firm in 2009 after a career in investment banking, I felt emboldened to fix certain structural problems in the industry I was leaving. After working at Credit Suisse through the acquisition of Donaldson, Lufkin & Jenrette and Barclays Capital through the acquisition of Lehman Brothers, which were two of the largest investment banking deals in recent history, I walked away with a couple of clear conclusions: the industry over-promotes and over-estimates the success probabilities of M&A transactions, and it fails to offer investors enough credible alternative research to balance the chorus of “Strong Buy” recommendations.
I set out over 10 years ago to challenge and disrupt the status quo of the conflict-ridden sell-side research world by providing the investing public with unique forensic research at no charge. There was no such moniker at the time for a new class of “Activist Short-Sellers” that, like us, would use traditional and social media to share a detailed investment thesis about why a stock was over-valued and should be sold or shorted.
We are proud that over the past decade, we helped propel a new breed of short-seller and have carried the torch long after others have failed or closed shop. Spruce Point has had many successes, including facilitating the de-listing of a few companies and prompting dozens of CEOs and CFOs of multi-billion-dollar companies to resign shortly after the publication of our research. We believe that due to the strength and quality of our research, companies have rarely engaged with us to comprehensively refute our concerns.
But despite our own growth and success, there is still a deep-rooted mistrust and misperception of institutional Activist Short-Sellers. Short-selling is – and always has been – a tough business. The business has been further complicated in recent years by financial deregulation, trillions of dollars in monetary expansion, and the significant inflows into passive index funds, which we believe has distorted price discovery.
Human nature is to generally be defensive when someone opposes or questions your pre-existing beliefs, especially when money is on the line. This said, it is disappointing that short-sellers are often depicted as unscrupulous, shadowy individuals operating on the fringes of legality and the markets.
We believe this misperception of short-sellers is unfounded. Not only do Activist Short-Sellers play a valuable role exposing potentially overvalued companies, but the strategy has also become institutionalised. This is evidenced by the following:
- Activist short sellers operate as part of the regulated advisory industry and are registered with the Securities and Exchange Commission and/or various state regulators as required.
- Institutional limited partners such as endowments and insurance companies entrust Activist Short-Sellers with their capital. These types of institutions regularly employ operational and business due diligence consultants to rigorously evaluate advisers before making a committed investment decision.
- It is common for Activist Short-Sellers to have Boards of Directors and advisory committees which provide additional independent oversight and monitoring.
The short-selling community is a small, but vital, part of the investment world that needs to stand strong against the backdrop of unfounded misinformation. Firms like ours produce detailed and unique research that every investor – regardless of size – can access at no charge. Activist Short-Sellers stand behind their research by risking their proprietary and/or fund’s capital in the securities upon which they publish.
As asset bubbles persist, market euphoria peaks and SPAC-mania soars, the short-seller community has an increasingly important role to play in helping spot poorly-governed and over-valued companies. The integrity of the market depends on investors being able to absorb credible research – and we look forward to continuing to provide that for years to come.
Ben Axler is a New York City-based Activist Short-Seller and forensic financial researcher. Since founding Spruce Point Capital Management in 2009, he has exposed billions of dollars of financial schemes globally.