Engine no.1 ditches activism for big bucks – the untold story behind private capital!

Engine no. 1 burst onto American corporate radar in 2021 as the small hedge fund that beat ExxonMobil. The investor who holds 0.02% of the oil major’s shares won three seats on the board with calls to take climate change more seriously.

Two years later, the enthusiasm has faded though the climate worries have not. Engine no. 1 is in the midst of a change in strategy that doesn’t include public proxy fights.

“I have never considered myself an activist investor,” Chris James, founder and chief investment officer of Engine No. 1, said in an interview with the Financial Times. activism it is a tool of last resort, not a strategy”.

Instead, a company focused on private investment is taking shape. Late last month Engine No. 1 announced it would invest $780 million in Brazilian miner Vale’s base metals business through its private equity arm, giving it a 3% pole.

Days earlier, Engine No. 1 announced the sale of its newborn exchange-traded funds business, including products such as “Transform Climate ETF”, to large asset manager TCW.

The moves stand apart from what put Engine No. 1 on the map – it’s powerful and successful countryside versus Exxon, which has pushed companies and their advisors to the edge and signaled a new league of small but aggressive activist investors who could snap up tiny stakes and push for change.

“The No. 1 engine was just the tip of the spear, but you couldn’t ignore them,” said a banker who advises companies on how to deal with attacks by activists.

James launched Engine No. 1 in late 2020 with approximately $250 million of his own money. He previously founded Partner Fund Management and spent more than two decades investing in technology companies, including an ill-fated bet on fraudulent blood test start-up Theranos, and worked for famed investor Louis Bacon.

Just 10 days after its debut, Engine No. 1 began its proxy battle at the largest US oil company. Exxon faced “existential corporate risk” by entrusting its future to fossil fuels, the fund said. The months-long proxy campaign attracted at least partial support from big investors like BlackRock and Vanguard, culminating in the election of three of its four board nominees in May 2021.

Investors who hit such large payouts typically try to replicate their strategy and use the momentum to raise money. Engine no. 1 intended to raise funds from institutional investors following Exxon’s triumph, the FT reported at the time.

Yet Engine No. 1 manages little outside capital: Regulatory filings show its Perennial Total Value Fund, which makes bets focused on public companies, contained about $300 million in assets as of Dec. 31. James declined to disclose how much money is in the private equity arm but said it was larger than the public fund.

Several crucial personnel have left Engine No. 1, including Charlie Penner, a veteran of activist investor Jana Partners who masterminded the Exxon campaign. James had hired Penner, who has pushed for changes at companies like Whole Foods Market and Apple, as head of active engagement in early 2020.

Penner exited after a falling out with James in late 2021, later claiming in a legal dispute that Engine No. 1 was fighting to stop it from launching new activist campaigns, according to three people familiar with the matter.

Engine No. 1 has since withdrawn a non-compete claim against Penner and the matter has been resolved in private arbitration, they said. James and Penner declined to comment on legal issues.

A former Engine No. 1 employee said Penner’s departure and the company’s decision to distance itself from activist investing had made them question whether it would simply adopt a more corporate-friendly stock-picking approach.

James argues that nothing has changed in the way Engine #1 runs. 1 or in its goals from the beginning. “What we’ve been trying since the beginning is exactly what we’re doing today,” he said. “The strategy was exactly the same.”

Engine No. 1’s website states that “the goal is to create value by helping companies transform their businesses in a sustainable way – and voting is a key lever by which we push for corporate governance best practices, advocating for transparency at the largest companies in the economy”.

In the wake of Exxon’s win, Engine No. 1 established its first ETF, a competitive industry dominated by the largest fund managers. James told the FT that he expected it would take about seven years to scale the business. The sale to TCW comes just two years after launch.

Neither TCW nor Engine No. 1 has revealed the price. The Los Angeles-based group is obtaining all of the company’s people, infrastructure and assets, totaling more than $600 million, as part of the deal.

“We’ve started to see the initial traction,” James said. “But we thought this was going to be a long-term build because distribution is such a big component in the ETF business.”

James said he is largely focused on Engine No. 1’s private equity fund, managed by Erik Belz, who previously led the natural resources group at Blackstone. The Vale base metals business, which mines nickel and copper, will be his first major investment.

James acknowledged that mining companies tend to have a risky reputation. Vale agreed to a 7 billion dollars agreement with the Brazilian authorities, and subsequently a $55.9 million settlement with the U.S. Securities and Exchange Commission over a dam disaster that killed 270 people in 2019.

“While extractive industries have been a moot point, what we want to do is get into an industry like this and we want to find what looks good,” James said, adding that he believed he could drive more change from private investment than from public ones.

Engine No. 1 hasn’t run activist campaigns at public companies since Exxon.

It was reported late last year that the company had plans to target Coca-Cola, but James has denied it, saying he only brokered an introduction between the beverage company and waste disposal company. waste Republic Services.

“It was actually just an introduction from [chief executive] of one company to a senior executive at another business,” he said. “I really don’t know if there’s a model for that, but I don’t think it’s activism.” James added that the company didn’t own shares in the company at the time. Coca Cola.

At Exxon, Engine No. 1 last year voted against a resolution proposed by climate-focused investment group Follow This that called for Exxon to reduce its so-called range three emissions, or those produced by consumers burning its fuels .

“This was one of the big disappointments of 2022,” said Mark van Baal, head of Follow This, the climate-focused investment group that proposed the resolution. “I think everyone can see that this was just a [public relations] campaign, or have they really been convinced by Big Oil that the Paris climate agreement cannot be achieved.

Engine No. 1 said at the time it couldn’t support those resolutions because Exxon and other oil producers couldn’t be precise enough about how to reduce emissions without clearer guidance from customers.

For his part, James said he was unprepared for some of the effects of Engine No. 1’s proxy win at Exxon.

“I thought we could win the Exxon campaign,” he said. “I wasn’t fully prepared for the expectations associated with this, and how many people have expressed their own ideas about who we are or what we should be given in order to win.”