Even people paid to know such things have never heard of Groveland Capital, a Minneapolis hedge fund manager that is running a spirited campaign to oust the board of a mini-conglomerate called Biglari Holdings.
Groveland is a money manager, but in talking with some folks in investment circles this week, it’s not clear there is much to manage aside from founder Nick Swenson’s own money.
So it’s no surprise that what Groveland called a “meaningful position” turned out to be all of 0.2 percent of Biglari’s stock, rounded up.
Contested board elections can be expensive affairs, but not the way Groveland is doing this one. Its proxy statement estimated costs of no more than $175,000. With the investment it has made in shares, call it a total commitment of less than $1.6 million.
It would seem the barrier to entry in the field of activist investing is close to disappearing altogether.
Don’t get the idea, however, that this is some sort of joke. Swenson declined to be interviewed, but his experience as an investor includes years with the far larger Whitebox Advisors. And in going after Biglari and CEO Sardar Biglari, Swenson has picked a very rich target.
Sardar Biglari is a very interesting case of a revolutionary who took over the palace and then made enough bad decisions once in power to spark another revolution. As an activist hedge fund manager himself, he got the job as CEO after ousting the incumbent directors of a company then called the Steak ’n Shake Co.
Biglari Holdings is now based in Texas, and in addition to restaurants, it owns an insurance company and a magazine publisher. It’s far from a giant, trading at a value in the market of about $860 million.
Biglari started his first hedge fund at age 22, and once in control of what’s now called Biglari Holdings he made it clear that it was no longer a restaurant company but a conglomerate that would own unrelated businesses. It would be his job to shrewdly invest that company’s capital in the best opportunities.
If that sounds familiar, and a little bit like the legendary Warren Buffett of Berkshire Hathaway, well, that’s entirely intentional. Biglari is clearly a devotee, and that helps explain the name change to Biglari Holdings, and the stock ticker symbol to BH.
Biglari doesn’t just decide how much to invest in which business, but also writes long annual letters to shareholders. They don’t have the same tone, but his letters are clearly made to look and feel like the missives of Warren Buffett.
The differences between the two remain stark.
Buffett, for example, doesn’t have an arrangement that gets his private hedge fund 25 percent of any profits on the public company’s investment portfolio that exceed a 6 percent return, as Sardar Biglari does.
This arrangement with his hedge fund “has given unnatural meaning to the phrase ‘virtuous circle,’ ” noted the proxy advisory service Institutional Shareholder Services. “The public company issues equity to raise capital, then invests that capital with the CEO’s privately held hedge fund, through which the CEO then purchases the shares of … the very same public company.”
And, of course, the CEO’s private hedge fund stands to collect a 25 percent incentive fee.
The board’s explanation for this — the returns sure seem to have been good — begs the imagination, according to ISS.
It’s also impossible to imagine Warren Buffett licensing his name to Berkshire Hathaway, as Biglari did to publicly held Biglari Holdings. In fact, it’s difficult to imagine just about any other CEO doing that.
Biglari’s deal with the company doesn’t call for fees to be paid now, but the company would pay a license fee equal to 2.5 percent of revenue for a minimum of five years if he loses his role as CEO.
How the board could have soberly considered and then approved this one is another head scratcher. As a personal brand, “Biglari” is obviously a far less valuable asset than, say, “Buffett.” In fact, the Berkshire CEO’s reputation as a genial investor who buys a business and then leaves its managers alone is a key advantage when competing with other potential buyers for good companies.
Biglari enjoys no such reputation for geniality. A shareholder in both Berkshire and the Biglari Holdings once observed to the Wall Street Journal that “Warren Buffett charms people. Sardar Biglari doesn’t seem to be charming anyone.”
The hedge fund relationship, the incentive fee, the license deal, all of it has been grist for Groveland’s mill as it makes a case to shareholders for a new board. And it’s a case the firm has been winning. Both of the big proxy advisory firms decided to recommend that no shareholder vote any shares for Biglari’s board nominees.
That doesn’t mean Groveland’s slate can coast to an easy win. Its problem is that, well, it’s a tiny hedge fund few have heard of. And it doesn’t just want one seat, it wants all of the them. That would be challenge even with a slate of all-stars, and Groveland’s lineup falls well short of that. The proxy adviser Glass, Lewis & Co. came out in support of two of them, but ISS said the contest for the board of Biglari Holdings has turned into a “none of the above” election.
Somebody actually does have to win the shareholder vote next week, though. And if Groveland somehow gets enough of its slate elected to control the board, then that’s quite a business achievement for this little firm.
It may even attract some paying clients.