The global financial crisis has inspired an unlikely spate of shareholder activism in Australia as institutional shareholders have shown a willingness to challenge poorly performed executives and board members. Last year, major shareholders in red-light camera business Redflex, orchestrated the removal of several directors. In a slightly difference sense, two major shareholders in Seven earlier this year were able to improve the terms of the company’s merger with Kerry Stokes’ private WesTrac Caterpillar equipment business. Now the stakes have risen at troubled hedge-fund manager, Everest Financial Group, once known as Everest Babcock & Brown.
The largest shareholder in Everest, Wingate Financial Services, recently sent a letter to other Everest shareholders encouraging them to vote against the incumbent directors, including former AGL CEO (and current Santos director) Greg Martin, Marea Laszok and Everest CEO Jeremy Reid. Wingate is also seeking to have David Kent, Brett Elvish and Franco Dogliotti (who is head of advisory at Wingate) appointed to the Everest board.
Wingate, a Melbourne-based private investment and advisory firm has acquired a 19.9% in Everest and has been critical of Everest’s performance. In a letter to Everest shareholders on Monday, Wingate stated that a $1000 investment made in Everest in November 2007 would be worth only $21 now — a drop of 98%. Since March 2009, while the share prices of many financial companies rose, Everest’s scrip continued to fall, dropping a further 29%. (In 2008, Everest announced a loss of $305 million. In 2009 it earned $2 million before tax).
Everest’s share price melt-down coincided with the collapse of its backer, Babcock & Brown, and the poor performance of many hedge funds during the global financial crisis. As a hedge “fund of funds” manager, Everest would invest on behalf of retail investors in otherwise inaccessible hedge funds. Unfortunately for Everest, investors have turned away from hedge funds (and especially fund-of-funds, dubbed by Warren Buffett as “hyper-helpers”), with Everest’s funds-under-management slumping from $3 billion in 2007 to only $460 million.
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The loss of FUM has dented investors’ confidence in the stock. While investment companies such as Everest tend to trade at a discount to net tangible asset backing, in Everest’s case, the difference is substantial — the company has NTA of $25 million (according to its last annual report) but is valued by the market at only $11 million (Everest has cash of more than $15 million in the bank). It is most likely this discount that attracted Wingate.
Wingate is especially aggrieved at the remuneration paid to Jeremy Reid, who received a cash salary of $500,000 (and total remuneration of $679,880) in 2009. In total, Everest’s directors and executives were paid $2.63 million last year — equal to almost 24% of the company’s entire market value and a sum greater than the company’s pre-tax earnings. In 2008, despite Everest losing more than $300 million, Reid received a cash bonus payment of $320,250 on top of his $500,000 cash salary.
Everest had also proposed to issue Reid 6,000,000 options in the company at only 7 cents per share (which was less than the stated net tangible asset backing of the company). However, after pressure from major shareholders, Reid informed the Everest board (of two other directors) on April 20, 2010, that he would not take up the options package offered.
The turmoil at Everest represents a dramatic fall from grace for Reid and his father-in-law, Stephen Eckowitz. In 2007, BRW listed Eckowitz as having a personal fortune of $300 million. Eckowitz’s original fortune was made when he sold his pesticide company to Israeli-group Makhteshim-Agan for $35 million. Eckowitz had funded Reid’s original stake in Everest (which was worth $180 million).
Reid debuted on the 2006 BRW Young Rich List with an estimated wealth of $50 million but was believed by BRW to have increased his fortune to $200 million in 2007. While Reid suffered an enormous loss of wealth (his shareholding today is worth about $4.4 million), for Eckowitz, the consequences were even worse. The collapse of Everest led to the former rich list member placing his personal investment vehicle, Harsit, in liquidation in October 2009, with debts of $56 million. Eckowitz, whose investments also included Challenger Financial Services and property fund Challenger Kenedix Japan Trust was also last year forced to sell his $20 million Vaucluse mansion.
While the performance of Everest’s current management has been questionable, Wingate’s task was made more difficult by the revelation that Blann Investments Pty and Natpac Financial Services (who own 17.3% of Everest) are supporting the incumbent directors (Reid also personally controls 18.9% of the company).
In 2006, when Reid was interviewed by BRW, he noted that “it’s not the money that drives me, it’s a passion to build something you are proud of. The way I built Everest was to look at global investment managers and the way they built a sustainable funds management business. I’ve learnt a lot from Phil Green about investing and partnering, and hiring the smartest people you can to work with you.”
As Everest shareholders would no doubt attest, perhaps the 33-year-old Reid should choose better mentors in the future.
Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed, including the downfall of Babcock & Brown.