Diligent Market Intelligence (DMI) speaks with Oleg Karmanov about his newly-launched investment company Pillsbury Lake Capital and what motivated him to set up shop after 12 years with boutique activist firm Cannell Capital.

You recently registered Pillsbury Lake Capital with the Securities and Exchange Commission (SEC). When will you officially launch?

My plan is to commence trading later this year, specifically in November or December. There are no operational obstacles preventing me from doing that. However, there’s a more critical aspect to consider, which revolves around the timing and my comfort level with my portfolio. It’s not about trying to time the market. It’s more about assessing the flow of opportunities and being comfortable with your portfolio.

What investment strategy will you employ?

I want to focus on smaller, truly under-the-radar companies, particularly those with market caps below $100 million. I aim to focus more on technology and retail names, adopting a long-short equity strategy with a lower net exposure, around 20% to 30% net long. On the long side, I’m looking for quality undervalued companies with good corporate governance and some catalyst to accelerating growth or improving profitability. Activism is not a central part of this strategy, but I have a lot of experience in activism and maintain my network of contacts with other activist managers. So, if I come across an activist situation with a high chance of success, I will likely deploy capital into it. On the short side, more aggressive short selling with shorter holding periods and clear catalysts for the realization of value in these names.

So, would you consider yourself an occasional activist?

I categorize occasional activism into two types: proactive and defensive. I’m not a firm believer in defensive activism as a viable strategy. Proactive activism, on the other hand, involves approaching investments with an activist angle from the outset, assessing board composition, shareholder structure, and corporate governance and you already know that there are areas where you can press and succeed and enhance shareholder value by means of activism. It’s about picking fights you can win. Defensive activism, in contrast, stems from sticking with a failing investment and trying to effect change after the fact. This is riskier and often less successful.

We’ve seen a jump in the number of CEO departures after an activist makes a demand at a company. From an activist position, does management change usually solve problems?

The idea that changing the CEO is a panacea is a common misconception. It is a lot more complicated than that. It depends on numerous factors, such as the suitability of the new CEO, cultural fit and the willingness of the management team to accept change. Finding the right CEO can be challenging, especially for smaller companies. People usually think that if you change the CEO, there’ll be a line of candidates across the street, but sometimes these small cap companies are just not the most attractive places to work.

When you’re starting a fund like this, are you thinking about creating a diverse portfolio or a more focused one?

Due to my approach, which combines both activist and non-activist investments, I will maintain a more diversified portfolio. A truly dedicated activist can and should take a very concentrated portfolio because they have a lower risk profile than other minority investors. They pick names where they know they can influence the decision making because there are disgruntled shareholders, or a board that’s easily influenced, or the way the company documents are written. But for somebody that does occasional activism or no activism, I think the sweet spot as far as the long book is about 15 to 20 names.

Have recent market disruptions increased opportunities for your fund?

It played a pretty significant role in my decision to start the fund at this time. For the long book, there is a lot of historical evidence that small cap value outperformed large cap and large cap growth for multiple years following markets dislocation that were triggered by a collapse of a bubble. And there is a lot of historical evidence that shorting poor quality companies and investing in quality, profitable companies has been a successful strategy during periods of high inflation. So, I believe that higher interest rates can influence investor preferences and potentially shift interest towards long-short strategies like mine, which may offer higher returns without relying on excessive leverage in a low-yield environment.

What’s your take on investing in sectors such as technology?

Technology presents a great opportunity for value investors because the focus of Wall Street is asymmetrically skewed toward a handful of larger or higher growth names. There are a lot of great technology companies that are underfollowed. It is such a rapidly paced environment you can find overlooked, quality companies with some catalyst to accelerating growth, be it a product or change in the product or change in market dynamics. You can truly find names that re-rate more often. That’s one reason I named my fund Pillsbury Lake.

Lake Pillsbury is about 25 miles north of Clear Lake, which is the most popular bass fishing lake in the Western U.S. Clear Lake is a great lake with a bunch of great fish, but the sheer number of boats on the water makes it hard to find fish there. People don’t realize there is another great lake with lots of fish and without a single boat just a 40-minute drive away.