An interview with James Smith, chief investment officer with Palliser Capital, a global multi-strategy fund with a bias to Asia and Europe.

Looking back at 2023, what was Palliser’s most memorable campaign?

It was a busy year for us, as it was for many, after a turbulent year in 2022 with a lot of macro forces. Behind the scenes, we had a lot going on, in particular in places like Japan. But in terms of things that made their way into the public domain, we had some U.K. activism. More recently, we’ve had some thoughts that have gone into the public domain via the Sohn conference that we attended last year and a Korean company that seems to be doing very well in terms of reception, and the shares have traded pretty well.

If I had to pick one that was a highlight and is emblematic of a number of the things that we do at Palliser, it’s probably the engagement with Keisei Electric Railway in Japan. This is a company we’ve been invested in for a couple of years, since we launched in August 2021. It captures a number of themes that are very relevant in the Japanese market – this real thrust for change that regulators and other bodies like the Tokyo Stock Exchange are really pushing for. The shares performed extremely well; I believe they’re up by almost 40% since our engagement began. Also, the way in which our ideas and suggestions resonated internationally and with local investors has been very positive.? This is a theme that I think is going to remain very interesting for investors – change in Japan. The thrust for improvement, whether it is companies restoring their valuations above book value, or other things.

You mentioned U.K. activism. Last February, Capricorn’s board was overhauled when six director candidates put forth by Palliser were elected to a reconstituted eight-person panel. Those changes followed a proxy contest backed by several other Capricorn investors dissatisfied with the NewMed deal, which was also later abandoned – were you satisfied with that result?

When we think back to that case, what’s clear is the arguments for change were very strong and shareholder voting for change was absolutely overwhelming. It got support from both ISS and Glass Lewis on every single count. We haven’t found another case in the U.K. market where that level of substantial change has been achieved, certainly from the outside by an activist.

As a newer fund, a number of the team have an Elliott Management background, folks with experiences and skills that you develop at such a fine firm as Elliott. But when you’re doing things like that on a small base, it’s even more encouraging to have that check in the box. We don’t have a 30-year-old brand, so, from that perspective, that was a resounding success. In terms of since then, yes, the merger was cancelled and that was one of the core tenants of the activism. The new board has made good progress. So, $575 million of capital has been returned and there’s been a significant reduction and right-sizing of the cost base. There’s been a lot of exiting of non-core positions and exposures that the board have been monetizing as part of returning value to shareholders, and the singular focus now of the C-suite is maximizing the value of that residual asset in Egypt. So, a lot was achieved.

At the Sohn conference in London last December, Palliser unveiled its campaign at Samsung C&T? How are you hoping that will pan out?

We had quite a lot of dialogue with the management team prior to the conference. It’s a collaborative one for us and the call is really threefold. It’s to improve and enhance capital allocation, to improve and enhance corporate governance and to engage in a thorough reassessment of the right corporate structure for the broader Samsung Group. There’s a lot of history to this one, grounded primarily in a contentious merger from 2015, which Elliott was extremely vocal in. I led that engagement over many years. Korea has always been burdened with this discounted valuation, the so-called “Korea discount”. More recently, what we’ve observed is policymakers beginning to try and get focused on this issue and really assess how we fix this. To put the size of the issue into context, we think it’s about 40% upside if they come up with a real fix to that issue, as compared to Japan.

For us, the Samsung C&T case is the epitome of the Korea discount. There’s a lot to be gained for the family and for the group from embracing what we’re talking about in terms of improvements. That case really brings together quite a few strands. It is collaborative, we think it’s going well, certainly if I look at the local response. Even more than that, when I compare it to the 2015 situation. I think this is something that is a question of building on over time, obviously, the family and the insiders have a large position in the stock.

Over the months ahead, we hope to see further improvement and continued engagement and the management team have indicated they intend to continue engaging with us. We’re looking forward to that.

We’ve discussed Asia. Looking to Europe, what trends did you observe in 2023?

What we’ve observed, primarily through the Capricorn case, but through other situations as well is the willingness of the larger institutions to engage and to listen. Often, once it’s into a Glass Lewis or an ISS process, it’s easier for them, but the willingness to engage and listen is notable. In the Capricorn case, a number of institutions, including Legal & General Investment Management, came up very vocally in support. I think this is really encouraging. It’s healthy.

Finally, how do you feel current market conditions will influence activism and M&A activity in 2024 in the markets in which you operate?

There are quite a few trends here. We’re watching inflation figures. There are tensions in the Middle East, the tensions between the U.S. and China and you still have that regulatory headwind with groups like the FTC, DOJ and other regulators, as we’ve seen over the past 12 months. There are lots of different mixed forces. I suppose we’ll see a continued, relatively softer M&A environment, just because of the uncertainty.

On the positive side of the ledger, from a purely activism perspective, hopefully we’ll see valuations coming cheaper. Of course, we risk-manage our portfolio, but everything is always just a little bit easier when value is on your side from a fundamentals perspective. I think M&A may be a little bit quieter and a little bit softer. The way we approach activism, there will still be things to do. Perhaps they will become a bit more profitable because there is a bit of better value emerging. We’ll have to wait and see.