Harbor Spring Capital, LLC Comments on Urgent Need for More Substantial Change at Intertrust N.V. Following Announcement of Share Repurchase Program
Harbor Spring Capital, LLC (“Harbor Spring” or “we”), a global, fundamentals-based and long-term-oriented investment firm, today comments on the announcement of a €100 million share repurchase program by Intertrust N.V. (“Intertrust” or the “Company”) [Euronext: INTER]. Harbor Spring, through the investment funds it manages, is a long-term shareholder in Intertrust and the beneficial owner of approximately 4.5 million shares of the common stock of the Company, representing approximately 5% of Intertrust’s total shares outstanding.
Harbor Spring has an extensive history of private engagement with Intertrust, dating back to the Company’s 2015 initial public offering and continuing through this week. We believe that while Intertrust has the potential to be a market-leading company with substantial growth opportunities in the attractive, technology-enabled administrative services industry, the Company continues to follow a flawed approach that has delivered nearly six years of unacceptable operating and share price underperformance.
Intertrust’s announcement this week of a share repurchase program follows the most recent letter (reproduced below) that we sent to the Company’s Supervisory and Management Boards on 20 September 2021. Harbor Spring believes the announcement is a long-overdue step in the right direction, and we support the Company’s stated emphasis on investing in the business to drive better organic growth. Harbor Spring agrees with the Company’s statement in the press release announcing the share repurchase program that “the current market valuation of the Company does not accurately reflect its intrinsic value.”
However, we strongly believe that a one-time share repurchase program alone falls meaningfully short of the full set of concrete and timely actions required to address the Company’s underperformance and create long-term value for all stakeholders. Harbor Spring is disappointed that further measures were not announced after what the Company describes in the press release as “a process undertaken over recent months.” We once again urge the Intertrust Supervisory and Management Boards to take greater steps to improve capital allocation, improve governance and explore strategic alternatives, as outlined in our most recent letter and in repeated interactions with the Company over time.
Harbor Spring has chosen to publicly issue its most recent letter to the Company to better inform stakeholders of its long-held view that substantial and urgent changes are required to prevent continued underperformance and possible permanent impairment of the Company. We continue to seek constructive engagement with the Intertrust Supervisory and Management Boards, with an expectation that the Company will publicly communicate decisive action on the topics contained in our most recent letter on or before its November 2021 Capital Markets Day.
The full text of the letter can be found below.
20 September 2021
Supervisory and Management Boards
Prins Bernhardplein 200
1097 JB Amsterdam
Supervisory Board Chairperson Hélène Vletter-van Dort
Chief Executive Officer Shankar Iyer
Dear Prof. Vletter-van Dort, Mr. Iyer and Other Members of the Supervisory and Management Boards:
As you know, Harbor Spring Capital, LLC is a global and long-term-oriented investment firm that manages investment funds (together, “we”) through which we have been long-term shareholders of Intertrust N.V. (“Intertrust” or the “Company”). We participated in the Intertrust initial public offering in October 2015. Since the Company’s September 2016 secondary offering, we have continuously maintained a position as one of the Company’s largest shareholders. We have increased our stake over time, and since February 2019 we have held 4,487,760 shares, representing nearly 5% ownership of the Company.
We believe that Intertrust possesses significant competitive strengths and the potential to be a market-leading company with substantial growth opportunities in the attractive, technology-enabled administrative services industry. We have been long-term supporters of the Company, engaging with the Supervisory and Management Boards for many years through in-person meetings, phone calls, videoconferences, emails, letters and participation in Intertrust’s Annual General Meetings. We have worked with you constructively, patiently and in good faith on topics relevant to the Company and all of its stakeholders, with particular emphasis on long-term value creation through improved capital allocation, management compensation design and investments in technology-enabled growth.
While we appreciate that the Supervisory and Management Boards have received our input and analysis over time, we are disappointed by the Company’s failure to act on most of our suggestions. Instead, Intertrust has continued to execute what we view as a flawed strategy and has delivered unacceptable results that we believe indicate inadequate governance, poor judgment and complacency. Intertrust and its stakeholders have experienced nearly six years of exceptionally bad but avoidable operating and share price underperformance:
- The Company’s low single-digit annual organic revenue growth has lagged the double-digit rate of its closest public peers,1 and Intertrust’s operating margins have declined every year and substantially overall.2 This performance contrasts meaningfully with projections the Company has provided along the way for higher growth and improving margins.3
- Intertrust has experienced worryingly frequent turnover of senior executives,4 creating uncertainty and damaging morale among employees while hampering focused execution, particularly on technology-enabled growth.
- The Company has demonstrated considerable weakness in its compliance processes and systems, falling short of its responsibilities to clients, regulators and the public, as highlighted by the magnitude of the recent fine by the Cayman Islands Monetary Authority (CIMA) and the remediation costs required to address shortcomings.5
- Intertrust has delivered an abysmal total shareholder return of approximately -16% in its nearly six years as a public company, with a current share price near all-time lows.6 Over the same time period, peers and relevant equity market benchmarks have provided dramatically better performance for investors.7
We believe substantial and immediate changes are required to prevent continued underperformance of the Company and ongoing value destruction for its stakeholders. To help the Company reset for a brighter future, we re-iterate in this open letter, for the benefit of all stakeholders, what we have repeatedly and consistently urged you to do:
- Improve capital allocation – Adopt an updated and opportunistic rather than outdated and formulaic policy, prioritizing the most attractive long-term returns on invested capital available. Intertrust is a high-cash-flow-generating and growth-oriented company, currently positioned to take advantage of the stark gap between its confidence about its long-term prospects and the skepticism reflected in its public market valuation. Thus, at current and even substantially higher share prices, the optimal approach calls for: (a) targeted operating and capital expenditure investments in technology, high-performance employees and other infrastructure to support better and sustainable growth; (b) financial investments in the Company through immediate implementation and execution of a share repurchase program using all available annual free cash flow, given the large extent to which depressed market prices diverge from the Company’s intrinsic value per share; (c) a removal of near-term debt reduction as an objective, given the prevalence of low interest rates and the Company’s ability to deleverage over time with organic growth; and (d) elimination of the dividend, a tax-inefficient form of capital return and inferior driver of long-term shareholder returns as compared to alternative uses of the same capital for internal investments, share repurchases and value-added acquisitions.
- Improve governance – Raise performance expectations for the Supervisory and Management Boards while aligning their interests with those of stakeholders, including long-term shareholders. The Supervisory Board urgently requires new members who provide fresh thinking, greater diversity, domain expertise, stronger track records, a demonstrated intolerance for mediocrity and economic alignment of incentives with long-term shareholders. The management remuneration plan should be enhanced to include more appropriate and ambitious targets, providing greater compensation opportunities for outstanding performance on metrics that drive excellence in stakeholder value, including meaningful growth in long-term shareholder value.8
- Concurrently, explore strategic alternatives – Evaluate opportunities to unlock value by formally engaging with interested strategic and financial acquirers who are optimistic about the industry and well-positioned to drive enhanced performance of the Company under their ownership. We have observed the Supervisory and Management Boards being pulled in multiple directions. Without appropriately bold leadership that pushes forward in what we believe to be the right direction, inertia and attempts to partially satisfy divergent and sometimes competing stakeholder wishes have prevented Intertrust from meeting even the most basic of reasonable stakeholder expectations. Given the high level of investment and acquisition activity in the Company’s sector, we believe a time-limited and efficient process would highlight attractive alternatives to a public market that materially underappreciates the Company. Without substantial changes to strategy and governance, Intertrust and its stakeholders would be better served under private ownership. We strongly believe the Company’s intrinsic value would be discovered if the Supervisory and Management Boards publicly signaled a willingness to seriously explore strategic alternatives through a proactive and comprehensive process.
As reflected in our large and longstanding ownership stake in the Company, we maintain great conviction in Intertrust’s long-term opportunity as a leading enterprise in its industry. However, we are convinced, as we trust other stakeholders are, that timely changes to the Company’s strategy and governance are required for it to achieve its potential to deliver value for all of its stakeholders. It disappoints us that our constructive engagement with the Company for nearly six years has not resulted in greater change and positive outcomes. After years of failures on multiple fronts, the Company is now vulnerable to permanent impairment. We believe the operating and share price performance of Intertrust since its initial public offering clearly indicates that the time has come for meaningful change and a new path forward.
We are ready to assist and advocate further and more deeply on the topics above to help position Intertrust for long-term value creation for all of its stakeholders. We look forward to continued dialogue and productive engagement with you and other stakeholders in advance of the November 2021 Capital Markets Day, with an expectation that by that time the Company will publicly communicate decisive action on the topics above.
Harbor Spring Capital, LLC
About Harbor Spring Capital, LLC
Harbor Spring Capital, LLC is a global, fundamentals-based and long-term-oriented investment firm that manages funds for foundations, endowments, family offices, pension funds and other institutional and individual investors. Founded in 2012 and headquartered in New York, it follows a comprehensive research process to seek investments in a select number of high-quality public and private companies.
Harbor Spring Capital, LLC and certain of its affiliates and controlling persons (collectively, “Harbor Spring”), is publishing this announcement solely for the information of other stakeholders in Intertrust N.V. (“Intertrust”). This announcement is not intended to be and does not constitute or contain any investment recommendation as defined by Regulation (EU) No 596/2014. No information in this announcement should be construed as recommending or suggesting an investment strategy. Nothing in this announcement or in any related materials is a statement of or indicates or implies any specific or probable value outcome in any particular circumstance. This announcement is provided merely for general informational purposes and is not intended to be, nor should it be construed as (1) investment, financial, tax or legal advice, or (2) a recommendation to buy, sell or hold any security or other investment, or to pursue any investment style or strategy. Neither the information nor any opinion contained in this announcement constitutes an inducement or offer to purchase or sell or a solicitation of an offer to purchase or sell any securities or other investments in Intertrust or any other company by Harbor Spring or any fund or other entity managed directly or indirectly by Harbor Spring in any jurisdiction. This announcement does not consider the investment objective, financial situation, suitability or the particular need or circumstances of any specific individual who may access or review this announcement and may not be taken as advice on the merits of any investment decision. This announcement is not intended to provide the sole basis for evaluation of, and does not purport to contain all information that may be required with respect to, any potential investment in Intertrust. Any person who is in any doubt about the matters to which this announcement relates should consult an authorized financial adviser. To the best of Harbor Spring’s ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources that Harbor Spring believes to be accurate and reliable. However, such information is presented “as is”, without warranty of any kind, whether express or implied, and Harbor Spring has not independently verified the data contained therein. All expressions of opinion are subject to change without notice, and Harbor Spring does not undertake to update or supplement any of the information, analysis and opinion contained herein.
Not for release, publication or distribution, in whole or in part, directly or indirectly, in, into or from any jurisdiction where to do so would constitute a violation of the relevant laws of that jurisdiction. The distribution of this announcement in certain countries may be restricted by law and persons who access it are required to inform themselves and to comply with any such restrictions. Harbor Spring disclaims all responsibility where persons access this announcement in breach of any law or regulation in the country of which that person is a citizen or in which that person is residing or is domiciled. Harbor Spring is a registered investment adviser with the U.S. Securities and Exchange Commission.
1 Intertrust’s annual organic revenue growth of 3% from 2015-2020 compares to 13% for Sanne Group PLC and 12% for JTC PLC over the same time period.
2 Intertrust’s adjusted EBITA margin declined from 41% in 2015 to 33% in 2020.
3 In 2016, the Company provided medium-term objectives of organic revenue growth exceeding 5% and EBITA margin expansion. Since then, growth targets have been revised downward and margin guidance has been reset lower several times after previous guidance was missed.
4 The Management Board is now led by its third Chief Executive Officer and fourth Chief Financial Officer in six years, and the Company has experienced the loss of several senior client-facing professionals to competitors.
5 On 13 May 2021, CIMA levied an approximately €4 million fine against Intertrust, citing breaches of statutory obligations. The Company has announced €12 million of additional remediation and compliance costs for 2021, with a similar amount expected for 2022, bringing the projected total direct costs of correcting compliance deficiencies to a surprisingly high €25-30 million.
6 Through 17 September 2021.
7 Approximately 259% for Sanne Group PLC, 191% for JTC PLC, 94% for the Amsterdam Midkap Index, 58% for the STOXX Europe 600 Index and 115% for the MSCI World Index, with JTC PLC performance measured from its March 2018 initial public offering.
8 We continue to call for the potential for greater management remuneration, based on higher targets and metrics including organic growth of revenue and EBITA, growth of earnings per share and free cash flow per share, return on invested capital and total shareholder returns.
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Harbor Spring Capital, LLC
+44 (0) 7989 528421
Dan Gagnier / Jeffrey Mathews
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