L1 Capital's Catalyst Fund: Reflections on activism and the art of persuasion

James Hawkins, Partner and Head of the L1 Capital Catalyst Fund, recently conducted a webinar to reflect on the evolution of the Fund, which has been active for nearly three and a half years.

The session explored key lessons learned, shifting market dynamics, and the role of activism in shaping Australian investment strategies. Here’s an overview of the insights shared during the discussion.

The importance of fund size and track record

Hawkins kicked off the conversation by emphasising a core lesson learned since the Catalyst Fund's inception: for activism, size matters.

"We're a fund of scale," he explained.

"In order to have a voice and influence, you need to be a fund of scale”, says Hawkins, adding that a fund’s track record is essential for credibility, especially when presenting an investment thesis to boards, management teams, and other stakeholders.

The Catalyst Fund’s long-only structure, aligning its interests with those of management and shareholders, has also proven invaluable. Hawkins highlighted that this alignment ensures that the Fund’s investment thesis is taken seriously.

Leveraging relationships: the advantage of L1's Capital’s market presence

Hawkins also discussed how the broader L1 Capital reputation has helped bolster the Catalyst Fund's influence.

"Other investors have known L1 for nearly two decades," he explained.

This long-standing presence has not only established the Fund as a credible player but has facilitated relationships with boards and management teams across various sectors.

He further emphasised the importance of personal relationships cultivated over the years, which also play a role when advocating strategic moves.

This established reputation has been a critical factor when engaging with both companies and other major investors, enhancing the Fund's influence.

The evolution of activism in Australia

Turning to activism, Hawkins explained how the landscape has evolved since the Catalyst Fund’s launch.

He pointed to a significant increase in capital dedicated to activism within Australia.

“The pool of capital in Australia dedicated to activism is much larger now than when the Catalyst Fund started,” Hawkins said, referencing the approximately $1.7 billion in assets the Catalyst Fund now manages.

He also noted that industry super funds have become more inclined to engage in activism, a trend that aligns with broader shifts in Australian investing behaviour.

Unlike the US or Europe, where activism often plays out in the public eye, Australian activism tends to be more private, especially for industry super funds.

"Nine out of ten activist engagements in Australia happen behind closed doors," Hawkins explained.

This approach, he suggests, aligns better with the larger scale of funds in Australia, where investors have the power to influence change without needing to go public.

Passive investments and their impact on Australian markets

Hawkins also discussed the role of passive investing in shaping the Australian market.

The significant growth in passive strategies, driven largely by industry super funds, has led to both challenges and opportunities for the Catalyst Fund.

"The influence from the active part of the register is enhanced because there’s a larger percentage of passive investors who won’t engage with companies as we will," he noted.

The growth of passive has created a scenario where large, non-engaging investors leave space for active funds like the Catalyst Fund to exert more influence.

One stark example of this trend is seen in the Big Four Banks, which dominate the ASX index. Hawkins pointed out that these banks now make up a disproportionate share of the index’s returns.

"They make up a quarter of the index, yet they were responsible for nearly 70% of the ASX 200 accumulation index's returns calendar year to date," he remarked, calling it an unusual and somewhat concerning development.

However, the surge in passive capital also presents opportunities for smaller companies, particularly outside of the ASX 20.

"We see much larger opportunities outside of the ASX 20, but still within the ASX 200," Hawkins noted. For these smaller companies, the Catalyst Fund can often make a more meaningful impact on governance, which is harder to achieve in the larger financial institutions.

Activism: the art of persuasion

Hawkins elaborated on the strategic side of activism, often describing it as a mix of “reading the tea leaves” and the art of persuasion.

"When we engage with company management, the key is to understand the motivations behind their choices and then persuade them toward a different course of action – one in the best interest of the shareholders.”

When engaging boards and management, the Catalyst Fund uses a combination of in-house analysis, third-party advice, and detailed presentations to back up its proposals.

Hawkins emphasised that the Fund’s experience with both local and offshore listed companies provides a unique advantage, bringing fresh perspectives to Australian boards.

Public vs private activism strategies

Hawkins also discussed the difference between public activism (big "A") and private activism (little "a").

"90% of activist engagements happen in private," he said, explaining that private engagements are often more effective in Australia due to the market’s smaller scale.

However, public campaigns, like those involving Santos (ASX: STO) , also play a role when there is a need to socialise an investment thesis across a wider investor base.

Looking ahead: Optimism for the Catalyst Fund's future

Looking forward, Hawkins expressed optimism for the Catalyst Fund’s prospects.

"We feel confident about the outlook because we’ve been sowing the seeds for the last three years, and now those seeds are starting to bear fruit," he said.

With an established reputation, improved relationships with company management, and the continued rise of activism in Australia, Hawkins believes that the Catalyst Fund is well-positioned for long-term success.

The outlook for the Fund remains strong, especially given the anticipated reversion of valuations in the financial sector and the continued demand for active, uncorrelated investment strategies.

If you would like to watch the L1 Capital Catalyst Fund webinar in full, you can do so here.

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