Update - Pzena Investment Management Inc. (PZN)
Review
In October of 2020, I provided an overview of my
investment in Pzena Investment Management (here), an
investment firm founded and run by Richard Pzena and his co-founders. The thesis of the investment was based on 4
points (downside protection, dividend payout, recovery from pandemic and
reversion to the mean for value stocks.)
Interestingly, all of these factors have come into play over the past 20
months since that write-up.
On July 26th, 2022 when PZN announced their
second quarter results, they also announced that the company would be taken private
by the current class B shareholders. As
mentioned in the previous write-up, the capital structure of PZN ensured that
any such action could not be met with significant resistance. The valuation of the “merger” was set to
provide a buyout of the class A common shareholders at $9.60, a 49% premium
over the closing price on the day it was announced.
It should be noted that the previous write-up mistakenly
mentioned that the company is run for the benefit of the class “A” shareholders
when it should have said class “B”. The
relationship between the two classes was otherwise accurate. However, what was also accurate was the
caution that the class “A” shareholders were betting that they would not
be exploited to the benefit of the “B” shareholders.
While it would be difficult to say that Pzena exploited the
class “A” shareholders, there can be no doubt that the structure of the company
was opportunistically used by Pzena to capitalize on the current market
situation and the environment that he sees going forward. While there is little point in expanding on
the details of the outcome here, it remains disappointing that a suitable investment
will be needed to replace the one in PZN.
Finding such a high-quality investment is never easy.
While I have not precisely calculated the gain from this
investment, it exceeds 50% (30% on an annualized basis) due to the sale of 6000
shares at a price of $11.60 on a basis of less than $5 over a (approximate) 9
month holding period. Shares were then
repurchased as the price has fallen over the past few months. The current holding of over 25K shares will
bring a return of 50% over a holding period ranging from 3 to 20 months. These returns are certainly far greater than any
of the major indices and do not include the nearly $10K in dividends
received. However, despite the good
return, the longer-term opportunity cannot be captured now that the company
will be taken private.
Recap Key Points
- Investing alongside outstanding investors remains a solid strategy, particularly when a company similar to PZN can be found.
- A favorable entry price was absolutely necessary for a good outcome in this case.
- In retrospect, a full sale of fully valued shares at the $11.60 price would have resulted in improved returns, however, capturing this result required market timing and knowledge of the coming downturn that ultimately returned PZN to the $6 level.
- The level of research performed was appropriate and also proved accurate.
