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Company: SLM Corp. (SLM)
Business: SLM originates and administers private education loans to students and their families to finance the cost of their education in the United States. It also offers retail deposit accounts, including certificates of deposit, money market deposit accounts and high yield savings accounts. Additionally, it serves students and families through financial aid, federal loans, and student and family resources.
Market value: $5.3 billion ($18.25 per share)
Activist: Impactive Capital
Percentage of ownership: 5.54%
Average cost: $15.06
Activist Comment: Impactive Capital is an activist hedge fund founded in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar. Impactive Capital is an active ESG (AESG™) investor who launched with a $250 million investment from CalSTRS and now has over $2 billion. In just three years they have made a name for themselves as AESG™ investors. Wolfe and Asmar realized that it was possible to use tools, especially social and environmental ones, to generate returns. Impactive focuses on positive systemic change to help create more competitive and long-term sustainable businesses. The company will use all the traditional operational, financial and strategic tools used by activists, but will also implement ESG changes that they believe are important to the business and that drive company profitability and shareholder value.
What is happening?
Impactive Capital has declared a 5.54% stake in SLM for investment purposes.
In the wings
SLM is a unique and high quality company in the financial industry, specializing in student loans. There is a very negative perception in the market for government backed or implicitly guaranteed loans. However, SLM has not provided government-backed student loans since 2010. In 2014, the company spun off all of this business as Navient Corporation. Since 2014, SLM issues private student loans which they underwrite and assume the risk. As a result, they have a very healthy loan portfolio with 86% of loans co-signed by a parent of the student, an average FICO score of around 750, and a loss rate of 1%.
Impactive has held this stock since its very first 13F filed for the fourth quarter of 2019, and likely longer than that. This is an incredible core business and one that should continue to grow if management focus on it and withdraw from non-core projects. That’s exactly what management is doing with a CEO who not only knows how to run a business effectively, but truly understands capital allocation and how that drives shareholder value. So the company originates loans, sells the loan portfolio for 105-109 cents on the dollar, and uses the proceeds to originate new loans and buy back stock – rinse, repeat. This process will only increase annual profits and shareholder returns.
Impactive always has an ESG thesis in every one of its investments and this is no exception. While this is not necessarily a situation where Impactive will sit on the board, we expect this to be a situation where Impactive is heavily involved in the business and where they can implement AESG™ activism consistent with their investment thesis: using ESG to drive value creation and profitability.
By its very nature, SLM is a high “S” company because it provides loans to students to pursue higher education. But they can do even more by working with this demographic and we expect Impactive to work with them on ESG initiatives. For example, many companies today, such as Warby Parker, have give and take programs where charitable contributions are made in direct relation to business creation. SLM currently donates to charity, but can do more in ways that will help their business. For example, they could donate a percentage of each loan they generate to a charity chosen by the borrower. This has obvious advantages for society, but also for the company. This is the kind of thing that resonates with the borrower demographics of the business, it will strengthen the relationship between the business and the borrower, and it will give it a marketing advantage over competitors who don’t. Additionally, it makes the loans stickier because borrowers would be less likely to refinance, making the loans more valuable to the lender.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.