(Bloomberg) -- The era of a few giant tech firms controlling stock market gains is quickly coming to an end, according to activist investor Nelson Peltz.
The founding partner of Trian Fund Management — which has taken stakes in companies including Kraft Heinz Co. and Procter & Gamble Co. — said a US recession is likely, but high-quality businesses with strong cash flows will emerge more valuable after years of taking a back seat to high-flying growth stocks.
“Those are the kind of companies that we invest in,” he said on an episode of “Bloomberg Wealth with David Rubenstein’’ on Bloomberg Television. “They're really wonderful companies that generate cash.”
Peltz, 80, is known for taking large equity stakes in underperforming corporations and campaigning for changes. This year, he joined the board of Janus Henderson Group Plc, an asset manager that has struggled to retain clients after shuffling through three chief executive officers in five years. He’s also built a stake in Unilever Plc and was recently appointed as a non-executive director.
“We see companies that were once great but have lost their way, and we have a plan for them to get back to greatness again,” he told Rubenstein, a co-founder of Carlyle Group Inc. “We're not there to do all the terrible things that typically go along with the term ‘activist.’ We're just trying to get these companies to operate better, the way they used to.”
Peltz’s path to becoming a finance titan was circuitous. He grew up in Brooklyn, with his father running a produce and frozen food distributorship in Manhattan. After high school he enrolled at the Wharton School of the University of Pennsylvania but dropped out after a year to become a “ski bum” in Maine.
“I was quite bored at Wharton,” he said. “I felt that was the wrong place. What I really wanted to do was ski.”
He eventually returned to New York and began working at the family business while investing on the side, using his bar mitzvah money and contributions from friends and relatives. He spent the next decade or so expanding the food distributorship through acquisitions before taking it public in 1973 and eventually selling it to a group of investors.
He started Trian in 2005 with partners Ed Garden and Peter May, and the New York-based firm has since completed 35 deals.
Peltz has 10 children, including daughter Nicola, who recently married Brooklyn Beckham, the son of former soccer star David Beckham and British singer-turned-fashion designer Victoria Beckham. An avid hockey fan, Peltz built a backyard ice rink for his kids, one of whom was drafted by the NHL’s Ottawa Senators. “I'm probably the only person you've ever interviewed that owns a Zamboni,” he told Rubenstein.
Peltz, who splits his time between New York and Palm Beach, Florida, said he’s not sure how much longer he’ll keep working, but his mother lived to be 108.
“I don't think I'll make it to 108,” he said. “But I don't plan on going anywhere too soon.”
For more insights from the biggest names in investing, watch “Bloomberg Wealth With David Rubenstein.” Peltz’s interview airs July 26 at 9 p.m. ET on Bloomberg Television. The following has been condensed and edited for clarity.
Inflation’s high and the economy may go into a recession. How does that affect your business?
It affects every business. The problem for those of us who invest in public securities as opposed to private ones is that unless you were in 12 or 14 stocks, it was really hard to keep pace with the S&P over the last five or six years.
It was ridiculous. All of the gains came in a dozen or so stocks. Today there’s a reversal. Even though we're going to be in a recession, I think cash flow, stability, good quality companies are going be valued once again when this is all over. Those are the kind of companies that we invest in. They're boring companies, but they're really wonderful companies that generate cash.
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When you've taken activist stakes, how often does the CEO say: “Thanks, I really want your advice.” And how many say: “Thanks but I don't need your advice”
I don't remember anybody ever saying the former. But not very often have they been as tough as you said on the latter. Clearly, they're not thrilled to see us. But what usually happens is that these stocks go up, and they go up nicely for the right reasons — because sales have gone up, market share has gone up, earnings have gone up. We tell them what we think they're doing wrong.
The most recent one, which is really interesting, was Procter & Gamble. It was about a $70 stock for almost 10 years, and the biggest consumer company in the world. But they were giving away market share wherever anybody was challenging them. We didn't think the company was structured properly.
So we went to them and gave them a plan, and said, “Look, there's one CEO. No one has P&L responsibility in this company anywhere other than the CEO.” So we gave them our structure. They rejected it. We had a proxy fight. We finally won our board seat, and the shareholders won.
How do you decide which companies to invest in?
The companies that we think we know something about their industries. Anything consumer, including restaurants, asset management companies.
How are you received by a company’s board when you say: “Here's what I want you to do.”
First of all, we don't bring that to the boardroom. Our time is spent with the CEO, the chairman, the CFO, and we share our plans with them outside the boardroom. It's always best done the day before, the week before, outside that room. We wouldn't be there if they really were doing well. So it's hard for them to tell us straight-faced, ‘We're doing well.’
Years ago, if you tried to change a company, people said: “You're a raider. You're an activist. You're not good for America.” How’s that changed?
Investors want their portfolios to perform. And they haven't performed. What people don't understand is that we are making their portfolios better. We are making mega-cap stocks. Nobody is going to buy P&G. Nobody is going to buy Unilever. There are only a few people who can have an impact on a company like that. Those stocks are probably in 50% of pension fund portfolios. That's what we need to do.
What is the pleasure for you in doing this?
I like fixing things and I like growing things. I guess I suffer from a little ADD in that it's hard for me to focus on one business, which I was able to do when I was younger. When I built the packaging company, I loved doing that. But at the end it was getting a little tiresome.
What would you say is the most common mistake an investor makes?
They lose sight of their own common sense, their own judgment and start to get swept up in a tide of euphoria. There are companies today that, finally, the market woke up to them. But they had 10-plus years of phenomenal market share growth and never generated one dollar of free cash flow. The markets kept rewarding them until they finally stopped.
What was the best investment advice you ever got?
Sales up, expenses down. My father told me that. And that's why I dropped out of Wharton. I knew I didn't need to know much more.
To contact the author of this story:
Claire Ballentine in New York at [email protected]