The first thing I learned in a wide-ranging conversation with Gary Retelny, the CEO of ISS since 2011 when it was still part of MSCI, was that reports of an IPO were indeed true. “I would hope that we would be close to that point, in 18 to 36 months. I don’t think we’d be ready to go public before then, but that sounds realistic.”
That means a listed ISS in 2019, or thereabouts. I asked if there were any kind of timeline for it? “There’s no timeline,” he replied, “but one of the things that I’ve learned when I talk to bankers is that you need a proper scale; if you don’t have the right market cap it’s really hard for institutional investors to get interested when the stock is too small. I would be very surprised if it was 18 months; I would be very disappointed if it was longer than three years.”
I replied that because the IPO would be dependent on ISS’s market capitalization, would it therefore be dependent on making the acquisitions that must be in the pipeline? “You got that right,” he said. “It will be dependent on two things: it will be dependent on how effective we are in our new product initiatives, organic growth, and then, of course, how successful we are in both buying and integrating, appropriately, acquisitions.”
The conversation concentrated on the move from Vestar to Genstar, ISS’s future acquisition strategy, what a listed ISS might look like, whether there were any plans to hive off the corporate solutions business that has been the object of much criticism, and finally whether there were any plans to change the company’s name.
I started with the new owner, Genstar. Vestar made a handsome profit between acquisition and sale. Is Genstar expecting this or are they in it for the long term, I asked? Retelny replied: “This was a management-initiated transaction without bankers. Vestar, when they got into it, just as Genstar is now, were in it for the long term. That’s the only way these things work. It doesn’t mean that they won’t take advantage of opportunities down the road, and I will be the first one to encourage them to do so if it makes sense. But Vestar and Genstar were both looking at this as a long-term investment and were very interested in our prospects and plans and were very patient investors. And an IPO is clearly within our range of possibilities. Genstar is in support of many of the decisions not only that I made under Vestar but also those that I’ve made since Genstar acquired us. We are running ISS for the long-term and that’s fundamentally driven by what our clients want.”
Retelny said, in answer to my question about why he had made the decision to leave Vestar and go to Genstar: “Vestar was a wonderful partner, and we could’ve seen ourselves working with them for years to come, but they are also a private equity firm and they’ve been in the investment three+ years, but I’ve also been speaking to Genstar for almost three years as well. There are a lot of things that I want to do investment-wise to continue to strengthen our core proxy business as well as our ESG business. Having Genstar with us at the beginning of this process is going to be very supportive, and I didn’t want Vestar to, if you will, get hurt in the process by a very aggressive investment plan when they were three and half years into the process.”It sounded like Genstar was going to be a source of additional cash flow for ISS’ future investments? “Yes,” said Retelny, “they are not only supportive of using internally generated cash flow, and, if we need further investment for other acquisitions, they have said that they’ll be extremely supportive.”
We’ve seen a concentration in the ESG space, Morningstar’s investment in Sustainalytics, MSCI’s purchase of GMI Ratings, S&P buying Trucost, to name a few. I knew that ISS had been on the acquisition trail for around 18 months and I said to Retelny that I assumed that was going to continue, since it was part of the motivation for the sale to Genstar. Could he me an idea of the general tenor of acquisition strategy over the next six to 12 months.
“As far as I know,” he replied, “ISS has been much more aggressive in acquiring companies than anyone else in the space. We’ve done three acquisitions in the E&S space and we’ve done five acquisitions in total since we separated from our former parent. We are looking at other opportunities particularly in the E&S space, globally. We look at a lot of companies and many of those don’t turn into a realistic transaction. We are looking to continue to strengthen our E&S platform to complement what we believe is the strongest ‘G’ [governance] platform in the world.”
Was there was any particular region that needed to be strengthened? “I would say expand and strengthen globally,” he replied. Retelny would not get into specifics about countries or companies but also stressed that he did not want to give the impression that they were de-emphasising the legacy businesses.
“We are very keen on improving not just the content but also the plumbing that goes with those businesses,” he noted. But he also stressed that given the increased interest in the E&S space, and client demand, there was a compelling case for them to make these acquisitions. Are there acquisitions in the pipeline?
“Yes, there are. We do have acquisitions in the pipeline,” he said, “but that’s a very broad statement. I don’t want to give you the impression that we are weeks away from announcing something. We keep an active pipeline of potential acquisitions, but I don’t want to convey to you that because they’re in the pipeline we are negotiating or close to closing.
“The ‘soft’ issues with acquisition, the ability to integrate people, for example, are very important to us. We are not cost cutters, we are builders.
“There are companies out there that can be acquired and we’re in conversations with many of them, but sometimes you look around and think to yourself: this would not go well, either the people fit is not there or the product fit is not there.”
There has been an expansion of ISS’s services, knowledge base, skills, products etc. beyond its traditional role as a proxy advisor. If it were to go far enough beyond being just a proxy advisory firm, would this mean it would avoid being subject to legislation in the works that seeks to “regulate” proxy advisory work?
“We hope that the legislative efforts that are underway are modified by educating those legislators,” he replied.
“We spend a good deal of time making sure that our legislators are informed about what this bill says and why it’s not a good idea, and what the impact is for shareholders, the owners of the business. This is all about the owners of the business, not the proxy advisors. We oppose those bills. Having said that, the growth of our business in the E&S space is being driven by client demand. We don’t know what form the final bill will take, which means that E&S could be covered by the bills as well; many of the things that they are trying to do would apply as easily to the E&S space.
“Maybe it doesn’t end with proxy advisors, maybe it continues into the E&S space and even into the indexers. Avoiding the legislation is not part of our strategy. And our strategy might take us away from oversight or it might take us further into it.”
As a public company rather than a private one could the differences in how it might be regulated under the proposed legislation be similar to the difference in the regulation of privately and publicly-owned banks? I asked whether he thought, if the regulations did go through, that it would mean two sets of regulations, for listed and unlisted advisors?
“That’s a good point,” Retelny responded, “but I should emphasise that we remain extremely committed to our core proxy advisory business. We are already a registered investment advisor so our primary regulator is the SEC.
“If we became a public company there would be whole set of different regulations that we have to follow.”
I asked if ISS had a board already. “Just like before, yes,” said Retelny, “but it is mostly made up of the private equity partners, like it was with Vestar, and I’m also on the board. We have put forward the appropriate disclaimers for the board in regards to their non-involvement in ISS policy matters, other than myself of course.” The board members are not listed anywhere, however, since it is not a requirement. “No, we don’t list our board members,” commented Retelny, “probably because we don’t want them to be driven crazy with calls. Genstar has disclosures on its own website, which will probably say who the lead partners are, but that’s all.”
Then I moved on to the question of the corporate solutions business. From the outside, the corporate advisory work would seem to have been a thorn in the side of ISS for a very long time. I asked what portion of revenues were generated by that part of the business, but ISS does not make such disclosures, again because it is not required to.“We do get a number of attacks based on the fact that we own the corporate solutions business; these can be from competitors or others who don’t understand what we are doing. Just to be clear, we are interested in continuing to grow that business. We have proper procedures with regard to firewalls and managing potential conflicts of interest, just like many other financial institutions. It’s a business that we like, and that our clients like, but it is totally unrelated to our other businesses. It’s not a thorn to us, we’re proud of it and of the accomplishments of those teams. We made an explicit decision many years ago that this is an important business and our clients understand how we mitigate any conflicts. We understand the sensitivities, but there are no plans to change that business.”
He said the amount of criticism has reduced “significantly” in his time at ISS. “Corporate advisory and corporate consulting are a part of the offerings of the corporate solutions business, and that’s why it’s branded this way, but it is very strong on data and analytics that are factual. The advisory component comes into play with regards to the data and analytics that we are providing clients.” HE added that ISS doesn’t compete with compensation consultants or advise companies on their engagement with proxy firms.
“But we are in the advisory business as far as it relates to our data and products, we are not advising people like a compensation consultant does. It’s an important distinction. But maybe we haven’t done such a good job communicating that.” I commented that it may not be poor communication, but just persistence. Once there is a story out there that ISS advises companies on how to have a better ISS QualityScore, however erroneous it may be, it’s really difficult to get rid of it. “Yes, it is difficult, because it’s a nice little snippet to use to criticise us, even though it’s inaccurate. What we try to do in the corporate solutions business is to try to get companies to have better governance, broadly defined, which would lead to a better outcome whether it’s ISS or any other proxy advisor.”
As for a post-listing rebrand, Retelny was adamant about remaining ISS. “We are very happy with our brand, it’s a global brand that stands for the best in shareholder governance. There are no plans to change it now and there are no plans to change in the future. Hopefully the ticker that we would like is available.” So what is the brand value? “A leading global governance company engaged in the provision of data, analytics and insights to empower clients seeking to effectively manage ESG risks and realise long-term value.”