Global Finance - USA (2020-09)

PHOTO CREDIT TK

do from in front of a computer, such as listening to past confer-

ence calls with management and checking legal databases and

archives. If we find something interesting, we invest in “deep

due diligence,” which consists of an in-depth investigation and

undercover fieldwork to unearth the company’s skeletons. We

look at thousands of companies quarterly, but manage only a

couple of campaigns per year.

GF: Once the fund is happy with what it has found, what is its

next step?

Grego: The final part is publishing our findings and battling

with the company’s management. It usually ends up being very

confrontational.

GF: What success has Quintessential had thus far?

Grego: Of all the campaigns we have conducted against compa-

nies that we believed were fraudulent, we have put four com-

panies entirely out of business, and another four have been

injured severely. In all cases, every time we said anything against

a company, its board has kicked out the management, which

the authorities later prosecuted. In one case, they are serving

jail time right now.

GF: Do you have any advice for investors who are considering

adopting the strategy?

Grego: You have to be a bit crazy because it elicits a lot of

hostility from almost everybody—the shareholders and even

the regulators. Until you prove yourself right, you make the

regulators look like idiots, which is unfair since

they cannot prevent every fraudulent company

from going public. It is impossible to do since

there are too many companies. Regulators are

there to clean up after somebody shows them

the truth. In some countries, they do not like

us because of that. But in the US and other

countries, the regulators actually do like us.

GF: Will AI or other tech make the strategy

obsolete?

Grego: This cannot be made obsolete by tech-

nology. A lot of investment management is being

replaced with quantitative and algorithmic trading, but this is

based on real old-fashioned detective work, which is difficult to

outsource entirely to a computer.

GF: Have recent short-selling bans around the globe hampered

you in executing your strategy?

Grego: It has not affected it very much. We weren’t looking at

any companies affected by the short-selling bans. The Covid-

19 crisis has made it difficult, but not impossible, to travel and

investigate. ■

Shorting

For Health

Quintessential Capital

Management Managing Partner

Gabriel Grego explains why his

much-maligned “short activism” is

good for investors and markets.

Global Finance: How would you describe your firm’s “short

activism” strategy?

Gabriel Grego: It basically means looking for a fight with a

company that’s either committing a total fraud or where the

management team is breaking the law and committing serious

crimes that are hidden from the market. We look for opportuni-

ties where there is a suspicion that the company is misbehaving

and analyze it, sometimes for several months, until we extract a

critical mass of information that can prove our thesis or prove

that the company is misbehaving. We then publish our findings

suddenly and as loudly as possible to collapse the company’s

share price and start a chain reaction that typically brings regula-

tors and legal authorities to the table.

GF: Do you consider activist-shorting to be a

moral strategy?

Grego: Its beauty is that it eliminates bad apples

from the market and establishes deterrents to

those who want to be bad apples. Next time,

they will have to think twice about the risks

they could face. One day, out of the blue, we

could show up and try to put an end to them.

GF: How do you find likely candidates for the

strategy?

Grego: We have a network of people and

friendly funds, and are continuously scanning the media and

other sources for cases where a company might be hiding and

doing something illegal. We look very carefully every time there

is a very hot industry like bitcoin, cannabis or companies claim-

ing to be curing Covid-19. Any time there is an industry with

all that euphoria, it usually attracts bad people and fraud.

GF: Once Quintessential identifies a potential opportunity, what

comes next?

Grego: First, we do due diligence, which is everything we can

September 2020 | Global Finance | 11

GLOBAL SALON

By Rob Daly