How Linear’s investors won out after a shaky start


By Patrick Liddy*

During the war for the unification of Germany, French general Auguste-Alexandre Ducrot coined the phrase: “We are in the chamber pot and are about to be shat upon”. True story.

Seeing the game was up, Napoleon III sent a message to allow surrender to the Germans: Wilhelm, Molte and Bismarck. Offered a flask of brandy, Bismarck toasted everyone in English: “Here’s to the unification of Germany”, and promptly drank the entire flask himself.”

A lot of Australian investors must surely reflect on the words of Ducrot. With our regulators having far less power and money to operate than those in Europe, the UK and the US. Many things that could be punished are not. That’s one of the reasons that regulators encourage class actions.

So, it fills my heart with some glee when someone does the right thing and turns a return disaster into a positive outcome for investors.

As I reflect on Bismarck’s words, grabbing my flask and saying to myself: “Here’s to Colin Petersen and what he did at Linear for investors”. It’s a story worth telling, not just because it has a happy ending but more so because it shows the determination and cunning of Petersen to ensure that the outcome to investors was the right one.

It all started back in the 1980s when Petersen pioneered the managed accounts concept, but it was not until the early 2000s when he met the promising young technologist Chris Hipkin that things really started to happen.

Petersen provided the over-arching strategy, seed investors, client base and industry knowledge for their venture. Hipkin provided the technical smarts.

Thus, Linear was born. It grew and just before its merger with the listed in 2017, it had around $9.5 billion on the platform, along with some of the biggest names in retail distribution. It is, perhaps, the most functionally rich individually managed account platform in the industry.

The story started to get really interesting last year when IOOF made an offer for Linear – one that seemed to have been approved by the board, but luckily for investors was not.

The offer put the share price at around $2.64.

For Petersen that figure would have been a disaster for private investors from whom he’d originally raised money. After 14 years of patience, some would lose a lot of their original capital.

He was “furious with the management decision”, he says, and decided he could do better. By quietly getting the critical number of shareholders through, he was able to turn the decision on its head. He got the “invisible hand of capitalism” working for him through bringing more bidders into the process. He did this by personally meeting with the Linear shareholders and persuading them that the original offer was not in their best interests and he could “through a competitive process” increase the value of their holdings.

This was not done without internal conflict in Linear, and with a personal cost to Petersen and many a bruised ego. There were a few “forced” departures, but the result was the share price went from $2.64 to $8.57.

Needless to say, the investors did well out of it. But it took one man with considerable skill and commitment to force the issue for shareholders over management.

And I’ll drink to that.

*Patrick Liddy is principal of consulting firm MSI Group.