Keeping ESG commercial

Annabel Smith sits down with head of trading at activist hedge fund Bluebell Capital Partners, Pete Papanichola, to explore his path to activist investing and the importance of keeping ESG investment initiatives commercial to ensure their continued success. 

Pete Papanichola has had an unconventional and extensive career so far. Joining the industry after graduating from business school at the age of 20, Papanichola has an impressive track record that spans across five hedge funds and two banks. 

But running through the Brighton born and bred Papanichola’s veins is an activist streak that has continued to influence his decisions and shape the course of his career to date, ultimately leading him to his current role as head of trading at London-based activist hedge fund, Bluebell Capital Partners.

Papanichola began his career at interdealer broker, GFI, however quickly realised the environment wasn’t the one for him. “Interesting, lucrative, fun but highly unconventional,” he says. 

He subsequently joined RBC on the graduate training programme three weeks later in 1998, serving for a brief – and what would turn out to be his only – stint on the sell-side for three months. It was then that he moved onto the proprietary trading desk at the bank, mentored by former head trader at Moore Capital, Joe Cardello, and Jim Byrd, global head of macro trading at RBC.

“My key takeaway from those guys was that the core foundation of trading isn’t about buying and selling. It’s about risk management philosophy and methodology,” explains Papanichola. “During that period of my training, I was actively taking positions, taking risk, fundamentally managing a portfolio of sorts in macro products.”

“Both [Cardello and Byrd] were incredibly patient with me. It was a really good place to learn because they gave me so much latitude to do what I wanted. I could literally trade any product if I wanted to. When you’re on the FX floor, it’s buzzy and crazy and the characters tend to be interesting. There’s us sitting in the middle of the room trading once a day maybe sometimes once a week but taking very big positions and actively providing information for the room as well.”

Core values

After two years at RBC, Papanichola landed himself his first hedge fund role at Elliot Management Corporation as a multi-product manager and arbitrage portfolio manager mentored by Jon Pollock, Jean Luc Harnay, and Phil Streeton. It was a role that was less than conventional, but made up some of his most formative years, he tells The TRADE.

“It was basically six guys in Berkley Square in a loosely regulated industry at a time where markets were incredibly imperfect,” says Papanichola. “I cut my teeth in investment trust arbitrage and fund reconstructions. These are old investment structures which, pretty much in the majority, have no place in modern investing.”

“We weren’t a dealing desk, we were a trading desk so we actually took and actively managed positions but were also the eyes and ears for the more traditional PMs within the firm. As Elliot has gotten bigger, those jobs have become much more pigeonholed. The traders are now discretionary execution guys and the portfolio managers (PMs) don’t get involved. They’ve become more of a conduit between the street and the PMs at Elliott but when I was there we were jack of all trades, master of none, for want of a better phrase.”

Covering the European, Asian and US markets from one seat, Papanichola spent almost five years working around the clock, before finally jumping off the rollercoaster in 2005 for a career break. It was then that he founded a sustainable water company, Life Pure Water, and it’s associated charity, Drop4Drop, that delivers clean drinking water to countries in the developing world. It was during this period that Papanichola set his sights on finding a more meaningful way of taking part in the financial markets.

“We all should have something to add value ultimately and that’s why I shied away from other forms of investing in other parts of my career. My initial career was sitting in front of screen looking at two numbers, reshuffling the pack, going home and hoping that the number wasn’t red at the end of the day,” he says.

Now almost two decades old, Life Pure Water is carbon neutral, only uses recycled plastics, has an organic only catchment area, doesn’t export, and gives away 10 times the amount of water that it sells to the third world. However, when asked about the motives behind Life Pure Water, Papanichola is reluctant to call the firm charitable, instead insisting that the success of the charitable causes lies in its commercial performance. Something he’s taken forward into his current role at Bluebell Capital Partners.

“The idea of Life Water is not to be a solely charitable vehicle, but actually quite the opposite. The idea is that ethical companies can be responsible but they can also be commercial. The nature of the commercial side of that business is actually complementary to the charitable side. The more money the business makes, the more money the charity makes,” he explains.

Papanichola then re-joined the industry in 2007 for a brief stint on Barclays’ proprietary trading desk before serving in a series of head of trading roles at hedge funds Perry Capital, Centaurus Capital and P Squared Asset Management. 

Bluebell Capital Partners

It was in 2019 that Papanichola found Bluebell Capital Partners, a start-up hedge fund focused on activist investment tucked away in the back streets behind Sloane Square. The firm has run interventional campaigns involving the likes of Lufthansa, Hugo Boss, Mediobanca, Vestas, Danone, GlaxoSmithKline, Glencore, Saint-Gobain, Solvay, Richemont, BlackRock, Bayer and Worldline. And those are just the public ones. 

Set up by industry stalwarts Giuseppe Bivona, and Marco Taricco, Bluebell Capital Partners is a spin out from Bluebell Partners, an investment advisory business set up by the same pair in 2014. According to the firm’s rather aesthetic website – donned with an ever-rolling video of gently crashing waves – Bluebell champions a unique ESG approach, whereby it invests in businesses and seeks to increase shareholder value through “constructive engagement”. 

“Being involved in this type of investing, we genuinely add value to financial markets. We typically engage with the company on a constructive basis first, before going public,” adds Papanichola. 

“The fundamental philosophy of activist investing isn’t to go in like a bull in a china shop trying to smash down rock-solid doors. We tend to push on doors which are slightly ajar. You have to always accept and have the humility to say we will be wrong, but we want to be right many multiples of the times that were wrong.”

The firm found itself in the press recently thanks to its involvement with BP, coming under fire from those who suggested its discouragement of the oil and gas company’s involvement in renewables was driven by anti-net-zero intentions. A suggestion which head of trading Papanichola fervently denies.

“The reality is that in this investment case involving renewables they have is actually dilutive to the core business, as they don’t have the necessary capabilities and target returns at below their WACC (Weighted Average Cost of Capital),” explains Papanichola. 

“Is it right that a company that doesn’t really have the correct approach to renewables should invest so much money in this sector? Or should that money be returned to shareholders and shareholders make the active/successful decision to put that money into renewables elsewhere?”

A hybrid role 

Bluebell has a small but punchy refit. It trades equities only – dabbling in equity derivatives when the need arises – and roughly a third of its trades are public, Papanichola confirms. It outsources everything outside of its core functions including its HR, accounting, IT, compliance, custody and data management. 

“We outsource as much as we possibly can whilst retaining responsibility which leaves a very efficient and in no way compromised business which allows us to just focus on investing,” says Papanichola.

The hedge fund favours what Papanichola pegs as an up-and-coming investment style. It champions one core concentrated fund of about 10-15 names. It then runs a sub fund taking the best strategies or a name that is doing particularly well – this could be one security or a hedge on a security – and offers it out to its current investors on a first come first serve basis. Positions in just one name can be sizable, says Papanichola. 

“It’s an investment style that has really taken off in the last 15 years. I see our style of investing probably having more of that in it over the next five to 10 years.”

Papanichola is the only primary trader at the firm. However, in the event of his absence, it has various back up models in place including cover from within the firm and outsourced trading firm, Williams Trading, on standby. Bluebell focuses mainly on Europe, and while it has some dealings with the US, the US open is a sufficient amount of overlap with European market hours to satisfy its trading needs, Papanichola confirms.

“We also have a disaster recovery backup model where we can use an outsourced trading house to manage our executions if we need to or act as an extra layer of execution above and beyond the prime brokers that we use and the algos that we use,” he says.

“We use a variety of high and low touch. Obviously with Mifid we have to focus on best execution. We aren’t really involved in a huge amount of block trading because we don’t have that size requirement currently. We have done some especially in the SPVs [special purpose vehicles]. It’s something that I did in previous shops probably 90% time whereas here, I’d say 90% I’m using algos or low touch. It’s a very different model but as we grow, that ratio will change.”

The firm is passive in its execution given the nature of the business it is in. For Papanichola, it is long-term relationships with the street that make success using this method of trading possible. 

“What we’re trying to do here is we create a skeleton with our story and investment thesis. Then the trading is really about delivering what we’re trying to achieve in the most efficient and cost-effective way possible. At our size, we can do that very effectively with algos that are available to us,” explains Papanichola.

 “Something that I had to learn very early in my career is that it’s about bringing the street close to you rather than working against it because it just doesn’t improve or foster the right relationships – especially when you’re trying to do stuff that’s incredibly secretive or where you’re involved in stake building.”

Pete Papanichola had been around the houses before landing his current role at Bluebell. After a short spell in banking, an enduring period of ruthless hours at various hedge funds and a brief career break to co-found a sustainable water company among other ESG-championing campaigns, he has found a role that suits both the capitalist and the charitable streaks within him. As for Bluebell, in its line of business and current stage of growth, that will no doubt be a name heard in the press again in the not-too-distant future.

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