It has been a rough few years for Tom Barrack and Colony Capital (CLNY).

Tom Barrack is facing new activist pressure from Blackwells Capital after a period of underperformance.

The three-way merger with two NorthStar REITs has, to be kind, not worked well at all for Colony.

The REIT has seen its stock price reduced by two-thirds over this time.

Blackwells owns just 1.9% of the stock. The firm rarely uses an activist approach. However, the firm is demanding Barrack’s ouster as CEO. Blackwells also announced that it would be running five people for election as directors of the REIT to make sure that happened.

Blackwells Pressures Tom Barrack

The investment firm sent a letter to Colony’s Board yesterday. In the letter, the firm called Barrack a part-time and distracted CEO. The letter noted that Barrack faced two Congressional investigations and one potential criminal investigation due to his relationship with Donald Trump and his time as Inauguration Chair .

They wrote: “Whatever their merits, these investigations certainly have been a distraction for Mr. Barrack and may blemish the reputation of the company if Mr. Barrack remains Colony’s CEO.”

Blackwells has pressured the firm to make changes for some time now. Earlier this year, they reached an agreement with Colony that allowed them to place three members on the Board. Apparently, they do not like what they have seen since. They further want Barrack gone and new leadership to change the company’s direction. The firm is also adamant that Marc Ganze not replace Barrack. When Colony bought Digital Reanal Estate firm Digital Bridge earlier this year, the firm announced that Ganzi would take over as the CEO of Colony with Barrack becoming executive Chairman

More on the Activist Pressure

Blackwells’ letter noted that Ganzi and Barrack played polo together regularly at the Aspen Valley Polo Club. The letter said that “We do not believe business decisions and Colony’s resources should be expended on the basis of friendship and shared hobbies.”

They were also critical of Colony’s capital allocation decisions.

“Despite Colony’s stock sitting near an all-time low and a public market valuation that is approximately 50% of net asset value, Colony has not been actively repurchasing its stock,” the letter said. “In Q2, no shares were purchased, despite the extension in May 2019 of the authority to purchase $246 million of stock. The only directors to personally buy stock in the last year were Ray Mikulich and Dale Reiss. The lack of buyback activity gives shareholders the distinct sense that the Board is not bullish on the Company’s future. We believe the Company and the directors should be aggressively buying stock at these levels.”

It is not just Barrack that Blackwells wants to go.

The letter said: “this Board has meaningfully failed shareholders. That you would leave Mr. Barrack in place at CEO, appoint Mr. Ganzi at Mr. Barrack’s behest without a fulsome CEO search, refuse to purchase (or repurchase) stock, allow the Company to operate with excessive overhead and sit idle while Colony Credit destroys value, is testament to the need for a significant Board overhaul at Colony.

We expect you to immediately replace two of your longstanding members with members we help you select, in addition to the removal of Mr. Barrack from the Colony Board. The Colony Credit Board similarly needs new directors, and we expect you to replace two longstanding members there in addition to the removal of Mr. Saltzman from the Colony Credit Board, as well, with people we help you select. ”

The Activist Challenge

Blackwells does not own enough stock to force the changes.

In fact, Barrack owns far more stock personally that the investment firm with over 5% of the outstanding shares of Colony. Two of the largest owners are Vanguard and Blackrock, who run passive index predicts.

Seth Klarman at Baupost is also a significant shareholder. Convincing the institutions that own large stakes will be necessary to elect their director slate and force the removal of Barrack.

By: Tim Melvin

Related: Blackstone Group Buys Colony Industrial for $5.9 Billion