‘Activism has become a marketing strategy’

By James Williams

This year has arguably been the year of the activist within hedge fund circles. The likes of Bill Ackman, Dan Loeb and Carl Icahn dominated headlines with their forceful calls for corporate change at the companies they invest in.

Activist strategies have also proved to be one of the most popular in the hedge fund firmament among investors over the past 12 months: 28 new activist funds launched last year, compared with 12 recorded launches in 2012, according to Preqin, a data provider.

One of the main drivers for this increase is that most leading activist funds are closed to new capital. However, there is scepticism among established activist managers about the quality and substance of new funds coming to market.

The feeling is some are merely engaging in short-term opportunistic activism to catch the ear of institutional investors. It is a tactic also being used by event-driven and long/short equity managers, eager to piggyback on the popularity of activism and increase their capital-raising potential.

In the words of one activist manager: “Activism has become as much a marketing strategy as it has an investment strategy.”

Unlike an equity fund, an activist fund cannot start with $20m if they intend to buy a serious stake in a company. There is a clear advantage to having a longstanding record and longstanding relationships with investors who have gone through an activist life cycle. This favours established managers and represents a significant barrier to entry.

“One of the mechanisms to ensure you have the right longevity of capital is the fund lock-up. We never want to be in a position of having a liquidity mismatch between a client’s expectations and the requirement of the investment strategy,” says Dan Mannix, chief executive at London-based RWC Partners, which runs three activist hedge funds.

Mr Mannix says more traditional event-driven funds are now talking about being activists. “I am somewhat cynical as to the motivation of doing that. We believe activism offers the ability to create alpha rather than simply identify anomalies in the pricing of securities,” he says.

Like other traditional activists, RWC’s approach is to build a long-term strategy to derive alpha. This is considered to be a sustainable, repeatable process. Mr Mannix questions whether certain types of catalyst-driven behaviour can be too.

“In our eyes, short-term investors purporting to be activists are not sustainable and are unlikely to have repeatable investment processes,” he says.

According to Maarten Wildschut, co-manager of the $650m RWC European Focus fund, there is a structural shift where investors are moving into high-alpha strategies with a compelling investment proposition.

“This trend favours activism and explains why we are seeing an expansion of activist strategies. The M&A markets are starting to recover in Europe and this always attracts more opportunistic activist players,” says Mr Wildschut.

In the US, Ashe Capital Partners launched an activist hedge fund last October, as did Lone Star Value Management, while Legion Partners Asset Management launched Legion Partners last December. Event-driven managers such as Sandell Asset Management have engaged in more short-term activism recently by acquiring shares in Morrison, the supermarket chain.

Cevian Capital is Europe’s largest activist manager, with approximately $12bn in assets under management. Its Cevian Capital II fund closed last July with $10bn in assets.

Harlan Zimmerman is a senior partner at Cevian. In his view, the emergence of short-term activism is not a good development but he acknowledges the reasons why Europe might become fertile ground for this trend.

“I understand why a US event-driven manager, who wants to be an activist, would look at Europe. Valuations are more attractive, shareholder rules are better. I think a lot of fly-by-night managers will engage in more short-term activism,” he says.

To do activism well requires three elements to coincide. The stock needs to be cheap. There needs to be a plan to unlock its value, and there needs to be a path to execute that plan.

“In continental Europe, those paths are quite difficult but there is a lot of interesting value. In the UK, the opposite is true,” says one leading event-driven manager who asked not to be identified.

The manager adds activism is “one tool in our arsenal” and that engaging in dialogue with company management often generates interesting traction. But they were quick to emphasise that the fund always maintains a high degree of liquidity.

The Cevian Capital II fund holds a concentrated portfolio of 16 companies, of which the team sits on eight boards in five different countries. Cevian is more hands on and long term than most activists and Mr Zimmerman is quick to stress that the event-driven style of activism sits at the opposite end of the spectrum to how it operates.

“We saw it in 2007 and 2008. Event-driven managers were hunting in packs. One manager would disclose that they were looking to force a takeover or jumbo dividend and others would follow to put pressure on companies.

“However, when the financial crisis hit and fund investors started redeeming, a lot of these managers got stuck with large, relatively illiquid stakes in companies. They had liquid capital structures that may have been appropriate for event-driven funds but not for activist funds,” says Mr Zimmerman.

Activism is a strategy that can create returns as opposed to trying to capture returns in the market.

“We look for situations where we think companies need, and are ready, to adopt change. These processes take three to five years typically,” says Mr Wildschut.

Philippe Ferreira is head of research for Paris-based Lyxor Asset Management’s Managed Account Platform. He too sees increased activity among opportunistic managers.

“When we look at the most-traded names on our platform, across long/short equity, merger arbitrage etc, we see the same names that are being targeted by activists,” says Mr Ferreira.

The shareholder-activist space will probably continue to metastasise so long as the number of investment opportunities remains limited. However, it will take years for new funds launching today to be regarded as true activists.

“It is at times like this when managers may compromise their beliefs on liquidity, fees and capacity in order to raise capital. Investors should be careful about chasing opportunities,” says Mr Mannix.