Activists leading hedge funds warm up
for tough season ahead
showdowns likely but profit expectations are scaled back
is the pre-season for the hedge fund world’s activist investors; the Loebs
and the Icahns, and the Ackmans and scores more of lesser fame but no less
Think of Carl Icahn’s recent admonishment to
buy back more stock as a friendly
fixture, one for the crowds, as the old activist limbers up for more
competitive matches ahead.
All the activists are deep in training for the coming season. Although most
of the showdowns with target companies come in the spring, around the time
of the annual shareholder meetings, the groundwork is being laid in many
cases this month.
There is money still to be made, they believe, in targeting an
underperforming company and aggressively pushing for a change of strategy or
a change of management, or both. Investors believe the same. They have
poured $14bn into activist hedge funds this year, according to eVestment.
However, there are reasons to suspect the high-water mark for returns from
this strategy may already have passed.
The money that has flowed in has to be put to work, regardless of the
doubts, and all the signals are that 2015 could be the most active activist
Proxy solicitors, who help companies and hedge funds solicit shareholder
support during hostile battles, report a flood of incoming calls. Dan Loeb
was one of the first out on the pitch, revealing a stake in
Amgen last month and suggesting that
break itself up. Other activists are
likely to make their cases to management in private, with the threat of
going public in the new year, if they do not get co-operation.
Mergermarket survey last week showed
both corporate executives and investors expect another increase in showdowns
with activists in the 2015 season. It was an overwhelming poll result: 50
per cent said they expected activity to “somewhat increase” and another 48
per cent said they expected it to “substantially increase”. Only 2 per cent
thought it would stay about the same, and no one thought it was going away.
There is also a big red flag in that survey for investors tempted to put
their money with the activists. It seems profit expectations are already
being scaled back.
Only one in five hedge funds are targeting returns of more than 20 per cent
from their efforts to overhaul companies, Mergermarket found. The rest are
expecting something between 10 and 20 per cent. This compares with two years
ago, the last time the survey was done, when almost half the funds thought
they could make more than 20 per cent.
In part, this is an obvious effect of higher equity prices, a rising tide
that has lifted all boats, even the leaky tubs that usually attract the
attention of activists. It is also the result of activism’s popularity. With
more money hunting for undervalued and mismanaged companies, activists are
forced to pick less certain targets.
“Many activists believe that the popularity of the strategy will lead to
lower returns,” says Marc Weingarten, partner at the law firm Schulte Roth &
Zabel. “The previous year’s results may be hard to duplicate.”
The sheer size of the biggest activist funds means they are now targeting
corporate megaliths including the likes of
Air Products and, yes, even Apple.
While no one would pretend corporate governance is all it should be at the
top of the corporate food chain, this is a far cry from activism’s origins
drubbing the egregious, entrenched managers of staid mid-caps, where a
shake-up can be a game changer for the shares.
The need for large-cap activism may be diminishing since long-term
institutional shareholders are increasingly willing to challenge management
and the companies themselves have adopted much of the activists’ playbook,
with share buybacks and now mergers and acquisitions all at the top of
executives’ agendas. It seems fair to assume bigger targets mean smaller
profits for activists.
Investors are chasing historic returns, as they so often do. Activist hedge
funds led the industry last year with returns of 19.2 per cent, according to
HFR data, and they led it again in the first three quarters of 2014, with
4.2 per cent more, before October’s wobble.
It is clear the coming season will be busy, brutal and bruising for the
companies that come under attack. As for investment returns, the final score
is not so certain.
© The Financial Times Ltd 2014