Billionaire stock activism has become a marketing strategy, with the likes of Bill Ackman, Dan Loeb and Carl Icahn dominating headlines with their demands for corporate change at their target companies.
The
Financial Times reported some established activist managers doubt the quality of some of the newer activist funds popping up. Data provider Prequin estimated 28 new activist hedge funds launched in 2013, double the number in 2012.
“The feeling is some are merely engaging in short-term opportunistic activism to catch the ear of institutional investors,” the Times said.
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An activist hedge fund cannot start with only $20 million in the till if its managers intend to buy a serious stake in a company. Such an investment tends to cost much more, which means well-funded established activist funds have an advantage.
Dan Mannix, chief executive at London-based RWC Partners, which runs three activist hedge funds, said he is skeptical of traditional event-driven funds trying to pass themselves off as activists.
“In our eyes, short-term investors purporting to be activists are not sustainable and are unlikely to have repeatable investment processes,” Mannix asserted.
The Financial Times reported that successful activism requires a time horizon of three to five years and three pre-requisites. “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.”
Harlan Zimmerman, a senior partner at Cevian Capital, Europe’s largest activist hedge fund, said event-driven funds, with their emphasis on short-term investments, can end up as poor investments when they disguise themselves as activists.
“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,” said Zimmerman.
The Financial Times said it may take years for new activist funds starting out today to prove themselves.
“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,” warned Mannix of RWC Partners.
The Wall Street Journal reported that Ackman, founder of Pershing Square Capital Management, is probably the biggest winner among the larger activist funds this year. His main fund posted a 25 percent gain in the first half, likely earning his firm fees estimated at almost $1 billion so far in 2014, according to the Journal.
The Journal said Daniel Loeb's $15 billion Third Point LLC and Trian Partners LP, part of the $9 billion activist firm co-founded by billionaire Nelson Peltz, each got off to good first-half returns with returns of about 6 percent.
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