Former analyst turned investor catches the activism bug

NEW YORK Fri Feb 8, 2013 4:20pm EST

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NEW YORK (Reuters) - Former Wall Street casino analyst turned investor Jason Ader is stealing a page from the playbook of billionaire traders Carl Icahn and William Ackman.

The New York-based money manager is trying to boost the share price of U.S. slot machine maker International Game Technology by agitating for a boardroom shakeup in the company that an Ader-led fund owns a 3 percent stake in.

It is the first time that Ader, who is waging a proxy battle to get three of his representatives elected to ITG's board, has embraced an activist-style of investing.

But it is a strategy the former Bear Stearns gaming analyst Ader is taking a real shine to outside of managing his own fund. A hedge fund seeding business that Ader started in 2012 is considering providing investment capital to one or more hedge funds that focus mainly on shareholder activism, Ader told Reuters.

It is a growing indication that the kind of activist investing pioneered by Carl Icahn, and later embraced by Ackman and his Pershing Square Capital Management, is coming back into vogue - even as the two hedge fund managers most identified with activism are currently engaged in a nasty public feud over nutritional supplement company Herbalife Ltd.

"The market is overcrowded with funds," said Ader, who also is a board member of Las Vegas Sands Corp. He said, activists "are very good at creating their own catalysts on the long side."

For instance, last year Dan Loeb and his Third Point hedge fund used activism to force management changes at internet company Yahoo Inc. David Einhorn and his Greenlight Capital is using activism to push technology giant Apple Inc to give back more of its cash stockpile to investors.

Icahn, meanwhile, has teamed up with mutual fund Southeastern Asset Management to win board seats at natural gas company Chesapeake Energy Corp and help push the company's controversial chief executive, Aubrey McClendon, into early retirement.

Ader said activism is gaining favor as an investing strategy because the prices of so many stocks move in lockstep with each other these days. Pushing for things like a directional change at a company, a share buyback or dividend payment increasingly is being seen as a good way for a manager to differentiate a stock's performance from the pack.

Some of the top hedge fund performances in 2012 came from activists like Loeb, whose Third Point Ultra Fund jumped about 35 percent, and Mick McGuire, who saw his Marcato International fund rise almost 29 percent. On Friday, McGuire's $1.1 billion Marcato Capital Management took a 5 percent stake in auto parts maker Lear Corp and said it plans to seek board seats.

The fact that some of the $2 trillion industry's most prominent activists, from Loeb to Ackman and also Barry Rosenstein of Jana Partners, posted double-digit returns when the average hedge fund gained only 6 percent last year, has attracted the interest in the strategy at some big allocators like pension funds, some experts said.

SEED CAPITAL

Ader's seeding platform, Accelerator Fund Partners is focusing on new hedge funds with about $100 million or less in assets. The platform is funded by Ader's firm and a large, Beverly Hills-based family office, and has committed to providing $1 billion in seed capital over three years, he said.

In searching for a suitable activist fund to invest in, Ader said one thing he looks for are new managers that are cognizant of the potential volatility that activism can create for a portfolio as the bulls and bears duke it out over a company's direction.

"Hedge fund investors are attracted to the upside generated by activists, but the lack of volatility management in down periods has been a cause for some hesitation, or has caused allocators to invest smaller sums," he said.

Activism also has its limits, which may be one reason it has gone in and out of favor. While Ackman's Pershing Square had some success in pushing for changes that boosted the stock performance of fast-food giant McDonald's Corp, his attempts to induce structural changes at retail chain Target Corp went nowhere.

It is not clear how Ader's attempts to press for change at IGT, a company he knows well from his days analyzing the casino industry, will pan out.

IGT's stock, trading now at about $16.60, has risen more than 11 percent since January 4, when IGT told investors it had received a notice of intent from Ader to nominate four new members to the board, including the company's former CEO Charles Mathewson. But during the period, IGT also reported quarterly earnings, which beat Wall Street analyst expectations.

Ader has since reduced his demands to replacing three of the company's eight directors. He aims to boost the stock price of IGT by pushing the company to consider strategic alternatives for a social gaming unit it bought last year.

"I feel very strongly that all shareholders would benefit from having more ownership of the company represented on the board of directors," Ader said, adding he would like to see a board that has more expertise in casinos. "We would have preferred to avoid a proxy fight."

IGT has urged shareholders to reject the slate of directors put forward by Ader. IGT said Mathewson used company money to fund a lavish lifestyle and had a "decidedly 'old school' approach to corporate governance, which was driven by his own self-interests."

IGT's annual meeting is scheduled for March 5 in Las Vegas.

(Reporting By Katya Wachtel; Editing by Matthew Goldstein and Tim Dobbyn)

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