U.S. Markets

Friends turn to foes as activists challenge private equity

NEW YORK (Reuters) - Activist hedge funds, once trusted allies to private equity firms in their pursuit of companies, are emerging as their rivals.

A screen displays the price for Avon Products Inc. at the post that trades the stock on the floor of the New York Stock Exchange, May 15, 2012. REUTERS/Brendan McDermid

With the stock market close to all-time highs, buyout firms can only offer relatively small premiums to take companies private, pitting them against activists who have snapped up stakes in a broad range of businesses at the fastest pace since 2008.

Activists have historically pushed companies to explore leveraged buyouts, a role that diminished as high stock prices put a dent in private equity dealmaking.

The gradual shift in the relationship between private equity firms and activists comes at a challenging time for the buyout industry, which faces aggressive corporate buyers, tighter lending markets, and lackluster fundraising.

Stagnant leveraged buyout volumes are in sharp contrast to a surge in activist campaigns, which are increasingly moving away from calls for companies to explore buybacks or mergers, and more toward forcing the kind of operational changes that private equity firms would have carried out.

“They’re going to be converging on each other’s turf,” said Tyson McCabe, senior director for Nasdaq OMX advisory services, which provides shareholder analysis for companies trading on the exchange.

Activist firms such as Trian Partners make the argument behind the scenes to institutional investors and management teams that they can improve profits, boost value and keep the company publicly traded to encourage it to seek a partnership with an activist investor over a private equity firm. That will allow other shareholders to reap the gains from a company’s turnaround.

Underscoring the point, top executives at Trian, which has long prided itself on its focus on turning around a business over the long term, refer to activism as a derivative of private equity, according to people familiar with the matter. Trian declined to comment.

The rivalry has grown more pronounced as private equity firms seek to take minority stakes in companies, which in some cases are under siege from hedge funds.

Last week, for example, activist hedge fund Barington Capital Group LP warned cosmetics maker Avon Products Inc about striking a deal with private equity. In a letter, Barington said it owns more than 3 percent of the company and cautioned “against any sale of the company’s North America business to private equity or a dilutive sale of an equity stake on unfavorable terms to shareholders.”

Barington did not name the private equity firm, but Reuters has reported that Avon is in talks with Cerberus Capital Management LP, in a deal that may also involve the firm taking a minority stake.

Barington lays out a detailed restructuring plan and lists several proposed changes at the company that the firm says will drive shares higher over the long term.


The Barington-Cerberus clash is a far cry from the historic relationship that activists and buyout firms enjoyed. That pairing often involved an activist pushing for an under-valued company to sell itself, the management team agreeing to explore a sale, and a private equity firm swooping in for the purchase.

In December 2013, KKR co-founder George Roberts said at a Goldman Sachs financial services conference that KKR wouldn’t have bought industrial equipment maker Gardner Denver if an activist investor, which in this case was ValueAct Capital, hadn’t called for a sale of the company.

Sentiment has now changed. In an October interview with technology trade publication The Information, TPG Capital co-founder Jim Coulter cited activists as a reason that $10 billion private equity deals are not happening.

“A lot of the companies that might have been susceptible to buyouts in past cycles are now hitting price increases because the activists show up and wave some proxy cards and therefore action is taken,” Coulter said.

At the same time, activists are more open to buying companies outright, albeit of smaller size. On Monday, for example, activist investor Carl Icahn offered to buy auto parts company Pep Boys – Manny, Moe & Jack for $834 million.

The number of U.S. companies publicly targeted by an activist this year reached 305 by the end of October, more than triple the total in 2010, Activist Insight data show. The success of activists is due in part to the growing support of large institutional investors such as T. Rowe Price, Capital Group and BlackRock.

The flood of campaigns counters a drop in private equity deal volume.

To be sure, the challenge for activist hedge funds that take a private equity approach is delivering returns for their investors that are as attractive as those generated by traditional activism.

Demands in the sector’s “operational” category are up six-fold since 2010, according to industry data and trade publication Activist Insight. But that has coincided with lower investment returns in the same category.

Going back to 2010, the annualized total return for stocks subjected to operational demands was negative 2.3 percent from the date of disclosure, compared to 8.3 percent for all activist-targeted stocks, Activist Insight data show.

While not necessarily representative of activists’ actual performance, the data is indicative of a more subdued market reaction to operational activism, said Activist Insight Editor Josh Black.

The trend is “perhaps due to the successes of funds like Trian and ValueAct who have employed these strategies for some time and perhaps because this is the next opportunity set now that the ‘low-hanging fruit’ has been plucked,” Black said.

Reporting by Michael Flaherty in New York; Editing by Greg Roumeliotis and John Pickering