DAVOS, Switzerland (Reuters Breakingviews) - Activist investors are bigger and busier, but face tricky currents in 2019. That was the upshot of the debates about cage-rattling shareholders at Breakingviews Predictions events this month. Investors are taking on larger and more high-profile targets – witness recent campaigns against the likes of Pernod Ricard, Barclays, and United Technologies. But big shareholders are becoming more demanding, and private equity may muscle in.
There’s no question that activists are more active. They targeted a record 226 companies last year, deploying $65 billion of capital, according to research by Lazard. Most of that is still in the United States, where vocal veterans like Carl Icahn intervened in Dell Technologies’ proposed purchase of VMware tracking stock, and Third Point’s Dan Loeb fought to appoint directors to the board of Campbell Soup. But almost a quarter of all activist campaigns played out in Europe. Elliott Advisors outgunned French media group Vivendi in its battle to install new directors at Telecom Italia, while Edward Bramson’s Sherborne Investors pushed Barclays to scale back its investment bank – so far without success.
Activism’s move into the investment mainstream is reflected in investors’ willingness to take on multinationals that would once have been seen as untouchable. Asked to predict which publicly-listed company was most likely to face an activist campaign this year, the majority of the audience at Breakingviews Predictions events in New York, Paris and London voted for Apple, Renault and Deutsche Bank, respectively.
This is partly possible because big institutional investors are becoming more active, often behind the scenes. “They are not cowards, but they don’t want to be vocal, and they are giving a say or proxy to an activist on their behalf,” Sebastien Bazin, chief executive of AccorHotels, told the audience in Paris.
Broader shifts in the investing landscape also help. On the face of it, the flow of money into index-tracking funds might be expected to make shareholders more passive. But giant asset managers like BlackRock and State Street are exercising their voting clout. This actually makes life simpler for activists, Anne-Sophie d’Andlau, co-founder of activist investor CIAM, told the audience in London that shareholders agitating for change now only have to persuade a handful of big groups to back them.
Meanwhile, traditional fund houses, under growing pressure to justify their fees, are becoming more assertive. Lazard reckons that almost a third of the 131 funds involved in activist campaigns last year were so-called first timers.
The growing focus on boosting equity values is attracting attention from other areas of finance. Some buyout firms are presenting themselves as a friendlier alternative to sometimes aggressive activists. We are seeing “companies who are actually interested in engaging with private equity when they fear activists coming in”, Jon Winkelried, co-chief executive of TPG, told the New York event.
However, companies – and their shareholders – are also under growing pressure to look beyond financial performance. Treatment of employees and customers, enforcement of environmental standards and broader social responsibility all face scrutiny. These objectives can conflict with short-term investment concerns, particularly when activists are pushing companies to slash costs or dispose of underperforming businesses. Elliott’s bitter 2017 fight with paintmaker Akzo Nobel prompted the new Dutch government to propose beefing up corporate protections. The French “Florange law” grants investors double voting rights if they have held their shares for more than two years.
These factors do not entirely neuter activist investors, though. Some funds hold their shares for a long time, defying their popular image for seeking a short-term bump before selling out. And activists point out that their desire to improve the governance of listed companies is in tune with the broader vogue for ESG funds that filter prospective investments according to environmental, social and governance criteria.
Yet like all money managers, activists ultimately have to deliver returns to their investors. And here the picture remains mixed. The activist index compiled by Hedge Fund Research is down 7.4 percent over the past 12 months, lagging the broader S&P 500 Index. This hides a wide range of both out- and underperformance. Nevertheless, if activist investors are to become even bigger and busier, they will have to deliver the same results that they demand of their targets.