Activist investment firms thriving, but take different tacks on engagement
Once a niche dominated by hedge fund firms, activist investing has seen more long-only managers enter the fray, industry watchers said.
A fair number of activist hedge funds have shifted to long-only activist strategies, and as a result, "there are more funds than ever doing activism," Joshua Black, editor-in-chief of Insightia, a division of Diligent Corp. in New York that tracks activism and proxy issues, said in an interview.
Assets under management in event-driven activist strategies totaled $168 billion in the year ended Dec. 31, compared with $191 billion the prior year, according to data from the hedge fund tracking firm HFR Inc.
Sources contacted by Pensions & Investments, a sibling publication of Crain Currency, didn't have data about the number of traditional hedge fund activist firms or the number of long-only money managers that have moved into activism. And institutional investors contacted by Pensions & Investments declined to comment about their investments in activist strategies.
They're likely reticent to discuss their investments because "activism can be a little controversial," Kenneth J. Heinz, HFR's Chicago-based president, said in an interview. "Asset owners are interested in the strategy, but they're being quiet and staying out of the spotlight."
For example, Hindenburg Research LLC and Carson Block's short-selling hedge fund Muddy Waters Capital are some of the noisiest activists and have waged highly public campaigns against India's Adani and China's Sino-Forest, respectively. Hindenburg this year issued a report alleging widespread fraud at Adani, which the company denied.
Investment consultants diverge on how activist managers approach companies, ranging from careful collaboration with corporate boards to more rough-and-tumble battles between the activist firm and the corporation it's eyeing, sources said.
"We are not big consumers of activism strategies in our hedge fund portfolios due to its long-biased if not long-only exposure, lower liquidity and high fees," said Victoria Vodolazschi, director of investments and hedge fund research, who is based in Willis Towers Watson PLC's New York office.
"With that said, we do observe an increase in shareholder engagement as a type of softer activism.
"That said, many of our long/short equity managers engage in these shareholder campaigns, which are now generating more traction and are typically received in a more constructive fashion. We like that managers choose to exercise their rights as shareholders and adopt a responsible strategy to enact positive change and seize opportunities as opposed to immediately divesting from a company."
James Neumann, the New York-based CIO for consultant Sussex Partners U.K. Ltd. in London, said "fewer hedge fund managers hold themselves out as activists and prefer to be seen as more consultative with target companies.
"There is a subset of activist firms that still embrace the title or label and are willing to engage [in a company's] management on both public and private issues."
A particular focus by activist firms is "engaging with the management of small- and midcap companies that have a capital structure or business issues that need resolution," Neumann said.
Another growing area of activism interest is the money manager's interest in a firm's performance in ESG factors, said Daniel Sondhelm, CEO of Sondhelm Partners LLC, a third-party marketing firm based in Alexandria, Va.
Sondhelm said the ways that activist managers engage with companies vary but said "a focus of interest sometimes is the company's leadership structure itself.
"Funds may lobby for adjustments in executive compensation to better align with overall corporate objectives or advocate for an independent board of directors to ensure unbiased, effective governance," he said.
Long-tenured activist managers — both hedge fund and long-only firms — continue to ply their activist investment trades.
JANA Partners LLC in New York, founded in 2001, focuses on midcap companies in its search for firms that are good activist targets, Scott Ostfeld, managing partner and portfolio manager, said in an interview.
"Activism is competitive, and the universe has considerably declined over the last 10 years," Ostfeld said.
"The firm is seeing a lot of interest from institutional investors," given its outperformance, he said.
JANA's Drawdown Fund launched in 2020, and its annualized net return was 17% at the end of 2022.
JANA Partners disclosed its investment in FreshPet Inc. in September 2022 after the pet supply company experienced a period of dramatic operational underperformance and stock price decline, according to a summary from JANA, which said "the poor performance followed years of self-inflicted errors and came despite FreshPet's well-moated position in the very healthy and growing market for fresh pet food.
"JANA believes that a strengthened board providing better oversight of management and capital allocation is the key the FreshPet unlocking its full potential for shareholders."
Another reason for interest among activist investment firms is the current environment for private equity, which "is not working," Ostfeld said.
Another activist manager, Cevian Capital (U.K. Ltd., London), with assets under management of $14 billion in a single fund, has been in the business for more than 20 years. Cevian Capital has exclusively focused on European constructive activism in its fund.
"We believe the network, relationships, credibility and experience we've built in Europe over the past 20 years is very valuable in our day-to-day work as constructive activists, and we see no reason to move away from that," Harlan Zimmerman, a senior partner, wrote in an email. Zimmerman is based in Cevian's London office.
New York-based activist manager Trian Fund Management LP, which has been in business for more than 40 years, is "a highly engaged shareholder that combines concentrated public equity ownership with operational expertise," according to a notice on the firm's website that a company spokeswoman referred to.
The firm's senior leaders were unavailable for an interview.
"Trian seeks to invest in high-quality but undervalued and underperforming public companies and to work collaboratively with management teams and boards to help companies execute operational and strategic initiatives designed to drive long-term sustainable earnings growth for the benefit of all shareholders," according to its website.
Trian managed about $7 billion on June 1, the spokeswoman said.
One of Trian's most recent activist campaigns was with Walt Disney Co., "one of the most advantaged consumer entertainment companies in the world, with unrivaled global scale, irreplaceable brands and opportunities to monetize its intellectual property better than its peers by leveraging the Disney 'flywheel' — e.g., networks, theme parks, consumer products, etc.," according to statement from Trian on its website.
The company stressed in the memo that "Disney is well-positioned to navigate the ongoing transition from legacy content distribution channels to streaming."
On Feb. 9, Trian congratulated Disney on its recently announced operating initiatives, which Trian "believes is a win for all shareholders and broadly aligns with its thinking."