Recent anecdotal evidence suggests that family offices are increasingly taking activist roles in their interactions with their portfolio companies. What level of engagement they decide upon depends on what each family is comfortable with.
“There’s a lot of activism that goes on, including by family offices that you don’t see; because either they own less than 5%, so they’re not filing Section 13 filings, or they own more than 5%, but they’re not filing 13-Ds because they’re constructive activists,” said Jeffrey R. Katz, a partner at Ropes & Gray in Boston who advises activist shareholder clients. “They’re not demanding control — that doesn’t mean they’re not influencing companies.”
In July, renowned activist investor Ed Garden — until recently chief investment officer at Trian Fund Management — announced a plan to establish a family office focused on making opportunistic investments. That most likely will include taking activist positions in public companies.
Garden co-founded Trian with his father-in-law, Nelson Peltz, and Peter May in 2005. In recent years, Trian made headlines by agitating for shake-ups at companies such as H.J. Heinz, Procter & Gamble and DuPont.
While few family office investors are willing to announce their activist intentions so brazenly, many have become comfortable with protecting their investments more directly.
“I think it’s part of a broader trend, which is the expanding universe of shareholder activism and active shareholder engagement,” said Tom Matthews, a partner at White & Case in London and head of the firm’s activism practice in Europe, the Middle East and Africa. “We are seeing what could be regarded as traditional shareholder activist tactics being adopted by a much broader range of investors, including family offices.”
CREATING A LEGACY
Families, of course, have somewhat different sets of objectives other than categories of investors. While generational wealth preservation is a given, today’s families of means often also want to make a public statement about their values.
“For the traditional family office, getting a positive and strong financial result was always important,” said Meagan Reda, a partner at Olshan in New York who specializes in shareholder activism. “But now there’s an overlying theme to leave a lasting legacy for their families.”
Reda sees the younger generations more focused on giving back to society and views activist investing as a way for them to push for important societal changes that can support a family mission and values.
“There has been a fundamental shift in the sentiment toward activists generally, who are no longer viewed as corporate raiders and now are increasingly viewed as driving long-term value,” Reda said.
She points to an uptick among her clients in ESG investing following the pandemic. Considering a public company’s environmental, social and governance ratings in addition to its financial metrics has become not just a talking point but a driver of valuation and a catalyst for change and action.
Still, activist family offices tend to prefer building consensus among a company’s stakeholders as opposed to, say, engaging in more public and vocal strategies.
“From the occasional private conversation with the board through to a full-throated proxy campaign to kick out the board and replace them with somebody new, there’s a long line between those two points,” Matthews said. “Family offices tend to be longer-term shareholders, and a longer-term horizon allows for a more patient and constructive approach.”
RISKS AND (HOPEFULLY) REWARDS
While family offices are becoming more comfortable expressing their dissatisfaction with management, they rightly remain wary of unintended consequences.
The most humiliating of those may be not getting that call returned, not getting access to company officers or, worse, receiving blowback from management that results in a standoff.
The legal perils could be more serious. A family office could unintentionally trigger a notice from the Securities and Exchange Commission for failing to file the proper regulatory disclosures.
That’s why Ropes & Gray’s Katz says consulting a legal adviser before making any activist move is important.
“We talk to the family office and say: 'What’s your goal? How important is access?' Not only access to management but also access to opportunities.”
Katz also asks clients what percentage of a company they hold, because if they own less than 5%, then they have a lot more leeway. If they own more than 5%, which requires filing disclosures with the SEC, they need to know what the tripwires are and how to avoid them.
For example, Section 13 group rules stipulate that even when an investor owns less than 5% of a company’s shares, if they are talking with other shareholders who in aggregate own greater than 5%, they would have a filing obligation.
“It’s good to get the guidance in front of the investment professional before they talk to other shareholders, before they talk to management,” Katz said.
But family office activists, especially newer ones, have some advantages over institutional activists, in some instances.
For one, they have a little more flexibility than traditional investment firms, given that they are less driven by investor expectations and have more liberty to choose where and how to invest their assets.
Family offices also may engender more goodwill from companies when lobbying for changes.
“It’s much more difficult, in my experience, for a newer or a less traditional activist to effectuate change,” Reda said. “But family offices generally come off as less aggressive, and for that reason, that does give them some benefit in the sphere.”