Insights for emerging activist funds
By Gregory Marose – As hedge funds across the globe continue to face fee compression and performance headwinds, there’s a compelling rationale for managers to open up the equity activism playbook. Fund managers with the right expertise and resources can act as their own catalyst for value creation while showing current investors and prospective allocators that they’re able to generate alpha in a differentiated manner. There are even some potential tailwinds for managers to capitalise on right now.
First, large institutions are increasingly comfortable putting capital into strategies that employ frequent or periodic equity activism. This comfort level may even rise heading into 2020 based on the fact that the HFRX ED: Activist Index, a proxy for activist performance, is outpacing most other strategies this year with gains of approximately 10.50% through early December.
Many allocators navigating the current environment want to ensure that higher fees are getting them exposure to approaches that are proprietary and less correlated to traditional strategies in their portfolios. This demand for customisation has actually helped fuel sustained interest in special-purpose vehicles built around “best ideas” for specific activism campaigns and sub-strategies.
It is also important to highlight that savvy activists are poised to benefit from a more dissident-friendly environment, where more long-only funds are willing to assess activist campaigns and get vocal on their own at times. As evidence, several historically-quiet firms went as far as to publicly weigh in on board contests and proposed transactions in 2019.
After Cruiser Capital nominated four directors at Ashland Global Holdings, Neuberger Berman broke the log jam in the contest by brokering a compromise that included a board refreshment. Other notable examples include T. Rowe Price publicly supporting the dissident slate at EQT Corporation and Wellington Management issuing a statement to oppose Bristol-Myers Squibb’s acquisition of Celgene Corporation.
It’s equally noteworthy that fewer proxy contests have been going to votes, signalling that companies are willing to come to the table when activists make very well-formed arguments for board-level changes, strategic alternatives, and adjustments to capital allocation policies.
With all this context in mind, it’s still important for any emerging or first-time activist to recognise that making a successful case for change is no small feat. The process of running a sustained campaign or proxy contest, in particular, begins with important building blocks.
Manage your LPs’ expectations
If you’re not a proven or frequent activist, it’s important to proactively communicate with your limited partners prior to initiating a loud or resource-intensive campaign. Make sure they understand your thesis and general game plan with respect to how you intend to unlock value. Their input and support are important, especially if you are yet to fortify a track record as an activist.
Build an experienced advisory team
Retaining external advisors with relevant activist experience is a must. Hiring a top law firm, battle-tested proxy solicitor and specialised public relations consultant ensures you receive complementary perspectives about the various components of a successful campaign. But beyond advice about campaign requirements and milestones, an integrated advisory team will also play a major role in developing effective messaging, drafting letters and presentations, and facilitating effective engagement with fellow shareholders, proxy advisory firms, and the media.
Assess your own vulnerabilities
It can be easy for first-time activists to become enamoured with their case for change and overlook potential vulnerabilities. Work with advisors to analyse the intricacies of a target’s corporate bylaws, governance policies, shareholder base and performance history. When building a slate of director nominees, conduct thorough vetting to ensure prospective nominees possess additive expertise, bulletproof resumes and the right attributes for the board you’re seeking to improve.
Communicate your case for change consistently and effectively
Unlike a one-off letter to a company, running a proxy contest requires a persuasive campaign platform, message discipline, and ongoing investor and media outreach. Savvy activists begin their campaigns by developing a timeline to outline their letters, website launches, shareholder engagement efforts, and meetings with proxy advisory firms and influential long-only funds. When doing this, seasoned activists also actively anticipate how target companies will use the resources at their disposal to undermine and refute calls for change.
Launching an activist campaign of any kind is a major step that can have a material impact on a manager’s performance and reputation. It’s also a decision that can result in principals devoting an outsized amount of time to a single position. For these reasons, pairing sufficient planning with the right resources is critical.
Gregory Marose is a co-founder at Profile, a financial public relations firm that advises a variety of alternative asset management firms navigating special situations.