Institutional Investors Getting in on the Activist Game

8 March 2016

By Carol Wolf

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Activism isn’t just for hedge funds anymore. Institutional investors are increasingly getting in on the game and partnering with activists to spur rapid change. After all, the potential to unlock value certainly appeals to institutional investors as much as activists.

In a recent survey of 100 institutional investors representing nearly $1.7 trillion in assets under management, FTI Consulting found that 74 percent said they had a favorable opinion of the increased role of activists. More than 84 percent said that activists add value to the target company. And most importantly for IR professionals, about 70 percent of the investors said they expected an increase in partnerships between activists and institutional investors.

-Institutional investors benefit just as much as activists after a successful campaign.

Institutional investors are generally defined as mutual funds, pension plans and others that buy stakes in an entity as long-term shareholders because they hold a positive view of the company’s prospects. Activist investors on the other hand take stakes in companies not because they like what they see, but because they perceive ways to eek out value for themselves – and other shareholders – in a relatively short time period. In aggregate, activists now control more than $200 billion in assets, up from about $12 billion in 2003.

Institutional investors have historically taken a hands-off approach to the actual running of a company, instead choosing to simply sell off shares when unhappy with results. Now, as Gregory P. Taxin, then president of the $1.5 billion hedge fund Clinton Group, told The New York Times’ Dealbook, “Big institutional players listen to both sides and are willing to back the activist fund if they believe in them. You can win with persuasion and ideas.”

For example, Trian Partners, as an activist investor in General Electric, late last year posted online an 81-page analysis of the company online for anyone to read. Activist Wintergreen Advisors has a website called FixBigSoda.com, which spells out how in Wintergreen’s view Coca Cola could change its strategy to become more profitable. In 2014, Starboard Value used among other things a 294-page investor presentation that spelled out a detailed turnaround plan for Darden Restaurants. Starboard was eventually successful at ousting Darden’s entire board of directors.

This kind of due diligence and the resulting success has impressed many institutional investors to the point that some such as T. Rowe Price and the California State Teachers Retirement System have chosen at times to actually work with and vote their shares with activists in support of their agendas.

-As this trend continues, IR professionals need to spend more time than ever before listening to long-term shareholders to identify issues that may cause unrest and a possible alliance with activists.

T. Rowe Price in 2013 for example supported Carl Icahn’s opposition to the leveraged buyout of Dell, which ultimately resulted in increased gains for shareholders. In June of last year, the California State Teachers’ Retirement System, the second-biggest U.S. public pension system, teamed up with activist Legion Partners Asset Management to force changes at Perry Ellis International. BlackRock, the world’s largest investor with $4.6 trillion in assets under management, disclosed earlier this month that it voted with activists 39 percent of the time during the 2015 proxy season. In another twist, the California State Teachers fund, said it has invested $3.7 billion of its $191 billion in assets directly into activist hedge funds.

While some institutional investors publicly declare their support for activist agendas, others work quietly behind the scenes. When paired with institutional investors, however, activists have more clout, need less resources, and can produce faster results than when working alone.

-While some institutional investors publicly declare their support for activist agendas, others work quietly behind the scenes.

As this trend continues, IR professionals need to spend more time educating investors on business drivers and market dynamics, as well as listening to shareholders to identify issues that may cause unrest and a possible alliance with activists.

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