The activist approach(2)

Icahnesque hedge funds are once again popular with investors, exploiting opportunities private equity cannot access.

At the SALT Conference in Las Vegas this week, Jacob Walthour of alternatives firm Ramius put forth an interesting theory. Activist hedge funds, he said, are “displacing private equity”. That statement should raise eyebrows (and pulses) of fund managers, as the Carl Icahns of the world are enjoying power they haven't had since the 1980s. When they show up on the shareholder register, management teams sit up and listen. They often wield control in ways that private equity GPs wish they could, without having to pay a takeover premium. In some cases, companies are taking pre-emptive action even before an activist comes in, thus driving shareholder value by facing down the raider's threat.

Investors seem to like the look of this as well. Asset flows into activist strategies are up $5.6 billion in April and over $25 billion year to date, according to eVestment, a steady climb that shows no signs of abating.

Is Walthour right that activists are in the process of 'displacing' private equity? Unlikely: we're still talking about an industry which last year raised close to half a trillion dollars globally. But it is clear that in many cases activists are making excellent money for their clients, and it’s no surprise investors are paying attention.

Consider the case of 270-year old auctioneers Sotheby's. Daniel Loeb’s Third Point, with a mere 9.6 percent stake in the company, waged a weeks-long proxy war that resulted in himself and two cohorts gaining board seats and an effective control position without buying another share (although he can) – all of this over his criticism of the company for being too slow to adapt to technology, and making private sales unnecessarily difficult. Sotheby's staff marveled at all the noise Loeb made, and the startling effect it had on the company's management.

With its emphasis on majority ownership, the private equity value creation model could hardly be more different. Firms do much more than shake up boards to optimise the stock price in the short term. They provide capital and management expertise in ways that hedge funds don’t, and their investment typically means a commitment to the business for several years. Large, listed corporations are full of the inefficiencies private equity loves to attack, but again, short of acquiring the business outright, it is difficult for GPs to get involved.

Obtaining a controlling stake in Sotheby's would have required a protracted public-to-private (PTP) manoeuvre, which was never on the cards. Loeb on the other hand didn't need control of the company; all he needed was a seat at the table, and it wasn’t difficult for him to get it.

Expect more of the same in the public markets, and not just in the US either. Current deals like Pfizer’s hostile bid for UK rival AstraZeneca could foretell an uptick in activism in Europe, too.

Private equity-backed PTP on the other hand looks set to remain a minority sport. According to mergermarket, Europe saw 25 such transactions worth a combined €10 billion in 2008; in 2013, there were three. Cumbersome regulation and longstanding shareholder cynicism towards private equity have made PTP a distinctly unattractive deal-sourcing strategy for GPs. Which is why Loeb and his ilk will continue to have the activist opportunity more or less to themselves.