Who is an Activist Investor?
An activist investor is an individual or institutional investor who acquires a sizeable minority stake, typically 5% to 10%, of a publicly traded company. Their goal is to influence the company’s corporate strategy and operations from within to drive changes aimed at maximizing shareholder value.
The definition of activist investor is different from that of passive investors or corporate raiders as they seek to exert some degree of influence rather than taking full control of the business to implement changes.
They believe that target companies are substantially undervalued due to poor management, bad capital allocation, inefficient operations, or other problems that could be easily solved to unlock additional market value.
By obtaining a seat on the Board of Directors or collaborating with the management team, activist investors push their agenda for strategic, financial, and operational changes intended to improve profitability or fuel growth.
Their recommendations may involve cost-cutting, divesting assets, returning capital to shareholders, or overhauling the leadership team, among other levers they tend to pull to lift share prices.
What Does an Activist Investor Do?
Activist investors play a unique corporate role in the financial markets by targeting stagnant, struggling, or inefficient public companies needing a catalyst and strategic direction change.
The core role of an activist lies in identifying levers to substantially lift shareholder value at firms that may lack an ambitious vision and that have been left at the mercy of unaccountable management teams.
How to Become an Activist Investor?
Succeeding as an activist investor requires world-class financial analytical abilities paired with significant soft skills to navigate the process of high-stakes negotiations. It is insufficient to merely identify companies with hidden value and needed change; the activist must compel headstrong insiders to go on board with what will be often unpleasant remedies.
- The process starts by extensively evaluating companies on benchmarks like revenue growth, margins, costs, capital expenditures, and cash flows, among other metrics. Underperforming organizations are scrutinized to unlock their hidden value by solving unaddressed issues. Activists use both quantitative financial modeling and qualitative assessment to identify the problems and propose solutions.
- Once opportunities are identified, an activist must acquire a stake that is large enough to exert influence on the leadership team. These stakes may typically represent at least 5% of the company’s capital, which is often the equivalent of $50 to $100 million, depending on the target’s size.
- After announcing publicly and lobbying privately, they start to push the management to make the changes they have proposed by using the leverage and influence they have amassed via their financial stake, board seats, and networking. Attacking from within rather than through a hostile takeover differentiates activist investors from other corporate raiders. If negotiation fails, a proxy fight for board control becomes the activist’s tool of last resort to implement their agenda.
- Activists present comprehensive proposals to improve operations, cut costs, divest non-core assets, resize excess capacity, and improve capital allocation. Strategies may also involve restructuring the firm’s financial structure, altering executive incentives to align them to the company’s long-term goals, refreshing management teams with new talent, or changing a governance model.
Throughout this relatively hostile and multifaceted process, resilience, stamina, and conviction become critical activist investor attributes. The path involves regulatory, legal, and public relations minefields. These scenarios involve high pressure and intense scrutiny. Having sufficiently deep pockets, nerves of steel, and a thick skin are prerequisites for success.
Types of Activist Investors
While shareholder activism was once the domain of billionaire investors primarily, several new categories of investors today pursue this investment strategy with the assistance of pooled capital. Here’s an overview of the most common types of activists.
Hedge Fund Activists
Activist hedge funds utilize minority stake investments to call for a change in the company’s way of doing things both publicly and behind the scenes.
They typically utilize media coverage and public relations campaigns to exert pressure despite their ownership stake representing less than 5% of total activism. Well-known activists in this arena include Bill Ackman, Dan Loeb, Paul Singer, and David Einhorn.
Pension funds, mutual funds, and insurance companies increasingly conduct low-profile activism focused on governance and long-term value creation. Their credibility as fiduciary advocates lends them particular sway to pressure boards regarding issues like executive compensation, environmental practices, and succession planning.
They usually don’t involve the general public in the discussion, but rather they tend to negotiate and pressure the leadership team privately and via their board seats.
Private Equity Activists
Leveraged buyout firms have adopted activist tactics to create value in acquisitions. Unlike most activists, PE investors buy large stakes to gain control of a company, and they use their capital to exert pressure.
They may opt to take more straightforward and harsh measures like replacing the leadership team, selling off certain assets, shutting down business units or research projects, and even delisting the company from the public markets if they feel that these actions are needed to raise the market value of the target company.
Millionaires and billionaires still carry out bold activist campaigns on their own. This path was pioneered by corporate raiders from the 1980s who used their wealth to take control of meaningful stakes in large public companies that they thought were poorly managed at the time.
While less common recently, Carl Icahn remains the poster child of successful individual shareholder activism after targeting dozens of major corporations during his 40+ year career.
Characteristics of Activist Investors
Now that we have explored the meaning of activist investor, it is important to acknowledge that even though the techniques employed by these professionals to pursue and achieve their goals vary widely, most exhibit some common characteristics that make them a good fit for the job.
Some of these key traits include:
|Identifying value-creation opportunities requires in-depth financial statement analysis skills. Activists possess the knowledge to perform advanced quantitative and qualitative analyses on their target company beyond the typical investment fund manager.
Financial models and valuation metrics are often used to support their proposals, while their knowledge of the competitive landscape and industry-specific dynamics helps them make their case as well.
|Board rooms rather than trading floors become the activist investor’s habitat for deal-making and leveraging influence.
Strong interpersonal skills are essential to carry out successful negotiations directly with management teams, board members, and institutional shareholders.
|Tolerance for Conflict
|Activist investing frequently puts investors into adversarial positions that are rarely seen in finance. Proxy fights, rival director slates, lawsuits, and bare-knuckle PR battles come with the territory.
Having the resilience, character, and temperament to deal with constant high-stress situations becomes a critical piece of the puzzle for a successful activist campaign.
|Long Investment Horizon
|Despite frequent accusations of short-termism, most activist investors stay on board and have a long-term scope.
Strategic and operational turnarounds seldom occur quickly, with the average activist holding period spanning from two to five years, depending on how ambitious their goals are. Patience is a part of the process, especially when the company involved needs to undergo a significant cultural or strategic shift to unlock its potential.
|Activist investors leverage public platforms and media visibility to make their case for a change. Oral and written communications and the use of pitch decks to showcase their proposals are needed to rally investors behind their cause.
This is especially true during proxy fights, as PR wars tend to be determinant to achieve a favorable outcome.
|As one of the most regulated investment strategies, activist investors require specialized legal and financial compliance knowledge. Resistance from management frequently draws activist investors into litigation and exposes them to regulatory actions if disclosures and procedures are handled improperly.
Their expertise comes from years of advising others during similar actions, along with harnessing the support of the best minds in the legal field. Most activist investors have an army of lawyers who fight for their cause in this arena.
Activist investing hit record levels in 2022, according to data from Barclays Bank, with 235 initiatives being held by investment professionals. After a brief decline in activity amid the pandemic, many see no pause occurring in shareholder activism anytime soon, with assets under management dedicated to activism still moving in an upward direction.
During the first half of 2023, Barclays reports that 133 campaigns have been activated, representing a 4% jump compared to the number of deals recorded during the same period last year. A simple run rate of this figure indicates that this year may witness even higher levels of activist investing.
Several trends fuel expectations that activist investing could enter a new golden age rather than fading. Continued growth in the amount of assets under management by activist hedge funds and private equity investors is adding additional coal to the flames.
Meanwhile, the lack of alignment between the interests of management teams and those of shareholders may continue to motivate activists to take action to bridge these gaps and ensure that leadership teams remember who they work for.
While activist hedge funds once dominated headlines, strategic activism from pension funds and mutual funds is harnessing some momentum. Their priorities increasingly emphasize environment, governance, and labor issues that are now considered highly important to their own investors.
In 2022, the number of ESG-related activist campaigns accounted for 81% of the total initiatives tracked by S&P Global. This is the largest percentage achieved by ESG campaigns compared to non-ESG initiatives in the past five years.
Despite these positive indications regarding the growth and advancement of shareholder activism, some fear that newly proposed SEC rules concerning shorter 13D filing deadlines may cripple the tools that activists have to amass control over meaningful stakes without alerting the public about their intentions – which tends to increase the target company’s share price in the short run.
Pros and Cons of Activist Investors
Potential benefits of activist investors:
- They can exert pressure on self-serving management teams and passive boards by lobbying other shareholders and rallying public support via well-funded PR campaigns.
- Their involvement draws investor attention to chronically undervalued and underperforming companies. If their plans go well, they attract fresh capital and interest in the companies they invest in.
- They provide a voice to dispersed shareholders who individually lack the power to push for a change.
- Their proposed operational or strategic changes may improve efficiency and profit margins.
Potential downsides of activist investors:
- They tend to pursue short-term financial gains over long-term growth strategies.
- Their ideas for change don’t always lead to success, and their expertise is limited to the financial side of the business. They may lack the required industry-specific insight to foster meaningful strategic changes that create value in the long run.
- They aren’t necessarily acting for the benefit of all shareholders and employees.
- Their eventual exit and stock sales can negatively impact the company’s share price if investors believe that they did not achieve the intended goal.
The Biggest Activist Investors of All Time
A few prominent figures have made it to the hall of fame of activist investing due to their bold and ambitious initiatives to gain control and exert pressure on large public corporations.
Here’s a list of some of the most documented cases of activist investing and their leaders.
The pioneer corporate raider of the 1980s, at 87 years old Carl Icahn remains the world’s most feared activist investor with a formidable 40+ year track record targeting major companies.
Icahn has launched boardroom battles against the likes of Motorola, Dell, Hertz, eBay, and most recently, McDonald’s and Southwest Airlines, earning himself a reputation for ruthlessness. His tactics and style redefined shareholder activism but also proved enormously profitable; Icahn currently holds a personal fortune of $6.1 billion, according to data from Forbes.
Bill Ackman leads the $16 billion hedge fund Pershing Square Capital specializing in carrying out activist campaigns at prominent yet undervalued companies. After his early successes with targets including Wendy’s, Herbalife, and Mondelez International, he was temporarily discredited as a result of a disastrous investment in Valeant Pharmaceuticals.
However, some successful bets in Lowe’s, Starbucks, and Netflix managed to restore his reputation and allowed him to keep pursuing similar endeavors for a while. Recently, Ackman claimed that he will focus less on confrontational forms of activism and will lean more toward collaborative deals where he can work alongside the management to produce additional shareholder value.
As CEO of Trian Fund Management, Peltz has multi-year investment horizons and concentrates on operational changes that ultimately improve the company’s fundamentals in the long term. Peltz Pareto-style has launched a decent number of campaigns but exerted influence at targets as varied as DuPont, Procter & Gamble, Sysco, Wendy’s, and most recently Disney.
What is an example of an activist shareholder?
Is investor activism positive or negative?
What is the activist approach to investing?
How do activist investors create value?
- 5 trends in shareholder activism that have emerged in 2023 (Barclays)
- View Our Interactive Infographic (Market Intelligence)
- Carl Icahn (Forbes)
- Pershing Square Capital Management LP (AUM 13F)
- Long-Term Returns of Nelson Peltz’s Activist Targets (Insider Monkey)