Much like poor old Lindsay Lohan, activist investors have a serious image problem. And not just within the general investor community – within their own industry. "Activists are not evil" said Navi Hehar, principal with Kerrisdale Capital, a New York-based hedge fund. "Activists are not crazy people wanting to destroy [a company]," added Stephen Griggs, CEO of Toronto-based Smoothwater Capital. The "perception problem" was one of the resounding themes coming from the Activist Investing in Canada Conference which took place Thursday in Toronto. The event hosted Canadian and U.S. activist investment companies, investment bankers, lawyers specializing in mergers and acquisitions, fund managers, public relations firms and a smattering of financial journalists.
The "activists are not evil" line struck me as particularly bizarre considering the activist making the comments was preaching to the choir, i.e. other activists, and not to shareholders of, say, Herbalife Ltd.
Greg Feinstein, the gravel-voiced, managing director of prominent New York investment bank Houlihan Lokey, said that almost all of the major Wall Street investment banks and "some of the law firms" would never advise an activist.
The image problem dates from the go-go 1980s, during the first big buyout boom on Wall Street. Activists such as Mr. Feinstein concede that things were different then. The "hostile raiders" often had "a divergence of interest" from the shareholders of companies under attack, he said. Back then it wasn't uncommon for an activist to raid a company, bust it up, and sell it for scrap in a matter of months, making the activist a tonne of dough, but sometimes leaving general shareholders wondering what the heck just happened.
Now, activists say, things are different. Many insist they have the same objective that all shareholders have, i.e. make the stock go up and that all they are really trying to do is what every good CEO should be doing, but sometimes isn't (spinoffs, buybacks, asset sales, firing incompetent managers, etc.). Activist investing in the 21st century isn't about ripping a company to shreds, they argue; It's more about realizing a company's potential and making money for everyone in the process.
Activists know that they have an image problem, of course, and they are trying to do something about it. (Apart from making speeches saying "activists are not evil.") To soften their image, activists are increasingly taking a more cordial and "gentlemanly" approach when first approaching targets, much like in dating. Activists are, in the words of Mr. Hehar, "sending roses" rather than "hitting someone up on Tinder." The cordial approach has ancillary benefits too. It's far better to engage with management in a friendly, constructive criticism, feedback-oriented manner. That way, you avoid the horror show of a nasty, public proxy fight and potentially save tens of millions in legal fees. Mr. Griggs says, "The smartest thing to do is pick up the phone and build up a relationship [with a target] as opposed to a highly conflicted fight."
The activists also want you to know that they are not quick-flip artists anymore. Holding periods are getting longer for activists, because doing a proper restructuring of a company can take years, they argue. Pershing Square Capital Management's multi-year investment in Canadian Pacific Railway Ltd. was used as an example.
Paul Hilal, partner with Pershing Square says the average holding period for its investments is four years, but Mr. Hilal also said it wouldn't surprise him if holding periods could eventually be as long as 20 years, now that the firm has access to a permanent source of capital through its Amsterdam-listed fund. Twenty years? That sounds an awful lot like good old fashioned, conservative, buy and hold investing.
But don't think that activists are holding on to investments longer just to appear nicer and less corporate raider-y. Sarbit Advisory Services chief investment officer Larry Sarbit, who runs a Canadian fund that shadows the investments of activist investors, says the best time to invest in a company that has been targeted by an activist is not when the initial approach is made, but in the four years after the activist gets their ideas implemented.
When it comes to their image, activist investors may succeed in their efforts to make themselves over. But should their public relations campaign fail, the likes of Bill Ackman will surely take some comfort simply by looking at their bank statements.
Niall McGee