“What activists are very good at is networking and getting to know the wider share holder base,” says Walker. “They have the same core analytical skills as other investors, but unlike the other analysts, they are speaking to other shareholders big and small, other hedge funds and institutional investors.”
Marriages of convenience between US style activists and long-term investors in the UK has its attractions, however.
Steve Waygood, chief responsible investment officer at Aviva Investors, explains that his firm has engaged in ‘substantive dialogues’ with 238 companies over the past year, but does not have the resources to focus on turning around the fortunes of a single one in the way activists with 10-20 holdings do.
LOW KEY ACTIVISTS
While some US style activist hedge funds are drawn to public cases, most European active ownership funds prefer to focus on companies that are not. This is because they are less likely to have been spotted by other investors.
For this reason RWC Partners sees an activism ‘sweet-spot’ in the small/mid-cap market, where it views management as also being more open to shareholders with ideas. In its European fund, RWC has 10 core holdings in companies with which it takes up to a 20% stake.
Maarten Wildschut co-head of European active ownership strategy at RWC Partners, says: “In the lifecycle of almost any company there is a point at which they may have lost their way or over extended themselves.”
He says that typically the company in question has misallocated capital through diversification away from a core profitable business. A poor allocation of capital is often accompanied by poor governance and incentive structures.
Wildschut says of 19 companies it has held in recent years, only one made a loss, two companies had an IRR of below 15% while 16 were over 15%. Other activists go to the further extremes of investment markets to find companies to turn around, as the following case study explains.
For some decades now the biggest construction company in Peru has been Grania y Montero and for a long while it was off the radar of investment analysts based in London, New York and Hong Kong.
Mike Lubrano, managing director of corporate governance at the New York-based emerging market activist, Cartica Management, was one of the first developed world investors to take notice.
“We look for small to mid-cap companies ($1bn-4bn) where we feel the management is open to a dialogue with their largest minority shareholder, which we typically are,” says Lubrano, whose firm owns stakes in 20 companies with an average $100m stake in each.
