Hedge Fund Insights: Hard Out Here For A Hedge Fund
This market has been a real downer for activist investors. Of course, everyone is talking about Bill Ackman and his Pershing Square Capital. His dumping of Mondelez revealed the ever spreading need for activists to de-risk their portfolios as certain stocks continue to tumble.
HFR pegs the loss for activist investors for the first two months of the year at 6.5%, more than any other strategy. Bill Ackman’s Pershing Square is down 25% on the year. Both Nelson Peltz’s Trian Fund and Barry Rosenstein’s Jana Partners are down 7% on the year. Smaller activists are also feeling the pain, with both Orange Capital and LionEye Capital recently shutting down.
The fix is on.
Bill Ackman has the fix for Valeant Pharmaceuticals, which starts by getting Mike Pearson out as CEO and himself on the board. I’m still not sure why Pearson ever came back from medical leave.
Moving away from being a platform company that’s a serial acquirer, Ackman laid out the “new” Valeant in a town hall. The crux: Sell non-assets and pay down debt, but without laying off employees - besides Pearson and CFO Howard Schiller. This comes as the biggest Valeant issue appears to be poor public relations. The problem isn’t optional, it’s merely reputational. That’s it folks, Valeant just has a PR problem, and Ackman knows PR. But no amount of PR can save the reputation of the guys at Ruane, Cunniff & Goldfarb.
Their big bet on Valeant via the Sequoia Fund has imploded. We now have the CEO of Ruane, Cunniff & Goldfarb and co-manager of Sequoia retiring thanks to the troubled Valeant investment.
The first cut isn’t always the deepest.
Sequoia Fund is now under review by Morningstar given the Valeant bet. The fund’s “gold” rating is gone. The fact that Sequoia dumped 20% of its assets into Valeant showed recklessness, especially for a mutual fund. They own over 10% of Valeant, and even more than Bill Ackman. So, with that, Sequoia is now on probation at Morningstar. It’s even facing lawsuits by shareholders, saying that the company has breached its fiduciary duty.
There, nonetheless, with Valeant is plenty of blame to go around. Even Jeff Ubben and his ValueAct Capital are getting pulled into the saga, dubbed the creator of the monster that is Mike Pearson. ValueAct has been an owner of Valeant for a decade, helping hire Pearson and architect the company’s success thanks to the unique executive-compensation structure. Basically, ValueAct tied Pearson’s equity to meeting stock performance numbers, basically setting up Valeant like a private equity firm.
Even the company has taken to blaming ValueAct and the compensation structure, “The company has determined that the tone at the top of the organization and the performance-based environment at the company, where challenging targets were set and achieving those targets was a key performance expectation, may have been contributing factors resulting in the company’s improper revenue recognition.”
There is hope.
For all the naysayers and negative returns for the year, activist investors still play an important role. The weak will be culled. “If you're destroying the long-term potential of a company as an activist, you won't be in business very long ... In order to facilitate change at a large U.S. publicly traded company, an activist is going to need their support. If you do something that's good for you in the short term but bad for the company in the long term, you're not going to get the institutional shareholder support the next time.”
If you'd like to get stuff like this in your via email, right in your inbox, please subscribe here.