Activist Investors: The New Venture Capitalists
Activist investors have been known by many names over the years, from corporate raiders, sharks, to catalyst drivers.
In the end, all that really matters is whether activist investors are generating sexy alpha and superior returns for their funds.
It would seem that this is the case, with AUM growth exploding over the last couple years. Alternative Investment Management Association has some research detailing the growth of assets managed by activist funds, which has grown by 269% to $120 billion in the five years.
Over a 13 year period they have grown by 4,344%, having started from a $2.7 billion AUM base in 2001. The beauty is that the growth in AUM has been matched by the returns to investors. The AIMA puts Annualized returns for the three- and five-year periods ended 2014 at 13.9% and 7.8% for activist hedge funds measured via the HFRI ED Activist index. That’s stacked up against the 6.1% and 4.5% respective returns for the broader hedge fund index, the HFRI Fund Weighted Composite index, over the same periods.
Activists have evolved from the 1980s “barbarians” who preyed on usually weak, non-performing companies. The aim then was to dismantle the company and sell them for parts. This was succeeded by the leveraged buyout (LBO) model which has quietly evolved into the activist investor of today.
Major targets have been companies with large asset bases that could be liquidated, or companies with huge amounts of cash on their books.
Granted, the entire wave of activism had seemingly passed by the technology industry due to their notorious cash burn and complex trends of technology advancement. See our post on ‘how to fend off activists: tech edition [linked here]. Circa 2015 and the technology industry has matured and many tech giants are sitting on large amounts of cash with steady non-volatile cash flow projections.
And so, this has attracted the attention of activists and has led to campaigns against the likes of Dell, Microsoft, Apple, Yahoo and eBay. The activists have been surprisingly successful in winning these campaigns. They have forced Apple to increase its capital returns, ValueAct was a driving force in ousting Ballmer from Microsoft and a string of mid-sized tech firms like Compuware, BMC Software and Integrated Silicon Solutions have been taken private at the behest of activists.
Predictably, this has led to a backlash by the industry against the activists. Leading the charge has been some venture capitalists like Marc Andreessen. Recall that Marc and Carl Icahn had a ware of letters, each penning several letters about the proposed eBay breakup. These VCs cry that the “short-termism” of Wall Street has forced tech executives to make stop gap decisions to support the stock prices.
We also have VCs insisting that companies are shying away from investing in innovation for the future, becoming a “shell of their former shelves.”
The solution espoused is the dual class structure followed by Facebook and made famous by Google. This structure gives the founders enormous power to control the board and “steer” the company towards long term success as opposed to the short term gains sought by activists. On the other side, activists oppose such moves, insisting on fair corporate governance.
For now, certain tech companies are winning out versus activist, with both Google and Facebook hitting all-time highs. A big question will be how the market responds once we see marked maturing of either name. Don't forget - sign up for our free daily newsletter to stay in the activist investing know.