Activist investors seem to be everywhere right now.
Last year, the number of activist campaigns in the US spiked to its highest level in at least a decade.
Now the line is blurring between who is an activist investor — and who isn’t.
That’s according to Goldman Sachs’ Steven Barg and Avinash Mehrotra, coheads of the mergers and acquisitions shareholder advisory business.
“Companies are judging an idea put forth by shareholders on its own merits and are now less concerned about whether the idea was generated by an activist or non-activist shareholder,” said Barg in a recent Q&A shared by Goldman.
“In fact, the distinction between who is an activist and who is not is becoming increasingly blurred and less relevant overall.”
Activists tend to demand management changes, pivots in corporate strategy, or some sort of shareholder-friendly move such as a buyback or dividend issuance.
That’s becoming more attractive to investors and is increasingly becoming a tool used by traditionally more staid shareholders.
“More mainstream investors, including index funds, are engaging with boards and management teams,” said Barg. “We are in an age of more active and sustained engagement among boards, management teams and their shareholders.”
The explosion in activist funds has reached far and wide across the market. Here’s Mehrotra (emphasis added):
The growth of activist AUM over the past seven to eight years has essentially created its own asset class. Although the market’s returns have contributed to that growth, a meaningful amount of the AUM has come from new capital pursuing activist strategies. This growth has permeated the asset management industry, and we estimate that activist funds are currently invested in at least 25 per cent of the number of companies in the S&P 500 Index, comprising over 40 per cent of its market capitalisation.”
And as Barg notes, these activist campaigns are getting what they want more often and faster than in the past.
“The average number of days it takes companies to reach a settlement with activists has gone from 146 days in 2013 to an average of 60 days last year,” he said. “Much of that is driven by companies wanting to avoid the time and expense of a protracted proxy fight that could disrupt their business.”
Whether or not this sort of activism is a good thing is up for debate.
On the one hand it shows that large companies are listening to shareholder concerns and it could be making them more nimble. Entrenched management is forced to make moves that otherwise they would not consider.
On the other hand, it could be giving in to the fears of some, including BlackRock CEO Larry Fink, that companies are more focused on the short-term results in order to placate shareholders that want immediate returns.
The latter line of thinking might be reflected in recent performance by activist hedge funds, which have underperformed the market in recent months. As Mehrotra points out, many activist hedge funds that have been leading the charges for change are struggling.
“Activist hedge funds typically hold more concentrated, less diversified portfolios so when the markets are volatile — as they were earlier this year and in August 2015 — they have more downside exposure in a dislocation,” said Mehrotra.
In sum, there are more activists launching more campaigns at a higher success rate, but whether or not that’s a good thing remains to be seen.