Opalesque Industry Update – Activist hedge funds suffered a lot during the 2008 global financial crisis. But with improving economy and relatively cheap stock markets, as well as cash-heavy companies, the strategy is ripe for a rebound.|
A report by the New York Times cited known activist investor William A. Ackman, CEO of $7bn Pershing Square Capital Management, who bought majority stakes in retail giant J.C. Penney and Fortune Brands. Ackman’s move renewed speculations that he was looking to shake up the brands (see Monday’s article).
Activist investors are described as speculators in underperforming companies. They introduce major changes to raise stock prices, including changes in management and asset sales. However, the last financial crisis created trouble for this type of strategy as money for acquisitions went dry and the hedge fund industry was itself being squeezed.
But activist hedge funds have registered good returns this year. Among them, according to WSJ.com, were : Cevian Capital, a Eur3.5bn Stockholm-based activist hedge-fund firm run by Christer Gardell and Lars Forberg, which returned almost 14% in September and 28% YTD; Trian Partners, run by Nelson Peltz, which was up about 7.5% in September; and Third Point Offshore, a $2bn activist fund run by Dan Loeb, which gained 3.9% in September and is up 19.1% YTD. Ackman’s Pershing Square returned 4% in September, leaving it up about 7.5% YTD.
These activist investors are known for their aggressive positions. Gardell, a former McKinsey & Co. partner, has been described as "the butcher" by Swedish newspapers because of his hardliner stance when introducing major changes at prominent, cash-rich companies like Volvo AB and Munich Re. While Trian Partners, which owns almost 19% of fast-food restaurant company Wendy's/Arby's Group Inc., has been trying to re-organize the business and re-fashion its menu offerings.
Last week, Barry Rosenstein, head of New York-based hedge-fund firm Jana Partners, said that he saw a very interesting opportunity for activist investors not seen since the mid-1980s, reported MarketWatch.com.
There are three main ingredients for successful activist investing: lots of cash, cheap borrowing costs, and relatively cheap stocks. These three are in abundance this year.
According to Rosenstein, corporations are sitting on $3tln of cash on their balance sheets, or some 12% of company assets. He said this abundant cash is “unsustainable.”Meanwhile, the Standard & Poor’s 500 index trades at 12 times next year’s earnings, and corporate borrowing rates are at record lows.
“This makes financing acquisitions very attractive,” Rosenstein said.
He explained that one main driver of acquisitions are private equity firms which have at least $500bn in cash. Nearly half of its is due to be given back to their investors in the next five years.
“Guess what? They’re going to find a way to spend it, not give it back to their investors,” Rosenstein said.
Rosenstein's Jana Partners climbed about 4.5% in September and is roughly up 4% so far in 2010.
U.S. economy ripe for acquisitions
"I'm more bullish than I am bearish. I see a lot of reasons for economic improvement in this country," Ackman said in his speech during the Value Investing Congress in New York. He also noted that corporations are now leaner and more efficient after the 2008 financial crisis.
Speaking in the same conference, Lee Ainslie, another activist investor who runs $10bn hedge fund Maverick Capital, said that technology stocks are inexpensive and that companies have a lot of cash on their balance sheets.
"We are willing to go extremely active so long as you never hear about it," Ainslie declared.