There’s a lot of debate about whether activist investors are good or bad for Wall Street, and this is one debate that’s likely to rage on forever. The overall sentiment on activism is positive, however, as demonstrated by inflows into funds that are operated by activist investors.
Activist investors one of three catalysts
Morgan Stanley analyst Michael Cyprys and his team see activism as one of three big catalysts for alternative investment deployment activity. The other two are rising merger and acquisition activity and self-help strategies followed by European companies.
So are activist investors a help or a hindrance? The Morgan Stanley team sees them as a friend, noting that they offer a “$100 billion deployment opportunity for Alts.” Last year activist flows sped up, hitting $14 billion in 2014 and 20% of overall hedge fund flows. (All charts and graphs in this article are courtesy Morgan Stanley.)
On April 9th 2021, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. Q1 2021 hedge fund letters, conferences and more Read More
That’s three times higher than the levels in 2013. Since 2008, the amount of assets under management at activist firms has grown by four times, hitting $119 billion.
The analysts think the sudden surge in activism might push more sales of assets and “carve-outs,” thus creating “a favorable deployment environment for Alts.”
Activists shifting focus toward M&A
The reason for this view is that activists are beginning to shift their focus from demands for share repurchases and dividends to sales of assets or mergers and acquisitions. Demands for asset sales or mergers or acquisitions increased 33% from 2013 to 2014, making up 14% of campaigns. That was 300 basis points higher than 2013’s 11% share of campaigns.
Here are some of the most prominent activist campaigns involving asset sales or carve-outs:
The Morgan Stanley team estimates that activists could create about a $100 billion potential deployment opportunity. This assumes that they’re demanding sales of assets or mergers or acquisitions between 15% and 20% of the time. It also assumes a success rate of 67%.
What’s fueling the rise in activism?
So why are more and more investors excitedly handing their cash over to activist firms? The Morgan Stanley team suggests several reasons. The clearest reason is because activist investors are enjoying greater and greater success rates. There’s an obvious correlation between the success rate and the number of activist investments made per year.
Investors are probably also opting for activist strategies because most hedge fund strategies are underperforming the market, according to Morgan Stanley. As you can see from the following chart and graphs, activist strategies are also underperforming the S&P 500, but they’re at the top of the heap in terms of performance.
And here’s a broader look at how activist hedge funds have been performing against event-driven and global hedge funds.
Overall trends in activism
It’s been particularly interesting to watch the evolution of activism in recent years, and it has become increasingly clear that activist investors aren’t only interested in smaller companies. In fact, the largest corporations are no longer safe, with even Apple, the biggest company by market capitalization, drawing attention from activist investor Carl Icahn in the last few years.
The Morgan Stanley team noted that activists are increasingly going after companies with a market cap of more than $25 billion. Unsurprisingly, they also noted that the greatest majority of activist campaigns are in North America.
Wall Street’s favorite activists
The Morgan Stanley team also identified which activist investors have garnered the most attention. The top activists hold significant chunks of the total amount of assets under management by activist firms.