An activist investor is a private or institutional investor who aims to obtain seats on a target company’s board of directors in order to obtain a controlling interest in the business. In order to uncover the target company’s alleged hidden value, activist investors seek to significantly alter the business.
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Activist investors typically target businesses that they perceive to have a structural weakness in their management and seek to increase value by either influencing the choices made by the current management or by bringing in new management.
Activist Investor Types
There are numerous varieties of activist investors, such as:
1. Investors who are individual activists
Individual activist investors are typically very powerful and rich. In order to acquire sufficient voting rights on the board of directors, they can use their money to buy a sizable portion of a company’s shares. Their goal is to affect the target company’s strategic direction.
These people are typically well-known in the finance sector and use their power to change a company’s strategy from the ground up. For instance, an individual activist can use their power over the board of directors to demand a different capital allocation if they feel that management is not allocating capital appropriately.
Well-known activist shareholders include, for instance:
Pershing Capital was founded by Bill Ackman, who serves as its CEO.
Icahn Enterprises was founded by Carl Icahn.
Greenlight Capital’s founder and president is David Einhorn.
Dan Loeb, Third Point Partners’ founder
Personal Activist Investor Benefits
By directing management’s actions in the best interests of the shareholders, individual activist investors might be able to increase value for existing shareholders. For dispersed shareholders who lack sufficient shares to have an impact on management choices, activist investors can offer a voice.
Individual Activist Investors’ Drawbacks
Individual activist shareholders have the potential to destroy shareholder value because they may not have the same objectives or interests as other shareholders. An activist shareholder, for instance, might only favor a brief holding period. They will persuade management to take actions that will benefit the business in the near term at the expense of long-term shareholders.
2. Firms of Private Equity
Although they use a variety of tactics, activist investors in the form of private equity firms typically take over a publicly traded company with the goal of taking it private. A private equity firm’s structure consists of a general partner who takes on unlimited liability and limited partners who own a sizable portion of the fund and have limited liability. Capital from a variety of investors who are prepared to make sizable investments over an extended period of time is used by private equity firms.
Private equity firms invest in a wide range of circumstances, such as:
Purchasing a business in its entirety with the goal of reorganizing its capital structure to boost its worth and withdrawing the investment through an IPO (initial public offering) or company sale is known as a leveraged buyout.
Looking for businesses or business lines that are in distress (about to go bankrupt) is known as distressed investing.
Venture capital is the provision of funds to new businesses or entrepreneurs with the goal of assisting them in expanding their enterprise in exchange for an equity stake in the initial investment.
Private equity firms’ advantages
In circumstances where they might be able to obtain traditional financing, private equity firms provide many startups and businesses with access to capital and liquidity. Furthermore, current investors in a company that is underperforming in the public markets may find value in private equity firms, which enable the company to avoid the public market’s scrutiny.
Private equity firms’ drawbacks
Since there is no official market to find buyers and sellers, private equity firms have a harder time liquidating their holdings. The process of finding a buyer for a private company can take a long time. Additionally, since pricing is decided through negotiations, the realized return may change depending on factors outside the market’s control.
3. Hedge Funds
There are several ways for activist investors, such as hedge funds, to take over a publicly traded company. Hedge funds can behave like private equity firms or like individual activist investors. The fundamental objective of a hedge fund is to make money for investors no matter what, and the funds are not limited in the methods they can use to achieve this.
As with private equity firms, a number of limited partners and a general partner contribute to the establishment of hedge funds, which are used by many individual activist investors. In order to give hedge fund managers flexibility, the investments are typically locked up for a minimum of one year, making them illiquid.
The Benefits of Hedge Funds
Since hedge funds are not subject to regulations regarding how they produce alpha, they are free to use a wide range of tactics without worrying about adhering to investment policy statements (IPS) or investors. It enables hedge funds to target businesses aggressively and implement changes. It gives them the chance to raise the value of their target shareholders and make activist investments.
Negative aspects of hedge funds
Due to their widespread lack of regulation, hedge funds are subject to many disputes. Moreover, hedge funds are more costly to invest in; wealthy investors are usually the ones who use them. Additionally, the funds usually offer extremely erratic returns and underperform the overall market.
