Within the financial markets, there are a wide variety of participants whose primary goal is to make money. While brokerage firms, retail traders and institutional capital outlets all hope to achieve sustainable profitability, one group also seeks influence. Known as activist investors, such entities engage the markets to invoke corporate and sectoral change.
What Is An Activist Investor?
Activist investors are entities that tactically focus their capital to gain control over a selected company or companies. Also known as shareholder activism, large blocks of corporate shares are purchased to influence corporate leadership. The practice is often directed at companies perceived to be undervalued, mismanaged, have a high break-up value, or a valuable brand identity. Proxy fights, leadership upheavals and hostile takeovers are few potential consequences of shareholder activism.
Typically, activist investors come in three forms: individuals, private equity firms and hedge funds.
Well-capitalised individual investors may leverage their wealth to gain influence within the leadership of a company. This may be accomplished through buying enough shares to secure a seat on the company's board of directors or garnering support from like-minded equity firms or hedge funds. Both of these actions can directly impact the policies enacted by corporate leadership.
2. Private Equity Firms
A private equity firm is a combination of partners with limited liability and a general partner who assumes unlimited liability. Equity firms may purchase large stakes in companies to make them private, liquidate distressed assets, or provide venture capital to startups in return for ownership rights.
3. Hedge Funds
Hedge funds are pools of capital used to generate returns for its investors. Hedge funds enjoy vast strategic freedom and may function as either an individual or private equity firm activist investor. In contrast to mutual funds or ETFs, hedge funds face minimal regulatory oversight.
How Does It All Work?
From an operational standpoint, activist investors acquire minority stakes of individual companies to exert influence. In the U.S., such investments must be disclosed to the Securities and Exchange Commission (SEC) if said position exceeds 5% of a company's voting class shares. Known as a schedule 13D, the filing reflects the following data:
- Reports the stock purchase within the 10 days following the transaction
- The targeted company is informed of the acquisition by the SEC
- In many cases, the 13D accompanies a tender offer on large blocks of stock
A schedule 13D filing is an important event, as it publicly discloses that a company is the target of activism. This can lead to a multitude of actions, namely widespread retail buying or selling as well as the exercise of insider stock options.
## Modern Activist Investors
Extremely well capitalised and famous individuals can work alone as activist investors. A few prominent names that fall into this category are David Einhorn, Bill Ackman, Nelson Peltz and Carl Icahn. However, most activist shareholders open their own hedge funds or equity firms after enjoying some degree of success. These entities offer select investors an opportunity to pledge their capital in the hopes of achieving greater returns. Below are four of the leading activist investors, their funds and values:
- Cevian Capital, Switzerland: Cevian was founded in 2002 by Christer Gardell and Lars Forberg. As the largest activist investor in Europe, Cevian was valued at US$11.7 billion as of March 2016.
- Pershing Square Capital Management, United States: Run by Bill Ackman, Pershing Square was founded in 2004 and is based in New York, N.Y. As of March 2016, Pershing was valued at US$14.8 billion.
- Third Point LLC, United States: Based in New York, N.Y., Third Point LLC was founded in 1995 by Daniel Loeb. As of March 2016, Third Point boasted an aggregate value of US$22.6 billion.
- Icahn Enterprises, United States: Founded by legendary options trader Carl Icahn, Icahn Enterprises is a prominent figure on Wall Street. Valued at US$32.3 billion (March 2016), Icahn has taken notable positions in Apple, Chesapeake Energy and American Railcar.
Social Media Leading To New Type Of Activist Investor
In addition to these financial heavyweights, a fourth classification of activist investors may be developing via social media. Early 2021 brought instances of retail traders working together to drive depressed securities higher.
One example came in the form of the "Reddit traders," who conspired to buy large quantities of GameStop (GME) and AMC (AMC) stock to drive out hedge funds that were actively shorting the stocks. The intense buying drove shares of GME 1,500% percent higher in two weeks time, forcing larger hedge funds to liquidate open short positions. Controversy surrounded the GameStop saga, as some financial market professionals argued collusion while others labeled the Reddit phenomenon pure activism.
The function of activist investors in the financial markets is a controversial one. Although these entities often intervene to save corporations from bankruptcy or insolvency, takeovers and proxy wars are often thought to be detrimental to common stock shareholders. In addition, the practice of hedge fund short-selling and use of dark pools has painted some of these entities in a negative light.
It remains to be seen what the role of activist investors will be in the future. Shortly after the onslaught of the coronavirus (COVID-19) pandemic during March 2020, activism fell to US$3.3 billion in May 2020. While still robust, the figure lagged the previous six-month average of US$4.6 billion. However, the capitalisation and standing of shareholder activists remains significant. And, with the early-2021 rise of the Reddit traders, a new era of social media-based stock market intervention may be well underway.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…