The 2016 Proxy Season

Activists setting their sights further afield

Executive summary

Activism continues to be one of the most dynamic investment strategies across global equity markets. In the past five years, it has evolved from a handful of seasoned hedge fund managers targeting underperforming stocks to a population comprising over 80 direct activist funds, in addition to the even larger group of multi-strategy and event-driven hedge funds that also frequently engage in activism.1

The 2016 proxy season further solidified activism as a widely accepted strategy within global equity markets. Activist-style engagement is now embraced by myriad investors, ranging from newly minted activist funds to traditional long-only investors. Other constituents are also making their voices heard, including labor unions and former executives with significant ownership stakes. As the universe of activists has expanded, so too have their parameters for screening prospective targets. Companies performing in line with (or even outperforming) peers can be targets. Companies once thought too big for activists to tackle or too small for them to notice can be targets. International markets once considered unfriendly to activism have begun to welcome the strategy — both on a homegrown basis and with the appearance of U.S. funds seeking opportunities abroad.

In summary, the 2016 proxy season has demonstrated the versatility of the activist investing strategy and the willingness of its applicants to expand far beyond its roots in their search for alpha.

Yet, despite its widespread use and acceptance, activism faces some headwinds as well. After growing at a compound annual rate of 23% from 2009 to 2015, total assets under management for direct activists decreased by 8.5% during the first half of 2016 to $112.5 billion, as a result of both underperformance and outflows from the strategy. Hedge funds more broadly have experienced outflows too. Large pension funds and institutional money managers are questioning whether the sector’s recent anemic returns merit their fees, particularly when compared with the returns and fees of passively managed products. On another front, regulatory and legislative authorities have taken notice of activists’ impact on companies and their disclosure requirements. The U.S. Department of Justice, Federal Trade Commission and Congress have all recently acted to curb activists’ ability to build significant ownership stakes and exert influence on companies, either by more strictly enforcing existing reporting requirements or by introducing legislation aimed at tightening regulatory rules.

Curbing activists

Regulatory and legislative authorities have acted to curb the ability of activists to build significant ownership stakes and exert influence on companies.

proxy season infographic curbing

2016 proxy season key takeaways

  • As the strategy matures in the U.S. and the asset class becomes more competitive, campaign demands have continued to shift from capital allocation to addressing overall corporate strategy and advocating transformative transactions.
  • Despite the underperformance of certain high-profile managers over the past 12 to 18 months, new managers continue to successfully attract funds and wade into the fray.
  • Activism has become far more prevalent in international markets, with much of the growth in 2016 campaign volume originating in Europe and Asia.
  • While U.S. activists’ presence has grown in international markets, local activists have led some of the most high-profile international campaigns of the season.
  • Major institutional investors have become more engaged in dialogue on both sides of the table — supporting dissidents in proxy contests and shareholder proposals, as well as pushing back on the wave of quick-fire settlements.

Notable emerging trends

Implications for companies

Activist investing has evolved into a global strategy in which fund managers compete for institutional investor mindshare and advocate for increasingly complex agendas. As activist-style engagement continues to originate from both existing and new activists as well as other traditional long-only investors, companies must adapt their activism preparation and response tactics accordingly. Responding to shareholder criticism will increasingly become an inevitable part of management and board responsibilities. Companies that recognize this now and are most proactive in addressing potential areas of vulnerability will be best positioned to communicate with all shareholders effectively and efficiently.

How can companies prepare for activism?

Companies must adapt as activist-style engagement continues to originate from both existing and new activists as well as other traditional long-only investors.

proxy season number 1

Communicate proactively and clearly with shareholders

proxy season number 2

Think strategically about all external communications

proxy season number 3

Proactively address corporate governance lightning rods

proxy season number 4

Be ready to engage if and when activists show up

1Global Hedge Fund Industry Report — Second Quarter 2016, HFR ( Note: In distinguishing activist strategies within the broader category of event-driven hedge funds, HFR defines activists as those that would expect to have greater than 50% of their portfolios in activist positions over the cycle.

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