I had a wonderful exchange over the last two days or so with a loyal reader, let's call him "Angelo" who wondered after my comments about the potential conflicts, mostly timing driven, between private equity firms and hedge funds. Angelo, himself a hedgie in a larger first-mover activist fund, preferred to call what I termed "follow-on" activists (firms that pile into the disclosed investments of known activists) something a bit less, well, active. "Activism Arbitrageurs" was the term he preferred, pointing out that these investors rarely do the heavy lifting required of activists who do battle with management, and also pointing out that this genre of investors is defined by, among other things, quantitative models geared to predicting the success of an activist campaign.
They are more pre-occupied with calculating the value/risk of the activist event and determining the odds of a successful activist campaign than the nuts and bolts of makings things happen.
These he distinguished from the crowd that might be late to the party, but actually contribute. I'll call these "Secondary Activists" from now on. "Tag teaming" in this way is generally a good thing, from this perspective because practice areas can overlap and improve results. Wendy's, an activist success to use for example, was set upon by both Ackerman (financial improvement focus) and Peltz (operational guru).
Angelo puzzled, however, over why activists should come across private equity firms with any regularity.
What fund in their right mind would ask a PE fund to participate in an activist campaign? Also, I have a hard time imagining many scenarios that would warrant an activist agenda on a company that was brought back to market by a PE fund. If the PE fund is doing its job, it should unlocked most of the "hidden" value in the company. All the things an activist fund looks for (i.e. high cash balances, M&A activity with questionable rationale, under-exploited asset values, earnings under-performance or the presence of disparate businesses with limited strategic underpinning wrapped within a single entity) should not be an issue after a PE firm is done with it.
Ironically, just as I received this question, another deal junkie, "Paul" at an activist fund, and a loyal reader, forwarded me an old Economist article about the battle over a European industrial giant, wherein a well-known private equity firm was set upon by activist hedge funds arguing the private equity giant was offering minority shareholders too little.
According to Paul, who happened to have sent lawyers to the very shareholder meeting discussed in the article, the private equity firm in question was ambushed from the podium by a well-prepared activist, and the meeting thrown into total chaos as the individual shareholders (who have a reputation as a rowdy bunch in this particular country) were literally rallied on the spot from the stage. I envision a populist rising in the former Soviet Bloc complete with students holding forth from atop overturned Trabants. (It is quite easy to overturn Trabants even with a small crowd- read: two students. I attribute the fall of the former Soviet Bloc partially to the unintended consequences of this obscure oversight). "It was quite a sight, apparently. I wish I had gone myself to see it," says our dear reader. One of the more vocal shareholders was actually ejected by security. The matter was finally settled to the activist's satisfaction, according to lore, over a Starbucks on Madison avenue.
The "ecology" of these relationships, to quote the deal junkie, is complex. Private equity firms often make good buyers of assets from activists, who are often eager to capitalize on the quick liquidity private equity firms can provide. What activist hasn't at some point asked a large corporate to throw off an under performing division or two? (I know we've bought at least one such divestiture here at Sub Rosa). When the timing matches up, the two institutions can be the best of friends.