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Activist Investor: Definition, Role, Biggest Player

In recent decades, the phrase "activist investor" has become increasingly prevalent in the financial industry. But, what does it actually mean? In this article, the idea of activist investors, their place in the market, and the potential effects they have on businesses are all discussed.

Activist Investor: Definition, Role, Biggest Player

Activist Investors: Brief Introduction

"An aggressive person shaking up boardrooms and questioning the established structure" comes to mind when you hear the term "activist investor". And although that might not be completely false, an activist investor's responsibility extends beyond merely causing disruption. At its basic level, an activist investor is a person or organization that buys a large amount of stock in a business with the goal of influencing its strategic choices and eventually maximizing shareholder value. Activist investors are always actively seeking changes that will enhance the performance of the firm and raise its stock price by using their ownership position to their benefit.

Activist Investors: How do they operate?

An activist investor seeks poorly managed firms and is convinced that making significant changes to the way the company runs might improve the company's fortunes. In order to acquire enough shares of such businesses on the open market to qualify for a board seat, these investors?typically affluent individuals, hedge funds, or private equity players?purchase their majority shares from the open market.

The markets often become aware of such purchases when the investors, who have now acquired a sizeable position in the company, file the requisite regulatory reports. For instance, when an investor receives more than 5% of a corporation in the United States, he/ she must submit SEC Form 3D. Proxy battles, shareholder resolutions, and legal actions are just a few examples of how shareholders might engage in activism.

Role of Activist Investors

The role of an activist investor is to create strategies that will reduce losses or increase the company's profitability. Other board members and shareholders are also determined, planned for, and persuaded to support the activist investor's objectives on the future path of the investee firm.

Because of high costs, lack of new revenue streams, declining existing revenue streams, and many other problems, a company that lacks significant majority shareholders and is inefficiently managed by entirely professional managers often loses money. If left unchecked, these problems can ultimately result in the company's demise over time.

Activist investors contribute significantly to reviving the business in such circumstances. They acquire control of the board, implement the required adjustments, and considerably raise shareholder value and the overall worth of the company.

Major Types of Activist Investors

1. Individual Activist Investor

Independent stakeholders, known as individual activist investors, typically challenge and interact with corporations using their money. These people frequently have a wealth of expertise and a thorough grasp of their respective target sectors. Their activity may take the shape of open campaigns, proxy conflicts, or legal action.

  • Benefits of Individual Activist Investors

Individual activist investors provide a distinctive set of benefits. They can identify operational inefficiencies and strategic mistakes that traditional investors would need to be aware of thanks to the extensive industry expertise and pragmatic attitude of individual activist investors. Additionally, individual activists are frequently seen by other shareholders as long-term investors who genuinely care about the future of the firm. This eventually helps to build trust.

  • Drawbacks of Individual Activist Investors

Individual activist investors are subject to several drawbacks despite the possible benefits. The range of their actions may be constrained by their lower financial resources than institutional players. They may also make decisions based on their own prejudices and subjective viewpoints, which might result in conflicts of interest or improper goals.

2. Private Equity Companies

These businesses are investment corporations that combine funding from diverse sources to buy substantial corporate ownership holdings. These businesses frequently take an active stance when investing in underperforming or undervalued companies. They take an active role in the management and strategic planning of the businesses in their portfolio with the goal of providing their investors with sizable profits.

  • Benefits of Private Equity Companies

Private Equity companies are able to bring about dramatic changes in a company because they have significant financial resources and industry knowledge. Their network of business specialists and access to money may turn around the fortunes of faltering companies. Additionally, private equity investors' focus on the long term is consistent with their dedication to maximizing shareholder value.

  • Drawbacks of Private Equity Companies

Private equity firms also have disadvantages despite the possible advantages. Because of the aggressiveness of their investment plans, they occasionally have to take cost-cutting measures like layoffs or community-harming budget cuts. Additionally, some private equity players' attention to immediate financial gain may be detrimental to long-term sustainable growth.

3. Hedge Funds

In addition to engaging in activist investing, hedge funds, which are frequently linked to high-risk investment techniques, also take part as activist investors. These investment vehicles aggregate money from a number of investors in order to execute strategies that seek to provide substantial returns. Hedge funds participate significantly in corporate affairs and utilize their clout to bring about change in the context of activism.

  • Benefits of Hedge Fund

With regard to activist investment, hedge funds provide a quick and opportunistic mindset. They can take advantage of market inefficiencies since they can spot undervalued or poorly run firms rapidly. Hedge fund managers may also help the businesses they target by applying their experience and knowledge to new ways of thinking.

  • Drawbacks of Hedge Fund

Like every kind of investing, hedge funds have drawbacks as well. Some hedge funds prioritize short-term profits above sustainable long-term growth due to their focus on short-term profit maximization. They may cause market volatility and uncertainty through their aggressive behavior and speculation.

Biggest Players

In the chart below, Third Point Partners, located in New York City, is listed as the largest activist shareholder by assets under management (AUM) as of Q1 2023.

The largest activist investment firms according to AUM (Q1 2023) are as follows:

Investor Managed AUM (USD)
Third Point Partners 18.1 Billion
Pershing Square Capital Management 16.8 Billion
ValueAct Capital 13.2 Billion
Eminence Capital 10.5 Billion
Pentwater Capital Management 9.9 Billion
Starboard Value LP 9.2 Billion
Trian Fund Management 7.6 Billion
Effissimo Capital Management 6.8 Billion
Sachem Head Capital Management 6.2 Billion
Scopia Capital Management 2.7 Billion

Except for Effissimo Capital Management (Asia), all of the other nine are North American. The above data or statistics have been obtained from Sovereign Wealth Fund Institute (SWFI).

The Bottom Line

In the current financial environment, activist investors are crucial. Through their efforts, corporate governance may be improved, accountability could be promoted, and shareholder value may grow. However, it's important to reconcile activism with the long-term viability of a company. Stakeholders may more successfully negotiate this changing landscape by understanding the goals, tactics, and possible effects of activist investors.

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