THIS IS PART SIX OF A SERIES: read Part Five.
QUESTION > How have private equity firms and other alternative investors changed the expectations for shareholder communications?
Jason M. Halper > In some ways, you can look at PE firms as the original activists, going back to the 1980s with companies such as KKR. But they had a different model, which was leveraged buyouts, taking companies private, reforming them and then going public with them again. Many times, the rationale was similar to what’s happening with activists, however – the PE firm would argue that the company was underperforming and would do better under different management.
In the current era, I think PE firms and other alternative investors come into this in a few different ways. You could have a private equity fund either aligned with an activist or acting as a white knight or a white squire for a company. For instance, you could theoretically place a large block of stock with a PE firm to deter an activist. So I think PE firms and non-activist hedge funds are potential wild cards. Ultimately, if you know some significant PE firms are in your space, it pays to engage with them on a regular basis, because, firstly, they could be adverse to you in some way in the future, or secondly, they could be potential allies.
Kai Haakon E. Liekefett > PE investors are typically welcomed with open arms by companies, for a number of reasons. For starters, they have capital that companies may want. Also, most PE funds are prohibited legally in their formation documents from going hostile or activist against companies, so it’s safe to talk to them. This is changing on the margins, but the vast majority of PE funds still have a prohibition on waging proxy contests.
As for hedge funds and other alternative investors, what we tell our clients is that when you receive a request for a meeting from an investor you don’t know, we look hard at that investor’s history and try to determine whether it has a record of activism or of otherwise making life difficult for companies. That doesn’t mean we would advise clients not to meet with them – in most cases, we advise them to meet even if it is a known bomb-thrower, because it’s always better to know your enemy than to stiff-arm them. We are also seeing a lot of first-time activists in recent years, so looking at activism history doesn’t necessarily tell you whether a fund is going to be an activist going forward.
Lex Suvanto > The thing about PE is that you know PE firms are inherently long-term investors. They may bring a different kind of rigor in their investment analysis, or a different approach to making an investment in a company. But in reality, they don’t change how companies communicate, because they still need a strong investor base and a strong investor story, and they still need to maximize shareholder value.