Tag Archives: hedge funds

Here’s Why Activist Investing Isn’t Going Away

A new report details the eye-popping numbers surrounding activist campaigns in 2014, which reached new heights and targeted bigger companies than ever.

Keith Bedford / Reuters / Reuters

Last October, the activist hedge fund Starboard Value, claimed an unprecedented victory in its campaign to replace the entire board of Olive Garden parent Darden Restaurants. It was the first time an activist had managed to unseat the whole slate of directors at such a large company, not to mention such a popular consumer-facing brand.

Starboard’s victory, it turns out, was part of the changing tide of activist investing in the U.S., and was just one of 344 campaigns in 2014, according to a new report out by Activist Insight, which provides an annual look at the activist investment ecosystem in the U.S. and abroad.

2014 was a record smashing year, the report says: an 18% increase in activism over 2013’s 291 campaigns, alongside a staggering success rate of 75%, a new high from 67% in 2013.

The fact that three out of four activist investors get all or part of what they are asking for is a good sign you can expect more and more activist investors in the future. The report points to some compelling evidence that activist investing is becoming more prevalent–not to mention effective–than at any point in the history of public companies.

Here’s a look at activism by the numbers last year, and what it could mean for 2015 and the years to come.

Rick Wilking / Reuters

Some activist investors were busier than others, with Starboard Value taking the cake launching public campaigns at the rate of nearly one per month.

Jeff Smith’s powerhouse activism fund carried out 11 public campaigns last year, the most notable of which was Starboard’s ultimately successful pursuit of Darden’s entire board, as well as its less successful push for an AOL-Yahoo merger (Starboard may not have got the meger, but Yahoo’s spin-off of its Alibaba stake makes it ripe for a takeover by AOL or another potential buyer.

Dan Loeb’s Third Point partners ranked second in activist investment activity last year, fighting for change at five public companies including Sony, Sotheby’s and Dow Chemical, among others.

Close behind Loeb was Jana Partners, which counted causing a major shakeup at Walgreens and successfully pushing for a private equity buyout of PetSmart among its eight public campaigns.

Chance Chan / Reuters

Activist investors went after larger targets last year. Much larger.

Activist Insight’s report notes that, “some of the largest corporations in America, previously thought invulnerable due to their size, were targets,” of activists last year. This list includes Apple, Microsoft, and eBay, Pepsico, Walgreens, Yahoo, and DuPont, to name just a few.

The type of company activists are targeting is changing as well, with one-quarter of targets representing the services industry, and 19% this year, a decline over 2013, coming from the technology sector.

AP Photo/Damian Dovarganes, File

Most of the demands were either board related or a push for M&A activity.

With a total asset base of $159 billion among the top 50 activists of last year, the investors comprise a powerful group that is hard to ignore. Their demands appear to acknowledge this fact, as a higher percentage of activist campaigns than ever before pushed for board replacements in 2014. Nearly half of all activist investors (47%) pushed for board-related changes at the companies they engaged, an increase of 3 percentage points over last year.

The second most common demand among 2014 activist investors focused on mergers and acquisitions, with 21% of all campaigns dealing with M&A in one way or another. This means a fund could be trying to stop a merger or leveraged buyout, or trying to encourage one, though Activist Insight’s data shows the campaigns of 2014 skewed heavily toward the latter.

Bill Ackman’s ultimately unsuccessful push for pharmaceutical giant Allergan to merger with Valeant was among the highest profile M&A activism campaigns of 2014, and ended up netting Ackman $2 billion when rival pharmaceutical company Actavis bought Allergan instead, sending the stock, of which Ackman had 28.8 million shares, skyrocketing. As a result, Ackman’s publicly traded fund ended the year up 40% less than two months after its initial public offering.

Rick Wilking / Reuters

So what does this mean for the future of activism?

The report suggests activism shows no signs of slowing down, especially as the M&A landscape is currently exploding and a number of corporate governance initiatives have sided with shareholders and expanded their power to hold special meetings, buy up more shares, and take on campaigns to change the companies they invest in fundamentally.

Moreover, the report found that increasingly institutional investors like public pensions and the largest money managers in the world are not only supporting activist investors in their endeavors, but bringing them to campaign for potential activist investment.

“Few forces are as feared on Wall Street as activist investors,” the report says in its closing comments. That looks like it will be unavoidable truth corporate boards and management for years to come.

American Apparel CEO Fights Back A Pro-Dov Charney Email Insurgency

The company’s new CEO, Paula Schneider, recently responded to a series of mass emails sent to employees by an anonymous insider. The emails were critical of American Apparel’s new management and the hedge fund backing the company.

American Apparel

American Apparel may have fired its founder Dov Charney last year, but new management is learning that he’s far from gone.

A group of Charney supporters within the company, who operate behind the name and hashtag #TeamDov, have been rallying support for the founder and slamming American Apparel’s new executives and investors through a digital campaign that management is struggling to quell. One employee has been sending pro-Charney mass emails to American Apparel employees through a variety of anonymous addresses during the past two months, causing enough ruckus that CEO Paula Schneider was forced to address the messages in a staff-wide memo on Feb. 19, BuzzFeed News has learned.

Internal memo from American Apparel’s CEO about problematic emails.

Obtained by BuzzFeed News / Via Source

“Over the last couple of months, we all have received ‘blast’ emails from an anonymous outsider criticizing American Apparel, its management and its policies,” Schneider, who started as CEO last month, wrote in a message obtained by BuzzFeed News. “Some of the emails have even been designed to appear like they are being sent from inside the company. I have refrained from responding to these emails because I feel they do not deserve our collective attention.”

She continued: “That said, I cannot let today’s email — which stooped to personally attacking hard-working members of the American Apparel team — go without a response. As a company, we embrace free speech and social commentary by our employees. That is a valued part of our culture. But today’s email provides an opportunity for me to reach out to all of you. I encourage you not to be influenced by unfounded personal attacks or baseless threats about job security sent by outsiders who do not have the company’s best interests at heart.”

The specific email Schneider is referring to accused Standard General, the hedge fund with the most financial control of the company, of “draining” American Apparel and forcing cutbacks at the retailer. The email included a link to a New York Post story about a lawsuit against Standard General, in which unsecured creditors of RadioShack are accusing the hedge fund of timing its investment in RadioShack to maximize a payout from the company’s recent bankruptcy, raising concern that American Apparel could suffer the same fate. The email noted that Colleen Brown, American Apparel’s newly appointed chairperson, was brought on to the board last year by Standard General (though it incorrectly identified her as CFO) and that new General Counsel Chelsea Grayson was Brown’s pick.

“We need Standard General OUT,” the employee wrote in the Feb. 19 email. “We have a bunch of consultants draining our company sitting in a room all day making 6 figures a month. THAT IS NOT AMERICAN APPAREL.”

One of the anonymous emails described the campaign as being about more than just Charney, saying it is also a response to American Apparel “being taken over by corporate Wall Street guys who don’t care about the company or the brand or the image or its employees.”

The emails reflect concern among employees that as American Apparel tries to right itself under new management, it could lose sight of its core values that were championed by Charney. The founder was a vocal advocate for treating workers generously, paying a fair wage, and making high-quality items in America.

A source inside the company told BuzzFeed News that management has spoken of their commitment to the company’s principles, and says it will continue to focus on remaining sweatshop-free, paying fair wages, and manufacturing in the USA.

While Schneider wrote that the emails came from an outsider, BuzzFeed News confirmed they originated from a current employee, who requested anonymity citing fear of retribution. The employee said they have roughly 5,000 americanapparel.net addresses and sent the messages in batches of 500; multiple employees have told the anonymous emailer that the messages have been deleted from their inboxes as American Apparel’s management works to stem the tide.

A spokesperson for American Apparel declined to comment.

The pro-Charney insurgency shows how tightly a founder’s personality can become entwined with a company. Emails prior to the Feb. 19 message centered around gaining signatures and statements for the Team Dov website, which says it’s “a statement of support for Dov Charney and his business vision at American Apparel from workers and executives at all levels of the company and around the world.” Hundreds have since signed the petition.

Charney, who founded American Apparel in 1998, was served with a termination letter in June for a long list of reasons including breaching his fiduciary duty, violating company policy, sexual harassment, and misusing corporate assets.

Charney was working as a paid consultant for American Apparel during an internal investigation that began in July, but was fired in December; the #TeamDov website was born almost immediately after. In a statement on Dec. 22, his lawyers described the investigation as “a complete sham” and said the decision to terminate him was “completely groundless.”

Charney pledged 43% of his stake in the company to Standard General this summer in a deal that apparently soured. He told Bloomberg News in late December that the hedge fund conspired with a board member to oust him after agreeing to reinstate him.

He told the news outlet: “I gave them my entire life’s work and they agreed to put me back in, but instead they used this investigation to fire me. They betrayed me.” Charney has not commented on the current round of anonymous emails and the response by management.

Standard General, for its part, said last December it “supported the independent, third-party and very thorough investigation into the allegations against Mr. Charney, and respect the board of director’s decision to terminate him based on the results of that investigation.”

A Team Dov email sent to employees on Feb. 19

Obtained by BuzzFeed / Via Source

Team Dov email sent to employees on Feb. 16

Obtained by BuzzFeed / Via Source

9 Places To Move If You Want Wall Street As Your Landlord

In the years following the recession, hedge funds and private equity firms snapped up cheap residential real estate across the country. Here’s where to move if you want to send Wall Street a rent check.

AP Photo/Julie Jacobson

In the years since the recession, Wall Street has capitalized on the housing crisis it helped create, snapping up properties in stalled or distressed residential developments across the country and renting them out for a profit.

Most recently, New York-based private equity firm Cerberus Capital joined the Wall Street landlord trend, purchasing more than 1,500 houses in Florida, Illinois, and Texas.

Since 2012, private equity firms, hedge funds, and real estate investment trusts or their affiliated business have bought north of 150,000 houses and spent more than $25 billion to do so, according to investment bank Keefe, Bruyette & Woods. And the online real estate database RealtyTrac has a tracker by county that shows where the largest institutional investors own the most rental properties.

Here’s a look at where Wall Street is buying: the places where a hedge fund, REIT,* or private equity firm could potentially end up as your landlord.

*Real Estate Investment Trust, a tax-friendly way to create a publicly traded company that owns real estate.

1. Minneapolis

Superior Imagery by Jim Ericson/Superior Imagery by Jim Ericson

Sylvan Road Capital initially set its sights on suburban Atlanta, looking to invest more than $1 billion in rental properties throughout the city.

Now, HavenBrook, a subsidiary of the firm, founded by a former Morgan Stanley analyst and backed by private equity dollars, has turned to Minneapolis for its next investment, specifically the city’s North Side, which has been plagued by poverty and mortgage fraud in the last few years. Sylvan Road recently purchased 40 homes there and quickly began renting them out, worrying the City Council about the company’s ability to manage the properties.

2. Tampa, Florida

joeymasterworks/joeymasterworks

One of the earliest and most aggressive members of the Wall Street Landlord Club is Blackstone, the private equity giant. It jumped at the chance to buy residential developments in the recession’s wake and at one point was spending more than $100 million per week on property.

In suburbs and neighborhoods across Tampa, Blackstone subsidiary Invitation Homes began spending at a rate of $800,000 per day on rental homes in 2013, including foreclosed properties or those nearing foreclosure. Neighborhoods include Riverview and Spring Hill.

3. Phoenix

ChrisBoswell/ChrisBoswell

Pretty much anywhere you move within the Phoenix city limits, you’re likely to have at least one Blackstone-owned home on your block. And Maricopa County, in which Phoenix exists, has the highest number of rental properties owned by the four largest institutional investors, according RealtyTrac’s database.

Blackstone and other private equity giants’ investment in Phoenix is so rampant that it has driven up housing prices in the city.

4. Chicago

mpaskvan/mpaskvan

While Blackstone focused its home-buying spree on properties in Las Vegas, Phoenix, Atlanta, California, Miami, and Orlando, one of its more concentrated rental home investments is in the Chicago area.

In 2013, the company’s Invitation Homes subsidiary accounted for 18% of all single-family homes sold in Oak Forest, a Chicago suburb.

In the neighboring suburb of Oak Lawn, Blackstone’s home ownership rose to 20% of all 2013 sales, and in nearby Galewood, Blackstone purchased 22.4% of all homes on the market.

5. Dayton, Ohio

Globe Turner, LLC/Globe Turner, LLC

In Dayton’s northern Huber Heights suburb, Magnetar Capital, one of the major hedge funds that made a killing by betting correctly against the housing market in the economic crisis of 2008, bought around 1,500 single-family homes in 2013.

That purchase meant the $9 billion hedge fund now owns 1 in every 11 homes in Huber Heights.

6. Houston

Shobeir Ansari/Shobeir Ansari

On the northern side of the city’s sprawling metro area, The Woodlands is one of the fastest growing suburbs of Houston, nearly 28 miles from the city center.

Howard Hughes Corp. is a commercial and residential real estate development and property management firm created, in part, by hedge fund mogul Bill Ackman. Pershing Square, Ackman’s hedge fund, owns more than 25% of Howard Hughes, which he spun off from General Growth Properties in 2010, making it a stand-alone business.

Howard Hughes has big plans for The Woodlands, with a company representative telling the audience at Ackman’s Harbor Investing charity conference earlier this month that it plans to build 4,600 residences across 28,000 acres in The Woodlands, an area larger than that of Manhattan.

7. Atlanta

graphiknation/graphiknation

Blackstone, Colony Capital, and other investment firms have been on a buying spree in the Atlanta suburbs, waging battles at auctions for foreclosed properties across the metro area.

Blackstone claimed 1,400 properties in what was its largest buying spree in recent years in the Atlanta suburb of Flowery Branch and the Gwinnett County towns of Snellville, Sugar Hill and Dacula, where Colony also bid on foreclosed properties to convert to rentals.

8. Las Vegas

AP Photo/Julie Jacobson

Blackstone and Colony have also heavily raided the Las Vegas housing market in the last few years, buying up 10% of all homes sold between 2012 and 2013.

Like in Atlanta, the two investment giants are putting the properties up for rent, amounting to 55,000 single-family homes throughout the city and surrounding towns like Henderson and Summerlin, both of which have been plagued by foreclosures since the recession.

9. Williston, North Dakota

Jim Gehrz/Minneapolis Star Tribune / MCT

Among the big private equity firms on Wall Street, KKR sits very close to the top. Though it is based in New York, the firm set out in late 2012 to capitalize on the North Dakota oil boom and develop housing units in Williston.

KKR set out to invest up to $150 million on the project, which included 737 single-family homes and 810 apartments.

Teachers Unions Use Financial Clout Of Pension Funds To Make Up For Lost Political Power

The American Federation of Teachers has used its pension funds to take on billionaire asset managers, the nation’s largest private student loan company and the world’s biggest education company.

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Randi Weingarten, president of the American Federation of Teachers, with former New York City Mayor Michael Bloomberg, a sometime union foe. AP Photo/Mike Groll, File

It hasn’t been an easy time for teachers unions to actually effect change: They’ve lost major court battles in recent months, and have grown alienated from the Obama administration and many former Democratic allies on issues of education reform. But as their political clout fades, teachers unions have been increasingly wielding another kind of power, often with great effect: the financial strength of the billions of dollars in their members’ pension funds.

Until recently, teacher pension funds and the trustees who managed them on a district and statewide level were largely unorganized. But Weingarten and the AFT have marshaled fund trustees and the roughly $1 trillion that they manage into a tool for the union’s education agenda. They have used it to take on powerful hedge fund managers over their opposition to teacher pensions and influence public corporations in the interest of union members and students.

“This is about reclaiming our collective voice on behalf of worker’s capital,” said Dan Pedrotty, the director of the AFT’s pension office, which was started in January 2013.

In the office’s first project, the AFT took on a group of powerful hedge fund managers — including billionaire Dan Loeb — whom the union said were opposed to traditional teacher pensions. They published a list calling out the hedge fund managers for supporting groups like the Manhattan Institute, which has recommended replacing pensions with 401(k)-type plans, and Students First, whose national branch advocates eliminating defined-benefit plans. Defined-benefit plans, in which almost 90% of public school teachers participate, guarantee retiring teachers a monthly payment for the remainder of their life based on how many years they taught.

At the same time they supported groups opposed to traditional pensions, the AFT said, those hedge fund managers took in and invested billions of dollars of teacher pension fund money, reaping profits from the institution they were trying to destroy. Pedrotty called the asset managers’ involvement in anti-pension groups “a conflict of interest,” saying that they “betrayed” the interests of pension fund members.

The AFT released an “asset manager watch list in April of 2013;” by June, a cadre of Wall Street’s biggest hedge funds and their partners had already succumbed to the pressure of the union’s watch list. Cliff Asness, co-founder of $33 billion hedge fund AQR Capital Management, agreed not to renew his position on the board of the Manhattan Institute, which had called for eliminating teacher pensions in favor of 401(k)s, and Thomas McWilliams, a managing partner at private equity firm Court Square, resigned from the Institute’s board. Private equity giant KKR and several other investment firms wrote public letters promising their support for public pension plans.

While Loeb has refused to rescind his support for the Manhattan Institute and for StudentsFirst NY, the New York chapter of the national StudentsFirst organization, he did cancel a speaking appearance at an investor conference after Weingarten threatened to confront him. Loeb later baited Weingarten by announcing he was increasing his donation to Success Academy, a longtime foe of teachers unions, by $1 million in response to what he called the AFT’s “attack.”

While the national StudentsFirst organization advocates shifting from defined-benefit plans to other types of pensions, StudentsFirstNY released a statement shortly after the list was published saying it supported giving teachers “the right to choose” between traditional and other types of pension plans.

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A billboard in Times Square early this year targeted teachers unions and AFT President Randi Weingarten. Center for Union Facts / Via aftfacts.com

The success teachers unions are having against asset managers is diametrically opposed to their ability to influence education policy in other spheres. In June, unions were struck a devastating legal blow in Vergara v. California, a court case that made teacher tenure in the state illegal and that pundits speculated would soon lead to similarly damaging court cases nationwide. Later that month, the Supreme Court’s Harris v. Quinn decision, which let a group of employees opt out of a union, is also expected to have negative impacts on unions. The AFT has promised to fight both.

Teachers unions have become increasingly ostracized from the Obama administration and large swaths of the Democratic Party, leaving them without many of the political allies they could once count on. Arne Duncan, Obama’s secretary of education, vocally supported the Vergara decision. He and the administration have also been champions of the Common Core, a proposed set of nationwide standards with which teachers’ unions have become increasingly disenchanted, and of charter school groups like Success Academy, who employ non-unionized teachers.

Since its fight against hedge fund billionaires, the AFT has also turned the power of its pensions on massive education companies in which its funds invest. “We’ve decided we should should also be an active ownership voice in public companies that have an impact on our members,” Pedrotty said. A major task of the AFT’s pension office, Pedrotty said, has been to “remind trustees that they’re also shareholders — they have a voice in public companies, they get to help elect the board.”

At the annual shareholder meeting of Sallie Mae, the country’s largest private student lender, the union put heavy pressure on the company to sever ties with ALEC, a conservative-leaning lobby group. Sallie Mae did.

Then, in April, the union attended the shareholder meeting of Pearson, the world’s largest education company, to demand it lifts a gag order preventing teachers from discussing high-stakes tests in New York. An AFT-led petition has 18,000 signatures. (Pearson released a statement responding to the union’s claims.)

With public opinion of teachers unions slipping, Weingarten and the AFT have also heavily publicized the union’s investments in infrastructure: A partnership with the Clinton Global Initiative secured $10 billion in infrastructure investments, which Weingarten and the union say will create 150,000 jobs and “fix America’s crumbling infrastructure.”

But the union’s approach has not been without its critics. “If this were in the private sector, it would be close to flatly illegal,” said James Sherk, a senior policy analyst at the conservative Heritage Foundation. “Private sector pension fund managers can only govern from a fiduciary perspective — it’s illegal to use funds to achieve own ends. They’re only getting away with this because they’re a public sector union.”

Sherk also takes issue with the AFT’s central project, the asset manager list: the “conflict of interest” identified by the union, he said, doesn’t exist. “The hedge fund managers are not being hired to give advice on education policy, they’re being hired to get maximum rate of return on investments,” Sherk said. “His views aren’t relevant to the job he’s doing as a hedge fund manager.”

David Wood, who directs the Initiative for Responsible Investment at Harvard and has worked with the union’s trustees, sees the union’s mobilization of pension funds as a positive step in pursuit of socially conscious investment. “They’re looking at how to align their actions with their superior social outcomes,” he said. In part, the pension fund work is a recognition that “they live in a politicized world.”

Yesterday, the biggest news out of the AFT convention was the union’s call for the resignation of Secretary of Education Arne Duncan — unless he agreed to follow an “improvement plan” the union called for President Obama to put in place. The demand echoed a similar, even more strongly worded resolution last week by the National Education Association that the union’s outgoing president called a “venting of frustration of too many things that are wrong.”

But Duncan was clearly unconcerned, shrugging off last week’s call for his resignation in a curt press statement. His only mention of the incident at a later press conference was a comment that he was “trying to stay out of local union politics.”

In her keynote speech at the convention Friday, Weingarten worked to convince members not to “let court cases get you down.” She offered up the infrastructure investments, as well as fights against Pearson, Sallie Mae, and asset managers, as hope — and examples of what she called “badass unionism.”

correction

This article has been corrected to reflect that Dan Loeb is a supporter of StudentsFirstNY, a New York state affiliate of the national organization. A previous version did not distinguish between the national and state branches. It has also been updated to include the position of StudentsFirstNY.