November 19, 2012
post contributed by Katerina Yovchev
Jared Landaw, the COO and General Counsel of the activist hedge fund Barington Capital Group, LP, and Doron Lipshitz, a partner in O’Melveny’s New York office, were the panelists at the Roundtable’s November Event held at Fordham University, moderated by one of Fordham’s brightest- Professor Sean J. Griffith.
The discussion began by introducing the concept of hedge fund activism and focusing on the selection criteria facing investors. Jared Landaw outlined his company’s strategy as finding an undervalued company with a strong balance sheet and cash flow in an industry that they specialize in, such as industrials or consumer apparel. Landaw also added that they consider themselves operational activists as they work on formulating a plan for improvement while staying actively involved in the operations of the company for the long term.
While activist investing can be seen as applying a private equity approach to the target company, both panelists emphasized that hedge funds own only a 5-15% stake, rather than taking the whole company and turning it private. Lipshitz added that hedge funds take an opportunistic approach focused on providing more liquidity, while having a plan detailing the entire life of the investment. He also emphasized the importance of using protection provisions; convertible instruments and covenants in order to facilitate liquidity needs.
The discussion ended with remarks from both panelists on 13D Regulation and its implication on stock prices, particularly for mid and large cap companies. By disclosing their ownership and intent, activist hedge funds can potentially attract other investors, which not only affects the price of the stock, but the overall outcome of the investment.
In the end, both panelists agreed that the lower initial investment cost and not needing a liquidity event like an IPO to exit the investment are differences between private equity and activist investing that can be seen as benefits. However, one of the major challenges to activist investing is the extensive collaboration with management that is needed. There is a huge difference influencing change while owning only 15% of the company as opposed to 100%. Activist investors are really “value investors” Landaw said. It’s a profitable model which allows shareholders to retain control.