When confronted with problems in the stewardship of their business interests, the vast majority of family offices prefer to deal with them behind closed doors.
But sometimes problems will not go away. And where the future of listed businesses are at stake, family offices need to consider demanding boardroom changes through activism.
The overall number of family office actions is going up. In the year to October, family office activism occurred at nine companies, according to data compiled by Activist Insight
Family offices founded by Nelson Bunker Hunt, the late silver billionaire, and Bill Wyllie, a former Hong Kong-based financier, have lately been caught up in corporate actions.
And the overall number of family office actions is going up. In the year to October, family office activism occurred at nine companies, according to data compiled by Activist Insight.
This total compares to nine in the whole of 2018. They do not amount of a big deal compared to corporate actions by institutions and professional activists. But the total is more than double the annualised average of the last five years.
According to Activist Insight editor-in-chief Josh Black: “The prominence and successes of activist investing have encouraged established investors with no track record of activism to attempt to directly influence portfolio companies. In this respect, I believe family offices and their investment managers are no different in wanting to try out a new idea for themselves.”
Activism commonly involves requesting a change of directors at a company annual meeting. This frequently results in a proxy battle, where protagonists seek support from other investors. But sometimes companies cave in, or legal action takes place. Over the last decade, activism has been on the rise, due to the reluctance of predators to risk their capital on a takeover bid during an era of uncertainty.
Traditionally involved in the US, activists have raised their profile across the world. Mainstream equity managers sometimes get stuck in. Investment banks have raised their game.
Several prominent activists have raised family capital to build up their firepower. Elliott Management Corporation is arguably the best-known activist, widely feared by target companies as soon as it starts buying their stock. It is run by Paul Singer, whose son Gordon runs his London office. Over the years, Elliott has challenged the Lee family’s involvement in Samsung. It has exposed corruption in the Congo, to secure restitution of bank debt.
Occasionally, Elliott buys control of businesses, such as football club AC Milan. It has started lobbying for change at US-listed AT&T. In December 2017, Fortune magazine estimated Elliott’s annual rate of return at 13.4% over four decades.
Raging Capital Management is led by Bill Martin, whose family helped to fund its creation in 2006. It has gone on to become one of the top activists in the US, thanks to its success in the small-cap arena. According to US media, its return has lately averaged 24% a year.
However, returns like these are rarely achieved every year. It can take months, or years, to develop an opportunity, leading to lean years punctuated by the occasional blockbuster return.
The sector, taken as a whole, can fail to beat stock market indices. According to Activist Insight, activists only achieved 9.3% in the first nine months of this year, against 18.1% from the MSCI index. In 2018, they lost -3.5% (-8.2% MSCI index). In 2017, they achieved 13.6% (23.07%).
But some investors like the sector, because its returns offer diversification from market indices which have been boosted by big tech stocks. Prior to 2017, activists often outperformed. Like distressed debt funds, they have proved capable of delivering decent returns in bear markets.