Hedge fund activism and private equity are two powerful weapons at the disposal of family offices keen to supercharge their investment performance.
But both disciplines have been criticised for their fees and lack of transparency. New research now suggests they are continuing to generate returns at a cost to society which is unacceptable.
The newest study has been published by Guoli Chen and Phlipp Meyer-Doyle of INSEAD, the French business school, and Wei Shi, associate professor at Miami Business School.
Activists end up reaping a short-term gain, to add to similar gains elsewhere. But companies under attack have to live with the long-term consequences
It has found companies targeted by hedge fund activists are far more likely to suffer a brain drain of valuable personnel than those left alone.
According to the research: “The involvement of a hedge fund activist creates substantial uncertainty for employees and produces potentially adverse impact on their careers, which can lead to valuable employees proactively leaving.”
The research reached this conclusion by analysing the rate of attrition at 2,128 companies targeted by hedge fund activists between 2004 and 2015.
It says that soon after activists go hostile anxious executives start to jump ship. Stock option cancellations at firms under attack are 24% higher than elsewhere, excluding activist-induced layoffs.
Companies losing experienced staff often struggle to replace them. In the research area, companies end up filing less patents than the refugees produce at their new places of work.
Activists end up reaping a short-term gain, to add to similar gains elsewhere. But companies under attack have to live with the long-term consequences.
Private equity attitudes have been analysed by Ken Pucker, senior lecturer at Tufts University, and Sakis Kotsantonis of consulting firm KKS Advisors.
They cite research in a PwC 2019 survey which shows 83% of firms were concerned about climate risk. Yet only 31% said they had taken action to address it.
The authors interviewed several practitioners and learned that the median holding period was 4.5 years.
This short period to make money encouraged them to concentrate on generating a financial return, at the expense of sustainability, which needs time to work.
According to one practitioner: “ESG was always eight, nine or ten on the list. The CEO was focusing on the top six.”
Respondents said a lack of transparency relating to the activities of portfolio companies also gave private equity plenty of room to hide.
The report concluded that there was progress on sustainable attitudes in the sector. But it said: “ESG implementation remains unformed, discretionary and varied.”
Private equity seeks to reassure its clients on reporting, but some portfolio companies are better than others at tackling sustainability.
To deal with problems like these people should slow down, and think. Activists need to make more effort to be constructive to avoid frightening the cattle.
Private equity firms should seek to achieve returns over the long-term to leave room for sustainability, as Blackstone, CVC, KKR and BlackRock have done.
The family office ethos which twins purpose with profits also deserves more attention. You can get a good flavour at the BCorp movement which lends its brand to companies who can prove they look out for each other as well as future generations.
Elsewhere, investment consultants are telling managers that their chances of winning business are worsening, unless they back long-term sustainability.
This year saw the opening of the Long-Term Stock Exchange (LTSE) seeking share listings from companies prepared to comply with environmental, social and governance guidelines.
It is an open secret that leisure company Airbnb is interested in a secondary LTSE quote, alongside its proposed $42 billion Nasdaq listing.
It has said it will create an endowment fund out of 9.2 million shares, to support its 4 million holiday hosts. You don’t need to ask an academic to realise that’s the right way to generate a sustainable reputation in this day and age.