For Activist Funds, a Long-Term Approach to Investing

Cevian Capital isn’t exactly a hedge fund, though it classifies itself that way in public filings.
It takes significant ownership stakes in companies for three to five years, but it isn’t really private equity, either.
Cevian, a $3.5 billion firm that is based in Europe with mostly American investors — Carl C. Icahn and the Florida Teachers Pension Fund among them — calls itself an “operational activist fund.” It is among a growing body of investors who eschew the limelight and push for longer-term operational changes at companies.
Funds like Cevian don’t grab headlines the way that investors like Mr. Icahn or William A. Ackman do, but some of them have done very well this year. Cevian is up 34 percent so far this year, after ending 2009 up about 35.7 percent. ValueAct Capital, based in San Francisco, which manages about $4.5 billion in assets, and Barington Companies Equity Partners are posting similar gains.
Activist funds are nothing new, of course. Where Cevian says it differs is its strategy, long lockup period and relatively low-profile approach and desire to get into the business and alter strategies and operations — not just shake up management.
About two-thirds of its roughly 150 investors are not allowed to withdraw their money for three to five years, a longer period than most activist hedge funds, Cevian says.
Cevian owns pieces of eight to 12 companies at a time, including Volvo and Demag Cranes of Germany.
“One great thing about the environment we’re in — everyone is super short-term focused,” said Harlan Zimmerman, a senior partner at Cevian who is based in London “They’re just reading the headlines and moving as quickly as possible.”
Other activist funds agree that with pressures on funds to produce short-term results or risk having their investors ask for the money back, those that can stay in for the long term can have a competitive advantage.
“It’s been the perfect environment for us,” said Jeffrey Ubben, founder of ValueAct. “I don’t think a lot of activist investors do what we do, because they either don’t want to get illiquid or don’t want to go as long.”
But hedge funds, even activist funds, face a challenge in being able to gain access to a stable capital base.
“That’s where everybody would like to be in the activist world, but it’s a tough balance,” said Damien Park, managing director of Hedge Fund Solutions. Sometimes managers have to give up their fee structure, he said, in exchange for longer lockup for capital.

Still, it is difficult to persuade investors to agree to long-term commitments. Many of them want the ability to withdraw money from hedge funds when there is turmoil. During the financial crisis, a number of investors found themselves unable to take out money.
The influential CFA Institute suggested recently that endowments and foundations, which provide a substantial portion of hedge funds’ assets, consider limiting or restricting investments in hedge funds that tie up capital.
The Investment Management Code of Conduct for Endowments, Foundations and Charitable Organizations warned that “such arrangements may affect future members’ ability to effectively manage the financial resources to meet the funding needs of the organization.”
To avoid the difficulty of long lockups, firms have adjusted. More hedge funds are creating so-called special purpose vehicles, highly specific investments tailored to just one acquisition, say lawyers who work with hedge funds.
“It’s happening more than it has in previous years,” said Marc Weingarten, a partner at the law firm Schulte Roth & Zabel. “Investors are more willing to lock up for that kind of play with the right manager.”
Other hedge funds are trying different approaches.
Philip Falcone, the embattled manager of the hedge fund Harbinger Capital Partners, bought a public shell company to avoid the whims of flighty investors. With the stable capital base of a public company, he doesn’t have to worry about redemptions, which can force managers to sell investments on the cheap.
Cevian likes to distinguish itself from other activists in the field by emphasizing its long-term commitment to the companies it invests in. Cevian executives typically spend six to seven months examining a company before they invest, speaking with managers, competitors, workers, suppliers and even those who have left the company.
Of course, they can also employ the same set of tools available to other activists, like layoffs, sales and public fights, and have not always been welcome among their target companies.
The downside is that their strategy is volatile and highly concentrated; in short, like most activists, they’re not very hedged.
“If you’re going on the board,” Mr. Zimmerman said, “you can’t be shorting companies.”
The coming year looks to be a good one for activist investors. A recent survey conducted by Schulte Roth and Mergermarket found that respondents expected shareholder activism to increase over the next 12 months.
That sort of activism stands to benefit operational activists as well as those who focus more on the balance sheet end of the spectrum.
Still, some analysts think that operational activists have a more sustainable model than hedge funds that agitate for change but are less inclined to go beyond financial engineering.
“Companies are getting more and more sophisticated about how to deal with activists, and so the number of sitting ducks is decreasing,’ said Michael Armstrong, an analyst at Monitor Group who studies activist investors. “If you really are going to create value going forward, you have to find a way of creating value above and beyond just agitating for change.”
That’s not to say that the more conventional activists won’t do well for themselves, and potentially for shareholders.
“There is fair amount of research that suggests the existence of a large, knowledgeable shareholder in the capital structure of the company has great benefits to smaller shareholders,” said William N. Goetzmann, professor of finance at Yale University School of Management. “Having an activist investor on your side by owning the same class of shares that you own — that’s a good thing.”

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