The Year of the Activist Hedge Fund (page 3)

Special Purpose Acquisition Vehicles

Blank check companies, better known as SPACs – Special Purpose Acquisition Vehicles, are quickly becoming the new darling of the activist investor. SPACs are newly formed companies that raise equity capital through an initial public offering for the sole purpose of pursuing a business combination in a dedicated industry or geographic location. And although the purpose for raising a SPAC is quite different from the goals associated with investing in them, a number of activist investors are exploring the value of doing both.

Within the past few months, two of the world’s pioneers in activist investing—Warren Lichtenstein (Steel Partners) and Nelson Peltz (Trian Fund) —have launched two new acquisition vehicles with a combined value in excess of $1 billion.  Lichtenstein’s SP Acquisition Holdings went public in November 2007 with $400 million in capital and is currently trading close to $500 million in market capitalization, while Peltz’s Trian Acquisition I Corp launched in January 2008 with $750 million in cash is now trading north of $900 million in value.

The prospectuses for both companies indicate these activists will target businesses that are fundamentally sound but in need of certain financial, operational, strategic or managerial redirection to maximize value.  And both groups have 24 months to acquire a single business using at least 80% of their cash.

At the same time, other well-known activist investors have raised dedicated funds to invest into these new acquisition vehicles.  For example, Phil Goldstein, the founder of Bulldog Investors who famously—and successfully—sued the SEC over hedge fund registration requirements, recently launched the Absolute Plus Fund. The objective of the fund is to allocate capital into a SPAC where the money is locked-up in a Trust accumulating interest until a deal is approved by more than 80% of the shareholders. 

For activist investors like Goldstein purchasing a 20% stake in one of these SPACs is a win-win situation.  If the activist doesn’t like the proposed acquisition, they can block it and walk away with most of their initial investment plus the accrued interest on the cash while it was sitting in the bank.  On the flip side, if the acquisition plan is satisfactory to the activist, the upside potential can be phenomenal.

A New Era

In 2007, CEOs and board members at more than 500 US companies learned about activist hedge funds first-hand when signal flares shot off in IR departments following a routine review of the company’s shareholder base.  Some of those CEOs took the warning seriously and began to act accordingly, while others dismissed it as inconsequential.  Now, barely into 2008, more than 80 companies have felt the pressure of an activist’s campaign and many more will be pressed for changes to the status quo before the year is out. 

Just a few years ago, the reinvention of the hedge fund manager into an activist investor marked a new era for investing.  And now, activist investors are everywhere!  From the US to Europe, throughout Asia and into South America and Australia, activist investors continue to grow at significant rates with no slowdown in sight. Who knows what the future holds for these insurgents and the companies they target?  But one thing is for certain – activist hedge funds aren’t going away anytime soon.

Damien Park is president and CEO of Hedge Fund Solutions, a Philadelphia-based consulting firm singly focused on providing substantive solutions for companies and investors on issues relating to shareholder activism.  He is widely considered an expert on activist hedge funds, speaks at numerous seminars and events, and is often quoted in leading business publications around the world.

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