Activist Hedge Fund Crescendo Partners III Up 154% YTD

Sep 21 2009 | 12:27pm ET

Activist hedge fund Crescendo Partners III—which suffered last year amid the market meltdown—has come roaring back. The fund is up 154% year-to-date, and has gained approximately 22% since inception in January 2007 compared to a loss of 25% for the S&P500.

The fund is run by well-known activist Eric Rosenfeld, who even in the midst of the financial crisis last year never doubted his long-term investment strategy, which centers around his firm’s hands-on involvement in companies in which it invests. According to Rosenfeld, being correctly structured in terms of investors’ lockups and not utilizing leverage to enhance returns were key to the fund’s ability to withstand last year’s market turmoil.

“In situations in which we choose to become active, we will typically buy between 5% and 20% of a company,” says Rosenfeld, who formed Crescendo Partners in 1998 after managing the merger arbitrage business at Oppenheimer and Company for 14 years.

“If we think we can add value, we will seek to go on the board,” Rosenfeld tells FINalternatives. “There are many activists that as a last resort go on a board and don’t look forward to it. We really look forward to going on a board. We want to put in the time and improve the company and help bring out the value.” Crescendo has had representations on over 20 boards over the last 11 years.

But while some companies view hedge fund investors as short-term opportunists, Rosenfeld says that he invests with a long-term time horizon in companies he believes have great potential.

The company is active in the U.S. and Canada, but favors Canada for its shareholder-friendly regulations.

“We are the most active activist [fund manager] in Canada,” says Rosenfeld, explaining that Canada has many advantages over the U.S. for the activist investor.

“If you own 5% of a company in Canada, you can requisition a shareholder meeting,” he explains. “And three or four months later the whole board will be up for re-election.”

“Another difference [between Canada and the U.S.] is that you don’t have to publically surface with your position until you have 10%, whereas in the U.S. the threshold is 5%,” he says, adding that poison pills are also easier to dismantle in Canada.

In fact, two of the best investments Rosenfeld’s firm has ever made are with Canadian or part-Canadian owned companies. The first one, Cott, is one of the largest non-alcoholic beverage companies in the world.

“We bought them at two-and-a-half dollars and stock is now over eight dollars,” says Rosenfeld, “We added to our position at 70 cents earlier this year.”

The second, mobile data services firm Bridgewater Systems, is based in Ottawa. “We bought our position at two-and-a-half and the stock closed today [Wednesday] at eight dollars and eighty cents.”

But while Rosenfeld is bullish on Canada, occasionally an investment there turns to ice. In 2005, his firm invested in video game company Hip Interactive, which declared bankruptcy shortly after the investment.

But Rosenfeld isn’t fazed by the occasional loss, saying that his firm’s success is a combination of three things: “It is a mixture of finding companies that are undervalued in the market; having the ability to get on boards to help improve those companies; and the ability to successfully sell its position.”

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