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Activist Hedge Fund Firms Eye European Targets

Advisers warn U.S. activists to consider European subtleties, differences in strategies and culture. But opportunities abound.

Last October William Ackman, founder of New York hedge fund firm Pershing Square Capital Management, announced to an audience at Oxford University’s Saïd Business School that shareholder activism — largely a pursuit particular to U.S. hedge fund titans — “is going to happen” in Europe. The dots began to connect when news broke this spring that Ackman was raising money for a closed-end fund that could possibly list on the London Stock Exchange this summer.

The wave of U.S. activism of the past few years has largely remained on the western shore of the Atlantic. In the meantime, European companies have been watching and taking notes. Jan Weber, who runs Morgan Stanley’s European shareholder activism advisory practice in London, says that during the past two quarters his team has received at least 50 inquiries from European corporations looking to immunize themselves against external activism. This compares with practically no such calls two years ago, when Morgan Stanley launched the business advising clients on how to manage activist interventions.

According to Weber, “Most of the inquiries are coming from companies in continental Europe, where the culture is more antiactivism than in the U.K., where companies already face relatively active shareholder involvement, which for now mostly plays out in private.”

Figures from London data company Activist Insight show 44 public activist campaigns in Europe in 2013, more than half of them in the U.K., roughly on pace with 2012, when there were 46 such campaigns. So far this year Europe has seen 12 public activist investor initiatives.

Weber estimates that at least as many campaigns have been conducted privately. As a point of comparison, Weber says that last year the U.S. saw some 150 public activist situations. Yet if, as Ackman said in his October speech at Oxford, Europe remains ten years behind the U.S. in terms of activism, that makes Europe a focus.

“The amount of money flowing into [activist] strategies is so significant that funds are having to look harder and farther afield for opportunities to put the money to work,” says David Rosewater, partner at the New York office of law firm Schulte Roth & Zabel, which set up an activist advisory practice in London in April to handle a new wave of business in Europe. “It seems inevitable that a lot of this will be conducted by U.S. funds.” Schulte Roth advises and represents some of the highest-profile activist hedge fund firms in the U.S., including Pershing Square, Barry Rosenstein’s Jana Partners and Nelson Peltz’s Trian Partners, and has seen more interest from clients in European target companies.

There have already been some high-profile activist campaigns by U.S. firms in the U.K., including one targeted against transport company First Group by New York hedge fund firm Sandell Asset Management, and another against supermarket chain Morrisons by Paul Singer’s Elliott Associates.

In fact, the U.K. offers some of the most favorable conditions for activist investment in Europe. U.K. shareholders may, for example, call a special meeting if they hold just 5 percent of stock Shareholders in the U.K. have the right to remove directors with 50 percent of the vote. Also, compared with the U.S., “shareholder structures are very simple in the U.K.,” says FTI Consulting’s Edward Bridges, a senior managing director in the strategic communications practice at the firm’s London office. “You don’t have dual voting rights, nor much in the way of preference shares,” adds Bridges, who deals mostly in M&A.

The U.K. may not be entirely representative of the overall European market, however. In most other European nations, companies have majority government or family ownership, which makes penetration harder. Some business observers remain skeptical over how the press-savvy style of U.S. corporate activism will translate to the Continent, where Europeans have favored a more discreet approach. “You can’t march into Paris on day one and expect people to listen to you,” says Steve Brown, co-founder and CIO of London-based independent fund management firm Governance for Owners, which has $700 million allocated in European activist strategies. “We don’t take a traditional U.S. approach to buy a stake and go public with our views but prefer to be consultative. Because of the environment in Europe, you would see ranks close against you if you take actions that are not carefully attuned to the cultural environment.”

More and more, U.S. funds are facing competition from local fund managers. Monaco-based Knight Vinke Asset Management is helping to overhaul strategy at French appliances retailer Darty, where it gained a board seat last year, and it has been waging a campaign at UBS to hive the group's investment banking unit. European hedge fund firms and private equity firms have been beefing up their resources or adding new talent to focus on the activist market. The business seems to have gotten hot quickly, and returns are good. Chicago data firm Hedge Fund Research estimates that there are approximately 70 activist funds globally. At present only a handful are located in Europe. But these few have enjoyed some success. Governance for Owners’ €500 million ($679.5 million) European Focus Fund made 32.9 percent last year and a 25.6 percent annualized return in the past five years. Sean Capstick, head of new markets at London asset management firm RWC, which runs three activist hedge funds, including its European Focus Fund, which had $207 million, according to the 2013 II-Alpha Europe Hedge Fund 50 ranking, says opportunities exist, though they require a deep understanding of the differences in Europe. “You need to know the subtleties of the board structure, the subtleties of language, the disclosure requirements and difference in what companies do,” he says. “The U.S. is just one market and does not have the same subtleties.”

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