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Sleeping giants of the buy side are powerful partners for activists

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Are mutual funds and other buy-side institutions getting into the activist game?  The Dealbook blog at NYTimes.com writes that “increasingly it is mutualfunds and other more tempered institutional shareholders who are criticizing lavish pay packages and questioning corporate governance.”  According to the article, traditional money managers are not typically the vocal, public face of activist campaign, but behind the scenes, they are the hand that wields the sword that brings boards and management to the negotiating table.

For example, the article suggests that in the case of Canadian Pacific Railway, it wasn’t the campaign launched by Pershing Square, but rather the involvement of a large Canadian pension fund that led to the resignation of the CEO.  Charles Elson of the University of Delaware comments, “Years ago, it was really just the large pension funds and labor funds,” he said. “Today you’re seeing a very wide mix of people.”  ISS predicts a spike in proxy fights this year.

This trend looks powerful and alliances between hedge funds and real-money managers could be the blueprint needed to more successfully and consistently win proxy fights.  Looking down the road, activist hedge funds will more proactively recruit “quiet” but influential partners like mutual funds to join their causes.  It won’t be easy.  Traditional money managers are still risk averse and they will want to back a winner, because failing in a public campaign brings risks of its own.  To create the coalitions within the buy-side, activist hedge funds need to act carefully in order not to alienate traditional firms.

The successful activists will create their own “brand” of activism and an identity based on a track record of finding remedies for specific types of governance or performance issues.  It will be easier for pension funds and others to align with those “branded” hedge funds.

Are the sleeping giants of the buy side waking up to activists?  Probably, but not just any activist will get  their support.

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