Effecting Turnarounds Through Activist Investing

The current trend in activist investing was spearheaded by hedge funds some time in 2015 and is fast becoming a prominent feature of today’s business environment. Investors with controlling percentages of companies are now emboldened to take a more proactive response to company policies, when they believe the enterprise is underperforming.

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Although not without its risks, this strategy of exerting influence on company policies may be just what the company needs to increase shareholder value. In extreme cases, such intervention could effect drastic change, such as the replacement of a company’s board of directors and other members of management. But this extent of influence is rarely recommended. 

The most famous way that an activist investor could effect positive change in a company’s fortunes is by creating pressure on the management and swaying their decision-making. In many instances, this could be beneficial, allowing actions leading to an increase in shareholder value. 

At the core of facilitating change is a different perspective on issues. One of the reasons for underperformance could be that some executives had become set in their ways after making rarely-questioned decisions, which may not always bring value to a business. The pressure from activist investors forces them to think beyond this rut and focus instead on avoiding gaps and missed opportunities. 

Activist investors, however, should be wary of the steps they take when exerting influence on a company. Although investors may have novel concepts and perspectives on their side, flying blind comes with risks. Members of the management are often the most knowledgeable about the way the business is run. Thus, in most cases, effecting meaningful positive change within the company requires working closely with the management to understand the context of the problems. 

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Jon McKee Queen currently works for private equity firm Amatex Capital, which specializes in finding investment and arbitrage opportunities in Ukraine. For more on making significant investments in portfolio companies, visit this blog.