Investor activism continues to spike amid pandemic

Flagging environmental, social and governance factors are attracting the attentions of activist investors to a growing UK companies, something which has been exacerbated by the coronavirus pandemic. According to experts from Alvarez & Marsal, companies which boast sound fundamentals but have exhibited signs of organisational weakness are firmly in the sights of a growing number of investors.

In recent years, environmental, social and governance (ESG) has become increasingly important to the investment community, particularly large national pensions, sovereign wealth funds and concerned ultra-high-net-worth individuals. Research from audit and advisory firm Alvarez & Marsal (A&M) suggested that this had seen the European market for activism already set to grow prolifically in 2020. A study from A&M at the end of 2019 revealed that companies which find themselves in the bottom 50% of ESG rankings were on average 24% more likely to face an activist campaign.

Now, however, A&M have released a further update on the activist activity being seen in the US and Europe, suggesting that poor governance since the onset of Covid-19 has given activists a new angle of attack. In particular, investors are focusing on firms which they believe are ripe for turnarounds. While there already have been organisations which have not survived the pandemic through changes to demand, there is another cohort of companies that boast sound fundamentals but A&M suggests have “misfired operationally and potentially exhibited signs of poor governance since the onset of Covid-19,” and it is these entities which are being targeted.

Focusing purely on Europe, A&M found that the UK remains the leading hub for activist investments. In the firm’s latest A&M Activist Alert, the number of British companies likely to become a target within the next six-12 months has fallen by one in the last year – however, the number at medium-term risk of becoming a target within 12-18 months has risen by seven since 2019.

Transformations and restructurings can be uncomfortable for businesses with operational weaknesses, but they can also present rich opportunities. According to A&M Managing Director Malcolm McKenzie, activist investors are actively identifying opportunities to drive operational change and building their positions in target companies.

McKenzie explained, “In this environment, the organisations that can think like investors or shareholders may be positioned best to respond to external challenges… Companies in industrials, healthcare and technology may be of particular interest to European activists over the next 12 months.”

To that end, the A&M Activist Alert found that the number of firms in industrials at risk of both short and mid-term activist investment has risen since 2019. Most drastically, the number of potential mid-term targets has increased by eight from last year’s estimates, while technology firms have also seen a spike in possible mid-term interest, rising by seven firms. Healthcare has also seen a predictable increase in interest from investors, with the fundamentals of such organisations having been strengthened significantly amid the pandemic.

According to A&M, activist investors on both sides of the Atlantic have shown signs of recognising that operational transformations are a key ingredient to unlocking shareholder value of firms with solid fundamentals, but poor structure. An A&M analysis of 245 activist campaigns since January 2017 found that those which focused on transformation outperformed market indices by 3.4% since it began. Over the course of the pandemic, A&M has reportedly seen a further uptick in such activity.

A&M Managing Director Joseph Berardino said, “In recent months, A&M has helped implement many operational transformations for organizations that may otherwise have faced real peril. The share price of one leading consumer goods company has rebounded from a nadir of low single-digits to many times that figure today. Leading institutional investors are now taking positions in the company, underlying its long-term viability.”