The New CEO Activist Hedge Fund Makes No Sense

January 30th, 2015
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Contributed by: Michael R. Levin, The Activist Investor
With some fanfare, this month two corporate lifers left their white-shoe firms to start an activist hedge fund. That act alone, after careers serving CEOs and directors, would cause some head scratching. How they plan to succeed confuses us.

We and other activists we talked to wish them well. If they can find a new way to reform stubborn directors and executives, and convert them into responsible, responsive stewards of investor capital, they will have more than our lasting gratitude. They will also raise billions for further investment in what would become a profitable equity strategy.

We just can’t see that happening. No activist investor that we know takes this very seriously. The reasons why should instruct all of us.

Hudson Executive Capital
Douglas Braunstein (J.P. Morgan) and James Woolery (Cadwallader) announced their new firm as “driven by Constructive Engagement.” Note the initial caps, as they claim the term as a service mark. That sounds like constructivist activism, which puzzles us a bit.

Braunstein was an investment banker at JPM, and Woolery a securities lawyer at Cadwallader, both advising CEOs in M&A. Woolery also helped create the Shareholder-Director Exchange, a pretense to meaningful representation of investor interests.

They raised $250 million from 14 “CEO Partners” (another service mark) who constitute an advisory board. These CEOs, from S&P 500 companies, won’t “manage or control” the firm.

Constructive Engagement entails a specific value investment strategy. Hudson seeks to “facilitate Corporate Finance transactions”, including M&A, LBOs, share repurchases, and dividends. Even though they use initial caps, we suppose they can’t claim “Corporate Finance” as a service mark.

They state with conviction that the strategy won’t involve proxy contests or public calls for change at portfolio companies.

Raising Money Isn’t Making Money
So, what will they do with their $250 million? Hudson can acquire well under 1% of a given target company, assuming that it allocates its funds to ten portfolio companies, with the median market cap of the S&P 500 at around $18 billion. We don’t see them bothering with mid-caps or smaller. That investment will probably get a call to a CEO returned, and may get a meeting.

It won’t get companies to take their direction, at least without support from other shareholders. If Hudson refuses to make CEOs and BoDs uncomfortable, it will fail to gain even that support.

Even constructivist investors escalate matters. Trian Partners claims that title, and just started a significant proxy contest at Du Pont. ValueAct slammed MSCI publicly. Relational Investors routinely mixes it up with BoDs.

Hudson’s stated investment strategy also raises suspicion. “Corporate Finance transactions” include “[M&A], leveraged buyouts and corporate sales... divestitures, spin-offs, and split-offs... capital optimization strategies such as share repurchases, dividends, and special dividends.” When other activist investors do this, corporate lackeys slam it as financial engineering.

Hudson Executive Banking?
The firm strikes us activists as an odd form of investment or merchant bank. Hudson wants to collaborate with clients on corporate finance projects, and will invest in their companies. But, bankers typically win the engagement first, and then invest. Will Hudson invest first, then ask to engage constructively?

Among the CEO Partners, only a couple have significant corporate finance chops. The partners will have at best little to do with the investment strategy. To the extent that Braunstein and Woolery need introductions, which seems unlikely given their experience, the partners can open a few doors. Sounds like banking to us.

It looks like Hudson just wants to raise money in a hot segment, without the heartache of irritating their CEO friends. The CEO Partners, who together sit on over 50 BoDs, can claim some experience with a so-called activist fund, perhaps bolstering their independence cred.

Most tellingly, Hudson has no experience as a PM. Neither the principals nor CEO Partners have screened companies, assessed value, or allocated capital. They haven’t sweated volatile markets or calmed panicky LPs that demand redemptions.

We know, and suspect Hudson will learn the hard way, there is no easy way to make money as an activist investor, much less as a PM. We’d like to think otherwise, and for them to prove us wrong, but we have our doubts.
For Detailed Investor Profiles on these Investors, click below:
Relational Investors LLC
Trian Group
ValueAct Capital Management
Related People: David Batchelder; Ed Garden; Frank Hurst*; Glenn Welling*; Henry Jay Winship; Jeffrey W. Ubben; John A. Sullivan; Kirt Karros; Nelson Peltz; Peter May; Ralph Whitworth
Related Entities: Blum Capital Partners*; Relational Investors Alpha Fund I LP; Relational Investors IX LP; Relational Investors LP; Relational Investors Mid Cap Fund; Trian Capital; Trian Credit Partners; Trian Fund Management, L.P.; Triarc; Triarc Companies*; ValueAct AllCap International LP; ValueAct Capital International; ValueAct Capital LLC; ValueAct Holdings GP LLC; Wendy's/Arby's Group, Inc.(NYSE: WEN)
Related Article Tags: Shareholder Activists, Corporate Raiders and Proxy Battles; Investment Management and Hedge Fund Firm Mergers, Acquisitions, Spin-offs and Transactions; Hedge Fund Launches and Hedge Fund Closings; Hedge Fund Resources and Featured Partner News

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