Shareholder activists can't always be bullies. Sometimes they must master the art of compromise.
A good example is the decision last week by Pershing Square's Bill Ackman to drop his campaign against
Pershing, which used its 4.5% stake to push for an elaborate restructuring, can argue that it precipitated meaningful change at the burger chain. In announcing its fourth-quarter earnings, McDonald's unveiled plans to sell 1,500 company-owned restaurants within three years and said it would buy back $1 billion of stock in the first quarter, something that is always music to the ears of activists. The hedge fund also won a promise from McDonald's for more financial disclosure about its company-owned restaurants.
Still, the result at McDonald's wasn't a total triumph. While Ackman can claim victory on the 1,500 refranchisings, he was initially pushing for a more complete spinoff of McOpCo, the unit that runs all 8,000 of McDonald's company-owned restaurants. In addition, while McDonald's remains committed to returning up to $6 billion to shareholders over the next few years, Ackman's original plan advocated a $13 billion buyback.
Part of activists' challenge is to negotiate with, and get deals blessed by, corporate boards. But part of it is also to get their name in the press and enhance their most important weapon: their reputation. The Pershing Square campaign cemented Ackman's notoriety, getting him on the cover of
and boosting a profile that was already ascending after last summer's run on
. In that regard, his deal with McDonald's looks like the best solution to both challenges.
"Ackman bailed out gracefully," says Janna Sampson, portfolio manager at Lisle, Ill.-based Oakbrook Investments, a company that owns 900,000 shares of McDonald's. "He figured out he didn't have the support of the shareholders and the franchisees and that McDonald's would not do more. Now he can claim he got something. It's his way to save face."
Is the end near? For the first time in 10 years, hedge funds experienced a quarterly decline in net assets, with outflows of $824 million in the fourth quarter 2005, according to Hedge Fund Research. For the year, hedge funds brought in just $47 billion in new assets, bringing the total to $1.105 trillion. This compared with $73.6 billion in net new inflows and $972.6 billion in total assets in 2004. Meanwhile, funds of funds saw net outflows of $2.1 billion in the fourth quarter, the second consecutive quarter of outflows for the category.
Barely a week passes these days without the acquisition of a hedge fund operation by a large bank or asset manager. This time it's ABN Amro Asset Management buying $2.6 billion fund-of-funds shop IAM. IAM's management will remain in place; this is not a bad idea when one considers the importance of a well-established team of experts to successfully run an alternative investment business.
Acquisitions are being fueled by the strategic need of large financial institutions to meet growing client demand for hedge fund products, says a recent study by Putnam Lovell, an adviser on those transactions. According to the study, 20 transactions involving funds of funds and hedge funds were announced last year after 22 closed in 2004. The most recent are the purchase of Austin Capital Management by
, the purchase of a majority interest in Guggenheim Alternative Asset Management by Bank of Ireland, and the sale of Derivatives Portfolio Management to
Making the Leap
Speaking of restructuring, there is a lot of talk on Wall Street about which will be the first hedge fund to go public.
Robert Matza, former president of Neuberger Berman and the architect of its merger with
, recently joined $7 billion hedge fund GoldenTree Asset Management as president. The appointment has fueled speculation that Matza may have been poached to take the hedge fund public. "They hired him for a reason. It's a big enough fund to consider going public," says a Neuberger Berman executive.
GoldenTree Chairman Leon Wagner denies that there is such plan. "Going public, merging and selling: nothing could be further from the truth. That's not why Robert is coming, and we're contemplating none of that," he says. For the hedge fund, bringing on board a veteran Wall Street executive is part of a growth story in line with the institutionalization of the firm.
There's nothing new about the brain drain from Wall Street to hedge funds. Just lately, Michael Frydman, head of
proprietary desk in London, quit the firm to join Peloton Partners, a London-based hedge fund.
A more recent trend, however, has institutional investors setting up their own funds of funds. They stop short of running hedge funds, as they lack the portfolio management skills. But because those investors are trained to allocate money to hedge funds and know how to scout managers, they can be a fit for building funds of funds.
One example is Alexander Klikoff, former manager of a $1.8 billion absolute return portfolio at Stanford Management Company, launching his own boutique fund of funds, Palo Alto, Calif.-based Fintan Partners. Klikoff is getting several million dollars of seed capital from Stanford University. Notably, Klikoff's former colleague at Stanford, Anne Cascells, founder of Aetos Capital, got no such seed money from Stanford, according to a source familiar with the endowment. Cascells and Klikoff did not return calls.
Another recent move is Albert Hsu, former U.S. investment officer for the $3.7 billion Atlantic Philanthropies, who founded Anchor Point Capital, a Miami-based fund of funds. Before that, Mark Yuskio, the former chief investment officer at the University of North Carolina, created Morgan Creek Capital Management, and Smith College's Jay Yoder founded Tuckerbrook Alternative Investments.