The Truth About What Activist Investors Do

April 21, 20225 min read
The Truth About What Activist Investors Do
Share on facebookShare on TwitterShare on Linkedin

Key takeaways

  • Activist investors – private equity firms, hedge funds and wealthy individuals – typically pressure companies into making changes to increase shareholder value.
  • Activist investing can add risk, as it entails strong commitment from the asset manager, with increased potential for mistakes that can be costly for investors. 
  • While an interesting investment theme, activist investing per se does not necessarily help portfolio differentiation. 

Focused specifically on increasing shareholder value, a “so-called” activist investor examines underperforming companies and identifies the issues holding them back. After purchasing a significant stake in these organizations, an activist investor implements changes with the intention to increase shareholder value. 

What Activist Investors Do

The methods by which these types of investors accomplish the above mentioned goal depend largely on the nature of the issues hampering the company. In general, though, activist investors seek to redirect the management’s trajectory. 

This can entail bringing in a new management team, allocating the company’s capital differently, deploying assets more efficiently or breaking up the company and selling off some of its assets or business lines. Alternatively, in instances in which a firm has an excess of cash on hand, an activist investor can push for a dividend increase, share buybacks and/or taking on more debt to achieve more operating leverage. . 

As these examples suggest, the additional element for an activist investor is the “agency” – the willingness to actively steer a company’s course rather than relying on its existing one to harvest returns.   

There is also a class of activist investors whose main goal is to incite systemic changes in a company’s board. These investors can demand seats, put forth their own picks and insist upon the removal of specific directors. Notable companies have been subjected to this type of activity, including ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), Procter & Gamble (NYSE: PG), Hugo Boss (OTCMKTS: BOSSY) and Westpac Banking (OTCMKTS: WEBNF). Each of these firms has experienced board changes because of activist investor reactions to previous business decisions.

How is this Accomplished?

In most instances, activist investors operate hedge funds, private equity firms or are high-net worth individuals. Upon acquiring 5% or more of a company’s voting class shares, activist investors file a Schedule 13D  with the Securities and Exchange Commission within 10 days of that acquisition in order to make their intentions known. 

This filing is mandatory when the investor’s plan is to engage in mergers, acquisitions, or the sale of a significant portion of the targeted company’s assets. Other activities predicating the filing of a 13D include capitalization changes, dividend policy alterations and any other modifications to the way the company operates. 

These can be efforts to reduce operational costs, or strategic moves to stimulate revenue increases. Selling off underperforming divisions and reorganizing the company into separate business units are other ways performance improvements can be accomplished. Capital structure changes in the form of share repurchases, as well as changes in the size and membership of the board of directors, are  additional tools that must be reported.

Notable Activist Investors

Many people have made names for themselves as activist investors. Among them, Barry Rosenstein was instrumental in convincing Whole Foods to sell out to Amazon (NASDAQ:AMZN), a deal from which he netted $300 million for his hedge fund, Jana Partners.

One of the most famous activist investors of all time is Carl Icahn, who took over Trans World Airlines back in 1985.  Now well into his 80s, Icahn still runs the publicly traded Icahn Enterprises (NASDAQ:IEP). 

Bill Ackman has targeted Procter & Gamble (NYSE:PG), Canadian Pacific (NYSE:CP), and Fortune Brands (NYSE:FBHS) over the course of his career as an activist investor. 

Ackman and Icahn got into an infamous war of words over their opposing involvement in Herbalife (NYSE:HLF) back in 2013. Ackman had shorted the company, while Icahn, in partnership with another activist investor, Daniel Loeb, went long. Eventually, Icahn and Loeb were proven right and made a billion dollars, while Ackman lost a similar amount. 

Rise above Volatility

Diversify beyond the stock market with Yieldstreet.

Is Activist Investing a Good Thing?

High profile activist investors attract attention from financial media, which makes it difficult for the leadership of a company to ignore their concerns. This can goad a board into working harder to increase the company’s value for shareholders in general. 

Activist attention can also trigger added demand for a company’s shares, which in turn can increase their price. Smaller investors, seeing the robust interest taken in the company by an activist, will often buy shares with the hope the changes imposed will increase their value. This can have an immediate short-term benefit for the company’s existing common shareholders. Potentially, everyone invested in the company can stand to benefit if the prescribed changes produce positive results. 

However, there are some downsides to consider as well. 

The intention of an activist investor is usually to generate profit for themselves. As a result, people on the “wrong side” of the investor’s activism can suffer. Chief among them, company employees could be adversely affected by operational changes. Downsizing, spinoffs, and mergers often result in layoffs.

Similarly, share prices can drop precipitously when an activist investor unwinds their position, which can damage smaller investors with limited time to react to the news. 

Further,  activist investors may make mistakes

Their ideas do not always result in the changes expected. They could misjudge the company’s internal situation, or the time horizon for the value increase they seek might turn out to be too distant, leading them to close out their positions and cut their losses before their thesis materializes. Sometimes, smaller investors are turned off by the increased volatility – or cannot afford to wait out the storm – which leads to hasty selloffs.

It is critically important to consider these factors before following the buying activity of an activist investor.

Investing in activist funds

With that said, investors seeking to profit from the initiatives of activist investors can purchase shares in mutual funds and the exchange traded funds that track them.  One such opportunity, the 13D Activist Fund (NASDAQMUTFUND:DDDAX), follows their activities and invests based on the perception of the potential for a positive outcome.Similarly, the LeaderShares Activist Leaders ETF (NYSEMKT:ACTV) also provides activist investment opportunities. 

The 13D Activist fund – for instance – boasted a 15% annual average return for the decade between 2011 and 2021. 

Activist investing – even through passive products such as mutual funds or ETFs – can provide investors with exposure to a different investment theme, but it is typically not a differentiated play compared to traditional equity market long positioning.  

Investing in private markets can offer an opportunity for additional differentiation, as it targets asset classes that can be less correlated to public equity and fixed income returns. Yieldstreet offers ample access to many alternative products, which gives investors the potential to differentiate not only from their public market exposure, but also within the alternative portion of their portfolio. 

Learn more about the ways Yieldstreet can help diversify and grow your portfolio.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Plaid, Orum.io and Footprint and none of such entities is affiliated with Yieldstreet. By using the services offered by any of these entities you acknowledge and accept their respective disclosures and agreements, as applicable.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure