The march of passive investors and high price of money: Why activists are having their way

It’s been a massive week for activist investors with Lendlease, Karoon Energy and Bapcor all facing the glare of shareholders who want change and are not afraid to say it in public.

Lendlease chairman Michael Ullmer addresses one of the company’s AGMs. Picture: Britta Campion

Delivered like a guillotine to the neck. The boards of Lendlease and Karoon Energy found out the hard way this week that they had ignored activist investors at their peril. Autobarn owner Bapcor might be just about to learn the same lesson.

Heads have rolled at Lendlease, with the chairman among those agreeing to leave early on the back of its failed US strategy. Karoon suffered a first strike against its remuneration report after equally vocal investors punished the company for failing to pay dividends; and Bapcor on Friday discovered high-profile activist Tanarra was a significant shareholder.

Sandon Capital’s Gabriel Radzyminski, who was a driver for change at embattled oil and gas producer Karoon, said activism was on the rise as investors demanded change from companies that were failing to deliver.

Often companies are being asked not to dance to the beat of a different drum, just to remix what they are already playing, or speed up the track.

“It’s rare that you actually come up with a brand new idea as an outsider, but often you are trying to alter the priorities of the board,” Radzyminski says.

“Often it’s something that just gets pushed back at board meetings or carried over as ‘this is too hard’, ‘let’s do it next time’, and when you run a campaign like we do you are escalating the issue to be a priority.”

It’s early days, but the efforts of Radzyminski and fellow activist Samuel Terry at Karoon to demand the company start paying dividends – a call that received the support of company founder Bob Hosking – certainly has the company’s attention, if not yet its ­compliance.

In addition to the first strike at its annual general meeting on Friday, almost a quarter of Karoon shareholders voted against higher fees for directors, the performance rights of chief executive Julian Fowles, and the re-election of ­director Peter Turnbull – rejection votes that flew in the face of the advice of major proxies, which had backed the board.

Activism is definitely on the rise. From just a few hundred million dollars a few years ago, the market is now estimated to be more than $5bn.

How much more activism should market watchers expect?

A lot more, according to L1 Capital’s James Hawkins, due to the increase in capital flowing into these strategies, the increasing size and willingness of the industry super funds to publicly advocate their position, and the increased cost of capital.

“We are just really catching up to where the rest of the world has been for a long time, in terms of activism being a well-respected investment strategy,” Hawkins says.

“The Australian listed market is a fertile opportunity set for Australian activist investors.”

His fund, the L1 Capital Catalyst Fund, only started on July 1, 2021 and now manages more than $1.7bn.

“We look for companies that tick the value and quality boxes, as well as having identifiable and realisable catalysts which can be strategic, financial, operational or governance in nature,” Hawkins says. “There is a fertile opportunity set in the Australian listed market because the days of free money are behind us, and therefore unlocking value is going to come down to the actions of management, boards and shareholders rather than the share price simply going up because the cost of capital is basically free.”

L1 Capital does not often disclose its active positions, but Hawkins believes the public activism of the L1 Capital Catalyst Fund and other Santos shareholders is likely to have played a role in the $80bn takeover talks with the oil major’s rival, Woodside.

“We went public with a proposal for Santos to demerge its LNG business and shortly thereafter Woodside announced publicly that it was in discussions regarding a potential takeover of Santos,” Hawkins says.

“That’s a key point with activism: when you have shareholders who become active publicly it can put a spotlight on the underlying value of the company based on a particular investment thesis being enacted that can often subsequently lead to corporate activity.”

His view begs the question, what exactly is an activist investor? In a pure sense it can be described as an approach investors can take when quiet advocacy doesn’t change the way a company operates.

“A lot of Australian fund managers are very good at advocating their point of view in private, behind closed doors,” Radzyminski says. “The difference between advocacy and activism is that activism is what happens when active advocacy doesn’t work.”

Many activist investors first push boards to consider if they are part of the problem or whether they can be part of the solution for whatever problem the company is having, be it sluggish growth, failed strategies or lack of capital management.

In theory, that’s a win for investors. But it’s not all good news.

There has been increasing murmurs that some activist investors are more like vulture hedge funds of the past, and buying just enough shares to agitate for asset sales and break-up plans rather than to create growth at the ­company they are buying into.

Property giant Lendlease learned the hard way that ignoring Tanarra Capital’s John Wylie is a bad career choice.

Lendlease chairman Michael Ullmer this week agreed to step down amid growing fury – led by Wylie – about the company’s failed US strategy and inability to make a hasty retreat.

Wylie, who describes himself as a “constructive, engaged shareholder”, says activism is the result of several macro issues. The first is the lack of ownership mentality at many ASX-listed companies, because directors often buy the minimum number of shares they can to comply with company policy, and senior executives often “never put their hand in their own pockets” to buy shares because they are awarded on incentive plans.

“So you have this structural misalignment between the people sitting in the cockpit of the company, and the people whose financial interests they represent, the shareholders,” Wylie says.

The second structural trend is the rise of passive investing over active funds management. “With so much more money now being held at passive-low cost funds, ETF funds, the governance responsibility has been outsourced to the proxy firms, so there is absolutely a need for engaged shareholders and engaged shareholder strategies,” Wylie says.

In recent times, Tanarra has been extremely public in bringing down boards and executives of firms it thinks are failing to deliver quickly enough, such as Lendlease and Healius, both of which did not sell assets as fast as Wylie wished.

A betting person would suggest that autoparts seller Bapcor is the next company that might need to quickly get its ducks in a row to avoid a boardroom takeover. Tanarra emerged as a significant shareholder with a 6.5 per cent stake on Friday afternoon.

Tanarra’s Vidhur Rangas­wamy, from the firm’s long-term value listed equity fund, said his firm would now “engage with the board in an appropriate way”. While not spelling it out, Tanarra often buys into listed companies and then muscles its way into board positions to effect change.