Carl Icahn, Dan Loeb, and Bill Ackman are just three of the many billionaire activist fund managers who grabbed headlines in 2013.
According to Anthony Scaramucci, managing partner of the $9.6 billion fund-of-funds SkyBridge Capital, we can expect more activism in the years to come and it's all thanks to Dodd-Frank Act. Signed into law in 2010, Dodd-Frank was meant to regulate Wall Street in the wake of the financial crisis. However, activist shareholders are using it to gain leverage with companies.
"They've changed a lot of the specifics in terms of minority shareholder rights," says Scaramucci says of the Dodd-Frank Act. "I think the intention there was to protect the mom and pop investor – the small investor. It's had the unintended consequence of giving billionaire activist hedge fund managers the opportunity to use these rules to exert influence over the CEOs and their corporate boards of directors."
Scaramucci believes the next three or four years will see even more activism. His SkyBridge fund now allocates about 40% of its portfolio to the likes of Dan Loeb's Third Point Management, Barry Rosenstein's Jana Partners, Nelson Peltz's Trian Fund, and Leon Cooperman's Omega Advisors. The confluence of favorable regulations and large cash holdings by companies will make activists all the more, well, active, predicts Scaramucci.
"As people start to understand that with smaller amounts of capital," says Scaramucci, "they can influence these boards of directors and they can get them to do certain things…. The big macro positive is that there's $2.8 trillion of cash sitting on the S&P 500 balance sheet. This is the highest percentage of market capitalized cash since the early 1950s. So, this is very, very positive for this sort of type of investing. You've got positive regulation, cash that CEOs need to deploy, and it creates a rich opportunity set for these sorts of people."
Scaramucci also believes investors can figure out which the companies may be the next targets for activist investors.
"They're running screens on large cap names that have stale management – guys that have been around 10, 15, or 20 years – settled boards, [and] tons of cash piling up on their balance sheet," says Scaramucci. He thinks three ideal candidates for activist fund managers are consumer product companies Procter & Gamble, Colgate-Palmolive, and Kimberly-Clark. Carl Icahn's recent engagement with Apple's leadership may offer an example of what could happen with these companies.
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"Look at what Carl Icahn did with Apple," says Scaramucci. "Just a little bit of pressure there led to those share buybacks. And, he stepped away from it now but that was a positive shareholder event."
To see the full interview with Scaramucci on activist fund managers in the coming years, watch the video above.
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