Financial institutions face fresh attention from aggressive activist and hedge fund investors, adding another distraction to a list of troubles that already includes increased regulation and diminished profits.
Some of the biggest names in finance are already in the crosshairs.
Nelson Peltz, the billionaire co-founder of Trian Fund Management, is agitating for improvement at State Street and the investment bank Lazard, in which he took a stake last year. The investor is also searching for a new chief executive for Legg Mason, the asset manager where he sits on the board.
John Paulson, the billionaire hedge fund manager, last year pressured the Hartford Financial Services Group to sell its life insurance business and refocus on other products.
Now a new batch of activist stakes in financial institutions is expected to come to light in the coming months, as annual meetings approach, prompting investors to disclose their stakes with enough time potentially to wage a campaign for board seats.
“It has caught some people by surprise,” said Anu Aiyengar, co-head of financial institution M&A at JPMorgan. “Many people thought activists wouldn’t target financial institutions because of regulatory requirements. But this has been a bit of a wake-up call. No sector is immune.”
Already this year, Dan Loeb has taken a stake in Morgan Stanley with his Third Point hedge fund. Mr Loeb has taken a passive stance so far, saying he expects the stock to double as margins improve.
Mr Loeb’s stance reflects some of the challenges facing activist investors considering stakes in financial institutions. At the World Economic Forum last week Paul Singer, the head of Elliot Associates, the hedge fund, said the unfathomable nature of banks’ public accounts made it impossible to know which were “actually risky or sound”.
“It’s very hard for activists to do something at a depository institution because of the regulatory oversight”, said the head of one large activist fund. He said that “90 per cent of the returns come from the company, not the activist”.
An adviser to several large financial institutions said that regulators will tend to protect management and boards, making it difficult for activists to install new leadership teams.
Despite these challenges, financial institutions are now on the list of companies being considered as targets by activists and aggressive hedge funds.
Activists said that beyond asset management and depository banks, there is still a very wide circle of companies connected to finance: for instance McGraw-Hill, owner of the Standard & Poor’s rating agency that was encouraged to split last year by Jana Partners, the activist hedge fund.
“Financial institutions don’t make easy targets,” said Bruce Goldfarb of Okapi Partners, a proxy solicitation firm. “They’re highly regulated and have broad shareholder bases. But it doesn’t mean they’re immune from shareholders who have opinions on how to enhance value.”
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