Cevian Capital is a multibillion-dollar activist hedge fund that you’ve probably never heard of.
The firm, the biggest of its kind in Europe with 12 billion euros, or about $13.6 billion in assets, eschews the aggressive activist tactics popular in the US.
It doesn’t write sharp-tongued letters to CEOs à la Dan Loeb, a more stereotypical American activist hedge manager.
Instead, Cevian takes a more cool-headed approach to activist investing, the firm says. It sees itself as different from many of its American counterparts, which critics say focus on short-term value for themselves.
The fund started in 1996, and invests only in Europe. Investors put money with the fund in rolling periods of three to five years, and 70% of the capital is from investors in North America. The fund doesn’t short stocks or use leverage.
As part of our series “The Price of Profits” with public radio’s Marketplace, Business Insider interviewed Harlan Zimmerman, a senior partner in the firm’s London office, to learn more about Cevian’s process.
This interview has been edited for clarity and length.
Rachael Levy: Can you describe Cevian’s investment process?
Harlan Zimmerman: We work very hard to identify typically around two investments a year, which are companies with world-class businesses at their core, but which have the potential to perform better as a company over the long term – sometimes companies, which have already embarked upon the process of improving themselves, and in some cases, we need to be more of a catalyst to help them become more competitive and more valuable over time. These are companies that are listed in Europe but they may be global businesses.
Levy: How do you get shareholders on board?
Zimmerman: We’re focused on making the companies more competitive in the long term, and more valuable. For us, this means a holding period that normally ranges between three and seven years. By making companies more competitive, because most of them are exposed to a great deal of international competition, if it’s a Swedish company, they might be exposed to German competitors, Chinese competitors, US competitors. By making them more competitive, we’re making them more secure for everyone, and we’re making them more valuable for shareholders.
And so when you’re talking about a company that has owners that are big, long-term institutions, then we don’t have to mobilize them in these sorts of initiatives. It’s the sort of thing they want to happen anyway, and for most companies, it’s the sort of thing they’re interested in, as well. They’re interested in becoming more competitive over the long term.
So it contrasts a bit with the US classical activist style, or at least the more hostile type where it’s short-term initiatives usually to get jumbo dividends or put a company in play or something of that nature, which can be very destructive. And where it often can be about bringing in certain types of shareholders, the “wolf pack,” as it’s sometimes called. And there you can have really a big conflict between what’s good for the company and its shareholders in the long term, and what’s good for some of the shareholders in the short term.
Levy:Cevian doesn’t write open letters or engage in proxy fights, for instance.
Zimmerman: Because we think they’re not necessary and sometimes counterproductive to achieve the objectives that we’ve already set out. And that’s a function of a number of different things. No. 1, it’s a function of the rules for owners that we have in Europe compared to the US, and No. 2, it’s a function of the culture that we have here compared to the US.
First, from the governance point, it’s surprising to many people in the US, but the rules for shareholders in most places in Europe are more favorable for shareholders than they are in the US. And in most cases, if we own 5%, 10%, 15% of a company, we have a very powerful position at the table, and therefore particularly when we’re supported by other long-term owners, this means we don’t have to resort to yelling and screaming and publishing letters and doing proxy fights, which obviously can be very divisive and pin management teams into a corner.
We see those techniques as more of a reaction to the very strong governance position that the companies have in the US, and therefore, to put pressure on the company, it’s often necessary to be public. Particularly if you have a short-term agenda, as many of these activists do in the US, then you don’t care about damaging your relationship or creating a relationship that’s not functional. You care about forcing someone into a position where they have to do something.
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For us, as we’re working to build these stronger, more competitive companies over a longer-term horizon, and we’ve seen the benefit of being engaged with them in a constructive way and over the long term, we find that we don’t have the need to go hostile, nor is it likely to be beneficial to achieve our ultimate aims.
I would [like to] make a distinction between constructive and friendly. We don’t call ourselves friendly activists because we don’t go and ask people’s permission to invest. We don’t only invest if we have an invitation. We invest where it makes sense, and of course sometimes there can be very difficult discussions, but in our case, they are future-looking, or forward-looking, non-personalized, and they’re oriented, as I’ve said many times, to create a better and more valuable company in the long term.
Levy: Carl Icahn recently spoke with CNBC and he mentioned there are too many share buybacks over capital improvements. Icahn had influence over the firm in its founding days. So what does Cevian think of buybacks?
Zimmerman: Sure. First off, we hold the view that there’s too much short-termism in the market, and it reflects pressure on investors, and that creates pressure on the companies, and that’s absolutely the case that companies are often put in a position that they feel they have to do something that’s good in the short term, even at the cost of what’s right in the long term.
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Of course, they can’t openly admit it, but it’s definitely the case. You can find lots of surveys of management answering these questions anonymously, and it’s clear that it’s happening. It’s people responding to incentives that are given to them across the investment chain, and so this short-termism in many cases is leading to buybacks, enhanced dividends, things of that nature.
However, absolutely in some cases, it’s still appropriate for the companies that are well-capitalized and which have the resources they need to make appropriate investments to grow their businesses.
That creates more incremental gains in the short term, and we’re much more about being with the company that today is achieving a 5% margin and in four years’ time achieving a 10% margin. And having a much clearer strategy is much more appreciated by the capital markets. That’s how, in our view, big returns are created in the long term.
Levy: Can you describe a campaign that has gone really well and succeeded?
Zimmerman: Generically, I’d just say that often the best investments are when we’re starting with a company, [where the] main businesses are very strong, which have gone out of favor because the market is being very short-term focused and is challenged in the short term. Or maybe the sector has gone out of favor or maybe the company has had a very bumpy road, and that’s a starting point. And that enables us to buy into the company at a very attractive valuation compared to long-term intrinsic value of the company, and provides a good platform for working with the company to implement changes, to make it more competitive and valuable over the long term. Because when everything is going super well, there’s much less reason for people to change what they’re doing, and there’s typically less value to be created.
Levy: Would it be possible to talk about a counterexample, where a campaign didn’t go as you anticipated?
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Zimmerman: Only generally. Typically, if something isn’t going well, it’s that it’s taking longer to get things done than we planned for. Sometimes it’s for good reason, because the company is doing better more quickly than we anticipated, and in those cases typically we’re just happy to come out if we’re not fully engaged with the company. In some cases, there could be changes in the environment that make things more difficult, but for us it’s imperative in every case that we invest in companies that have very attractive fundamental valuation and have huge, or significant, value-creation potential. So if things are not going well for a company, then for us, there’s an opportunity to accelerate the value-enhancement work.
Levy: Is there ever a time you target a company and then decide not to go into it?
Zimmerman: One of the things that we analyze very carefully is the ability to make change happen. And that’s a function of many different things, including the formal rules in the country – that’s the governance rules, so the hard power we have as shareholders. Each country has [a] slightly different set of rules.
Then we also look at the informal rules in the country, what we can rely on, the way things are actually done. Is there extra influence that a big shareholder will have, for instance? Is there a tradition of shareholders joining boards? Things of that nature.
And then also we have networks that we built up over the years of board directors, management teams that can help us access a company not just their potential for change, but the ability or the potential to make that change happen. So we use that network to help us, and those networks are very local.
And then certainly we look at the shareholder structure of companies, we look at how big we’re going to be, will we be a 5% owner or a 20% owner based on size of the company and the size of our fund and who the other shareholders are. Are they all just institutions with whom we are likely to have very aligned incentives and who will therefore likely support the value-creation initiatives that we think should be put in place, or are they foundations or family groups that can have noneconomic interests that will be driving them?
Levy: Are there any countries that are just too hard to penetrate, where rules are too strict or complicated?
Zimmerman: We have historically focused on the Nordics, UK, Germany and Switzerland. Those are the countries that for us have a combination of clearest governance rules in favor of shareholders, good transparency as well as interesting companies. We haven’t invested in Southern or Central Europe because we don’t know those environments and we don’t have relationships there, and we can’t be certain that the rules, formal and informal rules, are ones that we’ll be comfortable with.
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Levy: You mentioned how much more shareholder power you have in Europe compared to the US. Is that across the board?
Zimmerman: It’s certainly the case for all of the Nordics, the UK, Germany, Switzerland and France.
Some of the major differences are that, in almost all countries, the chairman and CEO have to be separate, either by law or governance code. [Editor’s note: In the US, the CEO and the chairman are usually the same person.] This means that the board’s role is to oversee or instruct the management team. Each country can be different. Some boards are more hands-on than others. But the point is there’s a level that operates above the management team, and that’s very different than when the chairman and CEO is a different person.
The second thing is that it’s very easy to nominate outside candidates to the board, in all of our countries. It can be done with a small percentage of shares in most cases, whereas in the US, in most companies, either the nominations are completely controlled by big companies, and you can only nominate by running a separate proxy contest, or they’re adding what’s called proxy access, usually meaning that if a shareholder owns more than X%, or say three years, then at that point you can nominate a small number of directors in the US. That’s the best case in the US, whereas over here in Europe, you can in all cases as a shareholder, there’s no minimum ownership period if you own 5% or 3% or even one share depending on the country, you can nominate someone. So it’s much easier to nominate people and therefore get them elected.
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Levy: How is activism perceived in Europe?
Zimmerman: The first type of activism, the hostile type, that is not welcomed here in Europe. And there have been some attempts to do it, both by domestic European players and some US players. Generally, they have not been very successful.
The hostile activists have found it difficult to find support from the big European owners of companies.
Levy: Is that cultural?
Zimmerman: I think that is cultural. There’s a feeling that it’s not necessary to be that hostile here in Europe. People don’t like it.
Levy: So is it the short-term activism that is giving activism a bad name in the US?
Zimmerman: Absolutely. First off, I’m not sure that activism has a bad name. I’d call it a complex name. There is definitely good activism that people respect. Look at the role of Trian [Partners] in GE, where they appear to be welcomed into the company and played an important role. That’s activism. But on the other hand, most of the headlines are created by the short-term hostile stuff – and let’s face it, people like to read about the salacious letter about a CEO and his country-club friends. That does give activism a bad name, but as I say, there’s a complex picture. There’s good and there’s bad. “The Price of Profits,” our series with Marketplace, looks at what happens when profits become a company’s product. For more, visit PriceOfProfits.org.