Wes Hall on the myths and realities of activist investing

The founder and CEO of Kingsdale Shareholder Services explains where ordinary investors fit in the new world of activist hedge funds

 
Kingsdale Shareholder Services founder Wes Hall

Kingsdale Shareholder Services founder Wes Hall.(Portrait by Micah Bond)

When Wes Hall arrived on Bay Street nearly three decades ago, he was struck by how management placed a low priority on retail investors. “If you’re not happy, sell your stock,” was a typical response to their concerns, he recalls. They could afford to be dismissive; slate- and plurality-based board elections meant that shareholders had to vote on the nominated directors as a group. Withheld votes counted for naught.

Today, stock owners hold more sway, in part thanks to the growing influence of activist investors. These individuals and funds build up large positions in target companies, then use them to push for changes to boost the stock price. Even as withdrawals and poor returns dog the hedge fund industry, the activist subset is bucking the trend: Hedge Fund Research’s HFRX Activist Index posted an annualized return of 6.1% over the three years to May 2016, against -0.7% for the Global Hedge Fund Index.

Jamaican-born Hall got his foot in the door of corporate Canada as a law firm mail clerk before serving as a law clerk at media company Canwest Global. His introduction to the work he does now came during a stint with proxy solicitation and consulting firm Georgeson Canada. He founded Kingsdale Shareholder Services in 2003 and was so successful that his former employer—the Canadian arm of Australian financial administration group Computershare—pulled out of the proxy solicitation space here, leaving Kingsdale with what it says is a 90% market share. Acting on behalf of management, hostile bidders or fund managers, Kingsdale plots strategy and crafts arguments to win shareholder support in battles for control of public companies.

Hall was involved with New York–based Pershing Square Capital’s shakeup of Canadian Pacific Railway (TSX: CP) in 2012. Working with Pershing and its combative CEO, Bill Ackman, Hall helped convince institutional investors and smallholders to oust incumbent directors and replace the then-CEO with industry veteran Hunter Harrison. CP’s stock now trades for twice what it did when the year-long boardroom battle began.

Getting a company back on track can be a long and messy process. The kinds of changes an activist looks to make—taking board seats, replacing executives, selling off assets—are seldom welcomed by those in charge. “When an activist targets a company, the CEO or board will often say, ‘These guys know nothing about my company,’” says Hall. But activists often spend months researching a target and talking to past managers and competitors before buying their first share, he notes. Still, he often counsels clients to tap on the boardroom door gently instead of breaking it down. In at least 25 cases last year, he estimates, a quiet agreement was reached before the conflict became public.

Hall doesn’t always take the insurgent’s side. He recounts one case in which an activist wanted to sell a target at $6 a share. Kingsdale worked on behalf of the firm, which was three-quarters owned by retail investors. “These moms and pops relied on their dividend,” Hall recalls. “Now if you sell the company, there’s no more yield.” Kingsdale urged shareholders to stand by management, and they did. Today, the stock trades close to $20; the activist is out of business.

Even if you lack the $1 million or so needed to buy into an activist fund, “every single activism situation needs retail investors’ support,” Hall points out. It’s possible to participate by buying the stock of a company in play or voting with the activist if you’re already a shareholder. Just be aware that the outsized returns that this tactic can generate are matched by serious risk. “Activism is not for the faint of heart,” warns Hall. ‘The guys who are [doing] it, they either become billionaires or they go bust. There are not too many in between.”


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