When the world thought investor activism had died down, it has bounced back stronger than ever. The past few years, due to COVID-19, did dampen the progress, but the ability to change the course of a company or business for good hasn't quickly passed.

In this article, we discuss what an activist investor is, along with their advantages and disadvantages. So, if you are ready to learn more about activist investor, please continue reading the article.

What is an Activist Investor?

You might think when hearing this for the first time that it might be an aggressive activist who hates the corps and how they affect our environment. While the goals aren’t different, the premise is.

Activist investor is the name you can give to an individual or a group that attains power, helping them change the status quo and change the direction for the better. They might buy shares and hold stocks and critical positions so that they have better influence on the board members.

Their prime purpose, if we look at the activist investor definition, is to focus on one stake and maintain its stake without any disruption.

Different Types of Activist Investor

Following are some types of Activist Investors, along with their pros and cons

Individual Activist Investors

They are there to challenge the goals and strategies they are against and do it openly with their resources. These investors can do it because of not just their experience but also because they have hold of shares and resources that give them the bargaining power.

They work their magic by making campaigns, targeting people and goals, and litigating.

Pros

Experience and resources allow them to detect bad practices and point out improvements. They generally have more heart in what they do.

Cons

They still have fewer resources and influence than a conglomerate might have with the same goals. Individual Activist investors may have more biases, and it can cause the investors to make bad choices.

Private Equity Firms

They have diversity in their resources, which they can pool in when they require a change or support. They only retain their activist role when it essentially requires things like improving the financial situation of smaller sister companies.

Pros

Bigger resource pool, much more experience in the market, access to massive capital and more.

Cons

Unfortunately, as it is a firm, and due to its aggressive nature, its working-class turnaround is one of the highest.

Hedge Funds

Most of hedge fund companies or conglomerates focus on getting higher yields with their high-risk investment methodologies. But when it is most necessary, they gather their support or change their direction like the private equity firms.

Pros

Again, they have more chances of making a change as they have tons of tools and resources at their disposal. Most successful hedge funds are highly trained and experienced, allowing companies to utilize their fresh and unique opinions and perspectives.

Cons

The fault with them is their high-risk mindset, which makes them focus on short-term goals for the company. Most companies, unlike hedge funds, want more long-term and sustainable goals, which don't align with these types of activists.

How Do They Make Their Case?

When any investors gain enough shares among the voting class, they can come forward with their campaign goals. Legally, there is a need to fill out the Schedule 13D form and inform the US SEC department by submitting the said form. In most cases, this is the right time where they can let their goals and motives known publicly.

The only issue with this is that once public, it will be difficult to change their stakes and goals. They can, though, file a change to make it known, but most people don't appreciate such changes to the original goals.

Activist investor need to be active in different circles and emphasize their perspective as much as possible to drive change for the better. It even involves backdoor lobbying to get more favours to tip the scales.

Do These Investors Make or Create Any Value?

First and foremost, they create values for themselves initially, as most of their goals align with the growth of a business or a company. In the end, the more business a company makes, the better their chances of higher yields. But sometimes, the road to success isn't the right one, and this is where some like to make an entrance.

So they make sure members are aware of the situation and how better they can drive the change. However, in some cases, these investors may demand short-term goals instead of long-term term, which may adversely affect the company overall.

What Does the Future Hold for an Activist Investor?

Now that you are familiar with the activist investor definition, their role, their goals, etc., let's discuss their future.

Biggest Players in the Industry

Now, before we see if investment activism has died or not, here are a few of the best players in this market scene.

• The Children’s Investment Fund Management (TCI) holds an AUM value of around 10.6 billion.
• Third Point manages 8.5 billion AUM from their activism
• Akre Capital Management has 4.3 billion against its name.

As you can see, these are just a few of the many more prominent players in the market and how much business they have generated with their dealings. The federal government has tried to change its power with different policies, making activism more a force of good than profit-mongering.

There have been many cases where the investor steps in with their influence and stops the board from making bad decisions. So, in general, this type of financial activism is highly wanted in some cases. But more often than not, it is used for more profit than concern.

Final Words

In this article, we shared the advantages and disadvantages of different types of Activist Investors and helped you understand them better. If the goals are pure and more sustainable, an Activist investor is a reasonable force of change.