A Rolls-Royce Trent XWB engine. ValueAct gave up on the aerospace and defence group in August, shortly before its rescue rights issue © Paul Ellis/Reuters

Move fast and break things up. That has long been the motto of the activist investment funds, which are said to be homing in on Britain to take advantage of its underperforming stock market and battered economy.

We have entered a “golden age” for investment activists in the UK, says Gatemore Capital Management chief investment officer Liad Meidar. He said the same thing last year — though that was before Covid-19 blew apart break-up models and forced a pause in the lobbying campaigns that would have sounded tone-deaf in a crisis.

What resulted was not a golden age. ValueAct gave up on Rolls-Royce in August, shortly before the jet engine maker’s rescue rights issue. Third Point’s tilt at insurer Prudential in February was soon overshadowed by events in Wuhan. Stake building by Cevian Capital in Pearson, the London market’s most prominent recent target, has not yet provided a seat on the publisher’s board.

But whether it’s Brexit bargain hunting or a simple reversion to the mean, there has been an increase in activity of late. Companies including St James’s Place and Countryside Properties have had to welcome pushy new shareholders.

Who’s next? Speculation tends to centre on break-up plays such as Unilever, whose chief executive Alan Jope was an internal appointment so is burdened with an expectation of conservatism. Sector peers Pernod Ricard, Danone and Nestle have all attracted agitators in recent years, while last decade it was lobbying by Nelson Peltz’s Trian that led Cadbury into a break-up and eventual sale to Kraft. Unilever will be lucky to avoid the same pressures.

Similar talk attaches itself to engineering conglomerate Smiths, which is rumoured to have fielded predatory interest after its medical division spin-off stalled in April, and to BT, whose network operations might be more valuable if somehow separated from its pension fund.

Chasing these obvious break-up targets does nothing to address activists’ reputation for short-termism, however, whereas campaigns waged against management can help deflect the criticism. No one wants to publicly back an asset stripper. But picking a fight over failings of environmental, social and corporate governance suggests a desire to bring about enduring improvement, so is more likely to win the backing of institutional investors who help boost the activist’s influence.

Sectors rarely subject to activism, such as airlines and minerals, could, therefore, become targets in 2021. So might the corporate governance outliers and the founder-run businesses such as Boohoo, the fast-fashion retailer, though those carry a risk of unravelling if a tight-knit management structure is unpicked. Investors still questioning the value of ESG metrics should try reading the stock screens from the bottom up, because that’s what the activists will be doing.

FCA’s stress test spreads the pain

Financial services weathered the worst economy since the Great Frost of 1709 pretty comfortably, writes Vanessa Houlder.

The sector’s fall in output in the first seven months last year was smaller than almost any other. It proved well-suited to homeworking when the pandemic emptied offices. Fundraisings and a stock market revival helped banks, asset managers and investment platforms. But averages hide big disparities. For some financial firms — and their customers — there’s trouble ahead.

Up to 4,000 financial services groups are at a heightened risk of failure as a result of the pandemic. So says the Financial Conduct Authority based on a survey of a big proportion (but not the largest) of the firms it regulates. For context, about 340 of the firms it supervises became insolvent in 2019. 

Retail lenders were the gloomiest of all about the pandemic’s impact, and the most heavily reliant on government support. A big problem for the non-bank lenders in this group is that they cannot usually access retail deposits or central bank facilities. They often depend on the wholesale funding market, which froze up in the early stages of the crisis.

Pressures have eased since the survey was conducted last summer. “Conditions have improved markedly since the dark days of April, May and June,” said John Cronin, an analyst at Goodbody. The subprime sector is still under strain, though. Borrowers often have poor credit records and irregular incomes. Many have been hit by the pandemic and are eligible for payment holidays. In November, UK subprime lender Amigo said it had an uncertain future after 57,000 customers had taken advantage of such government-sanctioned respite.

Fintech Monzo issued a similar warning in July. It said the pandemic “cast significant doubt” on its ability to continue as a going concern, though for different reasons. The main problem was the drop in overseas travel that hit transaction fees, its main source of revenues. 

The FCA findings highlighted wider strains among fintechs (though Monzo, as a bank, was not included in the survey). The payments and e-money sector had the lowest proportion of profitable firms. 

There’s plenty for the FCA to worry about. It reckons about 30 per cent of at-risk firms could cause harm if they fail. It wants to spot financial distress early so it can intervene to protect consumers. It’s a worthy goal but the potential scale of the problem and its poor record at identifying failing firms are not encouraging.

Activism: bryce.elder@ft.com
Financial services: vanessa.houlder@ft.com

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