Even as activist-investor campaigns increase, publicly traded companies are often wary of this source of investment. The caution is not entirely unfounded, given that a majority of companies subject to these campaigns underperform in the long term. One alternative is private investment from organizations with an operating model that is supportive and collaborative.  

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Activism’s Impact

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Typically, activist investing involves hedge funds acquiring a significant minority stake in a public company to influence its operations and governance. The fund’s approach often focuses on pursuing M&A activities to enhance shareholder value, restructuring company boards, and implementing operational changes. Activist investors often aim for medium-term returns, with typical exit timelines at around three years.

Since 2018, shareholder activism has been on the rise globally, reaching a record high 252 campaigns in 2023, surpassing the 2018–23 average of 210 annually. The economic sector targeted most often is industrials, with 21% of all global campaigns in 2023.  

With activist investing, companies can raise capital quickly, and the regulatory burden is less than for secondary offerings. However, at these companies, long-term total shareholder returns (TSR) have often lagged short-term gains, and over two-thirds of the companies have lagged the S&P 500’s long-term TSR. For activist campaigns in 2018, short-term TSR (for 2018–21) was 26.3%, versus long-term TSR (for 2018–23) of 15.6% (Exhibit 1). Over the same period, the S&P 500 had a higher long-term TSR of 17.4%. Among individual companies that underwent activist campaigns in 2018, 63% had a long-term TSR lagging the S&P 500. One reason may be that activists’ stated objectives—M&A demands, board changes, payout policy, cost cutting, and governance—are siloed rather than focused on holistic long-term transformation.

[Exhibit 1]

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The S&C Alternative

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Supportive and collaborative (S&C) investing offers an alternative with a win-win structure. S&C investment is a form of private investment in public equity (PIPE), which involves the private sale of publicly traded shares or preferred stock to private investors, typically at a discount. Transactions are conducted privately and are not considered public offerings. PIPEs provide a way for companies to raise capital quickly and with a reduced regulatory burden relative to other investment methods.

A typical S&C investment includes a 2% to 10% private investment at a 5% premium to market, with the investors given two or three board seats and providing end-to-end transformation support in achieving capital redesign, cost optimization, and top-line growth, tailored to the company’s specific situation (Exhibit 2). The agreement includes a predefined exit—commonly after 18 to 24 months, with shares sold at market rates or sold back at a 10% premium to market rates.  

[Exhibit 2]

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This arrangement offers at least four advantages over investments from activists:

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1. Market confidence. Compared with shareholder activism, S&C investing contributes to market confidence with minimal scrutiny. The premium paid by the investor, made public in the deal’s announcement, signals confidence in the company. This can strengthen shareholder trust and buoy the share price, a pattern likely to escalate as the company’s performance begins to improve. Furthermore, the private nature of the investment means the company can move forward with less public scrutiny.

2. Tailored, results-oriented transformation. The supportive and collaborative approach focuses on a results-oriented transformation of the company. The size of the investment, premium paid, chance to resell the shares at a premium, and absence of investor fees give the investor a compelling incentive to contribute to the company’s future growth and profitability. Results can be rapid: A typical agreement includes clear 12- to 18-month timelines that enable quick, measurable improvements in margins and share price. Also, the investor can deliver targeted expertise in key areas such as digital transformation and operational efficiency.

3. Sustainable impact. S&C investment delivers sustainable impact as a result of its long-term focus. Transformation initiatives prioritize lasting growth and value over short-term gain. Streamlined restructuring is tailored to transformation needs, ensuring lasting improvements with minimal disruption.

4. Collaborative relationship with investors. S&C investment provides complete alignment through collaboration. Incentives linking exit returns to transformation outcomes align goals between investors and management. A flexible, collaborative approach to change avoids disruptive tactics like forced leadership shifts. With adversarial tactics minimized or nonexistent, the collaborative approach reduces disruptions to company culture and operations.

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A variety of examples illustrate the benefits to industrial companies. A packaging equipment and services company turned to an S&C investment to propel growth after years of stagnant revenue. Within two years, the transformation delivered a revenue CAGR of 1.7% along with 400 basis points of growth in earnings before interest, taxes, depreciation, and amortization (EBITDA). A provider of airport ground support equipment used the guidance of S&C investors to reverse several years of declining revenues. The company launched a comprehensive transformation program, and in two years, its revenue CAGR climbed from negative territory to 18%. And in the semiconductor industry, end-to-end support improved a company’s gross margins by 1,380 basis points in less than two years. The stock market rewarded the effort: the company’s share price more than tripled, outperforming the S&P 500.

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Since 2018, shareholder activism has been rising globally, reaching a record high 252 campaigns in 2023, most often targeting industrials. However, at the targeted companies, long-term shareholder returns have often lagged short-term gains. A promising alternative is private investment by organizations with an operating model that is supportive and collaborative. In S&C investing—the approach used by Fernweh—a private investor, alone or with other private investors it recruits, invests capital and management support to launch a holistic transformation aimed at increasing the company’s long-term value. Investors like Fernweh don’t just provide funds and demand results; they are an engaged investor and even operator, if needed. They become a support partner in the end-to-end transformation of the company, and they have skin in the game—a significant incentive to make the company successful.