Who are the best activists investors

How activist investors act in German SMEs

There are activist investors not only in corporations like Thyssenkrupp, but also in German medium-sized companies. Often they drive the performance of the company upwards - but do not always act to the delight of the entrepreneurs.

In July, Energiekontor's board of directors received a letter in which the author did not hold back from criticizing the company's management. The company would invest too little, sell promising self-developed projects due to a lack of financial strength, and the management would orient itself too much towards the financial interests of the two company founders, who are now on the supervisory board. However, these lines not only reached the board of directors of the company, which develops, builds and operates wind and solar parks, but also numerous media representatives such as the news agencies DPA and Reuters as well as the Frankfurter Allgemeine Zeitung. In this way, the author of the letter, the activist investor Enkraft Capital, wanted to put public pressure on the company. "It is absolutely legitimate to criticize the corporate strategy," says Peter Alex, who takes care of investor relations at Energiekontor. “The way it was presented, however, is not very constructive.” Enkraft Managing Director Benedikt Kormaier argues against this: “Through transparency, we want to ensure that the company management and the supervisory board are open to open and constructive discussions. They are currently closing themselves to that. "

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Energiekontor is not a group like Commerzbank or Thyssenkrupp, where activist investors regularly make headlines, but a medium-sized company. With around 160 employees, the company generated an average annual turnover of around 108 million euros over the past three years. “Activist investors keep making targeted investments in listed SMEs,” observes Kay Bommer, Managing Director of the German Investor Relations Association (DIRK). “Due to the typically high equity ratio of medium-sized companies, there is a lot of scope for investments in a growth strategy.” How often activist investors are actually on the move in medium-sized companies is, however, unclear. Although there is a reporting requirement if an investor holds at least three percent of the shares, many of the activists' interventions never reach the public. The data service provider and market observer Activist Insight records between five and seven publicly known activist campaigns at German medium-sized companies with an annual turnover of up to 250 million euros. "In two thirds of the investments we are in intensive, but non-public, exchange with the company management and the supervisory board," explains Thomas Schweppe, who looks after Enkraft's investments.

Influence on companies

Like any other shareholder, activist investors want their shares to be as profitable as possible. What distinguishes them from the other co-owners: They always try to influence the corporate strategy in a targeted manner. To do this, they use different instruments. "The first thing they typically do is talk to the board of directors and explain where they see potential for improvement," says Bommer. If both sides are on the same line here, the proposals are usually implemented without the investor's intervention being known. "Activist investors deal very intensively with the companies and therefore often address legitimate points with their criticism," says Bommer. That is why the activists' commitment often leads to share price increases.

The cooperation looks less harmonious if the company management and the investor do not come to an agreement, as in the case of Energiekontor and Enkraft. "We believe that an aggressive growth course is the wrong way, that would be too risky," explains Alex from Energiekontor. “We are in agreement with the majority of our investors, from whom we have received a great deal of approval for the strategy we are pursuing.” Kormaier sees it differently: “The actions of the supervisory board we criticized were exonerated at the annual general meeting, but only because the two founders and current supervisory board members supported each other in voting. ”Instead of buying back shares, Energiekontor should rather invest the capital in its projects in the USA.

Open confrontation

Enkraft currently holds 3.47 percent of the company's shares. "Since activist investors often only have minority shares, they need the support of other investors in order to be able to exert pressure at the annual general meeting, for example by not exonerating management or rejecting applications," says Patrick Siebert, Managing Director at the management consultancy Alvarez & Marsal. Since there are strict Bafin regulations for direct agreements among investors in Germany, activist investors often try to draw attention to themselves, their positions and the company through press reports.

In a letter to the Energiekontor board of directors, Enkraft announced that he would “demand the protection of minority shareholders with all available means and, where necessary, enforce it legally”. This could be an extraordinary general meeting or a special audit. Alex faces the threat calmly. “In order to enforce a special audit, Enkraft would have to present facts that justify the suspicion that dishonesty or gross violations of the law or the statutes have occurred. I think this is impossible. "

With his confrontational behavior, the German investor Enkraft, who specializes in the energy sector, acts similarly to the great American activists Cerberus or Elliott, who mainly invest in corporations. The German activist investor Active Ownership Capital (AOC), who specializes in medium-sized companies, has opted for a different approach. “You have to be very careful not to smash any porcelain,” says Klaus Röhrig, co-owner and founder of AOC. "Otherwise a constructive cooperation is hardly possible afterwards, so that all you have to do is sell or work towards a comprehensive change in management." He does not want to let it get that far if possible. "We talk to management before we make investments and try to convince them of our strategy with arguments, which we develop together with industry experts," says Röhrig. Often one would agree. According to its own statements, AOC has never exerted pressure via the media on an investment.

Preparing for Activist Investors

"It makes sense for companies to change their perspective every now and then," says Patrick Siebert from Alvarez & Marsal. “So don't look at your own figures from the point of view of a board member, but of an investor.” The investor, for example, does not like it when the company has too much liquidity. From the activists' point of view, the money should be distributed as dividends or - even better - invested in a growth strategy. "The best protection against activist investors is when few shares are in the open market, so many shares belong to management or friendly investors," says Kay Bommer from the German Investor Relations Association. However, this also has some disadvantages. The shares are then not very liquid, which scares off investors - not just the activists.

The company's CEO, Albrecht Köhler, can confirm that AOC's stake in the traffic engineering company Schaltbau: “We work together in a trusting manner.” However, in this case there is also no reason for an open confrontation. Company and investor are on the same line: "We want to expand strongly organically through high investments in the coming years," says Köhler. The company has undergone a restructuring process in which it parted with a number of unsuccessful acquisitions. “While some other investors wanted us to continue holding certain investments, AOC pleaded for a cut,” says Köhler. "We followed that and it was - as it turned out - the right decision."

Even if everything is running smoothly at Schaltbau, AOC does not generally shy away from pushing for a change in management if there are differences. “In medium-sized companies, we repeatedly have the challenge that the supervisory board is not optimally staffed, because either there are no experts for foreign markets on the supervisory board despite an international business model or it consists mainly of good friends from the management,” says Röhrig. In such a case, the investor works towards a change of personnel in the committee in which AOC is usually represented by one person, since the investor usually holds between 10 and 20 percent of the company shares.

Thorough analysis

Before AOC invests anywhere, it deals with the company and the industry for at least a year. This is typical of activist investors. "We observe that after the activist investor has come to the conclusion that the company is undervalued, it takes an average of two years before he buys larger blocks of shares," says Siebert of Marsal & Alvarez

This period gives companies that do not want activists as shareholders the opportunity to react. If they manage to get the company back on track relatively quickly, they become less interesting as an investment for activists. Since they typically want to increase their stakes significantly within a few years, it is especially worth buying for them if, in their opinion, the company remains far below the possibilities.

This year, however, companies hardly have to fear any new activist campaigns. Because of the corona pandemic, investors are currently rather cautious. “It is currently very difficult for them to determine the company's value because the crisis has created a lot of uncertainty about what the future will look like,” says Iuri Struta of Activist Insight. "After the crisis, however, the activists will probably invest regularly in medium-sized businesses again."

For some companies this will lead to growth and a win-win situation for the company and the investors. Others, however, will find themselves in a public mud fight. But this can also have positive consequences. "We agree with Enkraft that Energiekontor is currently undervalued on the stock exchange," says Investor Relations Manager Alex. "Not least because of the public campaigns, many other investors have now also come to this conclusion." The share price of the medium-sized company is currently at its highest level for 20 years - despite Corona and the associated global economic crisis.