At least three major activist hedge funds have built up sizable war chests in recent months even as the pace of activist campaigns has slowed. This suggests we may yet see a new surge over the next year, especially if there is another big correction in the stock market.
Jeffrey Ubben’s ValueAct Capital, for example, now has more than $4 billion in cash, according to a person with knowledge of the situation. This is way up from the $2.75 billion in cash we reported the firm had in early March after it sold more than 6.6 million shares of Motorola Solutions. This is also up from roughly $1.5 billion at the end of 2015.
The current cash position works out to more than 25 percent of the San Francisco firm’s total assets of $16 billion. This is down from $17.64 billion at year-end. ValueAct’s main hedge fund was down 5.5 percent in the first quarter.
Ubben declined to comment.
Meanwhile, Starboard Value appears to have more than $1 billion in cash. This would work out to more than 20 percent of the $5 billion that founder Jeffrey Smith said the New York firm had under management when he spoke at the SkyBridge Alternatives (SALT) Conference in Las Vegas earlier this month.
At the end of the first quarter, Starboard’s total U.S. equity long portfolio amounted to about $2.8 billion. This was down from $3.7 billion at year-end. This does not include capital raised in the past week from Starboard slashing its stakes in Insperity and Darden Restaurants.
Starboard also is not known for making investments in foreign companies trading on foreign exchanges, whose positions are not captured by the quarterly 13F filings. Smith did not respond to several requests to comment.
In addition, Marcato Capital Management, headed by Richard (Mick) McGuire III, appears to have about $800 million in cash. The San Francisco firm had $2.64 billion in total assets under management at year-end, and its Marcato International Fund was down a little less than 9 percent in the first quarter. So, if you do the math, this means the firm probably had about $2.4 billion under management through March, assuming no redemptions. This would mean its cash accounts for roughly one third of assets.
Ubben earlier signaled that he does not plan to use much of his cash in the near future. In early March he stressed in an e-mail exchange with Alpha that ValueAct had found only one high-quality investment that meets its valuation parameters in the past 12 months: Rolls-Royce, where Bradley Singer, ValueAct’s chief operating officer, sits on the board of directors.
“We are in an earnings recession,” Ubben told me at the time in the e-mail discussion. “Does it turn into an economic recession as job gains reverse due to profit pressure?” He pointed out that the mergers and acquisitions cycle is in “very late innings,” adding that “all the juice has been squeezed out of the lemons.”
In fact, in the first quarter, ValueAct reduced, liquidated or stood pat with virtually all of its holdings. ValueAct now has positions in 13 companies traded on U.S. exchanges, according to its recent 13F quarterly filing, and Rolls-Royce, traded on the London exchange.
The firm’s filing showed two new positions, but it is really just one. The filing showed a stake in Willis Towers Watson, the company resulting from the merger of Willis Group Holdings and Towers Watson & Co., two ValueAct investments at year-end. The hedge fund firm also established a small stake in Alliance Data Systems Corp., a provider of marketing services, including private label credit cards.
Starboard is more active than ValueAct these days. It is currently locked in a high-profile battle with Yahoo. Starboard also recently launched an activist campaign with Depomed, a pharmaceutical company that specializes in neurology-related products. On Thursday the hedge fund announced plans to call a special meeting, with the goal of replacing the current board of directors with a slate of six director nominees — including Smith — asserting it will enable Depomed “to unlock substantial value.”
Meanwhile, at Boston-based Baupost Group, which is not an activist firm, cash as a percentage of assets is currently in the low 30 percent range. While this sounds high, it is not for the firm founded by Seth Klarman. Rather, it is closer to its average. Baupost’s cash position sometimes can go as high as 50 percent of assets.
