Law firm insiders say they've been getting calls from private-equity execs asking how to go activist after KKR's splashy stake in Dave & Buster's
- Private-equity firms are quietly considering if they should take more stakes in public companies as they seek to differentiate themselves in an industry loaded with capital ready to be put to work, attorneys told Business Insider.
- PE firms are consulting with attorneys at law firms including Goodwin Procter and Cadwalader Wickersham & Taft about possible public company investing, though they are wary of mounting campaigns that are viewed as overly antagonistic to management, these people said.
- "You see some PE firms that have reached out to us and are interested in learning more about how they can work with shareholder activists," said Richard Brand, a Cadwalader lawyer whose clients have included Elliott Management and D.E. Shaw.
- "Other PE firms are interested in how they can engage in activism strategies on their own to put companies in play and compete more effectively with other sponsors for deals," he said.
The prospect of private equity firms entering into the activism arena has been all the buzz in January, after Bloomberg reported that TPG was raising a fund devoted exclusively for investing in public company stakes. Adding to the chatter was a mid-January securities filing from KKR, which revealed a 10.7% stake in Dave & Buster's, the sports bar and restaurant chain.
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Private equity firms, which often rely on close relationships with a company's management to land deals, are increasingly considering mounting stakes in public companies - a move that can be viewed as antagonistic to a CEO - as they seek to crank out better returns in an industry bloated with undeployed capital.
PE firms are consulting with attorneys at law firms including Goodwin Procter and Cadwalader Wickersham & Taft about public-company investing possibilities, though the PE firms would like to avoid any reputational harm that could come from getting into the area, known as "activism," attorneys have told Business Insider.
Joe Johnson, one lawyer at Goodwin Procter who has been involved in proxy fights and mergers, said that he is speaking with PE firms that are weighing legal issues that could arise if they went the public investing route, though he depicted their interest as curiosity rather than a flooding of the gates.
"There is a whole new list of legal requirements they are going to have to learn," said Johnson. "A lot of PE funds prohibit activism. It'll generally have to be new funds."
Richard Brand, another lawyer at Cadwalader who has advised clients such as Elliott Management and D.E. Shaw, also reported PE shops expressing interest in learning more about activism strategies.
"You see some PE firms that have reached out to us and are interested in learning more about how they can work with shareholder activists," said Brand.
"Other PE firms are interested in how they can engage in activism strategies on their own to put companies in play and compete more effectively with other sponsors for deals."
The prospect of private equity firms entering into the activism arena has been all the buzz in January, after Bloomberg reported that TPG was raising a fund devoted exclusively for investing in public company stakes.
Adding to the chatter was a mid-January securities filing from KKR, which revealed a 10.7% stake in Dave & Buster's, the sports bar and restaurant chain. The KKR investment, in particular, struck Wall Street attorneys as non-traditional approach for a private equity firm, especially in KKR's case given that it filed a so-called "13D" with the Securities and Exchange Commission.
The filing is a regulatory requirement that investors give notice to the SEC within 10 days of acquiring a five percent stake in a public company. It it intended to provide the public with transparency into a company's ownership and understand the motivations of its largest stakeholders.
The filing is often seen lodged when more aggressive hedge fund shareholders mount stakes in public companies as part of campaigns to challenge management and demand they make changes to the business. However, it can be used in friendly shareholder purchases as well.
The ambiguity is what struck a nerve with attorneys and finance executives who operate in the private equity world, as some wondered whether the 13D filing could be a "tip of the iceberg" moment, where PE blends with more aggressive activist hedge fund investing.
"There has been some noise," one attorney told Business Insider privately, calling the 13D filing "strange."
"If it's a 13D, it means you likely want to influence what the board is doing, though it's not hostile necessarily."
Attorneys said the flurry of interest in activism stemmed from the fact that PE shops had a huge amount of unused investor dollars - more than $2.5 trillion by one estimate - and in order to compete for the highest quality deals available, they are turning to activism to differentiate themselves.
Two other attorneys told Business Insider on the condition of anonymity to discuss sensitive client matters that they saw a similar trend.
"It is my belief that private equity, either on their own, but in many instances in partnership with an activist, will be looking at public company options going forward," one said. "It is an area that we think will develop slowly at first, and depending on how it works out, may grow."
John Hockin, the lead executive behind the Dave & Buster's deal, said that dry powder had nothing to do with its public investment strategy, and that its Dave & Buster's investment was no different than what KKR has done over seven years, making nearly 40 investments totalling about $3 billion.
Hockin, who joined the firm in 2015 from Golden Gate Capital, said that in public investments, KKR can offer its resources to help a company dig itself out of the slump in collaboration with existing management.
"We aren't trying to do anything hostile," said Hockin. "We aren't going to be writing letters. We aren't going to be running proxy battles."
But, he said, "We have a point of view."
No matter what the case may be, though, KKR will not invest in a public company if its presence is undesired by the company's management. "We are looking for companies that are open-minded and amenable to our interest. If they have no interest in us being around, we are going to move on to the next opportunity."
TPG declined to comment on its fundraising efforts, but the Bloomberg report noted that it would not write attack letters, launch proxy fights, or agitate for management changes, citing anonymous sources familiar with the Strategic Capital Fund.
To the extent that other PE firms do embrace activism generally, they will need to learn SEC regulations and a whole public relations playbook that would come with it, said Johnson, the Goodwin Procter lawyer.
After all, he said, activism campaigns are more expensive - and riskier - than private investing, given that there is no indemnification offered if a deal goes south, and that handling such a public campaign requires additional PR specialists and lawyers.
Although January has revitalized discussion around private equity firms' public investing efforts, it is not unprecedented.
There are other examples, in recent memory, that illustrate private equity firms willing to entertain public investments. 13Ds were also filed by TPG in 2017 when it bought an eight percent stake in online homemade goods dealer Etsy, and by Silver Lake in 2018 when it increased its stake in The Madison Square Garden Company to 9.7 percent.