"Activism" in the corporate or investment context refers the actions taken by public company investors to influence, control, or replace incumbent managers and directors. Activist investing, in one form or another, is typically undertaken by institutional investors in the form of private equity (PE) firms and hedge funds.
A sea change has been brewing since the financial crisis, however, that may see PE firms and hedge funds becoming the permanent targets of a relatively new brand "investor on investor" activism undertaken by their own institutional investors. This new form of activism seeks pre-negotiated fees and other terms and structures more favorable to pension funds and other institutional investors in PE firms and hedge funds.
Investor activism in the private equity context is arising largely because more firms are chasing less investment capital. PE investors' ability to go around PE firms and make their own direct investments may also give them more negotiating leverage. The Texas Teachers pension fund's PE investments is a prominent example, as noted by Bloomberg:
For years private equity has set the terms — and fees — of the arrangement. But as returns diminished after the boom and suspicion of Wall Street grew, pension-fund managers began to reassert themselves. [Texas Teachers manager Steven] LeBlanc is among those leading the charge. He is calling for more money to be allocated to fewer managers, and for more data from those managers to be shared with investors. He’s intent on making sure everyone has the right motivation. With the recent KKR and Apollo deals, management fees are lower, while better performance earns higher payouts. The managers also get to recycle some of the teachers’ profits into new investments, saving them from continually asking for more money.
Combining lower management fees with higher performance fees may help to lower the costs to investors from "zombie funds," those funds that are so underwater they will likely never earn profits for investors but nonetheless continue to operate and payout management fees.
Hedge fund investors, for their part, have been a step ahead of PE investors in seeking and obtaining better terms and structures for themselves. As shown by a figure in an Ernst & Young survey of hedge funds and their investors, this phenomenon has been going on for hedge fund investors for nearly three years now:
Given that 2011 has been one of the worst years for hedge fund performance, 2012 is likely to see continued activism by institutional hedge fund investors asserting their weight. Two results may include hedge fund managers granting investors more appreciation rights and increasingly running separately managed accounts for them.