LONDON -- French and German chief executives in charge of poorly performing companies had better watch out.
Hermes Lens Asset Management Ltd. is to launch a continental European version of its 430 million ($682.5 million) Hermes Lens U.K. Focus Fund, which attempts to turn around poorly performing companies through corporate activism.
Hermes Chief Executive Peter Butler hopes to launch the Continental fund early next year once the firm has sufficient investors and European partners willing to press the fund's case at local shareholder meetings.
Sponsors investing
The 18-month-old U.K. Focus Fund has proved so successful since its October 1998 launch that Hermes will close it to new investment at 700 million. The fund has financial commitments that will take it to 500 million by the middle of the year.
The latest 100 million investment came last month from the 16 billion Railway Pension Trustee Co., London.
There has been considerable interest in a European version of the fund from Hermes' U.S. partners, which include the California Public Employees' Retirement System, Sacramento.
Mr. Butler's main priority while drawing up a business plan for the fund will be to find partners in corporate activism in each country. He expects the first investments to be made in Germany and France, continental Europe's biggest economies by market capitalization.
"Having somebody within that country that fully understands what is going on is very valuable. . . . One thing that we have identified is that we cannot go into Europe and do the activism ourselves," he said.
The firm needs money managers with a yen for corporate activism and, more importantly, experience in working with Continental companies. Before joining Hermes in 1996, Mr. Butler was closely involved in strategic development at a number of U.K.-based companies.
New shareholder culture
Continental European companies are largely unused to the shareholder culture of the United States and United Kingdom, so getting the right resources in place in each country will be vital for the firm's ability to build the fund.
It took Arlington Capital Investors Ltd., London, almost three years to get the appropriate resources in place to launch its European Renaissance Fund. The E300 million ($267.8 million) fund, launched in 1998, has a similar corporate governance bent as the Hermes Focus Fund but has only a 10% exposure to the United Kingdom, said Chairman Karl Van Horn.
Mr. Butler is still undecided on whether to launch the European fund across several companies and several countries at once, or on a case-by-case basis, tackling companies as it sees fit.
"As soon as we have capability in France and Germany, we will start the fund and roll it out over time," he said.
He does not rule out the possibility of linking up with a similar continental European fund manager.
Whatever form it takes, the continental European fund will be managed along similar lines as the U.K. Focus Fund. In essence, the fund invests in companies in the FTSE All Share index that provide poor returns to shareholders relative to fellow companies in the sector.
"If we think it is a problem with management or strategy, governance or capital structure, and if we can put together a program to help narrow that performance gap, then we would buy a stake of between 1% and 8%," he said. That position would be combined with Hermes' existing holding of the company through its FTSE All Share index fund to give the group a combined holding of more than 10%.
"But we look closely at the other shareholders. If there is someone close to the board who owns 30% to 40% of the company, we would look long and hard at whether we are actually going to have any influence. If the chairman owns 51% of the company, we wouldn't touch it, because you cannot have any influence.
"We carry out an activist program generally behind closed doors. In the U.K., the law is generally on the shareholders' side so that anyone with 10% or more of the company can call an extraordinary shareholders meeting."
He is reluctant to call the firms "dogs," but prefers to describe them as "companies that are less well than they should be."
"We will stay in a company for the short to medium time, it can take 18 months to two years to turn a company around. Since the launch of the fund, we have had six realizations, four of our original seven are still there," he said.
The growth of the U.K. Focus Fund took the firm by surprise. "What we thought would take five years in the U.K., actually took 18 months," said Mr. Butler. During the 15 months to Dec. 31, the fund provided a total return of 47%, beating its FTSE All Share index benchmark by five percentage points.
The firm now wants to put a cap on the fund to enable the investment managers to "pause for breath."
The U.K. fund is invested in 11 companies, which required considerable commitment from the managers. Any more than 15 companies and Mr. Butler was concerned the firm would become a "me-too active manager" with insufficient capacity to implement the corporate activism.
