An increasing portion of M&A activity in Australia is set to come from active investors’ more proactive engagement with company boards, according to industry experts.

Some Australian active investors are increasingly behaving like investment bankers—approaching companies with proposals on capital strategy, operational optimization, and potential M&A activities, according to an investment banker and a fund manager.

“They will go in with 40 slides of presentation and say to the company: here is what you should do,” the fund manager said. “That is almost an investment bank-style approach to active investing.”

These active investors are more aggressively pushing boards for change to unlock value for shareholders, which often involves M&A, the banker said.

Australian agriculture chemical company Nufarm is a recent case in point. As reported by The Australian, three investors – Allan Gray, L1 Capital, and Tanarra, which own a combined stake of around 30% in Nufarm, are pressuring the board to put the whole company up for sale. The report cited Allan Gray managing director Simon Mawhinney as saying that he wants the company to test market interest and believes that an all-of-company sale would be preferable to Nufarm’s current plan to secure capital for the seed technologies business.

Over the past 12 months, active investors have featured prominently in some of Australia’s most high-profile corporate and M&A activities, including Lendlease’s strategy pivot to shift away from overseas construction markets, through trade sales of assets. In Healius’s sale of Lumus Imaging, Tanarra, a Healius investor, had argued that the company should not sell Lumus for anything below AUD 825m, and the business ended up being sold for AUD 965m EV to Affinity Equity.

Such high-profile cases in Australia are often driven by a handful of active investors that go public with their agenda, seen as “shareholder activism”, while most managers generally just tend to engage with boards more actively regarding issues they want to raise, the fund manager said.

“There are many ways of doing this,” he said. “You don’t tend to go to meetings with presentations…if I need to, I will write a letter to the board and make it official.”

The active – and sometimes activist – opportunities are highly company-specific, said James Hawkins, partner at L1 Capital and head of the L1 Capital Catalyst Fund. “They could involve demerging non-core assets, improving corporate governance, or cutting costs to boost margins. It is very idiosyncratic and particular to each company in which we invest.”

A second fund manager said they engage with boards on things like this all the time. “Is that really activism or is it engagement?” he asked.

Rethink active strategies

A big driver of more active engagement, or more aggressive approaches in some cases, is the rise of passive investing through ETFs and quant funds, which is pushing active fund managers to manage their portfolios more actively to outperform passive funds, the banker pointed out.

In response, active managers are indeed being forced to “reconsider” how they invest, the fund manager said. This includes shifting toward more concentrated portfolios — “rather than holding 40 to 50 stocks, you hold five to 10, you really have conviction in”.

With only selective companies in the portfolio, the manager could also afford to spend more time and engage more proactively. “You almost need to know them like private businesses,” according to the fund manager.

Apart from the active funds industry needing to get their voices out there to compete for distribution with fast-growing passive capital, technology advancements are also propelling the speed of information entering the public arena so that shareholders are better equipped to hold boards and senior executives to account, according to Kristi Cashman, Adara Group’s corporate advisory director.

“We are in an environment where increasingly proactive engagement from investors is inevitable,” she said. “This environment can amplify the voice of an activist investor.”

Board engagement

Active investor engagement can be mutually beneficial, as both parties are aligned in their interest to enhance value, argued Cashman, who works with some of the large ASX-listed companies.

It can be “an opportunity to listen to fresh ideas and insights on how to improve a business,” as these investors often come armed with extensive research, she said, adding that boards also need to be vigilant of continuous disclosure obligations when engaging with activist investors.

L1 Capital’s Hawkins noted that Australian boards have become more receptive to activism now than they were a few years ago, when the practice was still relatively nascent. “Boards are now becoming more used to engaging with activist investors. Boards know which ones are of scale, have a proven track record over a significant period, and, importantly, are long-only investors with aligned interests.”

The first fund manager said that boards will give you “airtime,” but whether they really listen is another matter. They tend to listen “if you are making sense” or if enough shareholders voice the same issue, he said.

The second fund manager, however, said that activism is the “next level” stuff after the engagement piece. “When we do it, we get the sense that boards are ill-prepared for it and feel that we are being unreasonable/unprofessional in our heavy-handed methods,” he noted.

In comparison with other markets, shareholder views are not listened to in Australia as much as they are in the US, said Manoj Jain, founder and co-chief investment officer at Maso Capital. Japan, which has made material progress in shareholder engagement, is now on par with or ahead of Australia, he added.

“We would like to see Australian domestic shareholders being more proactive in expressing their views,” he said. “We would like to see greater engagement in Australia between boards and shareholders.”