The phenomenom of financial activism has broadened its reach, no longer reserved for U.S.-based companies or large multinationals.
More and more, activist funds–especially hedge funds–are buying stakes in companies they consider “mismanaged” or under-optimized, aiming to force changes in their strategy and governance, and in some cases, even their shareholder structure.
Hedge funds and family business
Traditionally off their radar, family-owned companies are increasingly targeted by hedge fund activists.
With valuable assets and a tendency toward low public exposure and less formal organizational structures, family firms become attractive targets.
How do family businesses react when an activist fund enters the picture? And what can owners do to prepare?
A recent study published in Strategic Management Journal by Feldman, Amit and Chen delves into these questions and more. Their conclusion is clear: how a family business is organized can determine whether it resists, adapts or loses control.
In this post, I’ll share their core findings and the key decisions you should make today to protect your company without impeding its growth.
Company targets for hedge fund campaigns
Hedge funds primarily look for opportunities where they can “unlock value,” such as:
- Companies with valuable assets (brands, properties and loyal customers)
- Companies that could be more profitable with a different strategy
- Companies where there is doubt about who is in charge or where the business is going
If your company meets any of these criteria, it could be a target even if it’s not publicly traded. Sometimes, debt issuance is enough to attract the attention of a hedge fund.
Three profiles of family businseses
In their study, Feldman, Amit and Chen identify three profiles that react very differently in the face of hedge fund activism:
- The strong, united family
Clear family leadership, founder still active. Resists well, but sometimes ignores necessary areas for improvement. - The divided family
Presence of family members in different roles, but no clear leadership. The fund can take advantage of this fragmentation to gain power. - The flexible family
Shared leadership with external professionals. It tends to negotiate and adapt better to the proposed changes.
3 strategies to protect your firm from hedge fund campaigns
1 – Clearly define who’s in charge
Is it clear who makes your firm’s key decisions? Is there alignment around values and strategic priorities?
An activist fund takes advantage of cracks in the foundation. Family firms with internal divisions or blurry leadership lines are at greater risk of losing control.
Recommendation: Bolster your family governance structure with a family council, updated protocol and clear rules for family members to join.
2 – Professionalize internally before it’s demanded externally
Many activist funds ask for exactly what you know is missing: more board independence, more technical decisions, less intuition and more analysis.
Recommendation: Evaluate your board. Does it incorporate enough external profiles? Do independent members help you anticipate challenges and strategize, or simply rubber-stamp what has already been decided?
3 – Listen to uncomfortable signals
Financial activists sometimes appear when the family firm is already showing signs of strain: falling profitability, loss of market share or lack of innovation.
Recommendation: Create your own internal self-criticism mechanisms through advisors, strategic audits and review committees before being compelled to by hedge fund activists.
Preparation is better than reaction
While not always a direct threat, the risk of financial activism is definitely a stress test: it forces you to look at your business and your family more objectively.
Family businesses that survive—and thrive—know that protecting their legacy doesn’t mean resisting change, but embracing and leading it.
Is your business structured to simultaneously resist and adapt to external pressures? This dual capability will serve as a true shield for your company.
Homepage image: Benjamin R. on Unsplash