A kinder, gentler hedge-fund activism

Date: Tuesday, March 4, 2008
Author: Derek DeCloet, Globeandmail.com

Brian Gibson does not believe in the unspoken Bay Street commandment that Thou Shalt Not Accuse Thy Fellow Capitalists of Greed. He never has and, having long ago reached the age when a man's opinions harden, probably never will.

"It's not like you have to rip people off to make money," says the 52-year-old investor, who, it hardly needs to be said, believes far too many people in his field are all too happy to rip people off. Take hedge funds. At the typical fee - 2 per cent of assets, plus 20 per cent of the profit - many are nothing more than "get-rich-quick schemes for managers," he says. "You're paying all this money for average results."

So what's he planning to do with the rest of his life? Manage a hedge fund, of course.

Mr. Gibson went from obscurity to a well-known figure in financial circles by virtue of his role in running one of the largest stock portfolios in the country. But he left the Ontario Teachers' Pension Plan a couple of months ago - not, he says, because the chief executive's job went to somebody else ("having a management job is just not my psyche") but because he wanted to try an experiment. Could he replicate some of his success at the monster and teach the rest of the Street a lesson at the same time? The result is something called Panoply Capital and one of the more unusual financial startups we've seen in a while.

For a start, it's ambitious: Mr. Gibson and his partner, former Teachers manager Rob Farquharson, aim to raise $1-billion, in a country where even established hedge funds with strong track records, such as Goodwood, are half the size. The strategy is uncommon, too. They don't intend to engage in short-selling, play arbitrage games or buy a mutual-fund-like basket of 40 stocks and sit on them.

Rather, the plan is to bet big on a handful of companies - probably no more than eight or nine - that are candidates for some kind of restructuring or shakeup, or which need a capital infusion, and try to make it happen. In other words, Mr. Gibson hopes to enjoy some of the same sort of boardroom influence he used to enjoy when he had the weight of Teachers' $33-billion in stocks behind him.

You could call it activist investing, though Mr. Gibson doesn't like that label much, since it now connotes a kind of pushy, short-term fund that tries to force companies to strap on billions in new debt (as Luminus Management is doing at TransAlta) or to execute a quick sale or merger. That kind of activism has been under a cloud ever since the credit crunch began last summer, partly because junk bond rates have gone up so much (rendering their strategy impractical) and partly because some of the activists' ideas have turned out to be dumb. (What an idiot Ed Clark would look like today had he allowed the activists to force TD Ameritrade into a deal with E*Trade last summer, right before the latter was swept to the brink by a wave of mortgage losses.)

Mr. Farquharson uses the gentler phrase "relationship investing," which implies a more polite form of activism, and "not necessarily wanting to go around blowing things up." Think of Teachers' relationships with WestJet Airlines or MacDonald Dettwiler and Associates as examples. The pension fund was a large backer of both and helped finance a huge expansion (in the case of WestJet) or bring about a major shift in strategy (in the case of MDA). Both stocks were big winners. The returns on this kind of investing, done mostly in medium-sized companies, can be "25 per cent a year ... with no leverage," Mr. Gibson says.

In a low-return world - the average of 44 Canadian hedge funds tracked by Scotia Capital returned, net of fees, 4.1 per cent last year - that kind of number will capture attention. Some, though, wonder if Panoply's performance can live up to the boast. Teachers is so huge that any serious public company that needs money has to talk to it. "They see every deal," says one former manager at the pension fund.

In his new role at Panoply, Mr. Gibson won't have that luxury. Still, he's confident enough to have put most of his personal wealth into the fund, which has another twist. At most hedge funds, the managers can hit the jackpot on one very big year. At this one, they'll get a performance bonus only if they can beat the equity benchmark on a sustained basis over several years (and they'll be required to plow any bonus back into the fund).

This is based on the novel premise that maybe, just maybe, the customer ought to earn a good return before the manager does. "Most people in our business have forgotten about that approach to life," Mr. Gibson says. "I've had all kinds of advice - 'Brian, don't do this.' " He ignores it because, well, that's why an ambitious guy does when he thinks the rest of Bay Street has got it wrong.