Strategic block investing

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Strategic block investing is a hybrid investment strategy generally used by fund managers who aim to play a constructive, active role in unlocking value from public companies through the implementation of financial, operational and governance initiatives from both minority and control positions. Strategic block investors tend to focus on publicly quoted companies but may also pursue more traditional private equity strategies.^[1]

The style and level of engagement by strategic block investors varies. The majority position themselves as “company-friendly” and operate with a high level of engagement. A strategic block fund manager identifies undervalued companies, purchases a substantial block of shares in these companies (of either existing or newly issued equity) and then uses this holding to focus the attention of the incumbent management on increasing shareholder value.^[2] Some strategic block funds will intend on gaining board representation and most will work proactively with management, the board and shareholders on major issues of strategy, capital structure, management and performance. Some strategic block investors are prepared to take aggressive action if their proposals for improving shareholder value are not actioned. Strategic block investors will typically focus their investments in relatively few companies.^[3]

Most strategic block investors employ some of the skills traditionally used by private equity investors, however unlike private equity investors, they specialise in dealing with listed companies, often from a position of minority or sometimes majority ownership.^[4] In order to gain a sufficient minority position in an investee of more than 5%, some strategic block funds will monitor shifts in shareholder ownership to take advantage of out-of-favour or neglected situations that can often offer highly compelling entry valuations, while others will prefer the placement of new equity.^[5]

According to a study by The Journal of Finance, activist block share purchases with the announced intention of influencing firm policies are followed by increases in profitability and abnormal stock appreciation. Moreover, share prices tend to rise irrespective of whether divestitures followed.^[6]