Shareholder activism in the United States and worldwide was noticeably down in 2020 when compared to 2019, and that decline was largely due to the impact of the coronavirus (COVID-19) pandemic. However, for US Securities and Exchange Commission (SEC) registered closed-end investment funds, COVID-19 had the opposite effect. In the wake of the market dislocations that were driven by the COVID-19 pandemic, shareholder activism at closed-end funds was up noticeably in 2020, with closed-end funds experiencing more activist campaigns and proxy contests than in any other year between 2008 and 2020.
While shareholder activism at closed-end investment funds is not a new development and can be traced back to at least the early 1990s, it has historically been a niche area of shareholder activism dominated by a very small group of activist investors that target closed-end funds for the primary purpose of unlocking the discount between a fund’s share trading price and its per-share net asset value (NAV).
The COVID-19-driven market dislocations that occurred in March 2020 resulted in a significant, though relatively short-lived, widening of the discounts between a closed-end fund’s share trading price and its per-share NAV. This widening of the average NAV discount for US closed-end funds, which came close to the previous all-time record high set in the wake of the 2008 financial crisis, created an attractive opportunity for activist investors to accumulate large positions in the closed-end funds most impacted by the market dislocations and, thereby, lay the groundwork for activism campaigns to pressure closed-end funds to pursue liquidity events like self-tender offers that would allow activist investors to monetize such NAV discounts.
It is possible that the success that activist investors had during 2020, in the wake of the COVID-19 market dislocations, in pursuing proxy contests and other activism campaigns at closed-end funds and in driving the monetization of the funds’ NAV discounts may encourage more activism campaigns against closed-end funds, including by activist investors that heretofore have not targeted closed-end funds. It is also possible that the experiences of the numerous closed-end funds that had to respond to campaigns waged by activist investors in 2020, and the concessions that some of those funds agreed to make to avoid costly and distracting activism campaigns—including agreeing to a liquidity event to facilitate the monetization of the NAV discount sought by the activist investor—may be a “wakeup call” that closed-end funds need to more actively and regularly prepare for shareholder activism in a manner more akin to the approach that, in recent years, has been followed by larger, publicly traded operating companies.