Activist investing has turned its eye to Wall Street, and at places like Comerica and Morgan Stanley it could lead to firms making changes to banks' business model.
Market watchers say activists — ever wary of near-term returns — may nudge big banks away from low-margin, low-risk, dependable businesses, and into mergers and acquisitions activity to further consolidate Wall Street.
In 2016, investors have bought into Comerica and Morgan Stanley; Citigroup lacks an activist but has Seth Klarman's Baupost Group among its newest shareholders. Morgan Stanley's investor, ValueAct Capital, says it is "supportive" of CEO James Gorman's work. Still, said one source, who asked to not be quoted, banks could be pushed by investors to work less on traditional banking businesses, like mortgage origination, and more on high-margin work like credit default swaps.
"You have an industry that is clearly in flux," said Richard Farley, partner at Kramer Levin and chair of the firm's leveraged finance group. "Different institutions will have to pick out different lanes" in which to operate.
It means activist investors could preside over a reordering of U.S. financial institutions, if satisfying hedge funds' demands makes big banks change (or eliminate) certain lines of business.
Activists could also force some banks to get out of lending businesses that aren't driving enough margin, like lower-middle market debt. This, in turn, could fan out more lending business to multistrategy private equity asset managers, like KKR, which has for years also run a lending business, one source said. KKR declined to comment.