A Little Fund With Big Demands

TCI has moved to the forefront of a new breed of restless shareholders in Europe

When Deutsche Börse first received word earlier this year that a little-known British hedge fund was criticizing its $2.5 billion bid for the London Stock Exchange, the German stock exchange operator barely blinked. After all, it's rare for a shareholder group to have any bearing on such issues in Germany. And given Deutsche Börse's stature as the bluest of blue chips -- its core Frankfurt Stock Exchange unit dates back to 1585 -- few expected the oddly named fund, The Children's Investment Fund Management, to get its way.

But less than six months after first piping up, The Children's Investment Fund Management -- better known as TCI -- and its allies staged an astonishing coup. On May 9, Deutsche Börse's chief executive, Werner Seifert, announced that he was resigning, effective immediately. Chairman Rolf E. Breuer, who is also chairman of Deutsche Bank's (DB ) supervisory board, said he would step down by the end of the year. It turns out TCI, which now owns 8% of Deutsche Börse, actively recruited some powerful partners, including Atticus Capital, Merrill Lynch (MER ), and Fidelity Investments, in its quest to punish Deutsche Börse management for their pursuit of the LSE. "It definitely came as a surprise that the critical shareholders so clearly prevailed," says Herbert Bayer, a member of the exchange's supervisory board.

The investor-led boardroom revolt puts the focus on TCI, a $3 billion hedge fund launched in 2003 by money manager Christopher Hohn. The value-oriented fund takes its name from the money it donates to children's charities. TCI is at the forefront of a new breed of restless shareholders in Europe that are demanding that management create shareholder value, or else.

Deutsche Börse's Seifert and Breuer had resisted Hohn's demand to put the prospective LSE purchase up to a shareholder vote, which paved the way for their unceremonious exit. TCI's only comment about the kerfuffle was a statement saying that it "welcomes" the move. The fund's activist agenda has also been felt in Asia. In November, TCI threatened to seek a management shake-up at South Korean cigarette maker KT&G, in which it is an investor, citing unhappiness with the terms of a stock buyback plan, according to a KT&G manager.

TCI managing partner Hohn earned his spurs as a money manager for hedge fund Perry Capital in London, where he oversaw European investments. Since setting out on his own, he has posted impressive results, mostly by scoring big in European and Asian equities. Last year, when the S&P Hedge Fund Index rose just 3.9%, returns at TCI topped 40%. That helped the fund win the prestigious Fund of the Year award from EuroHedge, a newsletter published in London by HedgeFund Intelligence Ltd. that ranks Europe's best-performing hedge funds.

ROUGH EDGES

Yet TCI isn't for the faint of heart. People familiar with the fund say Hohn likes to take large bets. Investors, mostly wealthy individuals and institutions, must agree to lock in their money for three to five years -- no matter how TCI performs. Big investors include U.S. and European pension funds, insurers, and universities. Fans and rivals alike agree that Hohn has some rough edges. The TCI chief is known to have fired off dozens of demanding e-mails to Seifert -- sometimes several in the same day. City insiders also note his staccato, bullying way of speech. Hohn has retained attorney and Christian Democratic politician Friedrich Merz to represent TCI in Germany, where the prominence of foreign investors has come under fire by some politicians.

What makes TCI unique is its annual donation, through a foundation run by Hohn's wife, of the equivalent of 0.5% of assets under management to charity. That added up to $18 million in 2004. Cynics say it's just a marketing tool, but Hohn has said he hopes to inspire others. Charity aside, TCI is certainly making a name for itself with its contributions to the cause of shareholder activism.

By Laura Cohn, with Stanley Reed in London, Jack Ewing in Frankfurt, and Moon Ihlwan in Seoul

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