Each week, a professional investor tells us where he’d put his money. This week: Joe Bauernfreund, British Empire Trust.
Family-controlled investment-holding companies are firms where a single family has a board presence, or at least a large shareholding, and can exert a fair degree of influence on the business. They often have a diversified portfolio of listed and unlisted investments. Often, concerns about family control and perceived lack of transparency and geographic and sectoral diversification means that such companies are ignored by investors, which may mean shares trade at sizeable discounts to net asset value (NAV).
However, long-term returns from such companies often outstrip that of the market, in part due to the opportunity for management to create value for shareholders through dealmaking in these firms’ investment portfolios. When assets are sold for a good price, you not only get a boost to the firm’s NAV, but the discount between the share price and NAV may close as investors’ interest is piqued by the deal and the prospect of further potential sales come to light.
Wendel (Paris: MF) is a French holding company controlled by the De Wendel family, with a portfolio diversified across Europe, Africa and North America. Unlisted assets account for 54% of the portfolio, and this is where we see most potential. Management has stated that four of the unlisted companies, accounting for 44% of NAV, are candidates for an initial public offering (IPO), with a potential listing before the end of 2018. IHS is one of these candidates and makes up 13% of Wendel’s NAV. It is capitalising on the fast-growing demand for telecommunication services, with revenue almost quadrupling over the past two years. Wendel has been a key driver behind this success, being the largest shareholder in terms of voting power.
The Agnelli family is best known for its investment in Fiat Chrysler (FCA) through Exor (Milan: EXO), its holding company, but FCA accounts for only 28% of Exor’s NAV. Many other parts of the portfolio are overlooked by investors, such as ownership of PartnerRE, a reinsurer, and stakes in CNH Industrial, Ferrari and Juventus Football Club. Management has created shareholder value over the years by simplifying the holding structure and share classes, and diversifying the portfolio. We believe the current 23% discount can narrow.
Hudson’s Bay (Toronto: HBC) is a Canadian retailer in which chairman Richard Baker and his family own an 18% stake. The company owns the majority of the real estate it operates from and has set up two property joint ventures to hold these assets. It has sold stakes in these at prices that would value HBC’s interests at more than C$16 per share, versus a current share price of around C$11. We believe listing one, or both, of these joint ventures will give the market a clear insight on the value of the properties, which should thus be reflected in HBC’s own share price.