29 July 2019

Better value in listed equities

Institutional money’s latest fad after a crowded drive for infrastructure assets is to pile up again into private equity. There is ever more money flowing in on dubious TRI promises (and the delusion that PE funds are not listed and thus not a year-end valuation issue) than on investment ideas.

This pushes up prices of non-listed assets to ridiculous levels at 10x EBITDA or more, so that the only way out of this competition for assets is to bleed those assets from day one of the purchase and throw debt at them to spruce up returns. Debt at 6x EBITDA (whatever the definition of EBITDA is) is common, which will not survive the first blow to GDP growth.

Why would any wise investor commit his good money (or for that matter third-party money entrusted to him with fiduciary obligations) in what is nothing but a macro-sized Ponzi scheme, leaves us begging for an explanation.

With our narrow thinking as listed-equity promoters we wonder why one would pay a private equity fund a fortune to be eventually losing money when it is simple enough to buy into a listed holding company that will invest into cheap listed assets, avoid gearing up the parent holding company, support management on strategy, take a long-term view unencumbered by a disposal calendar and focus on a dividend income high enough for the holding company needs and low enough so as not to be destructive for the listed asset.

The differences between a listed holding company invested in listed assets and a PE fund are: a) that of the time perspective (the PE fund offers a silly contract as the assets have to be sold after 5 to 7 years for the fund to close, whereas listed holding companies have no such constraints), b) that of transparency (listed assets remain the best way to know what is under the bonnet and whether the managers of the fund are worth their salt), and c) of liquidity on the spot.

Listed holding companies have qualities that should be sought after, so that their discount to NAV should contract. It has not.

This offers a phenomenal opportunity for genuinely long-term investors to buy and go fishing. The returns on liquid listed holding companies are bound to be fabulous if one gives them the 5-7 year time span accorded to PE funds. Remember too that listed holding companies will do the asset management job for free.

Below is a list of 6 holding companies made of essentially listed assets. These are de facto quasi family offices. Industrivärden (not covered for now) would also fit that bill. Buying into this €83bn universe would ensure a 2.8% return with highly diversified but well-chosen assets.

The same universe has outperformed over the last three years (7-year relative performance in last chart…) and offers the safety net of still trading at an average discount of 20% to net assets.

Transparent, quality private equity at no cost can be had merely by buying into this universe.

Holding companies with mostly listed assets

Relative performance of above holding companies – 7 years