“University of Michigan to invest $126 million in four global private equity funds” was a headline that recently popped across my Bloomberg terminal. Skimming through the article, I discovered that the new Wolverine investments would be deployed in private companies throughout Latin America, Asia, and Europe. Wow, I thought, this move isn’t all that different from some of the portfolio moves we’ve made over the last year. Private companies, you ask? That’s correct. Although, as I’ll discuss below, we’ve chosen a less direct route to build such portfolio exposure.
Broadly defined, private equity investments are those made in operating companies that are not publicly traded on a stock exchange. Strategies focused on private equity run the gamut, but the primary subcategories include leveraged buyouts (LBOs), growth capital, distressed investments, and venture capital. The first three of these strategies generally involve investments in more-mature private companies (investments that fund acquisitions from current shareholders in the case of LBOs, expansion capital for an existing ownership team, and financing for a “rescue” or turnaround situation). The last subcategory, venture capital, involves investments in earlier-stage companies. These include startups, where financial track records or stable revenue streams have yet to be established. In most cases, private equity investors seek to actively add value to their portfolio companies and eventually prepare them for a “liquidity event” in which they can realize returns on their efforts. These events include things like the private sale of a company to a strategic buyer and the listing of a company on an exchange via an initial public offering.
Private equity deals, for a variety of reasons (many of which are regulatory in nature), are typically only made available to institutional or high-net-worth investors. Most offer their investors very limited liquidity (that is, you can’t access your funds for long periods), so they are generally only appropriate for investors with long-term (>5-year) time horizons. The allure of private equity, for those who can access this asset class, is a broader opportunity set and potentially greater expected returns than those available in traditional stocks and bonds. As such, many of the country’s largest institutions make private equity a key piece of their portfolio allocation pie.
In the case of U of M’s $10 billion endowment, the ninth largest among all universities nationwide, what’s classified as private equity and venture capital accounts for over 25% of its overall asset mix (see Figure 1).
Although our team is regularly pitched different private equity fund offerings, we generally prefer to gain exposure to this asset class via publicly listed investment and holding companies. We believe that this gives us the best of both worlds in that we can access LBOs, growth capital, distressed, and venture capital “deals” without having to accept the illiquidity tradeoff. This “piggyback” strategy with established listed holding companies also enables us to benefit both from the highly specialized due diligence teams and from access to deals inherent in such investment companies.
For a closer look at our approach, Figure 2 illustrates some of our recently held portfolio positions with meaningful private equity exposure. Our investor spotlight this month features a deeper dive into one of these names, Sweden-listed Investor AB. The others, which I’ll highlight below, cover a wide range of geographies, sectors, and private equity subcategories.
Dundee Corporation, one of FIM Group’s “deep value” investment company holdings (i.e., a portfolio position trading far below our estimate of its sum-of-parts), consists of approx-imately one-third listed holdings and two-thirds private equity investments. The latter includes an eclectic mix of venture capital, growth capital, and turnaround situations, including TauRx Pharmaceuticals (a neuroscience company working on Alzheimer’s cures) and Blue Goose Capital (an organic beef, chicken, and fish producer). Part of Dundee’s current corporate strategy is to bring several of its more mature private equity holdings to liquidity events. This, management hopes, will help “prove” the value embedded in its portfolio (and not currently reflected in its share price). In the case of Blue Goose, Dundee announced back in February that it is working on a transaction that could see the company listed later this year.
A French Duo
Wendel Corp. and FFP Group are a pair of France-listed holding companies that, like Dundee, also combine listed companies and private equity investments in their portfolio mix. Wendel’s strategy has taken on more of an international flavor since 2013 and now includes top-tier, private companies like IHS, the leading provider of telecommunication tower infrastructure for mobile phone operators in Africa. IHS has been growing at more than a 20% annual rate over the last five years and now manages more than 23,000 towers across five African countries.
FFP Group, the investment vehicle for the Peugeot family, generally makes minority stake investments in other family-owned companies. These hold-ings complement its long-standing 10.4% stake in PSA Peugeot Citroen group. Given its automobile legacy, it should come as no surprise that one of its private equity holdings is an invest-ment in Sanef, the France motorway operator that was privatized in 2006. Sanef runs a network of roads with highly strategic locations, including four of the six highways providing access to Paris.
Harris and Harris Group (H&H) focuses largely on providing venture capital to technology and life science companies. D-Wave Systems, for example, is a firm started in 1999 that develops super-conducting quantum computers for the likes of Google, NASA, and Lockheed-Martin. These computers, which are rented for millions of dollars each per year, aim to tackle complex pattern recognition, logistics, and optimization challenges that ordinary computers simply lack the power to efficiently solve.
Another H&H portfolio company, Metabolon, is an innovative company focused on metabolomics, or the study of the small molecules underlying all biological systems. It combines diagnostics and data processing technologies to advance developments in areas like precision healthcare.
For example, its QUANTOSE IR is a laboratory-developed test that measures insulin resistance and may be able to better diagnose prediabetes in patients.
Vietnam is a frontier market where we believe the long-term prospects are quite bright. A young, well-educated work-force, strengthening trade relationships with major economies like the U.S., and a government gradually turning more market-oriented are just three of the “macro” reasons we are looking for investment opportunities there. With London-listed VinaCapital Vietnam Opportunity Fund (VOF), we believe we’ve found a good partner to expose us to high-quality, reasonably priced investments in that country.
With a still relatively undeveloped public equity market, VOF looks to private equity deals for part of its portfolio mix. Management has recently been shifting more of its portfolio “pie” from real estate to private equity, so we expect this weighting (now about 15%) to grow over the next few years. An example of the kinds of private equity investments VOF looks for can be found in An Cuong Woodworking. An Cuong manufactures a wide range of wood and laminate paneling, flooring, and furniture with a strong commitment to sustainable environmental and social practices. With VOF’s growth capital injection and managerial expertise, An Cuong expects to take its current $70 million business to the next level.
I hope it’s clear that our team agrees with University of Michigan’s and other leading endowment funds that global private equity investments can improve a portfolio’s diversification and return profile. Regulatory constraints and tricky access to deals can make finding suitable investments in this area challenging. With publicly traded holding companies like the ones noted above, however, we can gain ownership in world-class private companies. And, unlike the traditional route to private equity, we can do so while maintaining the flexibility to sell, should conditions warrant.
For the past two years, I have mentored the Rotary “Interact Club” at the local high school. The primary goal for these 30 to 40 students is to collectively give their time and energy through serving the community. Over the past year the students donated a combined 300+ hours helping various organizations raise money and awareness for local charities. In addition to volunteering time during their busy school schedules, they raised $675 for Heifer International via a school-wide fundraiser. In addition, the local Rotary Club, which supports Interact, matched this for a total of $1,350! These funds purchased the following for underdeveloped countries:
1 biogas stove; 1 heifer; 1 water buffalo;
2 llamas; 1 tree seedling; 1 hive of honeybees; 1 flock of chicks
>span class="s1">Passing the “giving torch” is one of the greatest gifts we can instill in our youth. Most equate giving to monetary donations, yet giving our time and talent can also be rewarding and just as effective. Teaching this at a very young age (as early as age 4 to 5) instills a behavior they will carry through the rest of their lives. I’m a Rotarian of almost 20 years, and my children have served a variety of organizations, including the Maui Food Bank, the Maui Humane Society, the Ka Hale A Ke Ola Homeless Resource Center, the School Supply Drive, and the Bailey House Museum. Mind you, they rarely went willingly, as “serving others” was and is not considered a good use of time for a young child, especially a teenager – most prefer socializing, going to the beach, or being plugged in to a favorite electronic device. Today I’m happy to say they choose to give their time to various charities in their communities. Getting them to this point was no easy task, yet witnessing the outcome has been well worth the effort!
For those with little to no time to share, monetary donations are also needed to allow many wonderful charities to do good work on their behalf. There are a variety of ways I encourage clients with philanthropic intentions to consider: an outright donation of cash, highly appreciated stock (to avoid paying capital gains tax), or for those over 70½ a portion or all of their RMDs (Required Minimum Distributions from IRA accounts). For age 70½ and older individuals fortunate enough to have “required” income (up to $100,000) they don’t need, donating some or all of this directly to one or more IRS-approved charities can offset above-the-line adjusted gross income, which may provide greater tax savings over outright donations of cash or stock.
Regardless of the form of your donation, I suggest you involve your child, grandchild, a niece, or a nephew. Instead of a material gift, suggest he or she think of a charity they would like to donate to, and make the donation on their behalf. Perhaps even double the donation by matching what they’re willing to give from their own pocket. In our family we donate a specified amount every year to one or more charities and involve our children in the selection process.
Of course, seeking the guidance of a professional tax preparer, or one of our Certified Financial Planners, is highly recommended before deciding which donation is most beneficial. If you have any questions about charitable donations, or need assistance with planned giving, please call our office to schedule an appointment.
Understand that the intent of this article is not just about “giving.” Rather it’s about getting our youth involved in the process, and instilling the value and joy of giving. By involving our youth, we teach compassion to those less fortunate, fill a need in the community, and pass the “giving torch” to future generations.
Investor AB (Ticker: IVSXF, investorab.com,
Wallenberg.com, Bloomberg, economist.com, ft.com)
Share Price | Market Capitalization
06/20/2016 275.60 SEK | 212.495B SEK | SEK/USD = 0.121059 | USD/SEK = 8.2602
André Oscar Wallenberg founded Stockholms Enskilda Bank (SEB) 160 years ago. It was 1856, and the 30-year-old naval officer had just returned from the United States with an entrepreneurial spirit, plus a book on banking. That’s is how this story begins.
During a multidecade financial crisis, the option to force liquidations of various industrial companies was presented to him; time and again, the challenging decision to instead take on active ownership at these firms was the course set. At one point the Wallenbergs employed 40% of Sweden’s industrial workforce – with their companies valued at roughly 40% of the entire Swedish stock market. Today their companies still make up nearly one-third of the Swedish stock market.
Now the fifth generation carries on the Wallenberg legacy via Investor AB, FAM AB, and various family foundations. A triumvirate of sorts – descendants Jacob, Peter, and Marcus – have split their roles, each taking on different aspects of the family business. All the while they have worked together setting the foundation for the sixth generation to carry the torch.
The Wallenberg Family has recently been described as “convivial and modest,” worth perhaps a billion dollars but actually in control of hundreds of billions. Family foundations typically hold their wealth and keep individual aspirations in check, paying out 80% of their distributions for charitable purposes. The Wallenbergs plan to give roughly $250 million to scientific research and education each year, and have in fact given a whopping $3.25 billion since 1917.
The family’s guiding principles have been honed with each successive generation. A few of their key philosophies are worth mentioning in detail:
Investor AB is their primary loci, consisting of 20 core holdings:
In addition, Investor AB pays what we believe to be a sustain-able/defensible dividend that, given their conservative nature, should grow steadily through market cycles.
>span class="s1">Investor AB is now 100 years old, and FIM Group believes that the next 100 years can be just as prosperous as long as the Wallenberg family remains true to its principles. As always, we will remain diligent and keep an eye on management and its actions.
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