Family businesses hold huge value

Family-controlled public businesses often are viewed as financial dead ends for investors.

The conventional wisdom, especially in the United States, is that because these companies are family owned, their leadership has no interest in creating shareholder value. However, as an active value investor, I have found that many family-controlled organizations are, in fact, highly committed to creating value.

It turns out that there is much to be said for the drive and skill that have allowed these companies to maintain and build value over generations or even over centuries.

VAST HOLDINGS

Some of the most under-researched and undervalued companies in the world are family- controlled holding companies and include some of the biggest public companies in Asia, Europe and Latin America. Although some of the companies and family names may not be familiar to U.S. investors, their products and services certainly are.

Consider a few:

• Under the company name PPR, the Pinault family of France controls some of the world’s top luxury brands, including Balenciaga, Bottega Veneta, Gucci and Yves Saint Laurent.

• Through their family foundation, the Wallenbergs of Sweden have controlling interests in AstraZeneca, Ericsson and Electrolux, among other companies.

• Sibling acrimony notwithstanding, the Lee family of South Korea controls Samsung and its numerous subsidiaries and affiliates.

• With an eponymous holding company, the sixth generation of the Bolloré family controls one of Europe’s top 200 companies, with interests in paper, energy, plantations and logistics in Africa, Asia and South America.

• The Heinekens continue to control the brewing company their ancestor founded in 1864 and today sell more than 170 beers, with 115 brewing plants in 65 different countries.

Freed from the pressure of quarterly earnings reports, the leadership of these family-controlled public companies can make longer-term, potentially wrenching moves, such as exiting from product lines, customer segments or sales channels, bringing in outside expertise or divesting noncore businesses. In addition, with their family assets on the line, careful cash management becomes a priority, as does balance sheet and debt restructuring.

The family-controlled public companies that are most appealing to investors all have one thing in common: Their leadership isn’t content merely to serve as the stewards of capital.

The current generation of owners isn’t simply collecting dividends and conserving assets to pass on the company to the next generation. Instead, they are driven to create value and are willing to consider growth “catalysts,” including strategic restructurings, changes in management, spinoffs and downsizings, recapitalizations, and mergers and acquisitions.

ACTIVE APPROACH

Cross holdings in underlying assets add another layer of complexity, and investors simply may choose to avoid these companies outright. But the rewards can be substantial for investors when families respond shrewdly and aggressively to growth catalysts.

Active value investing in family-owned businesses isn’t a hedge fund approach, focused on finding and profiting from small inefficiencies via significant use of leverage, with the incurrence of significant risk. Rather, active value is an old-school approach for finding companies with real value that are trading at substantial discounts, with a real margin of safety.

This approach requires time and patience. The investor must create bonds of mutual trust and respect with these controlling interests — a process that can take years — and then assess in a clear-eyed way whether management will deliver on its prospects.

The current generation of owners is intensely interested in evolutionary action. These owners are deeply committed to building the value that their families have carefully nurtured for decades or hundreds of years.

I think that the global economy will reward such owners, and the markets will reward investors who make a commitment to their businesses early.

These family-controlled public companies in Asia, Europe, Latin America and other regions aren’t always easy to find, get to know or understand. But with deep analysis, understanding and patience, investors can reap great rewards.

David Marcus is chief executive and chief investment officer at Evermore Global Advisors LLC.