Meet the manager: Where British Empire is finding value

When it comes to extracting an investment’s value, British Empire Trust's Joe Bauernfreund prefers the carrot to the stick

Early callers came in under the radar but, from zero a few years ago, there are now more than 100 American agitators – they prefer the term activist shareholders – cajoling, bullying and besieging European companies. Many of these are in the major league.

Elliott Advisors, a name familiar on these shores largely because of its remarkably successful assault on Alliance Trust, recently tasted high-profile blood at AkzoNobel, the Dutch paint and chemicals firm that bought ICI. Danone, the French food giant, and even Nestlé, the Swiss leviathan, are similarly under pressure from New York hedge funds to improve performance.

Corporate governance in Europe, where management can be even more complacent and self-accountable than here, is seen as ripe for disruption. Moreover, equity valuations are some way below those of the UK and US, which are well-trodden ground for activists.

But not all skirmishes are an open book. Aware of European sensitivities, many activists prefer the softly-softly approach, a style not without reward.

If investment is about hope, these activists have brought a new dimension to the desk of Joe Bauernfreund, manager of the £800 million British Empire Trust. It has a long history of investing in sizeable holding companies – mostly European at present, with Asia also in the mix – some of which have complicated cross-holdings of family ownership or control.

The common thread is that their shares trade at way below asset value and that the families are very rich. Sit at their tables, goes the plan, and you will share the plate or pick up some crumbs. On paper, the case for investment in asset-rich businesses is irrefutable. Yet the price of a thing is the price it will bring, as the old saying goes, and many of these value loaded investments have remained in the slow lane of stock market reward.

In Bauernfreund's words: ‘Some of these assets have been family-owned for generations; they are high-quality businesses… companies that are under-researched, and as a result, obscurity gives rise to under valuations. The market is not sure how to value them. We are in a very long-term game. Some companies we have owned for five, 10 years and even longer.’

Bauernfreund’s asset base may be way below those of the activist hedge funds, but he also has form when it comes to profitable activism. He cites DWS Vietnam, a former Dublin-listed trust, which he bought into at as little as 40 per cent of asset value. British Empire used its 18 per cent shareholding to replace the board. Under the new board, the trust realised its assets and wound up.

In the main, however, he says: ‘We don’t want to behave like a hedge fund. Aggression doesn’t get a good response. We seek to engage in a constructive and supportive manner. Families react well to that.’

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One shining example concerns Aker, a family-controlled Norwegian oil company. When oil prices fell sharply in 2014/15, Aker was at one stage selling at a 40 per cent discount to asset value. Bauernfruend suggested its production side be sold off and the funds reinvested ‘in bargain-priced opportunities' on the other side of Aker’s business, oil exploration.

‘And that’s what they did,’ he says. Production was merged with BP’s Norwegian assets and the successful exploration side ‘is now benefiting from the recovery in oil prices'.

High standards

He agrees that many family-controlled companies will ‘do what they want, when they want. But we’ll only invest in companies that have high standards.’

Aggression may not be his bag, but Bauernfreund has no qualms about investing in activist hedge funds run by people that sniffy Continentals call ‘American cowboys’ – dudes such as Daniel Loeb, the force behind Third Point Management, who delivers gun smoke through his teeth. Yet, after periods on the yoga mats, Loeb also tweets inspirational quotes of the Dalai Lama. Right now he is trying to add to the notches on his gun belt by investing in global asset manager BlackRock and Switzerland’s big daddy, Nestlé.

Loeb has invested more than $3 billion (£2.2 billion) in Nestlé, and has started to niggle management. In late September, it bowed to pressure and, for the first time, unveiled targets for profit margins: 17.7-18.5 per cent by 2020. Early impressions were that Loeb wants more.

Below asset value

Many of Third Point’s investments are trading at way below asset value, Bauernfreund says, and the same reasons attracted him to Pershing Square Holdings, a New York based hedge fund run by billionaire William Ackman.

Ackman is clearly a man who knows how to bet properly. Some 40 per cent of assets in his Pershing Square fund are invested in Mondelez International, one of the world’s largest makers of snack foods and controversial owner of Cadbury’s. ‘There has been a lot of M&A activity in that sector,’ says Bauernfreund.

Significantly, much of British Empire’s assets are invested in closed-ended funds, investments that mean shareholders in British Empire pay management fees on management fees. But these funds are not the sort that private investors might come up with when constructing portfolios in their front room. ‘We only invest in other collective funds when we see an opportunity we can exploit,’ he says.

One successful example is NB Private Equity, a 2006 flotation that started life as Lehman Brothers Private Equity Partners and listed on Amsterdam’s Euronext stock exchange. Its name was changed to NB Private Equity in 2013, a shift in identity that did nothing to win friends and influence people. This is where Bauernfreund came in. Among other things, he persuaded the fund to switch its listing to London and give votes to all shareholders. The share price discount to net asset value subsequently narrowed from around 35 to some 15 per cent.

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Bauernfreund will not find it so easy to elbow his way into the hierarchy at Wendel, a 310-year-old, €6.5 billion (£5.7 billion) French holding company that started life as a maker of stainless steel. However, he may not need to: the Paris-listed enterprise is some 40 per cent owned by family members – more than 1,000 of them – but management is lively and has a time horizon more akin to mainstream investors rather than those of comfortable members of longstanding wealthy families.

Some 60 per cent of Wendel’s assets are listed: companies such as Saint-Gobain, the building materials colossus, and Bureau Veritas – the largest quoted holding, a global quality-control business that dates back to 1828. ‘But it is Wendel’s 40 per cent of assets that are unlisted which are our main interest,’ says Bauernfreund.

He identifies IHS as a prime example. This is a business that owns mobile telephone towers in Africa, where the growth in mobile telephony is remarkable. ‘Wendel has an eclectic portfolio and this deters many investors – they simply don’t know what it is. That’s the sort of opportunity we try to exploit,’ he says. The trust bought its first stake in 2015 and added to it ‘substantially’, in October 2016, when the discount to assets was 40 per cent. ‘It has since fallen to 25 per cent.’

Another investment that he believes will throw up hidden value through initial public offerings (IPOs) is Riverstone Energy, a relatively obscure Guernsey-domiciled, London-listed private equity investment trust that was launched in 2013 and, with a market capitalisation of more than £1 billion, is a constituent of the FTSE 250 index. ‘It focuses on oil-related assets,’ says Bauernfreund. ‘It owns assets in interesting parts of Ontario and the US’s Permian Basin. I expect some of the larger assets will be sold through IPOs.’

The Agnelli dynasty

Much the same logic lies behind Bauernfreund’s seat at the table of another fabulously rich family – Italy’s Agnellis. Once known as Italy Inc, they are the dynasty behind Fiat and much else. Through Exor, their Netherlands-listed vehicle, the empire is going to the breaker’s yard. Ferrari has been hived off and Bauernfreund points to the probable sale of Maserati and Jeep in the US.

Bauernfreund does not profess to have opinions on what some term the ‘big picture'. He adds: ‘I try not to think about currencies. When you buy British Empire Trust, you are buying into a quality portfolio that is truly international.’ Right now, the weighting is in favour of Europe. ‘Europe and its markets are showing decent growth. Investors have come to recognise that the US market is expensive and that European valuations are much cheaper.’

Bauernfreund took over management of the trust in October 2015 and promptly reduced the core holdings from 40 to 25, and introduced gearing. Waiting on the decisions of rich men can be a long game, and over one and three years the trust has been a third-quartile performer against its peers – although it is not a laggard and is beating its lead benchmark, the MSCI ACWI ex USA index. ‘Results have been lumpy,’ he admits, somewhat defensively. Given the nature of the trust, ‘this is to be expected'. 

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