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TRUSTED ADVICE – ENTREPRENEURIAL THINKING

Our highly experienced team provides independent corporate finance advice to shareholders and companies at every stage of the corporate lifecycle, from acquisitions and capital-raising through to disposals and liquidity events.

The team also advises clients on their direct investments and will introduce, structure, and monitor direct investments into private companies on their behalf.

 

ADDING VALUE TO YOUR BUSINESS

​We provide corporate finance advice to families and individuals, businesses and entrepreneurs. A key measure of our success is the value we help create for clients and their businesses, rather than the size or number of transactions on which we advise.

This approach has earned us a reputation for offering bespoke, considered and dispassionate advice. Whether you are looking for help with a specific transaction or a business relationship over the longer term.​

WITH YOU ALL THE WAY

Many of our clients appreciate our ability to commit to a long-term relationship to build shareholder value through partnership. Others recognise our meticulous approach in the execution of individual transactions.

​Similarly, some clients simply require expert guidance, whilst others require their advisers to take more of a principal role in the process.

DIRECT INVESTMENT ADVISORY

Our experience of advising families and entrepreneurs on their business and private investment interests has led to the development of our direct investment advisory practice.

We offer a customised origination and advisory service for those of our clients that seek a more focused exposure for their investments, or have more specific sector or geographic requirements, or a longer term investment horizon.

Many of our clients have extensive commercial and business interests and often view their private investing activity as a natural extension of this.

Our wide-ranging experience of working with and advising both corporates and investors leaves us well-placed to advise our clients on their private investing activities.

 

Steinhoff: lessons for the long-term Investor

CONCENTRATION RISK

Unfortunately it seems to take major corporate failures to highlight the virtues and merits of a diversified portfolio. Naturally, investment managers who potentially held such a failure in client portfolios, also choose to trumpet the benefits of a diversified portfolio at such times.

The subject of diversification also raises the active versus passive debate. One of the growing arguments against passive (or index tracking) investing is the inherent concentration risk in particular companies. In the case of the JSE All Share Index, it is Naspers at nearly 20% of the index (with Naspers, Richemont and BHP Billiton together constituting 34% of the index). Certain longer-term investors may be comfortable with such a concentrated exposure, but index investors need to be aware that although they may no longer be at risk of underperforming a particular index, they may be significantly increasing concentration risk.

LONG-TERM ORIENTATION

When investing in a listed company, investors are implicitly placing both their capital and their trust in the company and most importantly, in the company’s management team. Management are ultimately the stewards of shareholder capital and have a critical role to play in determining either the success or lack thereof of a particular investment.

In this regard, shareholder and management interests should be aligned in achieving long-term success. In a short-term oriented investment environment fixated on short-term peer rankings, industry awards and the pressures of chasing fickle inflows, achieving such alignment is increasingly difficult.

One important flag in the Steinhoff saga was of a culture of risk. Key management and executives entered into significant derivative positions and/or leverage to benefit from an increase in the company’s short-term share price movement. Although the argument can be made that management had material ‘skin in the game’, we view this as a misalignment of interest. Management stood to benefit from an increase in the short-term share price, despite potentially exposing shareholders to excessive risk or value destructive deals over the longer-term.

UNDERSTANDING COMPANY CULTURE

It takes time to understand a listed company’s culture. As outsiders, investors are reliant on management interaction, company disclosures or press reports and often an investor’s opinion on a particular company’s culture is based on accepting the status quo.

Paying close attention to a management team’s response to/or treatment of a poor set of results, a particular deal that may not have gone as planned or potentially unethical internal behaviour can often give good insight into the company culture. One notable example was Steinhoff management and executive team’s trading in Steinhoff shares leading up to the announcement of the acquisition of Pepkor from Brait in 2014. When later questioned on why the company was not under ‘cautionary’, Steinhoff’s response was that the ‘advice received was that no cautionary announcement was necessary’. To remain beyond reproach, and specifically to avoid after the fact questioning and insinuations, we would prefer management and companies to always take the most conservative option possible in such instances.

The ideal for the long-term investor is to find a company with a shareholder (both large and small) centric culture who understand and respect that they are ultimately custodians of all shareholders’ hard earned capital.

An even more recent example is the case of a JSE-listed retailer’s write-down of a recent overseas acquisition. Whilst the write-down was expected, the company recently altered their remuneration policy to incorporate ‘return of capital employment’ as a key metric. The write-down has the effect of boosting return on capital employed even if the company profits remain flat. Although the introduction of this metric may well be warranted on a longer-term view, the timing of the introduction in conjunction with the write-down is unfortunate. We have consequently placed our investment recommendation on the company under review.

THE ROLE OF INVESTMENT MANAGERS

In the same way company management are custodians of shareholder capital, investment managers fulfil the same role for clients’ capital. Just as company management are held accountable in cases of corporate failure or poor allocation of capital, investment managers should also be held accountable for poor decisions. All investment managers make mistakes. When mistakes are made, Stonehage Fleming Equity Management spend time examining what investment process refinements could be made or what may have been missed. Accepting that a particular investment decision was a mistake is, in our view, the most difficult acknowledgement for the long-term focused investment manager (even more difficult than a decision to allocate investor capital to a particular company). Analysing and assessing the merits of a new investment is a methodical and process-driven decision, accepting a mistake and taking the appropriate action requires accepting short comings in one’s research or process.

We do not agree that a failed company’s management team or lack/quality of disclosure should be blamed when investment decisions do not work out. The responsibility of the long-term investor is to understand the company where they are allocating client’s capital. As investors, we are quick to judge a management team for a poor deal and would not tolerate an excuse of ‘lack of trustworthy information’ and should therefore be held to the same set of standards as company management teams.

FOCUS ON ORGANIC GROWTH AND CASH FLOWS

We believe it is essential to differentiate between organic growth and cash flows as opposed to ‘engineered’ profit growth. Companies are able to grow short-term profits through one, or multiple, acquisitions which may or may not make strategic sense or be in the best interest of the long-term shareholder. The low interest rate environment experienced over the recent past has been particularly friendly towards acquisitive companies. When companies embark on corporate activity, our preference is for management to have a track record of successful activity and for the acquisition to fall within the acquiring company’s ‘core competency’ (whether this competency is operational, technical or even regional related).

In Steinhoff’s case, the company embarked on a series of global acquisitions over the past five years. The acquisitions, in conjunction with changes in segmental reporting and a change to the financial year end in 2016, made consistent analysis of underlying ‘organic’ growth near impossible. Further to this, it now appears very likely that cash flows and even profit numbers were inflated over the past few years.

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Four Pillars of Capital for the Twenty First Century

Executive Summary

In December 2013 Fleming Family & Partners (FF&P) published “The World in 2043: Wealth Strategies for Intergenerational Success.” In January 2015 FF&P merged with Stonehage to form one of the world’s leading independently owned family offices represented in eight jurisdictions, offering a wide range of investment and family office services. This follow-on report contains the input from a survey conducted during 2015, which benefited from 85 responses from 78 families and advisers; 22 of the respondents were from the “Next Generation” (aged 18-25).

Since the financial crisis in 2008, there has been increased scrutiny of the rich and of the perceived widening of the gap between he “haves” and “have nots”. There have been moves by various governments to increase tax revenues and what might previously have been considered efficient tax planning is now regarded with suspicion and even opprobrium. In light of this public and political sentiment, families have a renewed focus on their responsibilities as stewards of capital. The findings of our new report show the majority of Ultra High Net Worth (UHNW) families are seeking to strike a balance between preserving and growing the assets they are able to hand on to members of their own family and ensuring that they do this in a socially responsible manner. Giving back to society and local communities is important to these families.

In this context, we find there have been subtle but highly significant shifts in attitudes, which suggest a change in the way families approach the long-term management of their wealth and their legacies. A substantial majority of respondents believe quite strongly that great wealth can only be preserved across generations if it has a defined purpose and is used not only to benefit those who inherit, but also to make a positive contribution to the community in which they live and to the wider society. They also believe wealth is only sustainable if the family has the skills and experience to respond to the challenges and opportunities of an uncertain environment. These views were even more strongly held by the Next Generation, suggesting they will become more central to the management of family wealth.

The impact of this change of emphasis is likely to be:

  • A greater desire for active participation in direct investment opportunities,
  • An expansion of philanthropic activities which play a key role in the development of family culture; and
  • More focus on passing down the intangible aspects of the legacy, the experience and values of the founders.

From the many responses, concerns and ideas from the families that we spoke to for this survey we have tried to group these themes around four “pillars of capital”. In addition to the purely financial pillar, we identified these as intellectual, social and cultural. As the report will show, these Four Pillars all support a family’s success and its legacy; reliance on any one, or a reluctance to embrace the benefits of all four could conversely be detrimental to a family’s long-term interests. The four can be defined as follows:

FINANCIAL CAPITAL

Financial Capital comprises those tangible assets, business and intellectual property of the family which have quantifiable financial value.

INTELLECTUAL CAPITAL

The Intellectual Capital of the family is its accumulated skill, knowledge, experience and wisdom, which it can apply to the management of its wealth, its contribution to society, the individual fulfilment of family members and the collective wellbeing of the family.

SOCIAL CAPITAL

This is the way in which the family relates to and engages with the society and the communities in which it lives and operates. It includes social positions and the networks which help the family to use its wealth and other assets to the benefit of society and the good of the family.

CULTURAL CAPITAL

A family culture brings the family together by identifying shared perspectives and themes in the way family members conduct their lives, their approach to business, the way they treat others, the way they contribute to society, their attitude to wealth and the things they value.

In our research for our “The World in 2043” report we spoke to families still reeling from the aftermath of the global financial crash and, as such, found that their primary focus was a protective, conservative one of preserving their Financial Capital. Our research for this follow-on report has taken place against a background of economies beginning to recover from the global downturn and return to growth (albeit at far lower levels than seen before the crash), and the focus of families has shifted with this growth. Despite the obvious risks in the current environment, families are now taking a longer term view and there is greater emphasis on growing capital as opposed to merely preserving it. We are beginning to see that UHNW families are becoming more entrepreneurial and willing to accept a degree of risk, where the opportunity merits it. There is also some indication that wealthy families will accept higher taxes, provided that tax rates do not create a disincentive to wealth creation.

Beyond the Four Pillars, the principal findings of our new report are:

  • 71% of respondents listed capital preservation as the greatest concern but capital growth and succession planning ranked joint second at 57%, amongst the respondents to the main questionnaire.
  • Concern about income varied significantly between the Next Generation respondents and the main respondents (57% versus 34%), suggesting that the future stewards of family wealth are more anxious than their parents about income provision.
  • Family disputes and breakup were seen as the principal risks to long-term wealth, along with lack of planning. Poor investment management was the top concern of the Next Generation, though only 21% of core respondents cited it as a top three concern.
  • 82% of all respondents believe that there is a link between preserving wealth and benefiting society. This has major implications for business, investment strategy and philanthropy and has required families to be more structured in passing down their values.
  • 65% of Next Generation respondents thought the financial crisis had changed attitudes to the wealthy and wanted to ensure there was a balance between having wealth and contributing to society.
  • Private foundations and direct giving are the most common form of philanthropy but impact investing, and microfinancing are popular alternatives.
  • Many felt that their family had a defined set of values; this contrasted with 56% of the Next Generation who did not believe this to be the case for their family. According to our survey, only 6% of the Next Generation felt involved in developing their family’s code of conduct.
  • Real Estate remains the asset class of choice for wealthy families to hold for intergenerational wealth preservation and growth with Equities and Private Equity deemed to be the next most interesting asset classes.
  • The question that produced an intense and stimulating debate was “has your family agreed the purpose of wealth?” and much of the content of this report was generated through discussions on this topic.

We are grateful to all the contributors to this report for the time and insight they have given us.

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The Role of Active Management in a Modern Portfolio

In short a passive fund seeks to replicate the relevant market index, rather than select individual stocks, so that the performance of the fund will be in line with that index, less any management or transaction costs, which are generally mall. It could be one of the main stock market indices, such as the S&P 500 for US or the FTSE 100 for UK companies, or one representing a smaller subset of the investment universe based on a particular sector or investment style.

To read more please download the Know How Bulletin

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Approach

Our approach is rooted in a deep and practical understanding of the family, its wealth and wider circumstances. We help families develop and implement their plans to pass on an enduring legacy.