Holdings: a checklist of things to look at!

Why is it fun to look at holdings?

I like to look at holdings as they give the opportunity to do nice investigations, understand their complexity, find hidden assets and also because they are old companies which have a long term approach. They also tend to have solid balance sheets. 

When I am looking at holdings I like to see if they do buybacks as they are usually trading with a discount to NAV. 

This NAV must be adjusted to take into account the fair value of the holdings. We have to do it as holdings use either the market price or the book value to value their holdings, which as we know does not represent the fair value.

All NAVs are not equal: some have some very cyclical business so we need to take this into account. 

The NAV can also be affected by governance issues (repetition of bad investments, no protection of minority shareholders with a lack of checks and balances) in that case a discount must be applied.

Do not forget to look at the holding costs and use it to adjust the NAV.

Look for tricks used to reduce the NAV (discount because of liquidity…).

It is decisive to have a look at the decisions that have been taken place in the past. Some holdings seem to take consistently the right decisions while other ones get it systematically wrong.

Some holdings give out their NAV which is already an interesting information while other ones don’t like to give them (good as it means that there is something interesting!).

Using the buyback yardstick is useful for me as I can’t see why a good management team within a holding would not use this tool if the discount is excessive. Furthermore when we have an owner operator which is buying back shares either directly or through other companies it is always an interesting tell…

Another point to evaluate is how did they perform when they sold assets? What was the exit multiple, what was the internal rate of return? 

A catalyst to follow is the number of IPO’s they have done in the past. It will give us a sense of the rhythm they are trying to follow. We can also look at their timing (was the IPO postoponed until market conditions were good?).

Sometimes it is better to be at the holding level rather than being a minority shareholder of one of their holdings. By being at the holding level you can ensure that interests are more aligned. Indeed, sometimes holdings companies can be very aggressive or smart in the management of holdings where they are the majority shareholders…

Finally why is it attractive to invest in holdings?

Because they can be some hidden assets (self controlling loops, real estate held at cost…) and you get access to some great private companies or to the network of the company which enables them to invest in SME or start ups to which we can’t have access to (and we can usually trust their due diligence).

Cheers!

Jeremy