value and opportunity

Kinnevik is one of the more well-known “typical” Swedish investment companies. Founded in 1936 and still controlled (via A shares with multiple votes) by the 3 founding families, Stenbeck, Van Horn and Klingspor, the company now has a market cap of around 7,8 bn EUR.

Originally, farming, forestry & industrial were their main businesses but Jan Hugo Stenbeck, who unfortunately died in 2002 at the age of 59, transformed Kinnevik into a more “modern” company.

One specific feature of Stenbeck was that he didn’t only invest in listed companies but also helped to create new companies or invested in a very early stages. This is from Stenbeck’s obituary in the annual report 2002:

As one of the leading entrepreneurs and visionaries of his generation, he started hundreds of companies in his lifetime. They ranged from a college sweatshirt business established in 1963 with 10,000 customers and less than US$1 million in annual sales to Europe’s leading alternative telecommunications provider with over 16.8 million customers and US$3.7 billion in annual sales. All the businesses share several common features – they all break monopolies in order to provide people with choice, grow sales aggressively, are highly competitive businesses with low cost structures, and they all aspire to be“best in class”.

When he died in 2002, suddenly his oldest child, Cristina Stenbeck had to replace him at the young age of 24. Against many expectations over the past 14 years or so she successfully transformed Kinevik into a technology/growth oriented investment company. She disposed most of the remaining industrial assets and focused on new sectors like E-Commerce. The most prominent result is the 31.7% stake in online retailer Zalando.

Track record:

Although you cannot really “buy” the past track record it is still interesting to see how they have done in the past. Just for fun, I compared Kinnevik with a couple of other famous “capital allocators” for the period of the last 20 years. As a peer group I used Investor AB (Wallenberg), Pargesa, Berkshire, Fairfax and Leucadia.

Here is the surprising result:

Over the last 20 years, Kinnevik outperformed this Peer Group by a wide margin. Clearly the price was super volatile: The Stock lost around -90% from their peak in 2000 and again like -60% from the peak in 2007 until the end of 2008.

How does the portfolio look like ?

Starting in the year 2006, Kinnevik reports the holding extremely transparent. I have built this spreadsheet based on their latest report and share prices as of December 12:

So a few things are noteworthy in my opinion:

• Kinnevik trades at a discount of 20% to its sum of parts
• they use almost no leverage
• the portfolio is very concentrated with ~78% in the top 3 share Zalando, Milicom and Tele2

The main companies:

Zalando is well-known especially to European readers. The company is the most succesful European Online fashion retailer. As many similar E-commerce companies, the stock looks very expensive with a 2017 P/E of 87 and P/S of 2,7. On the other hand, Zalando clearly looks like one of the few clear winners in that space with a long runway of growth. So far even Amazon failed to crack Zalando’s prominent position in online fashion and the company grows around 25-30% p.a.

Milicom looks similarly expensive with a 2017 P/E of 85. The company used to be more profitable in the past but seems to have some problems at the moment. The interesting aspect is that despite being headquartered in Sweden, they are mainly active in Latin America and Africa.

Tele2 is the “cheapest” of the 3 big positions with a 2017 P/E of 27 and is a mobile operator mostly in the Nordic, Eastern Europe and Russia. As Milicom, the company used to earn more in the past but seems to have turned around this year.

Milicom & Tele2 are “old holdings”, Zalando is the newest one of the Top 3. Zalando is also the result of Kinnevik’s cooperation with Rocket Internet. Interestingly however, Kinnevik sold its complete Rocket Internet stake in early 2017 but kept the Zalando stake.

To be honest, I would have a hard time to purchase any of these stocks into my own portfolio but this is the result of Kinnevik being a real “growth” investor.

What kind of Holding Company is Kinnevik ?

Some time ago, I had a post on how to look at Holding companies. This is what I wrote back then:

A) Value adding HoldCos

This is in my opinion the rarest breed of HoldCos. Clearly, Berkshire Hathaway is an example or Leucadia. Those HoldCo’s add value through superior capital allocation capabilities of their management. In those cases I would not apply any discount on the underlying assets, however I would be hesitant to pay extra.

B) Value neutral HoldCos

Those are holding structures which exist for some reason, but most importantly are transparent and do nothing stupid or evil to hurt the shareholder. Ideally, they are passing returns from underlying assets to shareholders.

A typical example of such a company would be Pargesa, the Swiss HoldCo of Belgian Billionaire Albert Frère. They are quite transparent and even report their economic NAV on a weekly basisandpass most of the dividends received to the shareholders. Nevertheless, the share trades at significant discount to NAV as their own chart shows:

At the moment, we see a 30% discount for Pargessa. So one should ask oneself, why such a discount exists for such a transparent “fair” holding co ? I can think of maybe 3 reasons:

– The stock is less liquid than the underlying shares
– people do not really trust Albert Frere despite being treated Ok so far
– no one wants to invest into this specific basket of stocks

Nevertheless, one has to notice that even for such a transparent company like Pargesa, a 30% discount does not seem to be the exception.

C) Value destroying HoldCos

Looking at this, I think one can clearly state that in the past Kinnevik clearly has added value. Track record is one proof, but in my opinion the real added value came from a combination of company building, early stage investing and really long time horizon.

Milicom for instance had been founded by Stenbeck in the early 1980ies, Tele2 was created in 1993 and they still hold it. In contrast to a classical VC for instance, Kinnevik is not forced to sell after a fund runs off which in my opinion is a big advantage to maximise long-term shareholder value.

HoldCo Costs

One potential issue for Holding constructs is cost. In 2016, Kinnevik reported total administration cost of 261 mn SEK. Divided by the 2016 year and 72 bn NAV this translates into 0,36% “management” fee for 2016 which is interestingly low compared to any kind of “Venture” or “Private Equity” type of company.

Pro’s and Con’s so far:

Pro’s

– clearly a value adding HoldCo with very good track record
– very transparent reporting
– still family controlled, “new generation” seems to know what they are doing
– entrepreneurial tradition, very long-term focus
– focused investment approach
– low-cost
– trades at around 20% discount
– very good reputation in the Venture Capital area which creates a high quality deal flow

Cons:

• investments themselves are not “value” but “growth”
• stock is very volatile and will most likely lose more than the market in a correction
• CEO changes

Additional observations:

After reading the available annual reports, it is interesting to see that under the influence of Cristina Stenbeck, the company seems to have become a little less aggressive. In the early 2000. Kinnevik went into the DotCom bust with debt in the amount of 1,3 times equity. As of now, Kinnevik has no debt.

Kinnevik’s leadership is sometimes discussed hotly, like for instance in this article. In 2014, the former CEO of Kinnevik Mia Brunell stepped down and was replaced by a guy called Lorenzo Grabau. Lorenzo Garabau’s tenure was however over less than 3 years later. In between, Cristina Stenbeck stepped back from Chairman of The Board to “normal” board member.  The argumentation for this step was interesting in my opinion:

“To travel across the globe, virtually from board meeting to board meeting, has been intense, to put it mildly. As chairman you need to spend a lot of time with administrative work. I feel that my strengths come to better use when I can work closer to and support the entrepreneurs we invest in. That’s what I’m going to focus on now. That has always been my favorite part of Kinnevik, working with the entrepreneurs”, she says.

She took on the role as chairman of Kinnevik, just 24 years old, in 2002 when her father Jan Stenbeck died unexpectedly.

“I feel after so many years at a job, that I didn’t apply for, that there are better ways to use my abilities. I want to do the things I’m best at before I turn 40”, she says.

Another aspect that I found very positive is that Kinnevik seems to value its non listed participations quite conservatively. For instance according to this Reuters article, Kinnevik reduced the valuation of Home24 long before Rocket Internet realized the fact that things were not going so well.

Reputation and Deal Flow

Kinnevik has a very good reputation in Venture Capital circles as an active but patient investor. Other than with listed companies, in Venture Capital access to good deals is important. The really good start-ups can choose who is investing into them. You cannot call for instance AirBnB and invest money into them. Especially in the Skandinavian market, having Kinnevik on board is already a sign of quality for a start-up. Betterment, the US robo advisor is a good example. Lots of financial services company would love to invest into this but Kinnevik got the chance to build up a stake this year.Reputation in this business is clearly a competitive advantage.

What to do now ?

I do like the company a lot and I think it is a very interesting company. I am not so good at “growth investing” myself. I have partly outsourced this to Mathias  in the TGV Partners fund but I would also find it interesting to build up a long-term position in Kinnevik.

On the other hand I am slightly nervous about current valuations in general and as we have seen in the past, a stock market correction will hit Kinnevik and its portfolio companies over proportionally.

Summary:

Kinnevik is a very interesting company. They seem to have a distinctive style of combining Venture Capital with a very long time horizon and very good capital allocation. The long term track record is outstanding and a lot better than more well known capital allocators.

On the other hand, valuations overall in the growth sector look somehow “Bubbly” at the moment. So for the time being I will sit on my hand and do nothing, but Kinnevik is clearly my current top candidate to buy in case of a more significant correction.