12 ★ FINANCIAL TIMES Thursday20 February 2020

COMPANIES

T

he past decade has been a miserable one for

anyone investing in the average Italian listed

company. Since February 2010, the country’s

FTSE MIB index has returned a meagre 1.5 per

cent compounded per year, or less than if an

investor had simply bought a 10-year Italian government

bond and headed off for a decade-long excursion to the

beach.

The explanations for this dire performance may seem

obvious. The Italian economy has been stagnant for dec-

ades, the country’s banking sector went through a painful

crisis, and a succession of weak governments have failed to

push through reforms.

But simply glancing at the terrible aggregate perform-

ance of the Italian stock market over the past 10 years

misses the bonanza that has been enjoyed by many of the

country’s largest family-owned empires, which have out-

performed by an often eye-popping margin.

Exor, the Agnelli family holding company, has increased

its value almost seven times over the past decade. Davide

Campari ilano, majority owned by the Garavoglia family,M

is up nearly five times over that period.These perform-

ances exclude dividends, which would make the gap

between the average Italian company and these business

dynasties starker still.

Then there are a number of privately held Italian family

multinational businesses, such asFerrero roBarilla, which

have managed healthy profit growth through interna-

tional expansion as the domestic economy has flatlined. If

they were listed, they would be among the most valuable

in their sectors globally.

There are of course notable exceptions. Ex-prime minis-

ter Silvio Berlusconi’sMediaset as lost more than half itsh

value in a decade, mirroring Mr Berlusconi’s own political

fortunes. Other once-wealthy families with money con-

centrated in industries unable to escape Italy’s downturn

and debt crisis, such as construction and banking, have not

enjoyed the past 10 years at all.

The clear outperformance of certain large family-con-

trolled companies has piqued the interest of academics

and investors. A type of capitalism that was once viewed as

encouraging nepotism and

poor governance is now cited

by some business school pro-

fessors as a model for long-

term thinking and sustaina-

ble practices.

Credit Suisse has compiled

research that argues family-

controlled businesses —

defined as founders or their

dependants controlling at least 20 per cent of the equity —

generate faster sales growth, higher margins and use less

debt to achieve this than regular listed companies.

Family owners, the argument goes, can take a more

long-term view because they do not need to worry them-

selves with month-to-month management of the fickle

concerns of the stock market.

Most importantly, their vast fortunes depend on not

blowing up their business. Outside investors can buy

shares in their companies safe in the knowledge that if

they wake up one morning to news of some ugly event,

such as an accounting fraud, it will cost the family far more

than a minority shareholder.

Yet investors who conclude that just because a business

happens to be family-owned it will do better than average,

are making a risky bet.

The reason many of these family-owned multinationals

do so well is often because they are great businesses, with

valuable brands, high barriers to entry, large returns on

capital and are hugely cash generative.

It is precisely for this reason that these businesses are

able to stay under family control. Bad businesses in gen-

eral consume capital and require constant access to it.

Businesses that require ever greater amounts of capital are

forced to either take on large amounts of debt, or dilute

their shareholders, meaning founders eventually lose

control.

It is no coincidence that many of Europe’s largest family-

controlled companies are in structurally more profitable

industries, such as luxury goods and consumer products.

Far less remain in the world of banking, where successive

crises have washed out controlling families in countries

such as Spain, Portugal and Italy. Backing a family busi-

ness while ignoring the industry it is in can have terrible

results.

The best family-owned companies will continue to out-

perform the rest of the market.Notbecausethey are

owned and managed by families, but because they are

among the best businesses in the world. The dynasties that

control them are far too shrewd to ever give them away.

[email protected]

INSIDE BUSINESS

EUROPE

Miles

Johnson

Keeping it in the family

pays dividends for

Italy’s corporate clans

Family owners’

vast fortunes

depend on not

blowing up

their business

N E I L H U M E— N AT U R A L R E S O U R C E S

E D I TO R

Anglo American s under pressurei

from a hedge fund to increase its

£524m rescue bid forSirius Minerals,

the UK group developing a giant ferti-

liser mine in North Yorkshire.

Odey Asset Management, which

announced it had a 1.29 per cent holding

in Siriusyesterday, said the 5.5p-per-

share cash offer was not enough and

that Anglo could afford to pay more

without damaging its investment case.

“It is Odey’s belief that Anglo Ameri-

can’s current offer does not represent

fair value for shareholders in Sirius,” the

London-based hedge fund said in a let-

ter sent to Anglo and Sirius.

“In particular, Odey notes that Sirius’s

most recent accounts suggest that Sir-

ius’s equity value is £893.1m, a value of

120 per cent higher than Sirius’s board’s

recommended offer.”

Odey said Anglo had not declared its

offer final — meaning it cannot be raised

— because it was concerned sharehold-

ers could block the takeover or a com-

peting offer might emerge.

The deal needs the approval of 75 per

cent of shareholders at a special meeting

on March 3 to go ahead.

“Odey therefore commits to vote

against any Anglo American offer that is

not designated as ‘final’ at this level,” the

letter said. “If Anglo wish to retain the

option to counter bid, Odey accepts that

rationality, and hence also commits

today to vote in favour of any bid at 7p or

above.”

Other big bets byHenry Steel, a port-

folio manager at Odey who wrote the

letter, include a short position inTur-

quoise Hill, theRio Tinto-controlled

company that owns one of the world’s

biggest copper deposits.

Sirius has been criticised forrecom-

mending Anglo’s offer y its army ofb

retail shareholders, some of whom have

ploughed their life savings into the com-

pany and arefacing heavy losses f thei

takeover goes through. Some have said

they will vote against it even though Sir-

ius is running out of cash and has

warned it could fall into administration

if Anglo’s rescue bid does not go

through.

“Odey notes that the very low voter

turnout at Sirius annual general meet-

ings, at the level of 35 per cent, gives

greatly magnified power to Sirius share-

holders who do vote,” the hedge fund

said in its letter.

A regulatory filing publishedyester-

day showed Odey owned most of its 1.

per cent stake via derivatives and only

0.2 per cent in shares. The average price

of its purchases was 4.9p. Sirius argues

the Anglo bid is the best option for

investors and will safeguard the mining

project — the largest in the UK for a gen-

eration — and thousands of jobs.

Anglo declined to comment on Odey’s

letter while Sirius said there was a “high

probability” of it falling into liquidation

or administration if the deal failed.

See Lex

Mining

Hedge fund Odey presses Anglo American to raise rescue offer for Sirius

M I L E S K R U P PA— S A N F R A N C I S C O

Bets on private companies hit the per-
formance ofTiger Global Management’s
hedge funds last year after the group cut
the value of its stakes in start-ups
including e-cigarette companyJuul.
Its stakes in private companies had
“underperformed” because of “mark-
downs in several investments,” the
$36.2bn firm told investors last month
in a letter seen by the Financial Times.
Most of Tiger Global’s private invest-
ment losses came from the decision to
cut its valuation f Juul by half in theo
third quarter, one person briefed on the
matter said.

The letter pointed to “well-docu-

mented uncertainty and regulatory

scrutiny” around Juul, which faces a ris-

ing backlash because of vaping’s popu-

larity among teenagers.

The writedowns represent a rare set-

back for the New York-based firm,

which has forged a reputation as one of

the savvier investors in both publicly

traded and private technology groups.

In 2018, venture capital-style invest-

ments lifted returns for Tiger Global’s

hedge funds after Marlboro maker

Altria aid $12.8bn for a stake in Juul.p

However, since then Altria has been

forced to slash its valuation of Juul amid

rising regulatory scrutiny.

Private investments make up about

6 per cent of the market exposure in

Tiger Global’s close to $11bn public

equity funds, according to a fund docu-

ment. Its separate private equity funds

returned $3.7bn in cash and stock to

investors in 2019, the person briefed on

the matter said.

Investors have recently raised doubts

about the valuations of private start-ups

following a string of disappointing pub-

lic offerings over the past 12 months,

includingUber n May, as well asi

WeWork’s aborted flotation.

Seth Klarman, head of the Baupost

Group hedge funds, said last month that

“robust fundraising” for private equity

and venture capital funds had created

“bubble or near-bubble conditions in

these markets”.

In the letter to investors, Tiger Global

insisted that “the private portfolio has

been a solid contributor to our public

fund returns over time, and this work is

highly synergistic with our venture and

growth investing efforts.”

The letter did not say which invest-

ments Tiger Global had marked down,

other than Juul. The firm declined to

comment.

Founded byChase Coleman, Tiger

Global has not been the only casualty

as scrutiny has intensified over the

heady valuations commanded by the

likes of Juul.

Last week, Japan’s SoftBank,

WeWork’s major backer,disclosed ti

had marked down the valuations of

31 companies in its $100bn Vision Fund

as of the fourth quarter, comparedwith

38 that had been marked up.

Tiger Global’s hedge funds gained 32.

per cent last year and 19 per cent on an

annual basis since 2001, according to

the letter.

Tiger Global said in the letter it had

made investments in the payments

companyStripe nd software groupsa

Databricks nda UiPath n 2019.i

Financials

Private start-ups weigh on Tiger Global

Fund highlights impact

of writedowns including

e-cigarette group Juul

The hedge

fund

insisted

that ‘the

portfolio

has been a

solid

contributor

to returns

over time’

M I C H A E L P O O L E R— I N D U S T RY
R E P O RT E R

Sanjeev Gupta as pledged to investh
€2bn into his steel plants on the Euro-
pean mainland over the next decade, as
part of a commitment by the UK metals
magnate to make hisLiberty Steel
group carbon-neutral by 2030.

The Indian-born businessman told staff
the plans would modernise the facilities,
boost output and help to create a “new
champion in European steel”.
Projects include the installation of
new furnaces at sites in Romania and
the Czech Republic to lower carbon
dioxide emissions, as well as upgrades to
factory lines.
Liberty’s spending commitments
come as pressure grows on heavy manu-
facturers to help the fight against cli-
mate change by reducing their carbon
footprint.
Steel production alone accounts for
around 7 per cent to 9 per cent of direct
emissions from fossil fuels, according to
the World Steel Association.
Other significant polluters include
industries such as cement, chemicals
and glass.
In a sign of intent, Mr Gupta has also
applied thetarget for carbon neutrality,
which means any CO2 emissions are
balanced with offsetting measures, to
his aluminium business,Alvance.
Liberty became the eighth-largest
steel producer outside China last year
with the purchase of seven facilities
throughout the continent from bigger
rivalArcelorMittal or €740m.f
The deal followed a series of acquisi-
tions over the past few years that
has transformed the wider Gupta
family business empire,GFG Alliance,
from a relatively unknown commodi-
ties trading group into a global indus-
trial powerhouse with $20bn in annual
turnover.
However, the rapid expansion of the
loose conglomerate of privately owned
companies has sparkedscrutiny of its
finances.
Liberty said much of the €2bn worth
of initiatives would be funded by
“improved performance of the busi-
nesses themselves”.
“Beyond that, GFG funds investments
in a variety of ways including group
equity and finance raised through tradi-
tional term loans or securitised income
streams,” it added.
This week Liberty completed the
acquisition of abankrupt Indian steel-
maker or £46m after a long court bat-f
tle, the first foray by GFG Alliance into
the fast-growing market.

Industrials

Gupta plans

€2bn EU steel

injection in

green upgrade

N I KO U A S G A R I— LO N D O N

Formula One tyremakerPirelli illw

increase its focus on luxury cars as part

of a three-year plan to cut costs and

increase profit margins.

The Italian manufacturer announced

plans to expand its focus on the pre-

mium market alongside annual results

yesterday. Pirelli, whose tyres are used

by companies includingFerrari,Por-

scheandBMW, reported revenues of

€5.32bn in 2019, a 2.5 per cent rise on

the previous year.

The Milan-listedcompany expects

demand in the prestige sector, defined

as tyres with a diameter of 18 inches or

more, to grow 6 per cent a year until

2022.Demand for standard tyres, meas-

uring 17 inches or less, is expected to

grow around 1 per cent annually over

the same period.

“This prestige part of the market is

doing better,” Marco Tronchetti

Provera, chief executive, told the FT. He

added that there were signs at the begin-

ning of this year that the segment was

continuing to grow. The high-value sec-

tor accounted for 66.5 per cent of the

company’s revenues last year.

“The high-end market is the market

you really want to be growing in,” said

Kai Mueller, vice-president of European

automotive research at Bank of Amer-

ica. He added that the manufacturer

had faced increased competition from

the likes ofMichelin nda Goodyear, but

Pirelli was “more a brand than just a

tyre company”.

Global carmakers ave been strug-h

gling against a backdrop of US-China

trade tensions and slowing economic

growth. In a sign of the difficulties,

French carmakerRenault’s debt was

downgraded to “junk” tatus on Tues-s

day following poor results last year

when the group’s profits were almost

wiped out.

Pirelli aims to cut costs by €510m by

2022, generate €1.5bn cash and increase

profit margins. In 2019, earnings before

interest and tax were €917.3m with a

margin of 17.2 per cent. The company

aims to increase margins to 18-19 per

cent by 2022.

Mr Tronchetti Provera, who has been

in the top job for 28 years, added that

the company’s two shuttered Chinese

factories would reopen next week after

being closed due to thecoronavirus ut-o

break.

China accounts for 12 per cent of

Pirelli’s sales and the manufacturer

expects the €30m adjusted ebit lost in

the first quarter of 2020 to be recouped

later in the year.

Outside China, the company has been

largely shielded from the impact of

coronavirus, which has disrupted global

supply chains and caused component

shortages.

“The effect outside of China in Europe

is zero,” said Mr Tronchetti Provera.

Shares in Pirelli closed 3.3 per cent

higher yesterday.

Retail & consumer

Pirelli sees prestige sector as route to growth

Pirelli, which is facing increasing competition from rivals, expects demand in the luxury tyre market to grow 6% a year John Heng/EPA—

‘The

high-end

market is

the market

you really

want to be

growing in’

‘Sirius’s equity value is

£893.1m, a value of 120%

higher than the board’s

recommended offer’

Legal Notices

FEBRUARY 20 2020 Section:Companies Time: 19/2/2020- 18:54 User:jon.wright Page Name:CONEWS1, Part,Page,Edition:USA, 12, 1