@GSElevator – #1: It’s that time of year again — when children discover that Santa loves rich kids more.
1. Quote Of The Week / 2. Joining The Family Business / 3. 3. China Woes Disguise A Tale Of Two Economies / 4. Interesting Links / 5. Joke Of The Week
1. QUOTE OF THE WEEK
From Bill Gross’ December investment outlook [Janus Capital]
“A casino is an apt description for today’s global monetary policy… Today’s central bankers use Martingale] tactics to their success – at least for now. They bluff or at least convince investors that they will keep interest rates low for extended period of time and if that fails, they use Quantitative Easing with a Martingale flavour.
How long can this go on? …the limit is really the value of the central bank’s base currency.”
2. JOINING THE FAMILY BUSINESS
Investing in family owned businesses is a large and growing opportunity in emerging markets. However, those who would invest in these companies must first understand them.
Almost all of today’s biggest companies came into being through the work of a founder and family. Over time, in developed markets, ownership tends to become dispersed. Less than one-third of the companies in the S&P 500, for example, are still controlled by founding families. The picture is quite different in emerging economies. Approximately 60 percent of their private-sector companies with revenues of $1 billion or more were owned by their founders or families in 2010.
As brisk growth propels emerging regions and their family-owned businesses forward, an additional 4,000 of them could hit $1 billion in sales in the years from 2010 to 2025. If that’s how things shake out, such companies will represent nearly 40 percent of the world’s large enterprises in 2025, up from roughly 15 percent in 2010. Developing an understanding of them, therefore, is fast becoming a crucial long-term priority for would-be investors. What follows is a brief guide to their attractions—and some complicating factors.
The starting point for many family-controlled local companies is a demonstrable, even dominant, “home field” advantage; they have a deep understanding of their countries and industries, as well as considerable influence on regulators and domestic policy.
The very fact that they are family businesses may be advantageous in emerging economies. Where the conventions of commercial law and corporate identity are less developed, doing business on behalf of a family can signal greater accountability—the family’s reputation is at stake—and a stronger commitment to a “through-cycle view” of their businesses. Indeed, the owners’ long time horizons and sense of mission often suffuse the whole organization.
That said, investors need to tread carefully. The resilience of family-owned businesses in emerging markets contains a paradox for investors. Institutional investors approach these markets in search of rapid growth, yet the family-owned businesses they’re considering partnering with are balancing the importance of liquidity against an extremely long view. Founders and families hold their shares for decades.
Some investors have similarly long horizons. But others find that mismatched time horizons can create tensions that undermine strategic partnerships. Exacerbating matters is the volatility of many emerging markets. Many deal partners and portfolio managers have barely experienced a full business cycle, so they struggle to understand and quantify risk, to form a through-cycle view of the opportunities, and thus to partner meaningfully with their peers in family-owned businesses.
The big question for investors in family businesses is, of course, succession. Fewer than 30 percent of family- and founder-owned businesses around the world survive to the third generation as family businesses, and it’s an open question whether those in emerging markets will fare any better. History suggests they won’t. When power transfers from one generation to the next is a window for investment. As succession unfolds, the family must deal with the central question: Is the family the best owner or manager of a company, or is it in business to support the family? Potential partners, investors, and competitors should seek to understand a company’s family tree, ownership models, and current succession processes before drawing conclusions about sustainability.
3. CHINA’S WOES DISGUISE A TALE OF TWO ECONOMIES
China has achieved its self-appointed target of growing at an annualised rate of almost 7 per cent in the last quarter, but the numbers do not tell the whole story. The country’s economic woes are far from over.
For the past 35 years, manufacturing has been the driver of China’s spectacular expansion and an engine propelling the rise of a nascent middle class. Investment accounts for half of aggregate demand so its slowdown makes it even more difficult for the government to achieve the more modest target of 7 per cent growth.
Beijing is clearly tempted to step in with another full-blown stimulus. The official lending rate has already been cut six times this year, and further monetary easing is surely on the cards. That would enable manufacturers and the property sector to continue the investment splurge.
A fiscal boost has obvious attractions. Whether it would be the right step is less clear. Lost amid the turmoil in manufacturing is the story of the quiet rise of the services sector which has helped to offset declines elsewhere in the economy. Last month, services purchasing managers' index rose to 53.6. There are other signs domestic demand is picking up. Property sales have shown a recovery and the thousands of apartments built during the real estate boom are beginning to fill.
Beijing must keep sight of the long-term objective. Rushing to prop up manufacturing and real estate at every sign of market panic would be a mistake. Fiscal policy, if aimed at encouraging domestic consumption, is not a bad idea. But instead of vowing to build another road to nowhere, investment should be redirected at cleaner energy where China has still a long way to go.
4. INTERESTING LINKS
Should people be able to work for $1/hr? [Mises Institute]; If factor returns are predicable, why is there a return gap? [Research Affiliates]; buy Berkshire or Buffet’s stock picks? [Meb Faber]; Climate diplomacy in South East Asia [The Economist]; Robots teach each other to grasp new objects [Technology Review &
];; Incredible: Bezos’ rocket makes a controlled landing [Kottke].5. JOKE OF THE WEEK
