The framework for the group’s activities is determined by the owner’s stated values, risk appetite and stipulated requirements for ownership interests. Ferd’s vision, corporate mission statement and value platform direct the company’s business decisions and accordingly play a key role in the development of strategy.
Ferd Holding AS is owned 100% by the owner and his family, while in many cases the group’s assets and investments have shared ownership. The company measures its return as the increase in value-adjusted equity and dividend distributed to the owner. The owner’s willingness to accept exposure to risk is expressed in terms of the size of the risk of a fall in value-adjusted equity that is deemed acceptable, together with the level of liquidity risk that the owner is willing to accept.
Ferd’s corporate mission statement stipulates that the group is committed to value-creating ownership of businesses and investments in financial assets in situations that enable us to make good use of our expertise and the competitive advantages that result from our family ownership. Family ownership means that Ferd does not need to set an ownership period for our investments.
The group’s strategic development takes place through interaction between the Board of Directors, the Group Executive Board and the management of the business areas. The Board of Directors is the venue for decisions on major issues, such as strategic matters, new mandates and major investments. The returns achieved by Ferd are assessed in the context of the absolute return achieved over time and how this relates to the level of risk exposure that has been involved.
The responsibility for managing Ferd’s assets represents a significant task for the group’s organisation. It is important that Ferd develops its expertise and capacity in pace with growth in its overall assets in order to realise its strategies in a sound manner. The personnel resources available at both the group level and in the business areas give Ferd a sound competitive position in the markets in which the company is active. The group’s continuing growth will depend on Ferd successfully developing its organisation, and making good use of the breadth of the group’s expertise across organisational dividing lines.
Ferd’s capital base is the total of its value-adjusted equity capital and committed borrowing facilities. The capital base has increased substantially in recent years. Ten years ago, value-adjusted equity capital was NOK 10.0 billion and the available credit facility was NOK 1 billion. At the close of 2015, value-adjusted equity capital was valued at NOK 26.6 billion, with an available credit facility of NOK 6 billion.
The approach to risk exposure taken by the owner and the Board of Directors is one of the most important parameters for Ferd’s activities. It defines Ferd’s risk bearing capacity, which is an expression of the maximum risk exposure accepted in the construction of Ferd’s overall portfolio. Ferd’s risk willingness and risk bearing capacity will vary over time, reflecting both the availability of attractive investment opportunities and the company’s view on general market conditions. Ferd uses a set of financial and economic indicators to evaluate what stage the market has reached in terms of the economic and asset valuation cycles. Derivatives and index funds may also be used from time to time to manage overall risk and exposure.
When changes need to be made to Ferd’s overall risk exposure, considerations of stability for the management of the business areas make it important that the changes are carried out without having too large an effect on the strategy of the individual business areas. The allocation of new capital, as well as the reallocation of capital between business areas, represents a systematic approach to making use of the group's capital base and risk-bearing capacity.
Finding the right balance between exposure to market risk and the level of indebtedness is an important part of Ferd’s strategic planning. Ferd has held, and continues to hold, a high exposure of market risk, and maintaining gearing at a relatively moderate level has been necessary to ensure that the overall risk exposure does not become excessive.
Ferd operates with a long-term investment horizon, and this means that the owner can accept substantial fluctuations in value-adjusted equity. The objective is to ensure that if Ferd suffers a permanent loss on any single investment, the loss will not be on a scale that would force Ferd to change the composition of the overall portfolio.
Criteria for the risk of fall in value
Ferd’s allocation of its capital must be consistent with the owner's risk tolerance. One measure of risk tolerance is how large a fall in value in monetary or percentage terms the owner is prepared to accept if the markets to which Ferd is exposed experience a sharp and rapid fall. The risk of fall in value, calculated on the basis of various assumptions, must not normally be greater than 35% of Ferd’s overall portfolio. The risk of fall in value provides guidance on how large a proportion of equity can be invested in asset classes with a high risk of fall in value. The risk of fall in value is measured and monitored with the help of stress testing. Risk of losses is expressed as the potential overall fall in value, expressed both as an absolute amount and as a percentage of value-adjusted equity.
Criteria for financial risk
Ferd’s objective is that its main banking connections will rate Ferd’s creditworthiness as equivalent to ‘investment grade’. This will ensure that the group has freedom of manoeuvre, and that if it needs to arrange financing this will be available at short notice and at low cost. In the spring of 2013, Ferd entered into an agreement with its main banking connections for a long-term committed credit facility of NOK 6 billion.
Ferd Capital’s purchases of businesses and Ferd Real Estate’s investments are project financed through separate holding companies. This means each project is essentially assessed by the market, which protects Ferd’s other capital from some of the financial risk associated with increased borrowing. Ferd’s other assets, principally Ferd Invest and Ferd Hedge Fund, therefore constitute the principal security for the parent company’s loan facilities. Ferd has always paid close attention to liquidity as part of its risk management. We have always held liquidity comfortably in excess of the minimum liquidity requirements that are set internally and in loan agreements at the parent company level.
Ferd works on the assumption that the return generated by financial investments should help to cover current interest payments. It is therefore important that the balance sheet is liquid, and that the maturity profile of assets corresponds closely to the maturity profile of liabilities.
The group stipulates that in normal market conditions at least NOK 4 billion of its financial investments will be in the form of assets that can be readily realised within three months. This requirement is satisfied principally by holding investments in stock exchange listed shares and hedge funds.
Ferd has a conscious approach to currency exposure. If its exposure to any one currency is viewed as either too high or too low, Ferd will regulate this by taking out a loan in the relevant currency at the parent company level, or by using derivatives.
FINancial markets and Ferd as an Investor
Ferd’s investment activities are based on some fundamental assumptions about the markets in which Ferd invests and the way in which it carries out its investment activities. We work on the assumption that financial markets are, on the whole, efficient markets and that there is strong competition for attractive investment opportunities, but that this is not always the case either in general or in all segments of the market at the same time. For this reason, the investment mandates make it possible to take advantage of market imperfections that other investors do not recognise, or which they recognise but cannot or do not wish to exploit. Ferd’s risk management is designed to provide the capacity to take advantage of such opportunities when they arise.
For a multi-faceted operation such as Ferd, it is difficult and probably not appropriate to apply overall investment principles with which every investment area must comply. However, it is appropriate to establish basic principles to ensure that decisions on risk exposure are consistent with Ferd’s vision and values and make use of its comparative advantage.
Ferd strives to:
- Seek out investment opportunities that we can purchase at a price which we believe is lower than the underlying value.
- Focus analysis on the investment opportunity in question, as well as understanding the situation in which it has arisen, in order to evaluate what value Ferd might be able to add.
- When analysing an investment opportunity, attach great weight to the current situation and relatively little weight to assumptions about general market outlook.
- Make it a priority to understand what the expected range of outcomes might be for an investment.
- Identify the worst-case scenario for each investment opportunity and its downside protection in order to evaluate whether it offers an attractive balance of risk and reward.
- Pay particular attention when assessing investment opportunities to the difference between volatility and the risk of permanent loss.
- Never evaluate investment opportunities solely on the basis of an absolute return requirement, but instead seek out investments that offer an attractive expected risk-adjusted return.
- Make investments of a substantial size, but not so large that other activities would be affected if the investment resulted in permanent loss.
Many of these principles are characteristic of what is known as value-based investing, but Ferd also holds growth-based investments in its portfolio and takes a pragmatic view of all types of investment.
STRATEGIES FOR FERD’S BUSINESS AREAS
The objective for Ferd’s business areas is to achieve the best possible return within the risk limits specified by the Board of Directors. The allocation of capital between the business areas varies over time, depending on where the best investment opportunities are thought to be available.
Strategy for Ferd Capital
- Ferd Capital has three mandates:
- Unlisted companies: Ferd Capital is an active and long-term investor in privately owned companies.
- Stock exchange listed companies: Ferd Capital is an active owner of stock exchange listed companies and helps companies to realise their potential.
- Special Investments: The Special Investments mandate enables Ferd Capital to invest in financial instruments relating to most aspects of corporate capital structure, and its investment decisions are not subject to any requirements in respect of ownership interest or influence. Ferd Capital can invest in individual companies, bonds or funds, or can grant loans to companies where the relationship between the return expected and the underlying level of risk is assessed to be attractive.
Ferd Capital’s mandates provide the business area with a high level of flexibility in terms of the types of investment it can make. Common to all the mandates is that they are intended to ensure that Ferd Capital makes the best use of Ferd's competitive advantages. At the end of 2015 the portfolio consisted of twelve investments, of which Elopak was the largest single investment.
Thorough analysis is carried out to ensure there is a good basis for all decisions regarding Ferd Capital’s investments. The most attractive investments are those that offer the highest potential return over time relative to the risk involved and the possibility of realising the investment. The business area has the flexibility to invest in both unlisted and listed companies, including companies that are in an expansion phase as well as more mature companies that have a well-defined business model and strong cash flow. Understanding a company's current situation makes it possible to assess whether an attractive entry price can be achieved.
- Investment type: Equity or debt instruments, principally equity.
- Development phase for investments in companies: The company must normally have completed its establishment phase and have a business model that demonstrates its commercial sustainability. The criteria accordingly relate to companies that are in an expansion phase as well as more mature and established companies.
- Size of investment: Normally NOK 50-1,000 million.
- Industry: A broad range of industries will be considered, but Ferd Capital avoids sectors where value creation is principally driven by specific individual factors.
- Geographical location: Primarily Nordic countries, but with the flexibility to consider the rest of Northern Europe.
With regard to privately owned and stock exchange listed companies, Ferd focuses on creating long-term value for its shareholders on the basis of Ferd’s value platform and competitive advantages. When investing in companies, Ferd Capital strives to find investments where Ferd’s active ownership can add significant value. Strategies for adding further value are developed in close collaboration with each company’s management team and board of directors. Ferd Capital is proactive throughout the ownership phase in assessing the value of continuing to own a company relative to the value that could be achieved by a sale. Before any sale is considered, a thorough process is carried out to assess the case for continuing ownership.
Investment performance is monitored at both the individual investment level and at the portfolio level in terms of the absolute return generated over time and how this relates to the risk exposure the investments represent. Ferd benefits from its long-term balance sheet strength and lack of external factors that might restrict its flexibility, and it has a highly qualified team with extensive experience to help ensure that this target is achieved.
Strategy for Ferd Invest
Ferd Invest is responsible for Ferd’s investments in Nordic stock exchange listed shares, and the business area has a relative return investment mandate. The objective stipulated for Ferd Invest is for the business area to produce a better return than its benchmark index over time. The business area is free to select the shares in which it invests, but shares in medium-sized companies with market capitalisation typically in the range NOK 5 to NOK 50 billion will normally represent the major part of its investments. These shares typically have satisfactory liquidity, while at the same time one can assume that they are not subject to as much investor attention as shares in the major listed companies. In order to permit sufficiently close monitoring of its investments, the business area does not normally hold investments in more than around 20 companies at any time.
It is not sufficient for Ferd Invest to make investment decisions solely by evaluating the potential for growth in share price. What is important above all else is to have a clear understanding of the most important risk factors associated with an investment, and how these risk factors may develop over time.
Strategy for Ferd Real Estate
Ferd Real Estate has elected to concentrate its activities on property development projects, for example residential property developments, construction or refurbishment of office premises, and development of warehouse and logistics properties. These are segments of the real estate market where the business area is confident that its in-house expertise, combined with market opportunities, offer potential to create value.
Ferd Real Estate only considers investments that offer the potential for a return over and above what might be achieved from the performance of the real estate market in general. Development and refurbishment projects offer the opportunity of reward for taking on the greater risk that this kind of project involves. The performance of the portfolio is monitored on the base of the absolute return generated over time, and how this relates to the risk exposure investments represent.
Ferd Real Estate makes most of its investments in the Oslo area, but as a supplement to its core activities, the business area also invests to some extent elsewhere in Norway, and also invests in the international real estate market through managed funds.
Strategy for Ferd External Managers
The Hedge Funds portfolio comprises investments in funds that are judged to have good investment managers and that represent a range of strategies. A key factor in the analysis carried out to select investment managers is differentiating between return created by general market movements and return created by the manager’s performance.
In order to achieve good risk diversification, it is important that the composition of the portfolio should feature a range of funds that generate returns that are not dependent on the same factors. Ferd’s hedge fund portfolio will normally have a relatively small weighting in funds that are heavily exposed to the stock market, since this market is a major factor in determining the performance of a large proportion of the group’s other investments. The objective for Ferd External Managers is for the business area to produce a better return than its benchmark index over time.
Strategy for Ferd Social Entrepreneurs
Ferd Social Entrepreneurs (FSE) seeks to identify talented people and companies that are able to create beneficial change for children and young people. FSE has chosen to apply a focused strategy for its interpretation of what is included in the definition of social entrepreneurship. Social entrepreneurs must play a part in solving social problems while at the same time demonstrating a good likelihood that their activities will be financially self-sufficient over time. FSE supports its portfolio companies with both capital and expertise. FSE spends a lot of time working with each company to help to ensure that all the right decisions are taken in order to achieve the necessary progress and growth so that the targeted social objectives are achieved. There are four different stages to FSE’s involvement with social entrepreneurs, with well-defined targets set for the collaboration between FSE and the social entrepreneur at each stage. It will normally be the case that FSE is represented on the board of directors of the companies in its portfolio. Through representation on the board, FSE can exercise the necessary influence on the company's strategy, management and development.