Letter from the CEO
The value of people
It is the people and their expertise that turns, through day to day work, Ferd’s capital and our other advantages of being a family-owned company into enduring value and clear footprints. With our current organisation and diversification of investments, Ferd has never been better prepared to enter a new year. We are continually seeking new attractive investments. At the same time, we are cautious about increasing Ferd’s overall risk exposure in today’s market conditions.
Ferd’s value-adjusted equity at the end of 2017 was approximately NOK 32 billion, up from NOK 28.8 billion at the end of 2016. This is equal to a return of around 13%, and there is every reason to be satisfied with this result. However, in terms of Ferd’s long-term pursuit of solid value creation, one year’s return is little more than a time lap.
I am pleased to note that good progress was made in a number of Ferd’s business areas in 2017. We are seeing clear value creation at our privately-owned companies, and last year their combined operating profit was NOK 550 million or 28% higher than in 2016. After adjusting for the exciting acquisitions of Saltdalsbygg and Helsport, the organic growth in their combined operating profit was NOK 460 million or about 24%. This is significant progress, and is a result of all the good decisions made by the skilful managers and employees at these companies.
With our current organisation and diversification of investments, Ferd has never been better prepared to enter a new year.
A clear understanding of roles as a factor in Ferd’s success
I took over as CEO of Ferd on 1 August 2017. In this regard, I would like to highlight the importance of the clear understanding of roles that exists between Ferd’s owner and the management. This understanding is crucial for building an organisation capable of making the most of the fundamental advantages that family ownership has the potential to offer. As managers we have great leeway to develop Ferd and the businesses we own within the framework set by our owner and the Board. Major and strategic decisions are raised to the Board, while Johan and the rest of the Board function as a useful sounding partners in relation to the development of a number of aspects of the business. Having such a clear framework and a substantial amount of freedom ensures that our flexibility and predictability are a significant advantage for Ferd.
There are also clear parallels between this clear division of roles and the way in which we operate the rest of our organisation. We employ lots of talented young people – skilled, keen and smart people who share our vision and values. The main tool we use to develop our employees is on-the-job training. We trust them and give them more responsibility and influence as they gain in experience and become more accomplished. Ensuring a clear division of roles is central in this context as well. As a long-term but also impatient owner, we expect the management teams of our portfolio companies to continually improve and develop the businesses they run, while always allowing them significant freedom and ensuring there is a clear division between the roles of owner, board and management.
A good ‘home’ for businesses
One of Ferd’s key goals is for us to be a good home for businesses and for Ferd to be at the top of the list when business owners want to sell part of their company or to find a partner. There is often a lot of interest and good access to funding when a company is put up for sale. What we can offer in addition to funding is our expertise, insight and network, not to mention our flexibility and ability to take a long-term approach. This is a clear distinction between us and some of our competitors.
Ferd’s approach to a value-creating and active ownership has developed over time. It is all about the people, experience, values and culture integrated into a system – resources and skilled individuals that people view as an asset to have on board. We are flexible, we do not have to hold a controlling interest, and we can take a long-term approach to ownership. For us, taking a long-term approach does not just mean that we can own a company for a long time. When any decision has to be made at a company we own, we work to ensure the decision is the right one for that company over the long term. Time will tell whether we own the company for 3, 10 or 60 years. Our attitude is that we will only own a company for as long as we are the best owner for it. We are aware that the time may come when others may be able to replace us as a company’s owner in a way that will be beneficial to its further development. This may, for example, be the case when we have completed our value creation plan for a company or when a company could develop further within a larger industrial group.
What we can offer in addition to funding is our expertise, insight and network, not to mention our flexibility and ability to take a long-term approach.
Regardless of the direction in which stock markets, interest rates and exchange rates move, we are always seeking to invest in new companies. We look for companies that have a competitive advantage that can be developed over time, a strong management team, and skilled people – preferably forming a partnership with other organisations with which we have complementary expertise. Our entry into Fürst Medisinsk Laboratorium in 2017 is a good example of this. This great company has been owned and developed by one family for two generations, and they wanted to bring in a co-owner. We got the opportunity to buy 40% of the company, and are very excited about being invited to take part in this company’s journey. Interwell is a similar example; the company’s 15 founders in Stavanger and Trondheim welcomed us in as co-owners. In 2010 we bought a minority stake of 34%. After four years of testing our partnership, we had the chance to buy a larger stake in the company, which we increased again in 2017 to 64%.
Fürst and Interwell are good examples of situations that traditional private equity funds normally do not consider. They look for a controlling interest in a company they can sell in the next three to five years. Making such a commitment does not always suit a family-owned company or a founding entrepreneur if they are only seeking to sell a portion of their company or to bring in a new partner while remaining flexible in terms of their ownership horizon.
Mestergruppen and Fjord Line are two other good examples of successful partnerships. We have develope Mestergruppen from the sixth-largest company of its type into one of Norway’s largest distributers of building supplies as well as home and cabin concept businesses. As part of this consolidation journey, we have also set up a number of new partnerships over time with business owners who were keen to be part of Mestergruppen and our vision. At Fjord Line, we have worked in collaboration with the company’s majority owner to support the organization in a significant turnaround over the course of the last few years. This has resulted in the company increasing its operating profit by NOK 100 million in 2017.
The need to be cautious but still seize the right opportunities
Ferd Real Estate has, in line with the market over the last two to three years, delivered strong results, and in 2017 they achieved a return of 15%. We have used the strong market over the last 12-18 months to sell a considerable amount of real estate, and in 2017 we sold real estate assets and residential properties in our projects totalling approximately NOK 1.2 billion. In the residential real estate area, we brought in partners both to reduce our exposure and to complement our own expertise. Although we have reduced our overall exposure to real estate, we continue to look for attractive investments that suit us.
Ferd Invest achieved a return of approximately 6% in 2017, which is weaker than its Nordic benchmark index. We reduced our risk exposure in this area as well in 2017 by allocating NOK 1.5 billion out of the portfolio. With its liquid and scalable portfolio, Ferd Invest plays an important role in relation to capital allocation and risk management at Ferd. At the same time, Ferd Invest has contributed with strong absolute returns from the Nordic stock market for many years.
We achieved good results from our investments with external managers in 2017, which help us to spread our exposure in a scalable manner. As managers of a single family’s entire portfolio, we believe it is important for us to have exposure to geographies and value drivers that are different from those we can identify in our region. It is consequently important for us to have specialist internal expertise in selecting external managers.
One of the things we learnt from the financial crisis is that it is difficult to do private transactions when the market is tumbling or very turbulent. Buyers and sellers find it difficult to agree on price in these situations. For a long time, we have therefore worked on how we can transfer our long- term and active approach to owning and investing in private companies to how we assess listed companies. We currently own between 5% and 20% in listed companies such as PGS and Scatec Solar in Norway, NKT and Nilfisk in Denmark, and Benchmark Holdings in London.
The situation in the oil service industry is starting to look somewhat brighter, with good progress for Interwell in particular. It is, however, too early to say that the demanding times for Aibel and PGS are over, even though we see signs of improvement quarter-by-quarter. Our ownership in these companies are also good examples of how we have stood firm through the downturn; we have allocated considerable time and resources to supporting these companies at a time when their market value has fluctuated. The downturn has highlighted how important it is for Ferd as a system not to have all our eggs in one basket. This also gives us the capacity to make the right long-term decision when things are at their worst. Over 1,000 people at Aibel and PGS have lost their jobs in recent years. This has not been easy for anyone involved, and it hurts for us each time we have had to reduce staffing levels. However, in each case, doing so was absolutely necessary to strengthening the company’s competitiveness.
Better quality of life represents significant value creation
In everything we do, we regard value creation as more than just a question of creating financial value. This is particularly clear for Ferd Social Entrepreneurs, which creates value primarily by enhancing people’s quality of life. We encourage this value creation through our continuing work to support small and medium-sized social entrepreneurs. Last year we saw the social entrepreneurs with which we work make a positive, life-enhancing contribution to the lives of more than 740,000 people, and for more than 20,000 of these the contribution was life-changing. This is an enormously positive change for lots of individuals.
Ferd’s strategy in this area has gradually expanded from acting as a development partner to include potentially making equity investments in social entrepreneurs. We have provided Unicus and Gammel Nok with equity funding to support them through growth phases that will enable them to make an even greater social impact.
Greater relative strength in times of turbulence
We need to remember that Ferd has enjoyed strong tailwind from the markets over the last 8-9 years. Although we have got a lot of things right, we cannot ignore the fact that equity markets are up three-fold, property prices have reached new highs, interest rates have fallen, and the Norwegian kroner has depreciating favouring the returns of our USD and euro- denominated assets. Individuals, teams and our companies create significant value. We will, however, continue to be affected by the markets we are part of.
We see warning signs in today’s stretched valuations, but we are structured to be able to deal with any downturn and its effects. Ferd has an appropriate risk diversification, with no single segment currently representing more than 20% of our value. If equity markets or the real estate market falls significantly, so will the value of our investments. But we are not very concerned by annual fluctuations. Instead, we spend our time ensuring that our investments, and Ferd as a system, become stronger over time. Our long-term approach, our flexibility, and our risk management mean that our relative strength can be greater in times of greater turbulence. We can make the most of our ability to invest in periods in which many other organisations are either not confident enough or willing to invest. We shall always have the capacity to invest in attractive opportunities, particularly where we are able to significantly influence the outcome.
To conclude, I would like to emphasise the fact that Ferd today has significant liquidity, and are able to invest up to NOK 10-15 billion when the right opportunities arise. This capital can be used to make new investments and to strengthen companies that we already own. We are well prepared, and have the structure in place to acquire or invest in more good companies in the time ahead.
We are well prepared, and have the structure in place to acquire or invest in more good companies in the time ahead.