When Family Control Goes Bad?

We should all be so lucky to control a $10B NAV discount

One theme that I’ve noodled on is the slow creep of MBA-ZBB-American shareholder capitalism infecting some of the formerly most bureaucratic private institutions. What exactly do I mean by this? In some of my previous posts I’ve covered Japanese companies responding to American activists, China making the case to public shareholders, and other things like a Harvard MBA running the biggest Kazakhstani tech company. It’s an awe-inspiring thing, really. American HVAC businesses are being run on Lean manufacturing principles. Things that seemed to be permanently inefficient (almost by design, really) have seen fundamental changes to their structures in the name of shareholder capitalism.

I’d marry this theme to something of another hobby of mine: following publicly traded family-controlled businesses. One category of these businesses is what I would call the EuroCo: an investment holdco in various businesses that trade on European exchanges. They’re all family controlled and have some sort of investment stake in other major companies. Quick and dirty list from Gemini below:

These are PNDs: perpetual NAV discounts. Why? There’s no line of sight to shrinking the discount, the shares aren’t actually that fungible, and there’s not really an incentive for the controllers of the business to repurchase shares and shrink their empires. Why would they cash themselves out in the name of minority owners? Totally anathema to long-term orientation; disgorging any cash to minority owners is basically a bet against themselves.

Imagine a mahogany-paneled board room in Brussels or Turin. The patriarch or matriarch is seated at the head of the table, flanked by the Next Gen—the thirty-somethings with MBAs from INSEAD or Stanford. On the wall-mounted screen is a chart showing a 40% gap between NAV and the price the market is willing to pay for the family’s ticker symbol. This scenario is a Rorschach test to my dear readers: does G1 actually care? Which way does it go “Markets are dumb and fickle”, or “our public legacy is at stake!”? Young vs. old? I’ve watched the show Succession, but maybe there’s a different ending!

Still, I Ask: Why Would They Bother?

In Japan, the answer literally came from the government. The government bullied these companies into caring about shareholder value. In March 2023, the Tokyo Stock Exchange issued a “comply-or-explain” mandate targeting companies trading at a Price-to-Book Ratio below 1.0x. Essentially telling firms they were worth more dead than alive, the directive forced boards to publicly disclose specific plans to improve capital efficiency and ROE. By using a name and shame list for laggards and encouraging the sale of stagnant cross-shareholdings, the government successfully sparked a wave of share buybacks and dividends, transforming Japan from a value trap into a global favorite for shareholder-friendly returns.

Could something like this happen with EuroCos? Maybe. The EU has shown a willingness to centralize regulation and bully certain entities into compliance with certain policies. This is a low probability avenue for value to be unlocked, but never say never, particularly with EU regulators. The value trap disease isn’t as widespread as it was in Japan, and all of these monarchic dynastic folks in business and government go to the same schools and vacation resorts.

Another avenue is simply convenience. In many European dynasties (like the Agnellis or the Wendels), the shareholder base eventually grows to include 100+ cousins. Not all of them work for the firm; many just want to cash out to buy a villa or start their own foundation.

• If the discount is 40%, a cousin who wants to sell feels robbed. This creates a negative feedback loop: looming supply of equity weighs on the share price, and the stock goes effectively no bid.

• If there’s some impetus to get to a more reasonable NAV discount, controlling family members could offer liquidity at a fair price, preventing internal family feuds or a revolt where disgruntled relatives try to force a full liquidation of the company.

What about traditional American-style large cap activism? A 40% discount is a giant “Eat Me” sign for activist funds like Elliott, etc. These funds could conceivably buy up enough shares to cause a headache, demanding that the family break up the company to unlock value, but I seriously doubt they would. It’s just not proper decorum. And their invite to Gstaad or St. Barth’s might be rescinded. But, if it came to it, the family could conceivably proactively shrink the NAV discount to placate the potential predators and retain their independence.

Last possible outcome: Maintaining a listed vehicle is expensive (compliance, legal, auditing). If the market is only valuing your assets at 60 cents on the dollar, the family eventually asks: “Why are we public at all?” and thinks about going private with a new partner who won’t be so grumpy at his or lack of value crystallization.

Either way, keep these names on your watchlist for any of the above catalysts. Nothing imminent, as nothing on that continent has been imminent for 80 years. Cap size might be a bad thing in American markets, but these EuroCos being bigger companies could invite real players in search of real change.