Investing for growth: An independent view of the Swedish Investment Company, called Investor AB

About Investor AB

Investor AB is a Swedish company. It, was founded by the Wallenberg family in 1916. The Wallenberg foundations are the main owners of Investor AB, controlling 50% of the votes.

It is an investment company, meaning that its main activity is investing in other companies. Investment Companies like Investor AB generally have a fixed number of shares issued which does not change (unlike an ETF, or a mutual fund).

The share price of an investment company can trade above (a premium) or below (a discount) to its net asset value per share. The net asset value of an investment company (NAV) is represented by the current value of all the assets less the value of any liabilities. The NAV per share is determined by dividing the NAV of the company by the number of share in issue. The level of discount or premium will vary over time according to investors perceptions of the prospects, past track record, and extraneous events such as the sale or purchase by a large investor. For example, a large investor may have to sell some shares to pay his taxes. That will depress the share price. however the underlying NAV will remain unchanged. The discount will widen.

Objectives

Investor AB lists it objectives as:

Generate an attractive total return

Grow our net asset value

Pay a steadily rising dividend

Deliver on our ESG targets

From the website

Investor, founded by the Wallenberg family in 1916, is an owner of high-quality, global companies. Through board participation, our industrial experience, network and financial strength, we support our companies to outperform competition and reach their full potential.

We are an engaged and long-term owner — We drive the initiatives that we believe will create the most value for each individual company. Ultimately this creates value for our shareholders and for society at large.

We build sustainable best-in-class companies — We have a long tradition of being a responsible owner and company. Integrating sustainability in the business model is a prerequisite for creating long-term value.

Investor has operated with the same business philosophy since the company was founded in 1916 — to invest in companies and actively contribute as a leading shareholder to their long-term success.

Over the years, we have steadily evolved in step with boom times, depressions and recessions, with globalisation trends and with constantly changing capital markets, all to capture new opportunities and create value.

We have invested in companies in new and attractive markets and industries, but have also divested holdings along the way. Since 1916 our willingness to invest has been consistently based on the same business philosophy.

Investor’s investments are divided into three business areas, Listed Companies, Patricia Industries and Investments in EQT. Listed Companies consists of our long-term, strategic listed holdings. Patricia Industries contains our wholly-owned subsidiaries and other unlisted investments. Investments in EQT consists of our investments in EQT AB and in EQT’s funds.

Sustainability is fundamental to our business success and the success of our companies. Investor firmly believes that a sustainable business approach is a prerequisite for creating long-term value.

Investor AB’s Assets

The market cap at 31/12/2021 was SEK 711 billion. It is thus a large cap company. The net asset value (market value), as calculated by Investor AB was SEK 762 billion (Book Value SEK 683 billion).

The share price at year end was SEK 227.75, compared to the net asset value of SEK 248 per “B” share. The shares as at the end of 2021 were thus trading at a discount of 8.2%.

The Q1 2022 investor report indicated an 11% drop in NAV since year end. According to Investor AB the share price was at a 5% discount on 31/3/2022.

Stock markets and the share price of Investor AB have fallen further since then. As at 6th May 2022 the share price was SEK 171.74, down from SEK 230.65 at year end.

The OMX Stockholm index has fallen 21% in the same period. No doubt many of the underlying investments have fallen in value. I have not worked out the new NAV.

As at 31/12/2022, 66% of Investor’s assets comprised 11 listed Swedish companies. They are all large and well known. The names include ABB, AstraZeneca, Ericsson, SAAB, Electrolux, and SEB. Full details of all the companies can be found here: https://www.investorab.com/our-investments/?category=listed-companies

19% of Investor’s assets were in 10 unlisted mostly wholly owned companies, held via a division called Patricia Industries. Full details about each underlying company can be found here: https://www.patriciaindustries.com/our-companies/

The remaining 15% of Investor’s assets is invested in EQT AB and its underlying investment funds. EQT is a Swedish listed company with a current market capitalisation of SEK 275 billion. It manages and advises a range of specialised funds in two business areas; Private Capital (Private Equity investment), and Real Assets (Infrastructure and Real Estate). There are at least 9 underlying funds with names like EQT Ventures, EQT Life Sciences, EQT Private Equity, and EQT future. EQT’s assets under management amount to €73 billion according to a 1st March 2022 presentation on their website.

EQT say they have virtually no direct or indirect investment exposure to Russia and Ukraine (2%), and no Russian clients. There are at least 180 portfolio companies in EQT’s Private Equity funds. In the Real Assets division, the EQT Infrastructure funds hold 25 investments, its EQT Exeter (Real Estate) claims to be one of the largest real estate investment managers in the world with 800+ Real estate deals done.

EQT’s share price has fallen 50% since the start of this year.

Is there hidden value in Investor AB’s assets?

As mentioned earlier in this document Investor AB has two types of investments which are not listed. There is the 19% in the 10 unlisted companies held directly by Investor AB, and there is the 15% exposure to EQT AB and its underlying funds. I was unable to find the split between EQT AB and its underlying funds.

The total exposure to unlisted assets, including EQT is 34%.

How are investments valued?

According to Investor’s accounts:

• Companies defined as subsidiaries are consolidated in accordance with IFRS 3 and IFRS 10.
• Partner-owned investments are accounted for as associated companies. As a consequence of this, the equity method is applied, in accordance with IAS 28. (See below for explanation)*
• All other holdings are reported and valued as financial instruments in accordance with IFRS 9.

*The equity method is an accounting technique used by a company to record the profits earned through its investment in another company. With the equity method of accounting, the investor company reports the revenue earned by the other company on its income statement, in an amount proportional to the percentage of its equity investment in the other company.

*The equity method is used to value a company’s investment in another company when it holds significant influence over the company it is investing in.

*The threshold for “significant influence” is commonly a 20–50% ownership.1

*Under the equity method, the investment is initially recorded at historical cost, and adjustments are made to the value based on the investor’s percentage ownership in net income, loss, and dividend payouts.

*Net income of the investee company increases the investor’s asset value on their balance sheet, while the investee’s loss or dividend payout decreases it.

*The investor also records the percentage of the investee’s net income or loss on their income statement.

The above is the most meaningful way to calculate NAV. There is unlikely to be a lot of hidden un-accounted profit lurking in the illiquid investments. Investor’s calculation is the most accurate estimate that anyone would come up with.

Over recent years Investor AB’s share price has been trading at a reducing discount. At the end of 2017 the discount was around 27%. By the end of 2020 the discount had narrowed to 17% and as at the end of March 2022 it was around 5%. Compared to the historical level of discount the share price is not cheap. If one was looking for an investment company trading at a large discount, Investor AB would not fit the bill as the discount, (around 5% at the end of March 2022), is small compared to the historical average. In the investment companies sector there are many companies with much larger discounts.

There is little likelihood of an activist investor tying to unlock value from Investor AB. The discount is too low and the Wollenberg Foundations control 50% of the votes.

Are there other reasons to buy Investor AB?

In the investment trust / investment company sector, some companies trade at a premium to NAV and others at a discount to NAV. Management teams with a good track-record, or who are focussing on a very “hot” sector are more likely to see a premium. On the other hand, where the track record has been poor, or where the underlying investments are in an out-of-favour sector, we might expect to see a very large discount.

Most investment companies trade at some kind of discount. This is normal. It reflects the fact that the investment company incurs fees and costs, such as management fees, which eat into the return.

Investor’s 5% discount to NAV is less than the industry average, and it implies that investors view the company’s prospects favourably compared to others.

Historical Growth

In 2021 Investor AB reported a 41% growth in NAV. This is an amazingly good number. It is unlikely that kind of growth can be seen as any kind of guidance for the future. In any case, one-year’s growth is hardly a measure of the long term growth. A significant driver to the 2021 NAV growth was from a 111% growth in the EQT’s non-listed assets. However the performance of the listed companies (+44% in 2021) also helped a lot.

The laggard was the Patricia Industries Division (+3% in 2021).According to Investor AB, the average annual growth in Net Asset Value over the last 5 years has been 20%. This is an impressive number, no doubt helped a lot by the 41% increase in 2021.

Dividend

The latest announced dividend is SEK 4.00. Based on the latest share price of SEK 172, that’s equivalent to a yield of 2.32%. I find that an acceptable yield proposition. Analysts are forecasting a 5% dividend hike for the current year to SEK4.20.

The dividend has been increased every year, at least since 2012, except for 2019 when there was a single year reduction. The 2020 and 2021 dividends were both at record levels. The dividend has more than doubled since 2012. That’s a good track record that investors like.

Price/Earnings Ratio

The P/E ratio tends to be fairly meaningless in an investment company because sales at profit can distort the true underlying earnings. For what it’s worth the P/E ratio in 2019 ,2020, and 2021 was 3.83x, 8.67x, and 3.21x respectively.

Disclosure

I don’t own any shares in Investor AB, and I don’t have any present plan to buy any. I would certainly consider buying some if the discount to NAV widens, or if there is a sharp fall in the share price (from today’s price of around SEK 172).

I don’t own any shares in EQT AB, and I don’t have any present plan to buy any. I would certainly consider buying some if there is a sharp fall in the share price (from today’s price of around SEK 245).

Conclusion

Investor AB is a large well-known investment company trading at a modest discount to NAV. It is relatively easy to to buy or sell a large number of shares without affecting the price.

Investors in Investor AB will gain exposure to a diversified portfolio of listed and non-listed assets through a single investment. This makes it less risky than investing directly in a single company. Investor AB would a good fit for any diversified investment portfolio. However if you like bargains, look elsewhere. The current discount to NAV is small compared to its history, and below the average for investment companies. The lower discount probably reflects the excellent results and growth in NAV over the last few years, and investors’ confidence that this will continue.

The above is not investment advice. You should do your own research or consult an investment advisor.