Owning and developing best-in-class companies
We are a long-term owner, focusing on doing what we deem best for each company. Through our international network, strong brand name and active ownership, we create significant value.
We have a long-term investment perspective and support our companies in their efforts to create sustainable value. Our goal is to build strong and healthy, best-in-class companies. We aspire for all of our companies to perform better than their peers and to reach their full potential. However, our companies are diverse and therefore with different opportunities and challenges. Accordingly, we treat each company individually and independently.
Our active ownership model builds on substantial ownership. We own significant minority stakes in our listed core investments, and are often the largest shareholder, as it creates a solid base for active ownership and is a prerequisite for being able to influence the board composition and to impact key strategic decisions. Our subsidiaries are owned by Patricia Industries. The aim is to exceed 90 percent ownership, with the companies’ management and board of directors as co-owners, to ensure full alignment. While we are convinced of the merits of our model, successful execution is what ultimately creates value.
We work through the boards
We exercise our influence through our representation on the companies’ boards. We depend on the boards to ensure the building of strong and healthy companies for the longterm, while at the same time creating the needed urgency around short-term performance. In order for the companies to be come or remain best-in-class, it is imperative that they, in accordance with their respective needs, have strong and well-functioning boards.
We believe in boards of limited size, which still allow for sufficient breadth of capabilities while ensuring a high level of individual accountability. Our experience is that a well-functioning board is diverse in terms of age, gender and background. The board should include individuals with relevant industrial, functional and geographic knowledge which is not too narrow or specific. Most importantly, the board should have the experience and competence necessary to support the company’s long-term ambitions.
Based on our experience, some areas are particularly important when forming high-performing boards: agenda setting and time allocation, board dynamics, interaction with management, knowledge and capability building, and annual board evaluations.
The value added by the board is dependent on how well it carries out a set of key activities. We place particular emphasis on, e.g.: CEO appointment, strategic planning, investments and M&A, performance management, corporate health including sustainability, talent management and management remuneration, as well as risk management and compliance.
Listed Core Investments
In our listed core investments, we prefer to head the nomination committees and use our professional network to find the best board candidates. We strive to have two board representatives, including the chair. A clear division of responsibilities between the owners, the boards and the management teams is important.
The owners are responsible for ownership-related issues, for example the appointment of the board. The board appoints the CEO, approves the strategy and large investments, and monitors the performance of the company, while the CEO is responsible for executing the strategy and day-to-day operational matters with the mangement team.
The boards of Patricia Industries’ companies are typically composed of independent directors from our network and investment professionals from Patricia Industries, led by an independent, non-executive, chair. Patricia Industries’ subsidiaries are wholly-owned, and as such, Patricia Industries and the respective boards have full responsibility to set the direction and follow up on the performance of the companies.
What we invest in
We own companies mainly within engineering, healthcare, financial services and technology; industries we understand well, and in which we can use our experience, network, and financial expertise. Companies in which we invest should be high-quality companies with, e.g., strong market positions, flexible business models, strong corporate cultures, exposure to growth markets, strong cash flow, continuous focus on innovation and R&D, exposure to service and after-market sales and sustainable business models. This goes for our existing companies as well as for potential new investments.
Our investment philosophy is “buy-to-build”, and our base case is to develop our companies over time, as long as we see further value creation potential. Our business teams are responsible for regularly updating our view of the long-term fundamental values of our companies, serving as the starting point for our investment decisions.
If we arrive at the conclusion that a certain company no longer offers attractive potential, or that it would be better off with another main owner, we would actively drive an exit process in order to find a better owner for the company and to maximize the value for our shareholders.
We actively support our companies in making attractive investments, and are willing to sacrifice short-term profitability for longer-term value creation. We firmly believe that to become or remain best-in-class, companies must have the ability to invest in innovation, regardless of pressure from the stock market or from other external forces. However, our long-term perspective is never an excuse for weak short-term performance.
Value creation plans
Our ownership work is mainly carried out by our business teams consisting of our board representatives, investment managers and analysts.
The business teams analyze the industries and benchmark the companies’ performance versus their peers. Based on our analysis, we develop and constantly refine value creation plans for each company. These plans identify strategic key value drivers that we want the companies to focus on over the next three to five years, in order to maximize long-term value and maintain or achieve best-in-class positions. While our ownership horizon is long-term, we believe in shorter-term plans to create clear focus on execution. The plans typically focus on operational excellence, profitable growth, capital structure, industrial structure and corporate health. During 2017, we continued our efforts to better integrate sustainability into our value creation plans, as it is an integral part of long-term value creation.
We communicate our value creation plans to each listed core investment’s board chair at least annually, and encourage the chair to discuss the plan with the rest of the board. Patricia Industries maintains a continuous dialog around value creation with the wholly-owned subsidiaries’ management teams and boards.
Within Listed Core Investments, we focus on continuing to strengthen our ownership in selected companies when we find valuations attractive. We are also prepared to participate in rights issues in our companies, providing they are value-creative. While we do not actively seek new investments, we do not rule out additional investments should attractive opportunities arise.
Within Patricia Industries, we focus on investing through our existing wholly-owned subsidiaries, for example to finance organic growth initiatives or complementary acquisitions. While the main priority is to further develop the existing companies, we also look for new platform companies offering attractive long-term profitable growth opportunities, both in the Nordics and in North America.
Regarding EQT, we will continue to invest selectively in its funds, as we expect they will continue to offer attractive returns and cash flow potential over time.
Cash flow platform
Over the past few years, we have established a strong cash flow generation through Patricia Industries’ wholly-owned subsidiaries. This cash flow, together with the dividend from our listed core investments, allows us to finance investments in both existing and new companies without divesting assets. It also allows us to pay a steadily rising dividend.