Holding companies

Looking for the next Berkshire Hathaway

In the article Buffett's Alpha, we discovered that one of Buffett's key advantages wasn't just good capital allocation, but also the unique structure of his investment vehicle – Berkshire Hathaway. In fact, Buffett called Berkshire his biggest investment mistake, and it was never intended to be what it eventually became. But it gave him some unique advantages.

• It doesn't have the same obligations as a hedge fund

• It gives him access to permanent capital

• It lets him reallocate capital as he sees fit

• Gives him access to exclusive deals

• Lets him reuse float

Over the years, there have been numerous articles that try to pick the next such company, but many of these are from the perspective of finding an expert mutual fund manager or picking a stock, and they rarely focus on the advantages of the holding company structure itself.

We dug into the research and had a chat with an expert who spent 2 decades of his life identifying the best holding companies across the world and constructing a portfolio. Here's what we found:

1. A diversified portfolio of “hall of fame” holding companies beat the market over the last 30 years.

2. There are lesser-known holding companies across the world that beat Berkshire Hathaway in the recent past.

3. Holding companies have some unique incentive structures that could make them great investments for stakeholders.

4. Despite their advantages, investing in holding companies holds risks for public shareholders.

Let's dive in.

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The T.F. Ryan Portfolio

What is a holding company?

Many holding companies tend to be controlled by a family or a strong individual allocator. While there’s research on the outperformance of family-owned companies (which we have written about), there’s much less information on holding companies as a category. In Chris Mayer’s article, “The Next Berkshire Hathaway”, he talks about Todd Peters of Lyndhurst LLC who attacked this problem by creating his own list of 100+ holding companies from across the world, and invested in a diversified portfolio of such companies starting in 2013, which he called the T.F Ryan Portfolio.

We reached out to Todd for more information, and he was very helpful in understanding the holding company ecosystem and his portfolio construction.

The portfolio was inspired by a list of “Hall of Fame” holding companies that had a 20- to 30-year track record. Only 3 of these companies were American, and all companies had beaten the S&P 500 benchmark, some by more than 5-10% over decades! Re-evaluating returns up to 2024, the average return on these stocks was 2,360% compared to the S&P 500’s 2,000%, and 4 out of 9 of the stocks had beaten the benchmark. Todd didn’t invest in the “Hall of Fame” companies, but rather constructed his own portfolio inspired by the underlying principles.

While the list of companies is confidential, here are some insights from our conversation to understand Todd’s process:

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Structural advantages of holding companies

During the conglomerate bubble of the 60s, compensation with equity during acquisitions drove up prices to unrealistic levels, and it led to a market crash. Anti-trust regulation was another factor against holding companies. Despite Berkshire Hathaway being one of the anomalies that actually succeeded with a similar structure, the holding company structure fell out of favor as a tool for investors.

However, the holding company is still a favored structure in regions like Europe. Over 60% of all businesses are family-owned in Europe, and the holding company is a convenient tool for wealth to be passed on and managed over multiple generations. Todd believes that a well-managed holding company is one of the best ways to compound wealth for a family (but not necessarily for a public shareholder – something we’ll get to later). This is for a few reasons:

1. Access to permanent capital lets you be unaffected by the whims of investors

2. Owning 100% of businesses gives a view into the business and the ability to help the business by taking active roles on the board

3. A private division that adds value to the public-facing investments

4. Alignment of values because of skin in the game

The ability to reallocate capital between businesses is an edge – holding companies have direct access to the cashflows of underlying companies, and can choose to reinvest it into other areas. This lowers the cost of capital. Buffett’s use of float from Berkshire’s insurance businesses to leverage their investments without taking on debt was a significant factor in its returns.

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Red flags

Todd Peters shut down the TF Ryan Portfolio after a period of underperformance around 2021, and he was candid about his learnings in the process.

While constructing his portfolio, Todd looked at over 175 holding companies across the world. He favored companies that focused on 3 to 4 verticals, which were low on debt and well-stocked with cash. He also avoided conglomerates that had a central business for which the acquired holdings were a means of synergy (this canceled the benefits of diversification). These were good selection criteria. But here are some of the problems for retail investors in investing in holding companies:

1. Liquidity

What moves stock prices is the visibility of the holding company to public shareholders. Many of these companies had generational visions, and the key stakeholders preferred to not make the news. While this can create great buying opportunities and afford a certain level of stability, it hinders the compounding potential of holding companies.¹ At times when you are pressured into selling the stock, this can cause a problem with finding buyers.

Incentives between the controlling stakeholders and the public shareholders could be misaligned too. If the family views the business only as a source of steady dividend income or as a lifestyle business, it’s a subpar investment for individuals.

2. Keyman risk

Holding companies are usually controlled by a talent asset allocator at the top. When there is a transition from one generation to another, it becomes a completely different company. In one European holding company’s case, the family head stayed on too long and by the time his son took over, it was too late to repair the situation and the stock dropped by 90%. “If you’re investing in a person and that person changes, you have to essentially underwrite that investment completely,” says Todd.

3. Crisis

If holding companies don’t retain a source of cash flow that helps them survive bad decisions, there is no incentive for external investors to step in. Todd recollects an example where a holding company sold all its businesses. While they were great operators, their asset allocation didn’t work out, and without a source of cash flow to sustain it, the company collapsed.

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Some examples

While finding a comprehensive list of quality holding companies is a difficult task, these are some names we came across in our research. These are NOT recommendations or stock picks, only a glimpse of the possibilities available in the universe of holding companies and the variety in their styles.

1. Constellation Software

Berkshire Hathaway's returns in its early days were incredible, because Warren Buffett was investing with much smaller amounts of money. But Constellation Software's record beats even Berkshire's. In the first 18 years after the fund inception, CSU compounded at 35% a year (a 232X return), compared to BRK's 26% a year which gave a 66X return!

Constellation's business model is different from most holding companies – headed by Mark Leonard, the company's strategy is to aggressively acquire Vertical Market Software (VMS) companies that have a niche market. We'd recommend this excellent deep-dive by David Senra and our friend Liberty's newsletter if you want to explore Mark Leonard's strategy in-depth.

2. Groupe Bruxelles Lambert

This is a Belgian holding company founded in 1972, and under the leadership of Albert Frere starting from 1985, GBL acquired a controlling stake in a diverse list of companies, both public and private. In addition, it also invests up to 16% of its portfolio in funds managed by other asset managers. While GBL is a major holding company in Europe, it could also be considered an example of a company that didn't deliver similar returns to shareholders, delivering only 78.3% cumulative returns over the last 24 years compared to the S&P 500's 380%.

3. Investor AB

This is the investing arm of the Wallenberg family in Sweden and the largest publicly listed Swedish company. The historical returns of this company are 1,517% over the last 20 years (after adjusting for the Swedish Kroner's price change). For comparison, the market returned 396% in the same period, and Berkshire Hathaway returned 703%. The company has 69% of its assets in a diversified list of Nordic companies, and the remaining stake is divided among two subsidiary holdings.

4. Fairfax Financial Holdings

Fairfax is a Canadian holding company that was previously known as Markel Financial Holdings². It focuses primarily on property, casualty insurance, and reinsurance. Fairfax has returned 10.6% p.a over the last 20 years, compared to the S&P 500's 7.7% p.a.

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One of Todd’s insights was that the holding company mindset is a good method of constructing a portfolio in general – focusing on cash, keeping debt low, focusing on 3 to 4 verticals, and thinking in decades. If you plan to invest in holding companies, make sure you do your research, and understand what sort of events could give them the visibility needed to move the stock and the key capital allocators of the company.

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Disclaimer

This publication’s authors are not licensed investment professionals. Nothing produced under the Market Sentiment brand should be construed as investment advice. Do your own research before investing.

1. Chris Mayer notes that holding companies trade at persistent discounts to their underlying net asset values.

2. Different from Markel Corporation