JAB’s Buffett impression is a work in progress
22/05/2024 09:23
(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Aimee Donnellan
LONDON, May 22 (Reuters Breakingviews) - JAB wants to be
like Berkshire Hathaway BRKa.N . The private Luxembourg-based
conglomerate, whose $50 billion empire includes Krispy Kreme and
Pret A Manger, last week unveiled a push into the insurance
business under its new CEO Joachim Creus. As Warren Buffett’s
holding company Berkshire proved, customer premiums can be a
useful low-cost funding source for investors willing to hold
assets for a while. JAB mostly fits the bill – but without the
stellar investment track record.
JAB started life in its current form in 2012 as the
investment arm for Germany’s secretive Reimann family, whose
fortune dates to the 19th-century formation of chemicals company
Benckiser. The investment firm went on a consumer-goods shopping
spree, picking up bakery and café chain Panera Bread for $7.5
billion in 2017, drinks group Dr Pepper Snapple in a 2018 deal
worth $21 billion, and coffee and sandwich company Pret A Manger
the same year. More recently, it has focused on pet care and pet
insurance, spending around $5 billion, and now has 20 brands
that help animal-lovers pay vet bills.
The early success of those pet-insurance ventures, which
have risen in value and wrote a record number of policies last
year, helps to explain JAB’s new venture. Another factor could
be the long-term appeal of premiums as a cheap source of
funding. As Buffett has explained in the past, insurance
customers pay money up front to potentially claim something back
later. In the meantime, the insurer can invest those premiums
and keep most of the profit. Assuming the company’s
risk-management is good enough, it’s “free money”, in Buffett’s
words.
Private-capital groups Apollo Global Management APO.N and
KKR KKR.N have pioneered a similar model in recent years,
buying annuity and life-insurance players and investing their
cheap liabilities in high-yielding assets like private credit,
collecting a rich spread between the two. JAB’s boss Creus has
picked Anant Bhalla, who recently joined JAB as senior partner
and chief investment officer, to lead the push and begin buying
up insurers. Bhalla previously led annuity provider American
Equity Investment Life (AEL), where he boosted alternative-asset
investing before selling the company to Brookfield Reinsurance
last year.
JAB has a clear need for a new funding strategy, judging
from its 2023 balance sheet. The group’s $9.3 billion net debt
load was equivalent to 27% of its standalone portfolio value at
the end of last year, after stripping out the shares in JAB
businesses controlled by other investors. That uncomfortably
high loan-to-value ratio only came down to 20% in March after
Creus sold shares in JAB’s listed drinks brand Keurig Dr Pepper
KDP.O . In other words, debt-funded dealmaking looks tricky.
Another historic source of money for JAB is third-party cash
from other investors, like sovereign wealth funds. The JAB
Consumer Partners (JCP) division is effectively a private-equity
group whose funds invest external money alongside the main
Reimann-controlled vehicle. JCP has raised over $23 billion
since 2014. But the returns on at least one of the
consumer-focused funds have been disappointing, the Financial
Times reported citing an investor. Buyout fundraising more
generally has become trickier in recent years.
Over time, then, insurance premiums could add a useful
element to JAB’s funding strategy. And the long-term nature of
life insurance and annuity policies, Bhalla’s speciality at AEL,
match the Reimanns’ patient investment philosophy. But
impersonating Buffett is tough. Building up a meaningful book of
premiums will take a long time. More importantly, JAB is yet to
prove that its investment strategy adds much value.
Last year, for example, the fair value of its subsidiaries,
using the group’s own methodology, increased by a modest 3%.
Mark-to-market gains in the beauty and pet-insurance business
offset paper losses in JAB’s key coffee and beverages division.
That compares with double-digit gains for major U.S. and
European stock indexes and shares in Buffett’s Berkshire. The
annual fair-value change in JAB’s portfolio has been lower than
the return on both the S&P 500 and Berkshire stock in four of
the last five years, according to Breakingviews calculations
using LSEG data.
Comparing fair-value changes with stock-market moves is
tricky, since only 44% of JAB’s portfolio is listed. But if
JAB’s investments overall were shooting the lights out, it would
probably be more apparent. There’s no shame in trailing
Buffett’s investment returns per se, but it’s all the more
conspicuous now that JAB is thinking about mimicking the Sage of
Omaha’s corporate structure.
Follow @aimeedonnellan on X
CONTEXT NEWS
JAB, the largest investor in Krispy Kreme and Pret A Manger,
said on May 13 that it would build a global insurance business
and establish an asset-management company. The move marks a
departure from its traditional model of buying controlling
stakes in consumer-goods groups.
JAB was set up as the investment fund of Germany’s Reimann
family in 2012 and now manages investments with a fair value of
more than $50 billion.
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Graphic: JAB’s portfolio value change vs. indexes and Warren
Buffett https://reut.rs/4bIp2Mc
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(Editing by Liam Proud and Oliver Taslic)
((For previous columns by the author, Reuters customers can
click on DONNELLAN/
Aimee.Donnellan@thomsonreuters.com; Reuters Messaging:
Aimee.Donnellan.thomsonreuters.com@reuters.net))