Short-term investing draws scorn
Short-term investing has taken another drubbing, this time in a survey of investor relations professionals at 138 good-sized North American companies. The survey comes from Stanford University’s Rock Center for Corporate Governance and the National Investor Relations Institute (NIRI).
The findings should be of interest to annuity professionals who are trying to figure out how to work with, or compete against, carriers that are now owned by private equity companies, which have the reputation for being short-term investors (although some say they are not).
The relevant findings are these: Fully 95 percent of the surveyed companies said they view hedge funds as being short-term or somewhat short-term focused. This is enough of a concern that a separate group polled during the survey said they would like hedge fund ownership to decline from today’s 8 percent of company shares to 3 percent.
Furthermore, all companies that reported being partially owned by private equity said they want to reduce the ownership of their private equity investors down to zero, according to the researchers.
Reasons cited for the trouncing of short-term investors include: the short-term focus of the investors interfere with strategic decision-making (65 percent), short-term investors’ focus on cost-cutting (51 percent) and anticipated reductions in the company’s market value or long-term growth (57 percent).
That seems like an indictment of short-term investing, especially since the survey covered 20 industries, not just insurance and financial services, which together represented only 12 percent of the total.
It bears keeping in mind that the findings have to do with shareholders who own chunks of a company, not the entire company, and that the results reflect individual opinions not company policy. Even so, the complaints about short-term focus track closely with concerns of insurance regulators and others in the insurance industry about private equity ownership of annuity companies.
Private equity mixing it up with annuity companies is still a fairly new trend, so people in the field still have a lot of questions about dealing with such firms. Should I do business with a carrier that has a private equity owner or not? Might the new owner cut costs to the bone, as the Stanford/NIRI survey suggests? Might it pare back on services, erode value, and then sell the carrier a few years later? What would be the impact on clients? Alternatively, might this new arrangement work to the good, with the private equity firm infusing capital and talent that will help the acquired company grow and prosper?
Since no one can predict the outcome, answering such questions becomes a matter of assessing what you know and what you can find out.
A word of caution: Not everyone is talking the same language. For instance, the executives surveyed for the Stanford/NIRI study defined short-term ownership of shares as seven months or less. That is a dramatically shorter window than the three-year ownership period that annuity professionals typically associate (rightly or wrongly) with the short-term business model of private equity companies.
Some private equity buyers of annuity companies put the low bar on ownership at six years. It’s insurance, after all. But is that short-term or long-term? The question arises because the executives in the Stanford/NIRI study estimated a long-term investment horizon for shareholders to be, on average, at least 2.8 years. In the insurance world, 2.8 years comes nowhere close to what people have in mind for long-term investment in annuity carriers. If the private equity firm is buying controlling interest or 100 percent ownership, five years seems to be the bare minimum with 10 years and up the preferred. This is not carved in stone; it’s group think. The point is: What does long-term mean? And does the definition change if the investor buys a large but non-controlling interest in the company?
The insurance industry does not yet have a well-established road map in this area that advisors, distributors and other business partners can consult. For this reason, dealing with this new chapter in annuity history may be one of those areas where gut instincts will prevail.