In an era marked by increasing volatility and uncertainty, what strategic options do investors have?
For decades, the market has been shaped by significant capital inflow into short- to midterm return-oriented asset classes. But a sustainable, long-term approach to investments and value creation generates returns above the S&P 500 level for long-term investors and owners (LTI&Os). LTI&Os are marked by long-term-oriented, active management of investment portfolios and differ from conventional conglomerates by limiting operational integration within the business.
LTI&Os: A history of persistent differential returns
LTI&Os are a formidable force in the global financial ecosystem, with assets under management (AUM) estimated at €5 trillion to €9 trillion. They share some common characteristics: investment horizons of more than ten years, active ownership models (a minimum of 10 percent ownership) in multiple businesses, and few limited partner (LP) commitments, although their size, governance structure, and investment mandates vary.
Measuring the growth gap
Our research shows not only that a weighted portfolio of long-term investor-owned companies achieved an average annual return of 14.5 percent over the past two decades—almost five percentage points higher than the S&P 500—but that the trend held true across five-, ten-, and 15-year periods.
Understanding the competitive advantages of LTI&Os
LTI&Os face three primary structural headwinds. First, a lack of diversification can expose them to higher risk. Their deep roots in heritage investments lead by default to an overrepresentation in select industries, making them more vulnerable to sector-specific downturns or economic shocks. Second, in most situations, LTI&Os may have reduced flexibility to reallocate capital quickly in response to changing market conditions because heritage investments, such as historical properties or legacy businesses, can lock up capital for extended periods. Finally, parts of LTI&Os’ portfolios may face less pressure from public markets to improve operational efficiency or pursue growth opportunities.
Leveraging dual purpose
LTI&Os with a strong family or foundation anchor often strive to achieve both financial returns and broader societal impact. This involves maximizing long-term, attractive, risk-adjusted returns while accepting uneven pathways with patient capital and allowing for alpha-generating strategies.
Five strategic questions for LTI&Os
To prepare for the future, LTI&Os can address five questions:
- What is their reason for being?
- Where and how should they invest?
- How should they create portfolio synergies?
- How can they create value as a long-term active owner?
- How can they operationalize the dual purpose?
Conclusion
A shift toward an increasingly long-term-oriented investment approach can be motivated by both strategic and return objectives. Our research finds that LTI&Os, with their patient capital and active ownership models, are well equipped to navigate the complexities of the modern market and drive sustainable value creation. To position themselves for the long term, investors can reallocate investment capital toward long-term trends, continue building their ecosystems and developing their unique flywheels, and invest in cutting-edge technologies, innovation, and research to stay ahead of industry disruptions.
FAQ
What are LTI&Os?
LTI&Os are long-term investors and owners who have investment horizons of more than ten years and actively manage their portfolios.
How do LTI&Os outperform the market?
Our research shows that LTI&Os achieve higher returns by strategically positioning themselves to capture unique, long-term growth opportunities and creating ecosystem synergies across their portfolios.
