(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 . 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 and KKR 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
. 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.
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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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(Editing by Liam Proud and Oliver Taslic)
((For previous columns by the author, Reuters customers can click on Aimee.Donnellan@thomsonreuters.com; Reuters Messaging: Aimee.Donnellan.thomsonreuters.com@reuters.net))
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