Importance of the owner

A shareholder literally owns a part of the company. In general (depending on the type of share), a shareholder has similar rights as a founder or an institutional investor. Although the size of a shareholder’s stake affect, among other things, the shareholder's voting rights at the General Meeting, each shareholder is equally entitled to participate in the General Meeting and to receive a share in the distribution of profits according to their shareholding. 

The role of the owner is important when considering companies as investment targets, as it is ultimately the owners who determine the direction in which the company is to be taken. 

The ownership structure of a company can be divided as follows.

The optimal ownership structure is a mixture of all of the above. Stakes are not equally big and companies can have different ownership structures in different stages. An established company may have more institutions (pension companies, foundations, etc.) as owners, while private equity funds or founders may have a larger stake in a risky growth company.

Analyzing the ownership structure

In principle, it is a good idea for people who work in the company as well as the management to own shares in the company. They often have a vantage point for the future development of the market and also of the company. I would be concerned if the acting management, personnel, board or founders didn’t have any shares in the company.

In this context, however, it is also natural that the founders in particular will reduce their shareholding in the company, as without this it is often difficult to attract enough shareholders. It is also possible that a few players may have too large a stake in the company, which may hamper decision-making or reduce the liquidity of the stock, among other things. Significant sales by insiders (or even more so, insiders selling their whole stake) should make investors curious as to why this is happening.

The shareholder should also critically assess the decision-making power of the founding or managing shareholders. To some extent, holding all the strings in one person’s hands can lead to the wrong outcomes in the face of change. In this case, a strong owner can use their own ideas and vision to drive the company towards inevitable bankruptcy much faster than expected.
 

Institutions, asset managers and funds bring stable ownership to the company

Institutions, asset managers and funds often bring stability to the ownership structure, as they often make decisions for the long term, depending of course on the funds' strategies. In most cases, they are already involved in the company's IPO and provide a good basis for building the future of the company. Particularly in large IPOs, there is a need for institutional funding, as the necessary amount might not be raised from private investors. Often, institutions also provide some form of reassurance about the company's investability or future potential. For example, by monitoring the holdings of funds that have done well, you can also seek confirmation for your own decision-making. Often the people working in funds are experienced professionals who have done their groundwork on the company well, so you can see ownership with them as at least partly supporting your own decision.  

There are also many types of institutions. Funds are often long-term shareholders who become involved when a company has its IPO. Pension funds and foundations are also often long-term investors who value stability. Particularly in foundations and other similar organizations, values can also be an important investment criterion. The state, as a large owner, is not necessarily the best owner for the interests of a private investor. The state can pursue its own interests and make political decisions in the company, which is not necessarily in the best interest of the company's shareholder value.

Private equity funds are also a particularly early stage-focused institutional investor. They often become owners in companies before they go public and seek to sell their holdings at the time of the consequent IPO. In many cases, however, the company holds on to a part of its stake even after the IPO. However, the strategy of private equity funds is to seek an "exit" from a company so that they can put their capital into the next emerging company. In this sense, a large capital fund ownership in the company may not be beneficial, as it may create short-term sales pressure on the stock.

On the other hand, in such situations, a long-term owner has an excellent opportunity to get his hands on the company if a single big seller puts negative pressure on the share price. Often, however, the aim is to the stock in large batches, for example to other institutions. IPOs also allow the investor to monitor the quality of the private equity fund. What kind of companies has it listed in the past, how has the stock behaved since then, has the price been attractive and so on?
 

Private investors are one of the most important owners of a listed company

Private investors are one of the main owners of a listed company. Without private investors, the liquidity and price formation of shares often suffer, while other categories of owners often do not participate significantly in day-to-day trading. They often become owners either through an IPO or the secondary market. Private investors can be large or small owners and short-term traders or long-term owners. However, they often have a significant influence on the day-to-day trading and price formation of a stock.  

In general, it would be good if there were a reasonable number of freely tradable shares ("free float") in circulation, so that the price formation of the share would be good enough. In our view, there is no clear rule, but the largest and most stable companies often have a higher free float, while smaller companies can have a very low free float. This often results in good liquidity for large companies, but weaker liquidity for smaller ones, so diversification of the ownership could improve share price formation.

Liquidity is also often a problem for many larger investors and funds, as they cannot buy a share or sell a share without significantly affecting the share price. There is also the risk that even if you can get into a share, for example through a sale by a single large owner, it is still just as difficult to get out. It would therefore be very important to have some degree of decentralization in the ownership of the company. It also often improves corporate governance, as more people or institutions monitor the company's activities. 

But too much decentralization is also too much. Major shareholders or founders, for example, often also have an interest in the company's business, its direction and development. In my view, an overly passive herd of diverse investors could thus lead to stagnation or even to the end of development or to being left behind by competitors. In that sense, a large stake held by an accomplished or knowledgeable owner can be even better for long-term value creation than really good short-term liquidity. I think the right combination is between the two, where the company has owners who encourage shareholder value creation and reasonably good tradability.
 

Taking the ownership structure into account in equity research

In equity research, the role of owners plays an important background role in shaping the opinion on the direction and potential of the company.

An analyst evaluates the company in the same way as a long-term owner, but in the short-term special situations may need to be considered. These can be, for example, the negative impact of a single large seller on the share price or low liquidity when a stock rises or falls too much due to low tradability.