The Most Profitable Industry Ever?

Allan MacDonald, Senior Vice President and Portfolio Manager at Burgundy Asset Management Ltd presented at the Ben Graham Centre’s 2018 Value Investing Conference. The topic of his talk was: Finding Great Investment Opportunities in New Business Models.

Companies owned by their own customers

One of the opportunists that Allan covers he refers to as Demutualization. The term demutualization describes the act when companies or organizations that are in fact owned by their own customers, change legal forms to become joint-stock companies.

Mutual companies normally raise capital from organizations or entities that they will eventually serve as customers. Examples of typical mutual companies are insurance operations, agricultural communities and building co-operatives. Sanborn Maps, one of the legendary investments of the Buffet Partnership, was originally a mutual company the demutualized.

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Security Exchanges

Perhaps the most interesting types of business models that have gone through a wave of demutualization are stock exchanges. The first stock exchanges were formed as mutual organizations, owned by their member stock brokers who would buy a seat at the exchange.

The first national Stock Exchange to demutualize was the Stockholm Stock Exchange in 1993. Other Nordic Stock Exchanges soon followed, along with the Amsterdam Stock Exchange, the Austrian Stock Exchange. The Hong Kong and London Stock Exchange both demutualized in 2000. The Chicago Mercantile Exchange was the first Securities Exchange to get publicly listed, through an initial public offering in 2000.

Croupier Business Models

Croupier Companies are intermediaries that don’t risk any meaningful amount of capital but take their fair share in the economic activity of the market. Just like the house in a Casino – as term refers to – a croupier type of business can participates in the economic activity between other players, but with a limited exposure. 

A Stock Exchange is an interesting type of business model due to several factors:

  • An extremely long product life cycle. Stock markets might apply new technologies as time goes by, but go back 50 years and relatively little of the inner workings has changed besides speeds.
  • High switching costs. Once a company has listed on a stock exchange, they tend to stay there. Not often does one see a company de-list, to list at an other exchange because of price.
  • High barriers of entry. It seams that once a market has gained share in a given market it is very hard for others to compete. In most countries there is just one main stock exchange.

So if Stock Exchanges are such beautiful business models, that should be reflected in their financial statements, right? Well, that brings us back to Allan MacDonald’s presentation. On slide 15, he presents a table the showcases the EBIT margin percentages of publicly listed exchanges, which is impressive to say the least:

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Sometimes a table says more than a thousand words…

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