New PGIM research highlights long-term investment implications of three new types of companies emerging to dominate today's market.
New corporate models that are light on physical capital leverage technology and network effects to aggressively dominate markets. They are dedicated to a broader social purpose and are reshaping the corporate landscape globally. These models will be critical in determining winners and losers for years to come, according to new research by PGIM.
In The Future Means Business: The investment implications of transformative new corporate models, PGIM argues the evolution of these ‘weightless', ‘superstar' and ‘purposeful' firms - driven by disruptive technologies, winner-takes-all markets and environmental and social concerns - requires new approaches to asset allocation, valuation, risk models and investment frameworks.
"Firms are now evolving more rapidly and radically than ever before, with profound implications for their growth, profitability and returns," says Taimur Hyat, PGIM's chief operating officer. "We believe these new corporate models overlap, are often mutually reinforcing and cannot be ignored by any company seeking to innovate, grow, or avoid obsolescence risk. Even traditional ‘brick and mortar' firms with storied histories will need to consider how they respond."
The paper draws on insights from more than two dozen PGIM investment professionals in fixed income, real estate, private debt, quantitative equity, fundamental equity and alternatives, as well as a survey of over 300 public and private companies in the US, Germany and China that reveals the changing nature of the 21st century company. These changes matter immensely to long-term investors, given more than half of a typical institutional portfolio is comprised of corporate holdings. Among the research findings:
Intangible assets are surging, even across traditional capital-heavy industries. Almost 60% of firms in PGIM's survey said intangible assets had grown in importance over the last three years - with more than 80% of Chinese firms believing intangible assets would become even more critical over the next three years.
‘Superstar' corporations have learned to leverage technology, proprietary data and global networks to dominate markets. They effectively create ‘kill zones' around their area of dominance, buying out competitors and start-ups to shut down challenger products or assimilate new capabilities. In 1975, 50% of the earnings of US public corporations came from 109 firms. Today, the same percentage comes from just 30 companies.
Two out of every five companies surveyed globally by PGIM - and well over half surveyed in Germany - said they now balance profit maximisation with the potentially broader goals of other stakeholders, especially employees, customers and country. Today, the global Fortune 500 spent three times as much annually on corporate social responsibility as the combined development and humanitarian aid spending by the United Nations Development Programme (UNDP) and the United Nations Children's Fund (UNICEF).
What these transformative business models mean for investors:
• Re-evaluate public-private allocations. Weightless companies are staying private for longer, driven by lower capital requirements, a lower fixed-cost base, and easy access to the glut of late-stage private capital.
• Adjust risk models to appropriately evaluate intangible-driven firms. Mispricing of credit risk by ratings agencies can potentially create opportunities in both public and private debt markets for savvy investors.
• Develop an investment framework to identify next-generation national superstars. With rising concentration, fewer new entrants and expanding ‘kill zones', successful investors will need to identify potential superstars with strong staying power relatively early on.
• Transition to next-generation ESG approaches. Environment, social and governance metrics are not a one-size-fits-all proposition and no single ESG metric is material for all companies and across industries.
"The transforming corporate landscape can have a powerful impact - both positive and negative - on our world," said David Hunt, president and chief executive officer of PGIM. "For example, while weightless firms have led to greater use of remote-work arrangements and the emergence of flexible co-working spaces, their labour-light approach has contributed to a hollowing out of middle-income occupations in the US. Investors and other stakeholders will need to be nimble enough to capture the benefits of these new models while navigating the risks."