New billionaires and John Lennon’s piano

21st August 2013

Seven Investment Management's Ben Kumar

Seven Investment Management’s Ben Kumar

Summertime and the “silly season” tend to throw up a number of non-events talked up into news by a variety of media outlets, in order to fill airtime, screen-time and pages writes Seven Investment management analyst Ben Kumar.

In the financial world the situation is much the same; during the slow news days of August, various stories get a higher billing than might otherwise be granted in busier months.

Often this results in padding and filler that can be dismissed as the bored work of the summer intern, scrabbling around for a story in a deserted office. Occasionally though, an item stirs something lying quietly in the back of the brain.

The attention being given to a relatively minor takeover deal in the US is one such item; Steinway Musical Instruments may be taken into private hands for around half a billion dollars by hedge fund manager John Paulson, after a bidding war with another private equity firm.

Ordinarily I would skim this story, read that John Lennon composed “Imagine” on a Steinway & Sons piano, note that the same piano was later sold for £1.67m to George Michael, file those facts away under ‘miscellaneous knowledge’ and move on. However, in addition to providing pub-quiz fodder, the Steinway deal also gives rise to some more relevant investment insight.

Steinway’s business model does not initially seem to be the kind that hedge fund managers typically go for. After all it is a 160 year-old company that builds a limited number of high quality and very expensive pianos. And each piano takes a number of specialists a year to manufacture – there would appear to be very little input that Mr Paulson and his team can offer; “streamlining production” (and other management consultant buzzwords) is not going to add any value in this industry.

The real attraction is the markets Steinway is selling to; the growing ranks of the rich in the emerging markets such as China, Russia and India. The newly minted million and even billionaires of these nations are hoovering up luxury items from more developed nations. French wines, Italian cars, British fashion designers, and now, it seems, American piano makers have all had a shot in the arm at the very upper ends of their industry.

This trend is nothing new; the freshly flush have always tended to emulate those with more established wealth. European counts buying Roman artefacts, American “robber barons” in the 19th century building grand European style chateaux, high flying financiers developing a love of Renaissance art, dot-com millionaires buying Scottish castles; precedents are there throughout history.

The point is that whilst the location of the rich may vary, the quality premium persists. In the UK, we are singularly well placed to benefit from this, with a multitude of companies for whom heritage and quality are the watchwords. Burberry and Jaguar Land Rover (admittedly now foreign owned, but production is still in the UK) have been demonstrating how to leverage a good brand name into significant growth prospects. The rest of the UK’s “quality” sector should take note, and take heart – from manufacturers through to high end-law firms, opportunities abound in the Emerging Market.

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