I went to a very interesting event in London a few weeks ago. It was arranged by Human Potential Accounting and the event was titled “The Future of Investment: Human Capital”. A panel composed of people from different parts of the investment community – private equity, regulators, pension funds, investment banks etc. – discussed how much they use Human Capital when assessing the value of companies. The topic is ever relevant and interesting.
When I think back upon my time as financial analyst in London, I remember that a lot of our valuations was based upon gut feeling. This gut feeling (should PE be 15x or 17x) had a great impact on valuations and much of it came down to Human Capital. It was soft, people stuff such as ‘ability to execute’, ‘trust in management’, ‘aligned organization’, ‘ability to change’ and ‘ability to innovate’. I never tried to put an exact value on these things, but I would write things such as “I do not believe the management will be able to deliver on this strategy” or something like that.
About 80% of the market value of a stock is not accounted for by the tangible assets on the balance sheet. In the early 80’s this figure was closer to 40%. So clearly the intangible value matters more today that they did 30 years ago. Human Capital is without doubt one of the most important intangible assets.
So when people ask “is Human Capital actively used in valuing stocks today” the answer is both ‘yes’ and ‘no’. No, I never see an explicit value put on any parts of Human Capital and it is never capitalised on the balance sheet. But ‘yes’, people issues matters a lot when investors, analysts and companies assess the market value of a company.