Family-owned businesses 2018: comfortably outperforming their peers in every region and sector. Credit Suisse Research Institute publishes its third report on family-owned companies
The Credit Suisse Research Institute (CSRI) report reviews the investment case for family-owned companies and reveals that they have outperformed broader equity markets in every region and sector by an annual average of around 400 basis points per year since January 2006. The financial performance of family-owned companies is also superior to non-family-owned peers. Furthermore, family businesses appear to focus more on long-term growth and their share price returns have been stronger than their peers.
The CSRI has researched the characteristics and the benefits of family-owned companies for almost a decade.
The report “The CS Family 1000”, published today, deepens the understanding of this topic through an analysis of close to 1,000 family-owned, publicly-listed companies by region, sector and size (small cap, mid cap and large cap). In addition, a survey of more than 100 family-owned companies was conducted to test the conclusions from the analysis.
Eugène Klerk, Head Analyst of Thematic Investments at Credit Suisse and the report’s lead author said: “Family-owned businesses are outperforming their peers in every region, every sector, whatever their size. Our research seems to suggest that investors are not too concerned about the level of ownership but rather how involved the family owners are in the daily running of the business. This seems to be at the core of the success of family-owned companies, in our view.”
– Family-owned companies outperform.
Since the start of 2006 the family-owned companies basket generated a cumulative return of 126% thereby outperforming the MSCI AC World index by 55%. This implies an annual average ‘alpha’ of 392bps.
Family-run businesses boast superior growth and profitability. The financial performance of family-owned companies is superior to that of non-family-owned businesses. Revenue and EBITDA growth is stronger, EBITDA margins are higher, cash flow returns are better and momentum in gearing is more moderate.
– Family-owned companies have a longer term and conservative focus.
The surveyed family-owned companies show a strong preference for conservative growth. New investments are largely financed through organic cash flows or equity whereas more than 90% of companies believe they have greater focus on quality, long-term growth than non-family-owned peers.
Valuation is not too much of a concern. On a sector-adjusted P/E basis the report found that family-owned companies trade on a 2% premium to non-family-owned companies, much less than the historical average of 12%.
Succession risk may be overstated.
The report showed that first and second generation family-owned companies generated higher risk-adjusted returns than older peers during the past 10 years. The report does not see this to be due to succession related challenges but a reflection of business maturity. The report illustrates that younger family-owned companies tend to be small cap growth stocks, which has been a strong performing style during the past 10 years.
Governance slightly weaker but does it really matter? The HOLT governance scorecard (HOLT is a Credit Suisse platform that provides investment analysis) suggests that family-owned companies score slightly lower than non-family-owned companies. While a strong corporate governance structure can help identify whether a firm is correctly incentivizing its management, it is not the only mechanism through which companies can generate superior cash flow returns.
About the report “The CS Family 1000”
The basket of family-run businesses was extensively updated and re-assessed to guarantee strict family-owned criteria. This included either direct shareholding by founders or its descendants of at least 20%, or voting rights held by founders or its descendants of at least 20%. The review has increased the number of family-owned companies globally in the CS basket to almost 1,000 (i.e. “The CS Family 1,000 database”) from 900 in 2015.
Furthermore, this year the family-owned business basket was compared to a wider benchmark than the previously used MSCI AC World index. The MSCI AC World index of c1300-1500 stocks meant that any regional, sector and/or size comparison of family-owned companies was based on a too small subset of the index and thereby reducing the significance of the report’s conclusions. This year the benchmark was expanded to use all companies globally included in the Datastream Total Market Indices added to the constituents of the Russell-2000 index as control group. After filtering out the companies included in our family-owned universe this provided a control group of up to c8,500 companies globally.
The majority of companies included in the family-owned database are located in emerging markets with Asia alone contributing 536 or 56% of the total. Europe and the USA on the other hand are represented by 311 companies combined.
Why the emerging markets majority?
Family-owned companies across emerging markets are much younger than their peers in developed markets, which would suggest that family or founder ownership in the former is likely to be higher. Family-owned companies in developed Europe were founded on average 82 years ago compared to 37 years in the case of companies in Asia (ex-Japan) and 30 years in EMEA.
Another factor might be that economic growth across developed markets is arguably more challenging than for emerging markets. This combined with more mature family-owned companies might have given their owners more reasons to lock-in the value of their firms by selling down.
About the Credit Suisse Research Institute
The Credit Suisse Research Institute is Credit Suisse’s in-house think tank. The Institute was established in the aftermath of the 2008 financial crisis with the objective of studying long-term economic developments, which have – or promise to have – a global impact within and beyond the financial services.