Family-owned companies have outperformed broader equity markets in every region and sector, according to the Credit Suisse Research Institute’s (CSRI’s) ‘The CS Family 1000’ report, which reviews the investment case for family-owned companies.
The financial performance of family-owned companies is far superior to that of non-family-owned peers, and family businesses appear to focus more on long-term growth, with their share price returns having been stronger than their peers’, the report suggests.
The CSRI, which has researched the characteristics and benefits of family-owned companies for almost ten years, published the report last month. The report comprises an analysis of almost 1 000 family-owned, publicly listed companies by region, sector and size.
Additionally, a survey of more than 100 family-owned companies was conducted to test the conclusions from the analysis.
Credit Suisse Thematic Investments head analyst and the report’s lead author, Eugène Klerk, noted in a press statement last month that the research seemingly suggested that investors were not too concerned about the level of ownership, but rather how involved the family owners were in the daily running and/or operations of the business.
“This seems to be at the core of the success of family-owned companies, in our view,” he stated.
Key findings include that, since the start of 2006, the family-owned companies’ basket generated a cumulative return of 126%, thereby outperforming the Morgan Stanley Capital International All Country World Index by 55%. This implies a yearly average ‘alpha’ of 392 basis points, according to the report.
Revenue and earnings before interest, taxes, depreciation and amortisation (Ebitda) growth of family-owned companies are stronger, with Ebitda margins higher. Cash flow returns are better and momentum in gearing is also more moderate.
Family-owned companies also have a longer term and conservative focus, particularly on growth.
According to the report, new investments are largely financed through organic cash-flows or equity, whereas more than 90% of family-owned companies believe that they have greater focus on quality and long-term growth than their nonfamily-owned peers.
Meanwhile, valuation is not too much of a concern, despite the report’s finding that, on a sector-adjusted price/earnings basis, family-owned companies trade on a 2% premium to non-family-owned companies – much less than the historical average of 12%.
Further, succession risk may be overstated, as the report showed that first- and second- generation family-owned companies generated higher risk-adjusted returns than their older peers during the past ten years. The report does not regard this as a result of 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 ten years.
Additionally, family-owned companies score slightly lower than non-family-owned companies in terms of corporate governance, according to the HOLT governance scorecard. HOLT is a Credit Suisse platform that provides investment analysis and the scorecard is a proprietary, performance-based incentive scorecard.
However, the report notes that, while a strong corporate governance structure can help identify whether a firm is correctly incentivising its management, it is not the only mechanism through which companies can generate superior cash flow returns.
The report notes that of greater concern to family-owned businesses are factors such as increasing competition, the need to innovate and technological disruption.