Family-owned companies have outperformed broader equity markets in every region and sector by an annual average of around 400 basis points per year since January 2006, according to Credit Suisse Research Institute’s third report on family-owned companies.
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 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.
“Family-owned businesses are outperforming their peers in every region, every sector, whatever their size,” says Eugène Klerk, Head Analyst of Thematic Investments at Credit Suisse and the report’s lead author.
“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.”
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.
The report also shows that 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.
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.
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.