Family-owned businesses continue to outperform peers everywhere
The 'Credit Suisse Family 1000 in 2018' report, published today by theCredit Suisse Research Institute (CSRI), reveals family-owned businesses outperform broader equity markets across every region and sector on a long-term basis.
You can read our Family Business feature in the September issue of Business & Innovation Magazine.
Family-owned businesses deliver stronger revenue growth in all regions and higher levels of profitability, says the new report, which in turn support the relative strong share-price appreciation seen since 2006. In 2017 alone, family-owned companies generated 34 per cent greater cash flow returns on investment (CFROI) than their non-family owned counterparts.
The CSRI analysed its database of over 1000 family-owned, publicly-listed companies ranging in size, sector and region looking at their performance over ten years compared to the financial and share price performance of a control group consisting of more than 7,000 non-family owned companies globally. For the first time the report also assesses the best performing family or founder owned companies for each of the key regions on a 3, 5 and 10 year basis and reviews their commonalities.
Key findings:
·       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 growth is stronger, EBITDA margins are higher, cash flow returns are better and gearing is lower.
·       Family-owned companies have a longer term and conservative focus. The family-owned companies included in the survey show a strong preference for conservative growth. The average family-owned company relies less on debt funding than the average non-family owned company. Having a longer-term investment focus provides companies with the flexibility to move away from the quarter-to-quarter earnings calendar and instead focus on through-cycle growth, margins and returns. This also allows for a smoother cash-flow profile, thereby lowering the need for external funding. In turn, all of this has supported the share-price outperformance of family-owned companies since 2006. However the UK could do better. Credit Suisse analysis suggests that the best performing family or founder run companies on a 3, 5 and 10 year basis are found in Germany, Italy, India and China.
·       Periods of underperformance are not related to macro conditions. While there does not appear to be a strong relationship between macro conditions or general equity market sentiment and relative returns from family-owned companies Credit Suisse did find that periods of rapidly improving economic conditions tend to coincide more frequently with weaker relative returns for family-owned companies. This is due, it thinks, to their more defensive or conservative characteristics and helps to explain the somewhat weaker relative share price returns during the first half of this year.
·       Shareholder returns unrelated to voting structure. When reviewing total shareholder returns of family-owned businesses with ordinary shares versus those with special voting rights, the difference was negligible indicating that investor concerns in this area is misplaced.
·       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 whereas older firms are less likely to be located in the “new” more disruptive (i.e. technology) sectors, which by their nature offer much stronger growth.
Eugène Klerk, Head Analyst of Thematic Investments at Credit Suisse and the report’s lead author said: “This year we find family-owned businesses are continuing to outperform their peers in every region, every sector, whatever their size. We believe this is down to the longer term outlook of family-owned businesses relying less on external funding and investing more in research and development. Our research on a global scale also suggests family-owned companies with special voting right structures perform relatively in line with those with ordinary shares, contrary to the fears expressed by many investors.”
