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Family Businesses prove resilient with 60% reporting revenue growth of at least 5% in the prior year
Credit Suisse Family Business Index has outperformed the market over the past 5 years by 8%According to research released today by the Credit Suisse Research Institute and Ernst & Young, 60% of family businesses reported revenue growth of at least 5% in the prior year. The findings highlight that as other businesses struggle to create revenue, the family business model remains more robust in the face of slow economic activity and the Eurozone crisis. Furthermore, by operating a different management style focused on long-term investment, family businesses are outperforming public companies, thus proving to be very successful.
The research is based on a unique survey of members of the Family Business Network International (FBN-I) from across 33 countries. It dissects the attributes of listed and nonlisted, small and large and young and old family businesses, and considers the contemporary macro issues as well as the structural ones faced by family businesses, such as sustainability and governance and the human capital challenges of succession and talent management.
Michael O’Sullivan, Head of Portfolio Strategy & Thematic Research, Credit Suisse Private Banking: “The family business model – centered on a longer-term focus, cohesion and awareness of sustainability issues, and an emphasis on the importance of product quality – is not only proving to be a vital engine of economic activity, but also the antidote to some of the structural failings uncovered by the financial crisis.”
Richard Kersley, Head of Global Research Product, Credit Suisse Investment Banking: “We believe that now is an ideal time to cast the spotlight on family businesses, given their recent performance. As further evidence of this, the Credit Suisse Family Business Index has now outperformed the market over the past 5 years by 8%.”
The research found that the following characteristics contributed to family business success:
Performance and resilience: Family businesses have to date coped relatively well in the current environment with close to 60% reporting revenue growth of 5% or more in the prior year. As much as supporting them through the current difficult environment, the research highlights that their model has paid off consistently through time both for family members and outside investors. The cash flow returns that listed family businesses have generated have been consistently superior to the wider listed sector over time. This has, in turn, driven stock market outperformance. In fact, the Credit Suisse Family Business Index has now outperformed the market over the past 5 years by 8%.
Coping with the Eurozone credit crisis: The survey reveals that the Eurozone debt crisis is low on the list of concerns of family businesses. Only 15% of companies registered it as a major concern. External markets are not closed to family businesses. More than half suggest that credit is equally accessible now as before.
Long-term perspective: This robustness appears supported by their long-term, ‘quality first’ approach, particularly in the longer generation firms. At least three quarters of respondents see a long-term perspective as key to success; most have a long-term payback approach to investment and focus on an internal rather than external financing model to fund future growth. 40% of companies are happy to wait up to 10 years for a payback. The model is one of “patient capital,” but one that pays off.
Sticking together: Where succession is concerned, families are sticking together – there is a strong desire to pass on to the next generation and they highlight the priority to plan early. Though, a large proportion of family businesses struggle to navigate past the first generation. The business accounts for most of the family’s wealth in the companies surveyed. Governance issues and talent attraction and retention are of course risks for businesses where succession and retaining ownership are at the heart of the model.
Sustainability: Finally, sustainability – financially and socially – is a key issue for family businesses. The survey highlighted 72% of businesses led by the second or a higher generation reported they had a strategy related to environmental, social and governance issues (ESG). In fact, we find elsewhere that listed family businesses tend to have good ESG scores on average, if governance can be a weaker point. Of course, the generational interests and focus of family businesses should indeed be aligned with such sustainable thinking. However, in that regard their thinking is itself aligned with the growing focus of all investors.