The Irresistible Charm of the "Family Factor"
Family owned companies tend to outperform their non-family owned peers. This overall finding holds true for all regions, all sectors, and all company sizes. Over the last decade, the annual return generated by family owned companies was on average 5% higher. The latest report "The CS Family 1000" by the Credit Suisse Research Institute analyses this phenomenon.
Whether buying coffee at the small café around the corner, driving a BMW, or sitting in an IKEA armchair eating some fruit from the local grocery store, you are enjoying the products and services brought to you by a family owned company. Large, small, old, new, local, global – they come in all shapes and sizes. And, although it may not seem immediately obvious, these companies comprise a large chunk of the global economy. According to European Family Businesses, the EU federation of national associations representing family owned enterprises, in most countries around the world, family businesses are between 70 and 95% of all business entities.
Credit Suisse has been monitoring this phenomenon for a decade. The latest report "The CS Family 1000" published by the bank’s in-house think-tank Credit Suisse Research Institute (CSRI) revisits previous findings and sheds new light on the topic of family owned businesses based on the recent comprehensive analysis and research.
The Market Leaders
Data collected over the past few years has consistently shown that family owned companies outperform non-family owned businesses. The previous report from CSRI, published in 2015, revealed that family run businesses had outperformed MSCI AC World by an annual average of 4.5% during the preceding nine years. The updated analysis confirms these findings. Since the start of 2006, the companies in scope have generated a cumulative return of 126%, outperforming the MSCI AC World index by 55%.
While this finding is valid at an overall level, some differences between the regions and sectors were also identified. For example, key factors contributing to the performance of a family owned business include their size and age.
A Closer Look
Geographically, the front runners of the family business universe are concentrated in the US and in Asia (excluding Japan). Interestingly, the US is also the only region where large cap companies perform better than small caps.
On the other hand, while the regional comparison of the performance of family vs. non-family owned companies confirms the "family factor" for all locations, it shows that Europe observes the strongest outperformance: 5.1%, compared to 4.3% in the US, and 3.1% in Asia.
The researchers also found a link between a company’s share price and its age. There is clear evidence that younger companies, run by 1st or 2nd generation, outperform their older peers. This can be explained by the "small cap factor" and their early development stage. Usually, the younger companies are smaller and offer higher growth potential.
An additional check was run to establish whether the "family factor" is sector driven. The results suggest that on a global basis, family owned businesses across all sectors tend to outperform the non-family owned ones within the same sector. The sectors with the strongest presence of family owned companies are energy, financials and technology.
Optimism, Caution, and Long-Term Planning
But what is it that family owned companies have in common, except for the "family factor", and what differentiates them from non-family owned peers? These were critical aspects to explore in order to understand the reasons behind their stronger performance. To gain first hand insights, researchers conducted a follow up survey among over 100 family owned companies.
The survey identified three key aspects of a family business that are most likely driving the strong performance relative to non-family owned competitors: greater leadership loyalty towards the company, a more stable strategy and the focus on long term, quality growth over short term profits. These statements are reflected in companies’ management and performance.
For example, while the business owners share an optimistic outlook, they also typically adopt a very cautious approach towards funding growth. Nearly half of respondents prefer to use internally generated funds over taking out loans, assuming debt or issuing new equity. Interestingly, this mindset is valid for companies of all ages, and is even slightly more widespread among older businesses run by the 4th generation or later.
However, the findings did not confirm the common belief that succession planning is the biggest worry of family business. Rather, the top three concerns were revealed as: Increasing competition, the need to innovate, and technological disruption. These concerns translate into higher spending on research and development by American and Asian family owned companies (excluding Japan).
Keeping a Finger on the Pulse
The research also identifies direct family member involvement in company decision-making as a key business successor factor. On average, almost 70% of the surveyed companies have two or more family members on their board. And the level of family involvement does not decline substantially as the business matures Indeed, only 5% of 4th generation companies reported no direct family involvement or family board memberships.
This aspect, fueled among other things by a heightened sense of responsibility towards past and future generations, is considered an added value for family owned businesses. And, it is something that is unlikely to change anytime soon. 75% of the companies surveyed do not expect the family ownership to decline in the foreseeable future.
Investors can certainly benefit from the entrepreneurial mindset of families and their overall approach to business. In their efforts to avoid potentially letting down their successors, business owners typically focus on the long-term sustainability of their company. And, as the recent report findings suggest, those investing in family owned companies are unlikely to be disappointed either.