Family businesses outperform the wider equity market
Family businesses tend to perform better than the wider equity market, as a recent study by Credit Suisse shows. Read why family businesses outperform other companies, and what the potential advantages are for investors.
Family businesses analyzed around the world
Family businesses are the cornerstone of most economies. Yet they are still under-researched as an economic phenomenon. The Credit Suisse Research Institute (CSRI) has addressed this research imbalance and found numerous reasons why family-owned companies tend to be successful and attractive from an investor point of view.
Since 2008, the CSRI has conducted research on family businesses globally. In the context of this research, family-owned companies are defined as direct shareholding by founders or descendants of at least 20 percent, or voting rights held by founders or descendants of at least 20 percent. The CSRI looked at data from 1,000 publicly listed family businesses for the study. This broad universe is truly global in its reach, with over 40 percent of companies based in Asia. This allows us a valuable perspective on the creators of new wealth across emerging markets.
Family businesses outperform on the stock market
The striking feature of family-owned companies is performance. Family-owned companies have outperformed in every region. The best-performing family-owned companies since 2006 are based in Germany, Italy, China and India. The businesses have outperformed broader equity markets by an annual average of 340 basis points (bp) per year since 2006 and no less than 724 basis points in 2017.
Family businesses follow successful, long-term strategies
Supporting this trend, the financial performance of family-owned companies is superior to that of non-family-owned businesses. Growth in revenue and earnings before interest, tax, depreciation and amortization (EBITDA) is stronger. EBITDA margins are higher, cash flow returns are better and momentum in gearing is more moderate.
Moreover, a style and credit rating analysis of the family-owned companies under review suggests a strong bias toward quality. In addition, family-owned companies appear to have a long-term focus when it comes to running their business: they spend more on capex, have stronger asset growth and rely less on share buybacks as a means to generate shareholder returns.
Clear advantages of family businesses
Family-owned companies also appear to place a greater focus on innovation. Research & development (R&D) spending is distinctly higher. Funding for R&D is made easier as family-owned companies have lower pay-out ratios. Reviewing growth and cash flow returns by sector and size suggests that the «family factor» is largely universal and indeed identifiable.
Family businesses hold appeal for investors
The Credit Suisse analysis shows that first- and second-generation family-owned companies have generated higher risk-adjusted returns than older peers over the past ten years. Some might believe that this is due to succession-related challenges. Family-owned companies themselves, however, do not see succession planning as one of their key concerns. Younger family-owned companies tend to be small-cap growth stocks, which has been a strongly performing investment style.