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Credit Suisse: Asian family businesses are an important pillar of Asian economies, delivering 261% cumulative total return in the past 10 years and outperforming local benchmarks in seven out of 10 Asian markets
Mr. Hans-Ulrich Meister, CEO Private Banking of Credit Suisse, who was in Singapore on his first visit to Asia since assuming the role in August, said at the briefing of the study’s highlights: “The Asian Family Businesses analysis is the latest in Credit Suisse’s on-going series of thought leadership on the topic of global family businesses. This inaugural Asian family businesses study lays the foundation for what we aspire to be a recurring thematic research initiative to examine the key challenges and opportunities for future development of Asian family businesses.
“As a premier integrated global bank, we have a large number of clients who own significant family businesses and have diversified and intertwined personal and corporate needs, as well as complex financial and non-financial requirements. We have been able to help these clients successfully handle complex transitional phases in their professional, business and personal lives.
“Throughout our more than 150 years history in banking, Credit Suisse has built up a great depth of knowledge in serving family businesses, working hand in hand with our clients through the entire life cycle of their family businesses, from set up, to growth and maturity. We have supported many of them in dealing with the myriad periodic challenges ranging from growth and expansion, business culture, raising finance, succession and transfer of business and wealth to the next generation, capital structure, potential stock market flotation to monetization.
“We want to leverage this depth of expertise globally and in Asia, to affirm our commitment to family businesses and bring valuable insights to our clients through our research. This initiative is reflective of Credit Suisse's strong commitment to, and expertise in, translating families' needs and concerns into financial objectives.”
Mr. Marcel Kreis, Head of Private Banking Asia Pacific added: “Here in Asia, many family businesses are first generation, tracing their entrepreneurial origins to the period after the Second World War, and in some cases, in the last two to three decades. In the past decade since the Asian financial crisis, many family businesses have seen dramatic changes in the global business environment and financial markets. Many had to restructure, or in some cases, reinvent themselves. The findings of this study show the results of these changes made, how Asian family businesses compare with their non family-owned peers, and how they have been an important driver of economic growth across Asia. As Asia has begun to feature prominently on the global economic stage and many Asian family businesses are starting to go through a period of generational transition, this first systematic and quantitative research becomes particularly timely and relevant.
“Asian clients and families value the longevity and depth of relationships. Wealth Management is not just about transactions, but about forging deep relationships of trust. Credit Suisse has supported the current generational leaders of family businesses in Asia with world-class wealth management services for more than 40 years, and we want to be there for their next generation as they take up the responsibility of stewardship.”
In this study, a family business is defined as family-controlled companies if a family (or an individual of the family) holds at least 20% of the cash flow rights in the firm either directly, or indirectly, through holdings in private or public entities. Unlike other previous studies which mainly rely on surveys or case studies to draw conclusions, this study analyzes development trends and economic contribution of 3,568 publicly listed family businesses with market capitalization of over USD 50 million and evaluate financial performance of 1,279 publicly listed family businesses in China, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand with market capitalization of over USD 500 million.
Asian family businesses at early stage of the life cycle - 38% of family businesses were listed after 2000
Dr Nannette Hechler-Fayd'herbe, Head of Global Financial Markets Research for Private Banking and Asset Management said: "Despite the dominance of Asian family businesses in the local economies, the topic of family businesses is relatively under-researched due to a lack of official and systematic data. The Credit Suisse Emerging Markets Research Institute undertook this research project to generate systematic primary data for more in-depth studies of key trends, economic contribution and financial performance of Asian family businesses." Dr Hechler-Fayd'herbe highlighted a notable finding of the study is the relatively short equity market history of Asian family businesses as compared with their peers in Europe and the USA --- 38% or 1,371 of the family businesses with market capitalization of over USD 50 million reviewed in this study were listed only after 2000. This should be largely attributable to the much more early stage of their life cycle and the less developed capital markets in the Asian region. "In Asia, many family businesses are first generation businesses, in contrast with many family businesses in Europe and the USA which are already in their fourth or even fifth generation. Their early life cycle development stage underpins a growth bias among Asian family businesses," said Dr Hechler-Fayd'herbe.
Total market capitalization of Asian family businesses in the study has expanded roughly six-fold between 2000 and 2010. This partly reflects the entrepreneurial drive of early stage family businesses to seek for growth opportunities through fundraising in the capital markets, and the rapid development of the Asian capital market since the Asian financial crisis in 1997-1998.
Asian family businesses are concentrated in traditional sectors
The study finds that Asian family businesses tend to be more prevalent in the traditional sectors, especially Financials (banks and real estate), Industrials, Consumer Discretionary and Consumer Staple sectors, given family-controlled management proves historically to be conservative in innovation and investment in high-risk new businesses. Credit Suisse's previous studies also show that family control as an organizational form, is best suited to more traditional industrial sectors with high fixed costs and operations which require long-term investment horizon and less likely to be found in highly innovative and technology-intensive industries. Only South Korea, Taiwan and India witnessed higher concentration of technology-related family businesses due to the technology-driven industrial structure in these economies.
Asian family businesses have very limited exposure to the capital intensive energy, telecom services and utilities sectors. This is mainly due to the lack of access for Asian family businesses to gain control over these highly regulated and state monopolized industries. The more risk averse investment strategy of family firms also accounts for their prudent attitude in considering investment opportunities in these capital intensive industries.
Economic importance of Asian family businesses
The analysis finds that family businesses are the backbone of the Asian economies, as they represent about 50% of all listed companies in the study universe. In term of regional distribution, the study finds higher concentration of family businesses in South Asia at 65% of total number of listed companies, compared with 37% in North Asia. India is home of the largest number of family businesses in our study universe, accounting for 67% of all listed companies while Chinese family businesses account for the lowest percentage (13%) due to its state-owned economic structure.
Despite being more numerous than non-family businesses, family businesses only represent 32% of overall total market capitalization in the universe of the study. Family businesses in South Asia account for 49% of total market capitalization of the study universe while family businesses in North Asia account for 25% of total market capitalization. Market capitalization of family businesses is equal to 34% of total nominal Asian GDP. Market capitalization of family businesses is equal to 50% and 27% of nominal GDP in South Asia and North Asia respectively. In Hong Kong, while family businesses represent only 26% of total market capitalization, the combined market value of these family businesses is 291% of nominal GDP, while the combined market value of family businesses in Singapore is 140% of nominal GDP.
Despite higher concentration of family businesses in South Asia than in North Asia in terms of number of companies, the study finds that large-cap family businesses are more concentrated in North Asia than in South Asia. Among the 1,279 listed family businesses with market capitalization of over USD 500 million analyzed in the study, those in North Asian markets account for 59%, made up of Hong Kong (25%), South Korea (13%), Taiwan (12%) and China (9%).
As employers, family businesses account for 57% and 32% of all employees hired by listed companies in South Asia and North Asia respectively. However, as a percentage of the total labor force, they contribute only 0.7% and 1.0% respectively, a reflection of the fact that the bulk of employment in Asia is accounted for by the public sector, unlisted firms and self-employment. Family businesses are heavily concentrated in the Consumer Discretionary sector, accounting for 64.6% of the employees in that sector, followed by the Financial sector at 32% and the Industrial sector at 30.7%.
Prominent economic and market position of family businesses in Singapore
The study finds that family businesses in Singapore command a prominent role in the domestic economy and capital market. Family businesses account for 63% of listed companies in Singapore. As of end-2010, their total market capitalization accounted for 54% of the market total and 140% of nominal GDP, the second highest of the 10 Asian countries after Hong Kong. Family businesses account for 61% of total corporate hirings, which are most prevalent in the industrial sector. Historically, non-family businesses have been a larger contributor of total fixed asset investments in Singapore. However in 2009, investment outlays by family businesses surged to 74% of the total, primarily due to investments in the two integrated resorts.
Funding behavior and role in debt market development
The analysis show that funding behavior of family businesses and non-family businesses differs quite significantly. Across Asia, family businesses are generally less able, or willing, to issue bonds than non-family businesses, relying more on bank lending to finance their business activities. In South Asia, the share of family businesses bond issuances has been rising significantly from 19% of total corporate issuances in 2006 to 40% in 2011, while family businesses in North Asia have stagnated at a share of 20% due to abundant liquidity at the North Asian family businesses’ disposal.
In terms of credit ratings, family businesses and non-family businesses have the same median corporate rating of BBB in South Asia. However, in North Asia, the disparity between the credit ratings of family businesses and non-family businesses is much greater. Some family businesses in North Asia have received high-single A ratings and the median corporate rating of family businesses in North Asia is BBB- while non-family businesses enjoy a median corporate rating of A-.
Family businesses outperformed local benchmarks in seven out of 10 markets with total return at cumulative 261% between 2000–2010
Dr Hechler-Fayd'herbe pointed out that Asian family businesses share the common characteristics of their western peers, as they typically act as committed stakeholders with long-term investment horizons rather than a short-term focus on boosting current earnings, well exemplified by their frequent share buyback activities during the market downturn. Long-term commitment of the family business owners also translates into well-considered business strategy and investment decisions that focus on the firm's long-term financial and management well-being rather than short-term share price performance. “In our view, family ownership provides firms with the crucial stability and continuity in business ownership and management structure to implement long-term investment strategies that maximize long-term firm value, placing far less emphasis on short-term results. Too short-term a focus can discourage strategic investment in brand building, research and development, human capital development and other vital intangible investments,” she added.
Despite two severe bear markets amid the internet bubble crisis in 2002-2003 and the global financial crisis in 2008-2009, the study finds that total return of Asian family businesses was cumulative 261% during 2000–2010 at compound annual growth rate of 13.7%. Family businesses outperformed against their local benchmarks in seven out of the 10 Asian markets, among which family businesses in China, Malaysia, Singapore and South Korea achieved the strongest relative outperformance against their local benchmarks in term of compound annual growth rate in total return between 2000 and 2010. This is mainly driven by their above market average earnings growth and profitability, as measured by earnings per share growth for example, one of several indicators of family businesses' capability to create shareholder value and the main drivers of firm valuation. Throughout the last decade, Asian family businesses also delivered a higher average dividend yield spread of 22 basis points over the market average over the past decade, except in 2002 during the internet bubble crisis.