Credit Suisse Research Institute publishes its third report on family-owned companies
The Credit Suisse Research Institute (CSRI) report reviews the investment case for family- owned companies and reveals that they have outperformed broader equity markets in every region and sector by an annual average of around 400 basis points per year since 2006. The financial performance of family owned companies is also superior to non-family-owned peers. Furthermore, family businesses appear to focus more on long-term growth and their share price returns have been stronger than their peers.
The CSRI has researched the characteristics and the benefits of family-owned companies for almost a decade. The report “The CS Family 1000,” deepens the understanding of this topic through an analysis of close to 1,000 family-owned, publicly-listed companies by region, sector and size (small cap, mid cap and large cap). In addition, a survey of more than 100 family-owned companies was conducted to test the conclusions from the analysis.
Eugène Klerk, Head Analyst of Thematic Investments at Credit Suisse and the report’s lead author said, “Family-owned businesses are outperforming their peers in every region, every sector, whatever their size. Our research seems to suggest that investors are not too concerned about the level of ownership but rather how involved the family owners are in the daily running of the business. This seems to be at the core of the success of family- owned companies, in our view.”
KEY FINDINGS:
Family-owned companies outperform.
Since the start of 2006 the family-owned companies basket generated a cumulative return of 126% thereby outperforming the MSCI AC World index by 55%. This implies an annual average ‘alpha’ of 392bps.
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 and EBITDA growth is stronger, EBITDA margins are higher, cash flow returns are better and momentum in gearing is more moderate.
Family-owned companies have a longer term and conservative focus.
The surveyed family-owned companies show a strong preference for conservative growth. New investments are largely financed through organic cash flows or equity whereas more than 90% of companies believe they have greater focus on quality, long-term growth than non-family-owned peers.
Valuation is not too much of a concern.
On a sector-adjusted P/E basis the report found that family-owned companies trade on a 2% premium to non-family-owned companies, much less than the historical average of 12%.
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 during the past 10 years.
Governance slightly weaker but does it really matter?
The HOLT governance scorecard (HOLT is a Credit Suisse platform that provides investment analysis) suggests that family-owned companies score slightly lower than non-family- owned companies. While a strong corporate governance structure can help identify whether a firm is correctly incentivizing its management, it is not the only mechanism through which companies can generate superior cash flow returns.
The Credit Suisse Research Institute is Credit Suisse’s in-house think tank. The Institute was established in the aftermath of the 2008 financial crisis with the objective of studying long-term economic developments, which have – or promise to have – a global impact within and beyond the financial services. Further information about the Credit Suisse Research Institute can be found at credit-suisse.com/researchinstitute.
