On the stock exchange, family businesses beat their competitors in every sector and geographical area. This is what emerges from the third report on family businesses by the Credit Suisse Research Institute. The analysis shows that since 2006 these companies have outperformed the broader equity markets by an average of around 400 bps per year. The financial performance of family businesses is also superior to similar companies that are not family-owned. Family businesses also appear to focus more on long-term growth and their equity returns have been higher than their peer category.
The study "The CS Family 1000" analyzes almost 1000 family-owned companies listed on the stock exchange, divided by geographical area, sector and size (small, medium and large capitalization companies). A survey of more than 100 family-owned companies was also conducted to test the study's conclusions.
“Family businesses consistently outperform their competitors in every geographical area and sector, regardless of their size - said Eugene Klerk, head of Tematic Investments of Credit Suisse and responsible for the study - Our research seems to suggest that investors are less interested in the ownership structure, rather than in how much families are involved in the management daily activities. In our opinion, this aspect is right at the heart of the success of family businesses".
The main conclusions emerging from the report are as follows:
- Outperformance of family-owned businesses. Since the start of the time series in 2006, family-owned companies have generated a cumulative return of 126%, thereby outperforming the MSCI AC World Index by 55%, with an average yearly alpha of 392 bps.
- Family businesses show higher levels of growth and profitability. The financial performance of this category of companies is higher than that of non-family controlled counterparts. Revenue and EBITDA growth is more robust, EBITDA margins are higher, cash flow returns are better, and leverage dynamics appear to be more subdued.
- Family businesses show a conservative and longer-term approach. The family businesses studied have a marked preference for conservative growth. New investments are financed largely through cash flow or equity, while more than 90% of these companies believe they place a higher emphasis on quality and long-term growth than their non-family-owned competitors.
- Evaluation is not a central aspect. On an industry-adjusted price/earnings (P/E) basis, the study found family-owned companies trade at a multiple of 15,4x their 12-month forward EPS, at a 2% premium to to non-family controlled companies and well below the historical average of 12%.
- The risk of succession is perhaps overstated. Credit Suisse's analysis has shown that over the past 10 years, firms run by the first or second generation of the parent family have generated higher risk-adjusted returns than their more traditionally family-owned counterparts. The report considers that this fact is due not so much to the challenges involved in the succession as to the degree of maturity of the operational activities. The study also shows that younger family businesses tend to be growth-focused small caps – a style of management that has delivered solid performance over the past 10 years.
- Slightly less disciplined governance, but how much does it actually matter? The HOLT Governance Scorecard (HOLT is a Credit Suisse platform that provides investment analysis) shows that family businesses score slightly lower than non-family-owned companies. A solid corporate governance structure can help identify whether a company offers the right incentives to management, but it is not the only element available to companies to promote an excellent return on cash flow.
