Last updated: 09:05 / Friday, 24 July 2015
Credit Suisse Research

Family Firms, an Opportunity for Minority Investors?

Family Firms, an Opportunity for Minority Investors?

Family-owned firms are not just key drivers of economic growth, but also key employers. But do they generate returns comparable to benchmarks, and what type of specific risks do they pose for external shareholders?

To find out whether family firms generate returns comparable to non-family-owned peers, the Credit Suisse Research Institute analyzed financial data from the CS Global Family 900 universe, a proprietary basket composed of 920 family-owned businesses located across the globe.

From an investment point of view, sector-adjusted share price returns show that since 2006 family-owned companies have delivered superior performance: The CS Global Family 900 universe has generated a 47 percent outperformance compared to the benchmark MSCI ACWI index. This equates to an annual excess return of 4.5 percent over the nine-year period to the end of April 2015, according to the Research Institute's study "The Family Business Model."

Considering profitability in terms of return on equity (RoE), superior RoEs were seen in family-owned companies both in Asia and EMEA (Europe, Middle East and Africa), while US- and European-based family firms posted lower returns on equity (RoE) than benchmark. "Lower RoEs in more developed markets are indicative of more conservative strategies as well as broader priorities for family ownership beyond simply financial returns," explained Richard Kersley, Head of Global Equity Research Product for Credit Suisse's Investment Banking division.

But looking beyond a simple RoE analysis, data showed that the family firms in the CS Family 900 universe, excluding banks and regulated utilities, generated annual cash flow return on investment (CFROI) averaging 130 basis points higher than companies in MSCI ACWI. Over the longer term, family firms have generated twice the economic profit (earnings in excess of the opportunity cost of using assets or capital) than the benchmark.


Lower Leverage and More Stable Business Cycle

US- and European-based family firms use less leverage than their non-family-owned peers and showed faster deleveraging following the recent financial crisis compared to benchmarks. Asian family companies, however, operate with higher leverage than the benchmark. Globally, family-owned businesses delivered smoother and more stable business cycles than the benchmark. "Sales growth is less volatile through the cycle with lower peaks and less pronounced troughs," said Julia Dawson, an equity analyst at the bank's Investment Banking division.

Annual sales growth has also been higher in family-owned firms – 10 percent compared to 7.3 percent for MSCI ACWI companies since 1995 – and less volatile during both the Internet bubble and the financial crisis. "A longer term corporate strategy is fundamental to the structural nature of this higher and less volatile (sales) growth," Dawson said. "The importance of product or service quality, the development of long-term client relationships and brand loyalty, along with the focus on core products and innovation in these products rather than diversifying are all elements explaining this outperformance," she underlined.

A founder's premium was established when analyzing the CS Global Family 900 universe. Over the past nine years, first generation companies have delivered a share price compound annual growth rate (CAGR) of 9 percent. Share price returns are indeed the highest in the first generation, when investing alongside the founder, and then decline as family ownership passes down successive generations and the companies mature. "It pays to invest alongside the company founder, in the early years of a company's existence that is likely to correspond to a period of high growth," Dawson concluded.