An important segment for wealth managers - and breeding ground for family offices - dynastic businesses have a clear advantage over publicly-quoted companies, a study shows.
Debate on whether family-run businesses perform more strongly than those with a more dispersed ownership structure has taken another turn, with Credit Suisse saying family firms have a clear edge.
The Swiss bank’s Credit Suisse Family 1000 in 2018 report, published today by the Credit Suisse Research Institute, said that in 2017, family-owned firms generated 34 per cent greater cash-flow returns on investment than among non-family owned counterparts. The CSRI analyzed its database of over 1,000 family-owned, publicly-listed companies ranging in size, sector and region looking at their performance over ten years compared to the financial and share price performance of a control group consisting of more than 7,000 non-family owned companies globally. For the first time the report also assesses the best performing family or founder owned companies for each of the key regions on a three-, five- and 10-year basis and reviews their common features.
The financial performance of family-owned companies beats that of non-family-owned businesses. Revenue growth is stronger, EBITDA [earnings before interest, taxation, depreciation and amortization] margins are higher, cash flow returns are better and gearing is lower, the report said.
With family-run firms often spawning family offices over the decades and transition/wealth transfer issues an important focus for private banks, strong performance characteristics will be welcome news.
There isn’t, however, a hard consensus on whether family-run firms are always stronger. According to a study published November 2012 in the Harvard Business Review, which examined a mix of 149 publicly traded, family-controlled businesses in North America and Europe, it found that publicly-traded firms tended to outperform in an economic upswing, but family-run firms fared better when markets turned sour, suggesting they are more resilient in the long term.
The CSRI report confirmed that family-run firms tend to have a more conservative approach around growth and strategy. The average family-owned company relies less on debt funding than the average non-family owned company. Having a longer-term investment focus provides companies with the flexibility to move away from the quarter-to-quarter earnings calendar and instead focus on through-cycle growth, margins and returns. This also allows for a smoother cash-flow profile, thereby lowering the need for external funding. In turn, all of this has supported the share-price outperformance of family-owned companies since 2006, it said.
“Our analysis suggests that the best performing family or founder run companies on a three-, five- and 10-year basis are found in Germany, Italy, India and China,” it said.
The report also seemed to chime with the HBR research, as previously noted, that publicly-quoted firms can outperform in economic upswings. “While there does not appear to be a strong relationship between macro conditions or general equity market sentiment and relative returns from family-owned companies we did find that periods of rapidly improving economic conditions tend to coincide more frequently with weaker relative returns for family-owned companies.”
One issue that the CSRI report said may be exaggerated as a problem is succession planning, which has become a talking point in the wealth industry as the Baby Boom generation retires. “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 whereas older firms are less likely to be located in the `new’ more disruptive (i.e. technology) sectors, which by their nature offer much stronger growth,” it said.
Family-run firms do not, contrary cliché, simply involve small- or medium-sized enterprises. Some of the largest groups such as Walmart, Samsung, Tata Group and Porsche are family businesses. Within the private banking field, even when the firms might have become part of a listed group or partly changed their structure, family connections remain (Schroders, Pictet, Lombard Odier, C Hoare & Co, Rockefeller Capital Management, and others).