A long-term study has found family-owned listed companies have thoroughly outperformed non-family businesses.
Credit Suisse Global Research on Thursday revealed companies in its international Family 1000 database outperformed the rest of the market over 14 years by an annual average of 370 basis points.
Family-owned businesses in Asia returned 500 more basis points per year than their rivals, while in Europe it was 470. The gap was far narrower in North America, where it was 260 basis points per annum.
Six Australian companies are in the Family 1000: Fortescue Metals Group Limited (ASX: FMG), Crown Resorts Ltd (ASX: CWN), TPG Telecom Ltd (ASX: TPG), Flight Centre Travel Group Ltd (ASX: FLT), Seven Group Holdings Ltd (ASX: SVW) and WiseTech Global Ltd (ASX: WTC).
Those businesses have collectively returned an "exceptional" 23% per annum since 2006, according to Credit Suisse.
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Family businesses also shined through COVID-19
The "Credit Suisse Family 1000: Post the Pandemic" report showed that even through the COVID-19 downturn, family-owned businesses have fared better.
"In previous work, we highlighted that family-owned companies tend to have above-average defensive characteristics that allow them to perform well, particularly during periods of market stress," the report stated.
"Return data for the first six months of this year supports that view, given an overall year-to-date outperformance of around 300 basis points relative to non-family-owned companies."
Why do family companies do so well?
There is a theory that family-owned and run businesses take a longer-term investment view than listed companies owned and run by "independents".
"Family-owned companies have lower gearing ratios than non-family-owned companies, implying that they fund their operations more through internal funds rather than debt," stated the Credit Suisse report.
"We also observe that family-owned companies tend to focus more on research and development, which is arguably a long-term indicator."
Over the 14 years of the study, revenue growth from the Family 1000 companies was more than 200 basis points greater than other businesses.
Family companies are more profitable as well.
"Average cash flow returns are around 200 basis points higher than those generated by non-family-owned companies. These superior returns are observed across all regions globally," read the report.
A more recent pattern is that family-owned businesses rate better on environmental, social and governance (ESG) issues than its competitors.
But not on all three.
"This overall better performance is mostly led by better environmental and social scores as family-owned companies appear to lag their non-family-owned peers in terms of governance," said the report.
"What is interesting in our view is that relative performance appears to have been a more recent phenomenon and has been strengthening over the past four years."
What family businesses fail on
While family-owned companies have outperformed over the past 14 years, there are weaknesses that could leave them exposed in the future.
One area Credit Suisse identified was diversity and social justice.
"Our survey shows that, compared to non-family-owned companies, family-owned companies on average have less-diverse management boards, fewer of them have support groups for the lesbian, gay, bisexual and trans (LGBT) and black, Asian and minority ethnic (BAME) communities, or have made public statements concerning respect for human rights or the related United Nation principles," stated the report.
"The growing relevance of ESG investing is likely to put increased pressure on corporates to address these issues."
In order for a publicly listed company to make Credit Suisse's Family 1000 database, it must meet one or both of these conditions:
- The founder or her/his family owns at least 20% of shares
- The founder or her/his family controls at least 20% of voting rights
There are now 1,061 companies in the database, with almost half located in Asia.
