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洞见 02.02.2022

Family-owned businesses: Skin in the game

Family-owned businesses: Skin in the game

Family-owned companies have outperformed the indices over the long term thanks to their unwavering focus on long-term value creation.


Indeed, studies have shown that while these businesses invest more in research and development (“R&D”), they exhibit both higher margins and better return on invested capital (“ROIC”). In addition, their multi-generational experience of business cycles means that these companies are run with lower debt levels and are less prone to be caught in fads. At a time of lofty valuations, investing alongside entrepreneurs may provide investors with an interesting diversification angle.

Key messages

  • Family-owned businesses have outperformed the indices over the long term, showcasing both higher margins and higher ROIC
  • High ownership levels ensure a long-term vision, sound capital allocation and a strong alignment of interests

A track record of long-term outperformance

According to a Credit Suisse study, its Family 1000 universe (companies with a 20%+ family shareholding) has outperformed non-family-owned businesses by c. 370 bps per year since 2006. The outperformance has been the strongest in Europe and Asia, (470 bps and 500 bps) though still distinct in North America too (260 bps). The research also indicated that the smaller the family business, the stronger its outperformance, with small and mid-caps outperforming their peers by 650 bps and 390 bps respectively.

In addition, and this is key to their long-term outperformance, the Credit Suisse study also found that family-owned companies tend to have above-average defensive characteristics, allowing them to perform well during periods of market volatility.

Best-in-class businesses

The reason for this outperformance can be found in the fundamentals, with several studies showing that family-owned businesses on average have superior economic characteristics, showcasing EBTIDA margins 200-300 bps above non-family owned businesses and a lower capital intensity (capital expenditures as a percentage of sales).

As a result, Credit Suisse found that these companies exhibit cash-flow returns on invested capital (“CFROI”) about 200 bps higher non-family-owned companies.

This makes intuitive sense, since these economic characteristics are precisely what has allowed the families to finance their growth internally and not dilute their share ownership by tapping into the market or external funds.

Skin in the game

Importantly, because families and entrepreneurs have such a large part of their wealth tied into their companies – they have “skin in the game” – they manage their assets differently than “professional CEOs”: the focus is on business durability above all else, trumping temptations to cut corners to make quarterly or yearly numbers.

This can be seen in different ways:

  • They invest about 0.5–1.0% more of their sales in R&D, giving up short-term margin performance in favour of long-term competitiveness. This is especially true in the US and Asia, where the R&D-to-sales ratio 1.0% above peers.
  • They have been shown to reinvest more in capex in order to keep their assets competitive and up to date. As a result, they have been shown to allocate less of their cash flows to buy-backs (6.8% vs. 15.8% for non-family-owned businesses).
  • Their multi-generational experience of the economic cycle translates into lower leverage, with a net debt-to-EBITDA ratio 30% below peers at 1.6x and a 52% lower debt-to-equity ratio than the S&P500. At the same time such businesses are less prone to major capital allocation missteps in fads or at the top of the cycle.

Note: The products or services mentioned are provided as general information only and are not intended to provide investment or other advice. Not all products or services described are available in all jurisdictions. Past performance is not a guarantee of future results. For the full disclaimer, please refer to Legal Aspects.


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Alexandre Phily
Equity Analyst
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Nicolas Laroche
Global Head of Advisory Investment
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Expertise

Global equities

Invest in companies with superior and sustainable value creation.


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