The Credit Suisse Research Institute (CSRI) released its third edition of the report on family-owned companies globally. The report reviews the investment case for family-owned companies and reveals that they have outperformed broader equity markets in every region and sector by an average of 3.9% per year since 2006. Asia Pacific ex-Japan family businesses have also outperformed non- family-owned companies at an annual average of 3.1% across all sectors. The financial performance of family owned companies is also superior to non-family owned peers. Furthermore, family businesses appear to focus more on long-term growth and their share price returns have been stronger than their peers.
The CSRI has researched the characteristics and the benefits of family-owned companies for almost a decade. The newly published report, “The CS Family 1000”, deepens the understanding of this topic through the analysis of close to 1,000 family-owned, publicly listed companies by region, sector and size. The definition used for the database of family- or founder- owned companies is a minimum shareholding of 20% and/or minimum voting rights of 20%. The report’s research universe has a mid to large cap focus, with some 90% of the companies having a market capitalization of at least USD1 billion. By focusing on companies with a market capitalization of more than USD1 billion, we ensure that our research universe can be properly compared to a wider universe of non-family-owned companies.
Eugene Klerk, Head Analyst of Thematic Investments at Credit Suisse and the report’s lead author said: “Family owned businesses are outperforming their peers in every region, every sector, whatever their size.
Our research seems to suggest that investors are not too concerned about the level of ownership but rather how involved the family owners are in the daily running of the business. This seems to be at the core of the success of family owned companies in our view.”
56% of “CS Family 1000” are in Asia Pacific
The majority of companies included in our database are located in emerging markets, with Asia Pacific alone contributing 536 or 56% of the total and 38% of total market capitalization. This Asian universe consists of companies ranging from USD200 million to USD 463 billion in market capitalization. China tops the charts with the highest representation (167), follow by the US (121) and India (108). Among the top 25 countries with the largest number of family-owned businesses, 11 are in Asia including Malaysia (7th), Thailand (8th), Indonesia (9th), Philippines (11th), Singapore (17th).
Asian family businesses are much smaller
At USD 6.9 billion, the average size of family-owned companies in Asia Pacific ex-Japan is substantially smaller than that of companies in Europe (USD 13 billion) and the US (USD 21.7 billion). Average market capitalization is greatest in Spain (USD 30 billion), the Netherlands (USD 30 billion), Japan (USD 24 billion) and Switzerland (USD 22 billion). Among the top 25 countries globally in terms of average market capitalization of family-owned businesses, seven are in Asia including Singapore (16th) and Philippines (25th). Within Asia Pacific ex-Japan, in terms of average market capitalization Singapore family businesses come third at USD 7.5 billion following Korea and Hong Kong, Philippines is 6th at USD 5.6 billion, Thailand 7th at USD 5.2 billion, Indonesia 8th at USD 5 billion and Malaysia at USD 3.8 billion.
Asian family businesses are much younger, over 80% are in first and second generation
Family-owned companies across global emerging markets are much younger than their peers in developed markets, at an average age of 37 years in Asia Pacific ex-Japan compared to 82 years in Europe. While more than 70% of the global family-owned companies are in their first or second generation, regionally these companies in Europe and the USA are much more mature compared to peers in Asia where over 80% are first and second generation businesses.
Age and share-price – Younger family-owned companies perform better
The report finds that in terms of share price performance by generation, younger family-owned companies (first or second generation) tend to perform much better than older firms, generating share price returns of around 9% per annum, but returns drop as companies move into the third generation of ownership or beyond, to less than 6.5%. This drop could be due to younger family-owned companies being on average smaller, reflecting a “small-cap growth” factor.
Family-owned businesses outperform non-family-owned companies
Since the start of 2006, in terms of share price, our universe of family-owned companies have generated a cumulative return of 126%, outperforming the MSCI AC World index by 55% or an annual average of 3.9%, with outperformance across all sectors and highest in energy, financials and technology sectors. Within Asia Pacific ex-Japan, family businesses have shown an outperformance of 3.1% relative to their Asian non-family business control group, with Singapore and Chinese family-owned companies generating the greatest relative returns of 7% and 6% respectively. Out of the top 50 family-owned companies globally with market capitalization above USD 2 billion in terms of average share price returns between 2014 and 2017, 39 are from Asia representing total market capitalization of USD424 billion.
On a sector-adjusted basis, small-capitalization (less than USD 3 billion) family-owned companies in Asia Pacific ex-Japan generated the highest outperformance against their larger family-owned peers of nearly 19% versus 4% for large caps (over USD7 billion). Global small caps generated a return of 16% versus 5% for the global large caps.
Family-run businesses boast superior growth and profitability
The financial performance of family-owned companies is superior to that of non-family-owned businesses.
Revenue and EBITDA growth is stronger, EBITDA margins are higher, cash flow returns are better and momentum in gearing is more moderate.
Sales growth for family-owned companies also tends to be higher than for non-family corporates across all sectors on a 10-year and 5-year basis, and with companies in Asia Pacific ex-Japan generating a positive return last year of 6% and an average return of 3.8% since 2006. Chinese family-owned companies have generated the highest revenue growth of 19% over the last 10 years relative to their respective non-family control group, followed by Singapore-based family-owned companies at 16%.
Out of the top 50 family-owned companies globally with market capitalization above USD 2 billion in terms of average revenue growth between 2014 and 2017, 33 are from Asia Pacific ex-Japan with a total market capitalization of USD 883 billion and delivering between 24% and 115% annual average revenue growth.
Family-owned companies trade at a premium
The report finds that family-owned companies in Asia Pacific ex-Japan have traded at a premium relative to non-family-owned companies since 2006, recording a 10-year average of 8%. An exception to this was during the financial crisis of 2008, when family-owned companies in Asia Pacific ex-Japan traded at a discount of –7% relative to non-family-owned companies. At a country level, Chinese, Indian and Indonesian family-owned companies appear to be the most expensive, trading at high absolute multiples, with a 12-month median price-earnings ratio (P/E) of between 15 and 16 times, compared to around 10 to 13 times P/E multiples of companies in Korea, Hong Kong and Singapore.
Family-owned companies lead in future developments – Asian companies tripled R&D spending
The report finds that in terms of research and development (R&D), there is a greater focus on future growth by family-owned companies than by non-family-owned companies in Asia Pacific ex-Japan and the US, with firms in Asia Pacific-ex-Japan almost tripling their spending on R&D since 2012. All else being equal, this should provide family-owned companies in these regions with a strong platform to sustain stronger revenue growth and balance sheets. On the other hand, Europe is the only region where family-owned companies tend to under-invest in R&D relative to non-family-owned companies for each of the past ten years.
Re-disseminated by The Asian Banker