Family-Owned Businesses show Resilience through Pandemic, says Credit Suisse

The ‘Credit Suisse Family 1000: Post the Pandemic’ report shows the continued outperformance of family-owned businesses compared to non-family-owned peers in every region and sector as well as greater resilience amidst the Covid-19 pandemic.

Credit Suisse’s research to date highlights that family-owned businesses pursue a longer-time horizon in their investment strategy, delivering more stable and superior through-cycle profitability, and ultimately driving significant excess returns for all shareholders, the Bank said in a press release.

Using its proprietary ‘Family 1000’ database of more than 1,000 publicly listed family- or founder-owned companies, Credit Suisse has found that since 2006, the overall ‘Family 1000’ universe has outperformed non-family-owned companies by an annual average of 370 basis points. Asia Pacific (APAC) ex-Japan has seen the most pronounced effect, with compound excess returns of more than 500 basis points per annum, followed by Europe, at 470 basis points.

APAC family-owned companies continue to dominate the universe

The report covered 12 markets in APAC including Japan that continue to dominate and represent a 51% share of the universe, with a total of 540 companies and a market capitalisation of over USD5.56 trillion.

The universe includes 159 family-owned companies in China (USD2.48 trillion in total market capitalisation) and 71 family-owned companies in Hong Kong (USD505.1 billion in total market capitalisation). Together with the 111 family-owned companies in India, these three jurisdictions combined comprise 63% of the APAC universe, with a combined market capitalisation of USD3.9 trillion (or 70%) of the market share of the APAC universe.

Within APAC, the family alpha is strongest in Australia, with an annual average outperformance of 23% since 2006, compared to 12% by their Chinese peers and 9% by their Japanese peers, the firm reports.

However, the universe of Australian and Japanese family-owned companies makes up only a small portion of the overall universe, which reduces the significance of the calculations to a degree.

Family alpha factor during the Covid-19 pandemic

The Covid-19 pandemic has had a significant impact on equity market returns and volatility this year. Family-owned companies tend to have above-average defensive characteristics that allow them to perform well, particularly during periods of market stress.

Return data for the first six months of this year supports that view, given an overall year-to-date outperformance of around 3% relative to non-family-owned companies. This outperformance was strongest in Europe and APAC ex-Japan, at 6.2% and 5.1% respectively. Family-owned companies in Japan outperformed their non-family-owned peers by 30.1% during this period.

Key findings on family-owned companies:

• Higher growth and profits – The analysis suggests that, since 2006, revenue growth generated by family-owned companies has been more than 200 basis points higher than that of non-family-owned companies for both smaller and larger companies. At the same time, the analysis also suggests that family-owned companies tend to be more profitable. For example, average cash flow returns (using the Credit Suisse HOLT® metric of Cash Flow Return On Investment or CFROI®) are around 200 basis points higher than those generated by non-family-owned companies. These superior returns are observed across all regions globally.
• Perform better on environmental, social and governance (ESG) scores – Family-owned companies on average tend to have slightly better ESG scores than non-family-owned companies. This overall superior performance, which has strengthened over the past four years, is mostly led by higher environmental and social scores as family-owned companies appear to lag their non-family-owned peers in terms of governance. From a regional perspective, European family-owned companies have the highest ESG scores. Family-owned companies in APAC ex-Japan are scoring better than those located in the US and their scores are rapidly converging with those generated by their European counterparts.
• Older family-owned companies have better ESG scores than younger firms – This performance is seen across all three ESG areas. Perhaps the fact that older family-owned companies have more established business processes in place allows them to incorporate or focus on areas of their business that are not directly related to their production processes, but that are relevant in terms of maintaining overall business sustainability.
• Covid-19 impact – In order to better understand the ESG characteristics of family-owned companies, a survey of more than 200 companies was conducted. The companies were asked how much of a concern Covid-19 is to them going forward. Despite the impact on revenue growth this year, it seems that the family-owned companies surveyed view Covid-19 as slightly less of a concern to their firm’s future prospects than non-family-owned companies. Family-owned companies have also resorted less to furloughing their staff than non-family-owned companies (46% versus 55%). Among family-owned companies, support programs have been set up most often in APAC ex-Japan rather than in Europe or the US. This might reflect a greater availability of government-sponsored support programs in these regions.
• Social impact – The survey showed that while family-owned companies have focused more on social policies since the outbreak of the Covid-19 pandemic, they seem to lag non-family-owned peers on several ESG-related factors, most noticeably human rights and modern slavery-related policies. 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 related to United Nation principles.

Urs Rohner, Chairman of the Board of Directors of Credit Suisse Group, and Chairman of the Credit Suisse Research Institute, said: “We have tracked the performance of family-owned businesses compared to non-family-owned businesses for many years now and have seen a regular pattern of stable and superior through-cycle profitability and returns for all shareholders, minorities included. With the onset of the global pandemic and an increased global consideration towards ESG concerns, we’ve added further qualitative analysis to delve deeper into what makes family-owned businesses unique.”

Eugène Klerk, Head of Global ESG Research Product, Credit Suisse, said: “Our latest Family 1000 report reaffirms many of the outperformance metrics family-owned businesses have shown in our previous studies compared to non-family-owned businesses. When talking to investors about family-owned companies, we often hear that they outperform because of a perceived longer-term investment focus compared to non-family-owned companies. Our analysis suggests that this is indeed the case. This year, with the exceptional circumstances of a global pandemic, we delved deeper in our analysis and found that the traditionally more conservative financial model of family-owned companies built on lower leverage and stronger cash flow generation has proven to be an asset. They have notably relied less on government employment support to furlough their workforce, implicitly reflecting their own social responsibilities.”

Carsten Stoehr, CEO, Greater China, Credit Suisse, said: “Credit Suisse’s Family 1000 report provides a fascinating insight into the performance and behavioural patterns of family-owned businesses when compared to their non-family-owned counterparts. Our data consists of over 1,000 publicly listed companies, spread across the globe and spanning multiple sectors. Family-owned companies, including those from Greater China in our proprietary database, continue to show signs of outperformance in growth and profitability, as well as resilience to the ongoing Covid-19 pandemic. Credit Suisse remains committed to being the Bank for entrepreneurs, in turn supporting the innovation and wealth creation such activity typically brings.”