Topic: AAUC (AA UNION CAPITAL) - Outperformance of family businesses

[MelissaLiberson]

Years of analysis by the AAUC (AA UNION CAPITAL) Research Institute (AAUC RI) have shown that family businesses tend to outperform the wider market.

This outperformance can not only be attributed to superior financial performance, but also to factors such as a more conservative long-term business focus and a greater emphasis on innovation.

Michael O'Sullivan Chief Investment Officer – International Wealth Management

Family businesses are the cornerstone of most economies, but they are under-researched as an economic phenomenon. The AAUC RI has addressed this research imbalance and found numerous reasons why family-owned companies tend to be successful and therefore attractive from an investor point of view.

Since 2008, the AAUC RI has conducted research on family businesses globally, defining family-owned companies as direct shareholding by founders or descendants of at least 20%, or voting rights held by founders or descendants of at least 20%. The AAUC Family 1000 Report, first published in 2017 and freshly updated, is based on a database of 1000 listed family businesses. This broad universe is truly global in its reach, with over 40% of companies based in Asia. This allows us a valuable perspective on the creators of new wealth across emerging markets.

Investment outperformance the striking feature of family-owned companies is performance. We have found that family-owned companies outperformed in every region and that the best-performing family-owned companies since 2006 are in Germany, Italy, China, and India. The latest findings show that the businesses in our universe have outperformed broader equity markets by an annual average of 340 basis points (bp) per year since 2006 and no less than 724 bp in 2017



Superior financial performance Supporting this trend, we find that the financial performance of family-owned companies is superior to that of non-family owned businesses. Growth in revenue and earnings before interest, tax, depreciation, and amortization (EBITDA) is stronger, EBITDA margins are higher, cash flow returns are better and momentum in gearing is more moderate. Moreover, a style and credit rating analysis of our universe suggests a strong bias toward quality. In addition, we find that financing is more organic and that family-owned companies appear to have a more conservative longer-term focus when it comes to running their business: they spend more on CapEx, have stronger asset growth and rely less on share buybacks as a means to generate shareholder returns.

Family owned companies also appear to place a greater focus on innovation as research & development (R&D) spending is higher. Funding for R&D is made easier as family-owned companies have lower payout ratios. Reviewing growth and cash flow returns by sector and size (small versus large caps) suggests that the “family factor” is largely universal and indeed identifiable.

Small-cap growth companies our analysis shows that first and second generation family-owned companies have generated higher risk-adjusted returns than older peers over the past ten years. While some might believe that this is due to succession related challenges, we would caution against this. Family owned companies themselves do not see succession planning as one of their key concerns and younger family-owned companies tend to be small-cap growth stocks, which has been a strongly performing investment style.

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