BLI: Family-owned companies are attractive investments for long-term investors

October 28, 2019

BLI - Banque de Luxembourg Investments ordered an empirical study from the Handelsblatt Research Institute (HRI) on “family-owned companies as investments”. The study found that family-owned companies are considerably more stable and longer-term-oriented and achieve better total shareholder returns than non-family-owned companies. So, for long-term investors in particular they are an attractive investment.

The study used balance-sheet and financial-market metrics to research empirically how listed family-owned companies have stacked up against non-family-owned companies over a long period of time. “Forty European listed family-owned companies of various market caps were compared to a peer group of listed non-family-owned companies,” explained Professor Bert Rürup, Chairman of HRI and chief economist at Handelsblatt, while presenting the report. The study focused on the past 17 years in the auto/transport, consumer products/services, manufacturing, and real-estate services/construction sectors.

Ownership structure has a positive impact on performance metrics

After analysing the findings, BLI’s head of distribution for Germany, Austria and Switzerland, Lutz Overlack said that it was apparent that “a company’s ownership structure has a positive impact on its long-term total shareholder return and on several other performance metrics.” Among other metrics the study looked into total shareholder return, working capital ratio, equity ratio, and return on equity. Dr. Jan Kleibrink, head of economic analysis at HRI and co-author of the study said: “Regarding working capital ratio, an indicator of company liquidity, the study found that the high numbers were driven strongly by seven German and four Swiss companies, which had much higher working capital figures than companies from other countries.”

Family-owned companies have a more solid capital basis and are more focused on future growth

Both other metrics had similar findings. With a much higher overall equity ratio than non-family-owned companies, family-owned companies were found to have achieved a similarly high and, moreover, a more stable return on equity. “This is a clear sign that family-owned companies have a more solid capital basis and are more focused on future growth”, Overlack said. This finding is underpinned by the fact that family-owned companies have a lower average debt ratio.

Family-owned companies have outperformed non-family-owned companies considerably

In conclusion, family-owned companies outperformed non-family-owned companies as investments considerably between 2002 and 2019. Summing up the findings Kleibrink said: “Total shareholder return of family-owned companies has outperformed their benchmark index. By maintaining higher equity ratios and avoiding outsized debt ratios, family-owned companies have a more solid capital basis, which allows them to better withstand crises. Return on equity is even more appreciable in an environment of shrinking debt capital and higher equity capital cushions, which is rather counterproductive for enhancing returns.“ The findings support the hypothesis that family-owned companies are less eager to maximise short-term shareholder value and are focused instead on a long-term and sustainable corporate strategy, “a quality that can really pay off for long-term investors,” he added.