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Quoted companies that retain a family interest outperform those that don’t, says report

The stockmarket outperformance of family businesses is being described as the “Family Premium” in a report by leading academics at the IE business school in Madrid.

Yet ironically ‘family businesses’ – those quoted companies where an individual or family holds at least 20 per cent of the company’s shares and at least one family member is on the board of directors – generally trade at a discount to non-family companies.
 
The 2014 report, “Banca March – IE Business School, The Family Premium in listed European businesses: is it really a consequence of the family dimension of the company?” attempts to answer many of the questions raised by asset managers following the first Banca March–IE Business School report in 20121.
 
The earlier report was unequivocal in stating that in a study of over 800 quoted European companies with a market capitalisation of over EUR50 million in 2010 – over the ten year period to 2010, those quoted companies that retained a strong family interest clearly outperformed those who did not.
 
Those findings prompted a big debate among industry practitioners which led the report’s sponsors March Gestión de Fondos – the asset management arm of Spain’s largest private bank Banca March (and itself a family business) – to invest further in research at the IE business school in order to shed light on many of the questions raised.
 
The IE research makes clear that European markets do not value family businesses (FBs) as highly as non-family businesses (NFBs). This disconnect is even more remarkable considering the research indicated that second generation businesses tended to outperform those of the first generation.
 
Yet despite being better long term performers, the risks of investing in FBs are actually lower than those of NFBs. Having investigated the economic, market insolvency and liquidity risks, the researchers found that only in the area of liquidity was it found that FBs were more risky than NFBs. But, say researchers, this is simply because values traded are generally lower than those companies where 100 per cent of the shares are not held by families.
 
Also, the ‘Family Premium’ – the outperformance of family businesses – varies according to sector and geography. The research shows that the ‘Family Premium’ is much higher in the UK and Germany than it is in Spain and Italy. It also shows that FBs are more apparent in manufacturing – particularly clothing, machinery and computer, electronics and household appliances.
 
The IE Business School suggests that the greater the efficiency of corporate governance in UK and Germany may explain some of the geographical differences. Equally when it comes to sectors, “patient capital” is a competitive advantage in the more stable sectors where the human factor and longer investment horizons are more important.
 
Typically the difference in return between FBs and NFBs is much greater in the small (sub EUR350m) listed sector where the firms are usually niche businesses, leaders in their sector and have an extensive presence in international markets. These businesses tend to demonstrate a greater independence, a flexibility to adapt and a stronger sense of family values and culture.
 
One of the key question asked by the researchers was whether there was an optimum point in family ownership where the benefits associated with family control began to disappear. Analysis shows that there was a point – at around 40 per cent – after which the family premium tended to tail off. The IE researchers concluded that there should be a balance between family and market ownership in order to avoid the risks associated with expropriation of income of other minority shareholders.
 
Chief executive of March Gestión de Fondos, José Luis Jimenez, says: “The publication of the IE business school report does justice to all those family businesses around the world whose efforts and commitment generate jobs and wealth even in tough times. As a family business that invests in other internationally listed family firms, our Family Businesses Fund has shown a cumulative return over 40 per cent since the product was launched at the end of 2011 and, thanks in part to our research, we are convinced that it will become one of our most profitable long term funds.”
 
Chief executive of Argos Investment Managers, Jean Keller, says: “The IE Business School has done an excellent job in opening the eyes of many investors to an opportunity that has been overlooked. We have all seen the high profile cases of individuals in family having very public disagreements about their businesses, but that profile is a distortion of the reality – which is that family businesses – most of which are never in the public eye – do extremely well for their investors.”

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