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OPINION

Investing in the family silver

Investing in the family silver
September 30, 2014
Investing in the family silver

But I often hear the worry that big family stakes jeopardise corporate governance and the equal treatment of private shareholders – not least by entrenching a quasi-feudal system of hereditary management. A recent example is the speedy appointment of Ana Botin as the new chairman of Santander (es:SAN) on 10 September, just one day after the death of her father, the previous chairman. That’s despite the fact that the Botin family now owns less than 2 per cent of the banking group.

Happily, a new academic study offers an empirical answer to the question of whether family businesses make better investments. And equally happily, this answer confirms my hunch: they do.

Researchers at the IE Business School in Madrid analysed 832 listed companies in six European countries with a market capitalisation of more than €50m. Of these, they defined just under a third as family businesses, insofar as one family owned 20 per cent or more of the stock and provided at least one board member. During the decade 2001-10, these family businesses outperformed their non-family peers by 3 percentage points on average.

Why? Data comes without explanations. But the notion of “skin in the game” must have something to do with it. During the last property crash, professional managers – whose personal wealth depends more on their big salaries than share prices – preferred to raise capital to safeguard their jobs at the expense of shareholder returns. By contrast, owner-managers did everything they could to hang on and safeguard their equity.

More generally, Jean Keller, chief executive of Argos Investment Managers, a Geneva-based stock picker that runs a fund focused on family businesses, reckons they are better able to take a long-term view. “Most listed businesses were laying people off during the recession, but family businesses were taking people on. Management is less likely to be overpaid, and there’s less pressure on them to be seen to be doing something,” he explains.

Interestingly, IE Business School found that the “family premium” – the outperformance of family businesses – is much stronger in Germany and the UK than in France, Italy, Spain or Switzerland. In Germany, family businesses outperformed by a full 10 percentage points over the decade under review; in the UK the premium was 6 percentage points. Better corporate governance in Northern Europe may explain this, the researchers speculate. Another interesting detail is that the family premium tended to be concentrated in specific sectors, most notably clothing. Mulberry Group (MUL) and Ted Baker (TED) are local examples.

One somewhat counter-intuitive finding was that founder-run firms performed worse than second-generation family firms. Moreover, the benefits of family control tail off above a certain level of ownership: the researchers reckon the optimum family stake is about 40 per cent. Mr Keller argues that listed companies with a strong but non-executive family holding combine the “best of both worlds”: on the one hand the transparency, accountability and professional management associated with public markets; on the other the structural stability and long-term thinking provided by “a family doing all it can to protect its nest-egg”.

A final, crucial point concerns valuations. In most countries analysed, the merits of family businesses were not recognised by the market. On the contrary: although they performed better, were less likely to go bust and posted less volatile financial results, their shares traded at a discount to those of non-family businesses. In Germany and the UK, however – the two markets where their outperformance was most marked – family businesses were more expensively rated on a price-to-book basis. Judging by the performance record, it is worth paying up for committed co-investors.