(News Bulletin 247) – According to Credit Suisse, listed family groups are showing much better stock market performance than other companies over the long term, despite a hitch in 2022. This is due in particular to their ability to plan for the long term.

This is a type of company very present on the Parisian coast: family groups. A recent study by Euronext showed that in 2021 these groups held around 21.5% of the total capitalization of the CAC 40, constituting the first “block”, ahead of asset managers.

The stock market performance of these groups is the subject of an abundant and regular literature, with in particular the report “The Family 1000” by Credit Suisse, the latest edition of which was published at the end of March. In this study, the institution uses as the definition of a family business a company whose capital or voting rights are held at least 20% by the founder and/or his family. This leads the bank to constitute a total sample of 1,005 companies listed worldwide and weighing 13.7 trillion dollars in market capitalization. Among them, Alphabet, Meta, Tesla in the United States or Samsung and Softbank in Asia. For France, the major luxury players (LVMH, L’Oréal, Kering, Hermès) are included in the sample, but also the software publisher Dassault Systèmes and the perfume and food flavoring specialist Robertet.

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Over the year 2022, Credit Suisse observes a breakout. For once, these family companies underperformed other companies – a selection of 6,000 stocks held by the bank – by an average of 700 basis points, or 7%.

The bank puts forward two reasons to explain this lower performance. First of all, it believes that 2022 has been a difficult year for so-called “quality” securities, in a context of rising bond yields. However, family groups, because of their higher return on investment in terms of cash generation, belong to this category of “quality” shares, argues Credit Suisse. Another explanation put forward by the bank comes from the poor performance of “tech” groups, founded recently and therefore included in the 1,000 or so family groups in its study.

Clear long-term outperformance

Nevertheless, Credit Suisse considers that this poor performance in 2022 is not intended to change the long-term trend, which is much more favorable to family groups. “In many ways, the pullback in 2022 has only undone the outstanding outperformance experienced by big tech companies in 2021 and brought relative performance back to longer-term trend levels. , the long-term uptrend appears to resume in 2023,” the bank observes.

And over the long term, that is to say since 2006, family groups are doing much better than other companies. The average outperformance per year on the stock market thus stands at 300 basis points, or 3%, according to Credit Suisse.

Why in the long term, family businesses are more successful on the stock market? Credit Suisse explained in another edition of this report that these companies are perceived by investors more as groups with a long-term vision. Less indebted and more profitable, they can also be safe havens in times of uncertainty, which happened in particular in 2020.

In a study published in 2021, Pictet Asset Management drew up several reasons. “First families tend to invest most of their fortune and their reputation in these companies” and therefore “their interests are closely aligned” with those of society, advanced the financial intermediary.

“This leads to the second reason, which is that family businesses often reinvest a greater proportion of their profits than their counterparts. Finally, shareholder stability also allows management to take a long-term view, rather than to be obsessed with the profits of the next quarter”, continued Pictet Asset Management.

Risks to watch out for

Quoting a Societe Generale study from 2021, Jérôme Dedeyan, president of Mon Partenaire Patrimoine, mentioned three key factors on BFM Patrimoine last year: “a clear vision of their strategy, an ability to take unfavorable decisions in the short term but for a benefits superior in the long term, and stability of governance over time”.

This does not prevent risks from existing. Jérôme Dedeyan mentioned a certain number of them, in particular the pitfall which amounts, for these groups, to being too cautious in their investments, with the possibility of missing a key strategic shift which would require calling on external capital.

Another risk: that of opacity. “Family control can give rise to a lack of transparency on the strategy or a certain number of decision-making processes or to non-rational decisions such as a family consensus on a leader taken within the family, when it should be bringing in an external manager”, explained Jérôme Dedeyan. The latter also pointed to potential friction between family and non-family shareholders. “This can give rise to decisions to capture value via the salaries or benefits of family leaders to the detriment of other shareholders or minorities,” he said.

To limit these risks, there are a number of points of vigilance to be taken into account. Jerome Dedeyan advised looking at the transparency of decision-making processes, the real presence of independent directors, the separation of the functions of CEO and Chairman of the Board, as well as “the existence of an organization adapted to the management of relations between family shareholders and such as to ensure liquidity between them to avoid problems of intra-family conflicts”. Other signals exist, such as the presence of significant employee share ownership, which shows that the company is probably ready to be transparent about its strategy.