Family-owned firms more profitable, innovative, Credit Suisse says
Asia’s representation in the survey by Switzerland’s second-largest bank shows the region’s significance to the wealth management business, especially the financial services for family office and ultra wealthy clients.
Family-owned business outperformed their non-family peers by 3 per cent since 2006, Credit Suisse said in its survey of 1,000 family-owned companies.
Among the 1,000 family-owned businesses, 517 are from the Asia-Pacific region with US$4.2 trillion of value. The Asian families, excluding the ones in Japan, ran their businesses with excess returns of 3.3 per cent per annum over the period, according to the survey released on Tuesday.
“Family-company returns on capital have consistently reflected a premium in each region over their non-family counterparts of between 1.5 per cent and 2 per cent, showing a sustained track record of superior value creation by family businesses”, said Nannette Hechler-Fayd’herbe, Chief Investment Officer for the EMEA region and Global Head Economics & Research.
Asia’s representation in the survey by Switzerland’s second-largest bank underscores the region’s significance to the wealth management business, especially the financial services for family office and ultra wealthy clients.
Early-generation companies perform better, reflecting their early entrepreneurial life cycles and stronger growth that accompany them, according to the survey. On the contrary, the later generations may be facing impediments to growth as issues related to succession become more prevalent.
In 2022, family-business performance reversed sharply around 7 per cent in 2022. Companies with a high cash-flow return on investment model, which is in line with the family-business model, performed better in 2022 amid a world of rising bond yields.
By looking into the proportion of sales associated with the newly introduced product, the number of patents that the firm has been granted, and the ratio of patents granted to a firm to the amount of R&D investment, the survey found that family-owned businesses did better than their non-family peers in turning an innovative idea into something profitable.
Credit Suisse explained that because of higher company-specific human capital generated from longer employee tenures, stronger social capital and a more efficient operating model, family-owned companies can generate a higher innovative output.
For example, 40 per cent of 20 largest family-owned businesses have a CEO with a tenure exceeding 10 years, compared to only 15 per cent of non-family-owned businesses, which helps make internal collaboration stronger and barriers lower when entering into projects.
The survey also explained that company and industry knowledge, as well as close relationships, also formed stronger social capital that help drive innovation. And when CEOs in family companies are more driven by prudence and the desire to closely control the firm’s deployment of resources, it results in lower governance costs and stronger ability to monitor top managers closely to make the use of resources for innovation more efficient.
“Family-owned businesses generate a higher conversion rate of innovation inputs into innovation outcomes, despite more conservative spending on research and development”, said Richard Kersley, Managing Director, EMEA Securities Research and Head of Global Product Management at Credit Suisse. “Looking ahead, we see decarbonisation as a common thread across the unicorn landscape that will only grow in importance going forward”.
Half of the 1,000 family-owned businesses surveyed are from 13 markets in the Asia-Pacific region, with China, India and Hong Kong making up 63 per cent, with US$2.28 trillion in combined market value.
The 151 family-owned companies in mainland China had a combined value of US$1.03 trillion of value, while 66 Hong Kong companies accounted for US$397 billion.
Some of the biggest companies in the Asia-Pacific region include South Korea’s Samsung Electronics with US$280 billion, India’s Reliance Industries with US$193 billion and TCS with US$152 billion. Tech giants from China, such as JD.com, NetEase and Baidu, are also among some of the biggest.
The oldest businesses can be dated back to the 19th century, such as the Bank of Philippine Islands, India-based BBTCL, and The Hongkong and Shanghai Hotels in Hong Kong.