(15 JUNE 2019)The thought of weekend 1:Why family firms make good business sense

Family businesses are as diverse as families themselves, ranging from small local companies to well-known global listed players. In many economies, the small or mid-sized family firm is the backbone of the economy. "Family businesses represent two-thirds of all businesses worldwide, generate over 70% of world GDP and account for 50–80% of jobs in many countries, according to market surveys," write CIO analysts Stefan Meyer, Nena Winkler and Philippe Mueller in a new report. CIO estimates that family firms account for 20–30% of global equity market capitalization.

As well as representing a significant tranche of the market, family businesses typically share certain characteristics that, according to various academic studies, can help them outperform peers over the long run. These include a long-term focus on revenue growth and profitability; conservative funding structures for investment flexibility and independence; better alignment of interests between business ownership and management; and greater investment into Research & Development (R&D). Overall, family firms tend to exhibit high quality and defensive characteristics over the long term. "Wealth preservation over generations is a key goal, whereas the lack of a proper succession planning is a key risk," CIO's analysts note.

CIO's new longer term investment (LTI) theme, "Family businesses", looks at how to capture the attractive investment opportunity these firms present. As CIO explains, the theme is part of the "Society" section of the UBS LTI framework because the firms' organizational structure is based on the concept of family and family values. Entrepreneurs create or acquire a business, develop and grow it, and transfer it to the next generations as a legacy.

CIO defines family businesses as companies where family members (the founding family or the long-term family owner that acquired a company) own at least 20% of shares or control the business strategy and operations. For the purposes of its analysis (which is based on the 2019 EY and University of St Gallen Global Family Business Index), CIO focused on publicly listed companies as these are more easily accessible to investors and have already proven successful. Nevertheless, CIO notes that private markets also offer interesting investment opportunities in the family business universe, with similar characteristics and incentives as their listed counterparts.

Based on its analysis, CIO expects listed family businesses as a group to outgrow their peers by a low-single-digit percentage point rate annually over the longer term. "To capture the attractive investment opportunity of family businesses we advise a multi-year investment horizon as well as broad portfolio diversification," Meyer, Winkler and Mueller say. "It is essential to use a sector-neutral, region-neutral and company-equal-weighted investment approach for most consistent and stable total investment returns."

For further information, including a respective company reference list, please see CIO's report, "Longer Term Investments: Family businesses".

(By UBS)