Family business convince

AlphaValue has always been healthily sceptical about the concept of family businesses doing well, come rain or shine. There are too many ways to skin that conceptual cat to the benefit of intermediaries, i.e. fund managers, for us not to be suspicious.

We looked again at a well-established list set up 12 years ago of businesses under family influence. But for additions to coverage, this list never changed. It encapsulates anything with a hint of family influence: Michelin as a partnership in shares will qualify even though the family economic stake is unknown. So will a DiaSorin, a BMW  or a Sonae. That makes 102 names with a title to family nobility out of 463 stocks under coverage.

To our surprise after years of unsatisfactory relative performance puncturing the default view that families have a long view and thus are better at creating value, the last two years delivered bright performances. Here is the equally weighted performance. The weighted one does not diverge markedly.

Families diverge

Interestingly, while on the way down (March 2020) investors did not give credit to family influenced companies, on the way up there is a neat asymmetry of confidence. Supposedly safe and steady family management would be expected to capture a bigger share of the recovery.

That does not stack up with numerical observations. In terms of EPS growth, the 102 companies (€2.6tn market cap) show bog standard delivery (see table), i.e. they do not do ‘better’. But they are somewhat more expensive with a 20% premium on multiples.

Family-influenced companies’ valuation essentials

Family companies look somewhat like a momentum trade. Family companies are nice to have conceptually and even more so when money is free…

Family companies may, conversely, be seen as risky ESG-wise. They fail on environmental matters with a combined 4.2/10 when the average of the AlphaValue universe is 5.1/10, they fail on sustainability (4.1 vs. 5.1), they fail on governance (4.7 vs. 6.3) and on social matters (5.7 vs. 6.1). ESG metrics will be irrelevant for risk takers today but investors with deep convictions about family virtues will have an interesting moment explaining those in SFDR reporting.

While family drives do not combine easily with ESG requirements of transparency and independent boards, they have one quality which is that business models tend to be robust. AlphaValue’s numerical tracking of business models strength (fundamental strength) confirms that with a 6/10 vs. 5.5/10 for the global coverage.

In short, we remain sceptical once the ECB magic wand is off the table.

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