By David Bain - 16th January 2019
The Family Capital 750: Investors shun listed family businesses
Despite research showing listed family businesses outperform non-listed family businesses over most periods, investors aren’t convinced, preferring instead non-family companies, particularly the big brand tech stocks.
Analysis of the market capitalization of the biggest listed family businesses in the world as compiled by Family Capital in its World’s Top 750 Family Business Ranking (see below) shows investors undervalue most of them.
The total market cap of the 379 listed family businesses in the 750 came to $5.4 trillion at the end of 2018 – an impressive number, but only just over a quarter of the total market cap of the S&P500, which stood at $21 trillion at the end of 2018. Many of the 379 listed family businesses have strong revenue numbers, but much smaller market cap than many of the new economy companies on the S&P 500.
Family-owned Walmart, which in 2017 made more revenues than any other company in the world at $495 billion, had a market cap of $270.6 billion at the end of 2018. In contrast, Microsoft had a market cap of $752 billion at the end of 2018, compared with revenues of $90 billion in its fiscal year 2017/2018. Apple’s market cap was $737.2 billion on January 15, 2019, with 2017/2018 revenues just over half of those of Walmart’s for 2017.
Not all family businesses are being marked down by investors, with Berkshire Hathaway the most obvious example. Warren Buffett’s investment group had a market cap of more than $500 billion at the end of 2018. Pharmaceutical giant Roche and media and technology group Comcast’s market caps were also high relative to their revenues.
But overriding evidence suggests listed family businesses are bypassed by investors in favour of the big tech stocks like Amazon, Apple, Microsoft, and Alphabet (Google). That’s even though many listed family businesses outperform in terms of return compared with their non-family counterparts. Last year, research by Credit Suisse found 1000 listed family businesses had outperformed their non-family listed peers when it came to their sharemarket performance since 2006.
“The longer-term trend of outperformance of family-owned companies is clear, with our ‘Family 1000’ universe having delivered cumulative excess returns in every region and sector since 2006,” the Credit Suisse report said.
Another listed family business index, the Euronext Family Business Index, also outperforms many indices of European stock markets, as detailed here.
Of course, many other factors need to be looked at to get a better idea of the performance of listed family businesses like their price-earnings ratios. But one possible reason why investors view these companies negatively could be because most of them operate in old economy sectors. Perhaps they are perceived as being vulnerable to new economy disruptive forces.
After all, so-called Schumpeterian creative destruction is speeding up. In 1965, the average tenure of companies on the S&P 500 was 33 years, according to consulting firm Innosight. By 1990, it was 20 years. It’s forecast to shrink to 14 years by 2026. According to these figures, around 50% will disappear from the index over the next 10 years. And these trends are likely to be duplicated in most other public equity markets over the same period.
If that is the case, old economy listed family businesses might fall out of favour more with investors in the years ahead, with their market cap shrinking further, even if their revenues continue to hold up.
Top 750 Family Businesses
By David Bain - 16th January 2019