An old school British merchant banker, now living happily in retirement in the English countryside, listed, after dinner the other night, his basic stock picking formula. Never invest in family-controlled companies…..
The above extract is taken from a 2010 FT article that highlights the issues facing professional investors and capital markets when working with FBs- even larger ones- in this case VW.
Use this space to submit your arguments for why capital market investors should work and fund FBs. Make the case from both the investors’ and FBs’ perspective
There are 2 indexes tracking publicly held family firms:
- the Family Business Stock Index (FBSI) (follows more than 200 of the largest family-controlled companies nationwide)
- the Loyola University Chicago Family Firm Stock Index (LUCFFSI) (tracks 38 publicly traded, family-controlled firms headquartered in the Chicago area)
From the investor’s point of view:
- A study of the 20-year performance of FBSI companies showed average annual returns of 16.6 percent, compared with 14 percent for the Standard & Poor’s 500-stock index.
- The second study compared the performance of the LUCFFSI with the Dow Jones industrial average and Crain’s Chicago Stock Index from Sept. 28, 1990, to July 28, 1995. The LUCFFSI increased 94 percent during that period, compared with 92 percent for the Dow and 65 percent for Crain’s.
The reasons
- According to Oakland University’s Kleiman, “the families have capital tied up in the companies-vs. being absentee owners-and therefore work aggressively to maximize the stock value as it benefits them.”
- The Chicago researchers point out that an index of family-controlled companies can serve as a benchmark by which other family businesses can measure their own performances, and that such an index provides “the best way to judge the performance of portfolio managers who follow a strategy of investing in family controlled firms.”
For more information please refer here.
According to a research conducted in Britain: Family ties make more profitable publicly quoted businesses.
Amongst the reasons:
· During the past five years the share prices of UK quoted companies where families held a significant stake outperformed the FTSE all-share index of firms listed on the London Stock Exchange by 50 per cent, according to a survey by Manchester Business School.
· Family businesses had a higher average profit margin, return on capital employed and return on equity( Randall D., (2009) Forbes 2009 –>
(http://www.forbes.com/2009/03/10/investing-family-martin-personal-finance-martin.html)
than their peers, though growth in sales and assets tended to be lower.
· Family businesses were more stable performers when markets were down. They don’t tend to zoom up and zoom down.
The article does highlight, though, that the most important challenge for Family Businesses is to plan for succession as research by the Institute for Family Business and the London Business School in 2003 found that 57 per cent of family businesses had no defined succession plans, although 39 per cent expected chief executives to retire or leave within five years.
(Moules, J. UK quoted companies see profit of family ties, Financial Times, 2005)
Investing in a family-owned business
Hey guys
this is summary of the article - main points; “The family business owner is looking to sell. The private equity firm is looking to buy and wants to get a foot in the door. They need to tread carefully. While family-owned businesses are fertile ground for dealmaking, land mines abound. One false step and”…
According to the author family owned firms and private equity are “hardly strangers”. Moreover, according to a research more private equity firms will decide to invest in family owned business in the near future. Concerns of family business owners that want to sell their business or let other companies to invest in the family business:
By Stephen McGee, Executive Director, Grant Thornton Corporate Finance LLC
http://www.oecd.org/dataoecd/1/26/43654301.pdf
Family ownership may be seen as an opportunity or a threat, depending on a variety of factors. The family ownership and commitment to the business may be understood as adding value, provided that the company and the controlling family can respond to the concerns of the investor community.
Investors—both shareholders and creditors—may look with distrust on family-controlled companies, because of the risk that the controlling family may abuse the rights of other shareholders. So investors likely will scrutinize such companies with care before taking the plunge and investing.
From an investor perspective, the key is to establish the right corporate governance conditions so that the positive aspects of family ownership are coupled with assurances that investor interests will be recognized and addressed. Investor perception on ownership concentration, and the value associated with it, is revealed in a report of emerging market firms published at the beginning of 2007 by Citigroup Global Markets. The analysis suggests that investors place a three percent valuation premium on firms in which family insiders wield significant, but not absolute, control. Conversely, for emerging market firms where families are majority owners, investors assign a valuation discount of 5-20 percent.
A reason for which it is risky to invest in a family firms which undertook an IPO, is that initially, you may experience Underpriced value.
According to this article, this happens mainly because of: Information Asymmetry, Agency Costs, Institutional Settings and Investors - over optimism.
Usually the older and larger the firm, the lower the uncertainty and information asymmetry and, therefore, lower underpricing.
Another reason as to why investors need to be careful, is that many often consider IPO’s as a speculative opportunity. This may lead to a short.run underpricing with negative initial returns.
Source:
Roberto Arosio, Giancarlo Giudici and Stefano Paleari (2000), What Drives the initial market performance of italian IPO’s? An empirical investigation on underpricing and price support, 2000.
I found this source “Family Business Ownership: How To Be An Effective Shareholder”
it identified the aspects of family business ownership.
Owners Versus Investors:
Investor are people who are simply risking their money in hopes of a good financial return. They are not relly personally or emotionally involved with the company in which they are investing.
Being an effective businees owner is a more intimate matter.
The types of family business owners:
1.Majority and minority owners: more half shares vs less than half shares
2.Voting and non-voting owners
3.General partners and linited partners
The interests and goals of family shareholders are different from those of public shareholders. Serving both groups is usually a considerable challenge.
according to capital market and the evolution of family businesses, published in the journal of business vol. 74. no. 2(apr.,2001) pp. 187-219, by utpal bhatta charya and b ravukumar, published by the university of chicago press,
family businesses are crucial in the intial stages of a country’s development, the imoportance of these businesses diminishes as capital markets develop, however their roles remains significant in all countries.
family firms can be considered a wise and safe investment as the above research predicts that:
firstly, larger family firm have higher earnings retention ratios. secondly, in the time series, the earnings retention ratios of family firms increase over time.
third, capital-intensive family firms last longer and are bigger when they are sold off than a labour intensive family firm.
fourth, the price and duration of family firms are negatively linked with offer price and positively linked with the gap between the borrowing and the lending rate.
this article can eb viewed on the following link:
http://www.jstor.org/stable/2668619?seq=28
excellent refs Shaloo and a direct response to the key questions generated by the issue of a nation’s legal structure limiting the sustainability of multi-G families
while doing some further research, i came across an article which might help to make sense of making investmenst in family run businesses. or tell the potential investors at what stage of the company’s life cycle will investment in a family run business prove to be lucrative.
i cannot seem to access this article, however i did fidn an article analysing this article.
this article is called “How Do Family Ownership, Control and Management Affect Firm Value?”. it was written by a professor from wharton named Raphael Amit and a Harvard Business School professor Belen Villalonga.
this article states that family businesses are a good bet for stakeholders as long as the founder fo the firm is involved as chief executive officer or chairman. however, if a descendent of the founder runs the company, value is lost.
proxy data from all of fortune’s 500 companies were analysed from 1994-2000 for the purpose of this study. it was concluded taht performance slips when a descendent of the founder runs the business, as the founder’s vision becomes clouded.
an example of this is the american car maker Ford. the company is currently beig run by William Ford jr, a fourth egenartion descendant of Henry Ford. the company reported fallign sales by 7% since the previous year in 2004.
also linking this article our company right or wrong, even if we are the minority shareholders, the ideal family run company for minority shareholders is one where the founder is chairman or CEO and does not have any control enhancing mechanisms like class A Class B Super votign and non tradeable shares.
to analyse if family firm are a better avenue of investment for shareholders than non-family firms two reasons can eb looked at:
1) Many non-family companies suffer from the standard conflict between management and shareholders over such issues as returns, management pay and governance. “This conflict between owner and manager is standard in widely-held firms” says Amit. “In a family-run company, the manager and owner are the same and so the conflict doesn’t exist.”
2) even though family firms face tensions between minority and majority shareholders, there is a higher cost to the shareholder-owner conflict compared to squabbles between minority and majority shareholders. Although those conflicts may help or harm results, the real reason family companies seem to work is their link to founders. “We don’t go into the effects of founders specifically, but there is an effect,” says Amit. “Founders instill commitment into the entire employee base. That makes the company better. Non-family companies don’t have that.”
“family business: why firms do well when owners are at the helm”,(2004)
the article can be viewed on:
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1065
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