Private banking

Investments: Why the family makes sense

Edouard Camblain, deputy head of strategy and asset expertise and head of equity solutions at Societe Generale Private Banking, reckons shares in family-controlled firms could be a good bet – even for non-family members.

How are investments in family controlled businesses performing?

They are doing well, considering current economic conditions. The performance of the widely used DAXplus Family Index Total Return, tracking the 30 largest family-owned businesses, has shown resilience during these uncertain times of higher market volatility.

Over the past five years, the index generated a performance of -0.25% while other mainstream indices, such as the Eurostoxx600 and the S&P500 have performed poorly (-27.06% and-6.59% respectively).

What would you define as a family business?

While some might say it is obvious to consider a company that is 100% owned by a single person as being part of this category, most of the time – and specifically for listed ones – the criteria, and more commonly its threshold, varies from one expert to another.

Nevertheless, the most common selection criteria are:

➤Equity holdings: significant ownership of equity by the founder’s family (through shareholder agreement or not). While this is important, some specific situations reduce its meaning if taken alone. One also needs to consider shares offering multiple voting rights, company legal structures preventing a change of control, etc.

➤Voting rights: possession of a significant level of voting rights by the founder’s family. This is even more important when family members are in a shareholder voting agreement to reinforce the family’s weight on the company’s decisions.

➤Influence on management: the ability to appoint management through board members. With strong influence at board level, the family can influence both the day-to-day operational management and longer-term strategy.

➤Operating management: the level of involvement in day-to-day business operations by the founder’s family. Such a role is important but board members remain the final decision-makers, thus mitigating the operating role’s importance.

➤Generational transfer: transfer, or willingness to transfer, from a one generation to another. This criterion is not unanimously used as some consider it might be interpreted as nepotism and might not be well regarded by investors.

What are the benefits, as a non-family shareholder, of an investment in such a company?

Over the last two years, Societe Generale Private Banking has published theme reports encouraging clients to invest in family-controlled companies listed on markets.The rationale for such an investment is quite broad but can be summarised as follow:

➤Alignment of interests: family-controlled companies are generally the ones offering the best convergence of interests between a company’s management and longterm investors. This contrasts with other companies, where conflicts of interest may occur, eg, management might be reluctant to raise capital for an acquisition as it would penalise, through dilution, the shareholders that they are themselves.

➤Shareholder value creation: The running of the company will mainly target value creation, usually assessed by a very strict and pragmatic approach.
Most of the time, to preserve the stability of the shareholding structure, management will target shareprice appreciation, which would lead to increased wealth for the family but this will also benefit non family minority shareholders.

➤Careful management: Most family businesses are run with a strong sense of risk aversion, thus reducing the risk of going bankrupt because of a heavy debt load or because of foolish diversifications, acquisitions or the like.

➤Attractive dividend yield: Very often, a portion of the family’s resources comes from the company itself. As not all the family members necessarily work in the company and receive salaries, the dividends received from the company are an important contributor to most family members’ resources.
As a non-family investor, one would benefit from the predictability (real need of the family) and level of the dividend yield that will come on top of the expected capital gain.

Reading this, it seems one should only invest infamily-controlled businesses?

Of course not!
It is obvious that people from a family business background like to invest in family-controlled companies because of the similarities with their personal backgrounds or investment philosophies, but diversity is also positive! And one should not forget that some positive characteristics may also turn out to be negative in certain situations.
For example, the conservative approach of a family business could be interpreted as being too cautious, leading to missed opportunities such as entering new markets, launching highly capital-intensive projects, etc.
It is the same with the reluctance to increase the capital (and the debt load), as this might prevent the company from developing as it should.

The second example concerns the management: by systematically leaving the operational management and/or the board in the hands of the family, does the company possess the best resources to take key decisions? Lastly, we could mention the divergences that sometimes occur between family shareholders with regards to the dividend.
Granting dividends because some family members need it is great, unless it means that the opportunity for reinvestment (new project) is missed by the company.

You mentioned theme reports but more specifically how is Societe Generale Private Banking involved in investments in family owned companies?

A large portion of Private Banking clients are or have been related to family-controlled companies either because they own or owned such a company, they run or ran it, or because they invest or invested in it while it was a private, private equity-backed or listed firm. And we have a global offer for those wishing to investin family-controlled firms.

➤For clients wishing to invest as minority shareholders in family-controlled companies, we screen international markets and advise on the best opportunities. Those investments can be done directly by the client through a discretionary portfolio structure or under an advisory mandate.

➤For those wishing to build a significant stake in such companies, we are able to offer specific opportunities brought by existing clients of the private bank or the investment banking divisions.

➤For clients that are major shareholders of listed family-owned companies, Societe Generale Private Banking offers them “food for thought” through a careful review of the industry and of the company itself.
This review – assessing the catalysts for the shareprice, the sell-side analysts’ views and consensus, the bull and bear investment case, etc – is performed by making full use of the private bank’s knowledge and internal capabilities, cumulated within a large network of seasoned professionals on equity markets.

➤For unlisted companies, Societe Generale may help the company to get listed or to find strategic investors through the equity capital markets and merger and acquisitions capabilities within the Investment Banking division.

➤With its Private Investment Banking offering, Societe Generale also offers wealthy family entrepreneurs who have a holding company or a family office access to all the expertise within the Societe Generale Group, particularly in terms of wealth management and investment banking, for the management of their private wealth and their business.
The solutions include tailor-made financial engineering, dedicated portfolio management teams, best-in-class investment products and solutions, financing solutions, merger and acquisitions advisory, capital increases and initial public offerings, as well as direct access to all capital markets