Big family-run enterprises are a better investment than multinational corporations and professionally run businesses: ASK Finance

Big family-run enterprises are a better investment than multinational corporations and professionally run businesses: ASK Finance

Family-owned firms have outperformed their non-family owned counterparts in terms of returns, with returns growing at a compound annual growth rate of nearly 8% between FY14 and FY23.

A McKinsey analysis claims that FOBs may "outperform" non-FOBs and other peers because of their 4+5 value generating approach.

In the context of Indian equities, the proverb "keeping it all in the family" really makes financial sense. Investors in family-owned enterprises have outperformed their non-family-owned peers by approximately 8 percent, with CAGR returns of 24% between 2013–14 and 2022–23.

In a research, ASK Capital analysts pointed out that investing in family-owned businesses would be the most advantageous course of action for those wishing to put money into Indian shares.

The survey looked at the top 500 listed firms in India for evaluation purposes. Of these, 350 companies were classified as family-owned businesses, or FOBs (where the family or promoter ownership is at least 25 percent), while the other 150 companies were classified as non-FOB organizations.

According to the research, FOBs are commonplace names like Bajaj Group, Tata Group, and Reliance Industries across a variety of goods and categories today. With a combined sales of $150 billion in 2023, the Tata group accounted for almost 3.8 percent of India's GDP. Comparably, Bajaj Group's market value was $105 billion.

"With these goods and solutions becoming an integral part of the consumption, financials, manufacturing as well as infrastructure basket, FOBs have grown into behemoths in all of those industries over the decades," stated the research.

The study argued in favor of FOB investments as they have shown adaptability, creativity, and efficiency. The research went on to say that there is a great chance "for family-owned business to further expand their footprints as well as continue on the growth trajectory" in India's economy.

Number-based evidence

The ASK Capital analysis states that FOBs continue to do better than professionally managed businesses and multinational organizations.

The research said that for the previous ten years, this outperformance has been evident in all financial criteria, including stronger cash flow growth, greater profitability, capacity expansion, and reduced indebtedness. The study claims that free cash flow for FOBs increased at a CAGR of 22% (FY14-FY23), which was twice as rapid as the 11% growth for non-FOBs.

Earnings before interest, taxes, depreciation, and amortization (EBITDA) showed a similar outperformance. According to the analysis, FOBs were able to sustain a 10% rise in absolute EBITDA over a ten-year period, whereas non-FOBs were only able to expand by 6%. The study noted that FOBs decreased even in terms of net debt, demonstrating the solidity of the balance sheet.

Capacity growth was the fourth characteristic in which FOBs excelled, with the statement "businesses are ramping up their capacities at a faster pace than non-FOBs". For the same year, FOBs had a much higher capital expenditure as a proportion of sales than non-FOBs.

The 4+5 strategy's function

A McKinsey analysis claims that FOBs may "outperform" non-FOBs and other peers because of their 4+5 value generating approach.  The formula represents the five strategic actions of diversified portfolio, dynamic resource allocation, talent focus, governance, and capital/operational efficiency, as well as the four critical mindsets of prudent financial stance, purpose behind profits, long-term perspective, and effective decision making.

The experts highlighted that several successful FOBs' development tales demonstrate this effective method. Asian Paints would have increased 100 times today if someone had invested $2,250 in the company in the 2000s, the analysis claims.  Research from ASK Capital claims that the company's "financial prowess and savvy decision-making to revamp its supply-chain dynamics" are responsible for this rise.

The research also noted Titan, which by 2023 had increased by more than 26,000% from its previous status as a weak stock. "Titan's story reflects not just financial prowess, but also reveals strategic portfolio diversification of their portfolio as well as flexible resource allocation, demonstrating an in-depth understanding of India's evolving market dynamic," the report said. Innovation and portfolio diversification were key factors in Tanishq's success, as the company moved from making watches to making jewelry.