One-third of the index is family-owned. Half face succession within five years
Family businesses' share prices have consistently outperformed those of non-family businesses over the last 20 years in Asia. They have also consistently delivered superior return on invested capital (ROIC). But we estimate 48% of family businesses, affecting over USD 1tn in free float market cap and 18% of the index, will undergo intergenerational transfers in the next five years. Why does this matter? Our analysis shows that succession is a significant event for shareholders as share prices typically underperform in the near term when leadership changes occur. However, we find they rebound after three years. We believe buying into this weakness, or 'succession dip', could enhance long-term returns.
The Asian Family 500 delivered superior returns and profitability
Leveraging on Credit Suisse Research Institute's Family 1000 database and UBS Cross-Connections series, we created the Asian Family 500, which consists of approximately 500 publicly-listed companies in Asia in which families own at least a 20% equity stake, and examined their financial profile. Our findings show that family businesses have been more profitable than non-family-owned businesses, delivering 212bps higher ROIC on average over the long run. We think the market has recognized this, with the Asian Family 500's share price returns outperforming its non-family-owned counterparts by 96bps on an annual basis over 20 years.
But share prices typically underperform around succession
There is a large body of academic analysis on succession, however limited analysis on how stocks perform around succession events. To address this, we undertook a comprehensive analysis of 170 companies in Asia, the largest and most prominent family business groups across seven markets, and combed through each and every chairperson and CEO change over the last 20 years. Using this unique proprietary database, our analysis reveals that succession can be a relatively uncomfortable period for shareholders. Companies in which transition to non-family executives occurs tend to see short, sharp underperformance of 35bps in one year. In contrast, family transitions are more challenging, with 173bps of underperformance over the first two years. But from the third year, we typically see a rebound. We also observe on average ROICs are relatively stable around succession. This suggests that investors often get nervous around such events, but with no major strategy shift and ROICs intact, we believe this can present an attractive buying opportunity.
