Don't worry about squabbling heirs; investing in family-controlled businesses makes sense
The best ones to purchase right now are listed here.
Even though the television drama Succession ended two years ago, the Roy family's fictional arguments illustrate how many family businesses are still seen in which the founder or family still owns a sizable stake. That opinion is sometimes not far from the reality; according to Tom Wildgoose, head of equities at Sarasin & Partners, small investors may wind up being "treated poorly" and families and founders do occasionally treat their companies as their "own little fiefdoms." However, family ownership can also foster "pride in building the business in a long-term and sustainable way," which entails proper treatment of both employees and clients. Here, we look at the pros and cons of including family businesses in your portfolio.
The most evident advantage of family ownership, according to Gerrit Smith, manager of the Stonehage Fleming Global Best Ideas Equity Fund, is that "you've got a group of people who are extremely committed to the company and its long-term survival." Families "are less concerned with every fluctuation in the firms share price, or quarterly twist and turn" than institutional investors, who typically sell at the first sign of trouble and are hesitant to get involved in the day-to-day operations of the company. Rather, they "are more concerned with doing what is strategically correct for the company."
This is crucial because, according to George Godber and Georgina Hamilton, managers of the Polar Capital UK Value Opportunities Fund, professional managers have a tendency to place an excessive amount of emphasis on the short term. The average tenure of a chief executive at a FTSE 100 company is only five years, so they have little financial incentive to make long-term investments that may only pay off in ten years, especially if doing so means reducing profits for the following year or two, which is when the market typically evaluates a company's performance.
Morgan Sindall is cited by Godber and Hamilton as an illustration. The second-largest shareholder is still founder John Morgan, who still holds a sizable portion of the company's shares. Because of this, he now has the motivation and influence to persuade the company to invest in its urban regeneration and social partnership initiatives. This is something that a typical CEO "just wouldn't have done." The company will now benefit greatly from this proactive spending and behavior since these areas are a source of future growth.
A family that has a significant stake in the company can help hold management accountable, particularly when it comes to using funds in a productive and efficient manner, according to Michael Field, chief European market strategist at Morningstar. Executive short-termism is a problem, but what Field refers to as "empire building" can also result from a lack of accountability. In an attempt to boost their income and status, chief executives may go on a shopping spree or make other questionable investments rather than distributing the funds to investors, even in cases where a company has few prospects for investment-led growth. On the other hand, family owners "may depend on the income they get from their dividends to survive," so they will want to make sure the company's funds aren't just squandered. All investors, including those seeking a steady income, can benefit from family ownership by ensuring the business is operated in their best interests.
Smith observes that family businesses become more focused on "one, or just a few, areas of business" due to the same incentives that force executives who are eager to acquire other companies to slow down. They have a competitive advantage over more bloated conglomerates that may lose their focus due to their increased concentration.
According to Wilfrid Craigie, a senior investment analyst at Asset Value Investors, "a huge amount of academic research suggests that family-owned companies tend to outperform their rivals." According to Craigie, the now-defunct Credit Suisse Research Institute produced a list of the top 1,000 family businesses, which are companies in which the founder or a family owns more than 20% of the shares or voting rights. Even after controlling for the industry a company operated in, they discovered that, on average, family-owned businesses outperformed the market by roughly 3% annually between 2006 and 2022. Smaller businesses performed especially well.
Things are not always easy for family businesses.
Although there is evidence that family businesses generally yield higher returns, Craigie emphasizes that there are often disadvantages to family businesses. The first is that outside shareholders have "less power to influence the company's direction" due to family influence. Additionally, the family has frequently acted against the interests of other shareholders. Such businesses may be viewed "as something of a piggy bank for the family controlling them" in the worst situations.
According to Field, family ownership can be a "double-edged sword" since family-run businesses might not give minority shareholders the same consideration as regular public companies. He cites several cases in which family owners floated their business to raise money and then "stood by as the share price fell, using it as an opportunity to buy back the outstanding shares at a much lower price, with the result that the minority shareholders lost out."
It is also possible that family businesses generally "do not have the professionalism and communication that you would expect from businesses of their size, and are not as professionally run as other firms." According to Field, two family-owned testing and inspection companies, SGS in Switzerland and Bureau Veritas in France, are significantly less transparent and communicative than their British competitor, Intertek. This affects the market's perception and valuation of certain family businesses.
Especially important is this final point. Even when the controlling family isn't acting badly, the market's "mistrust" of family businesses can have a disastrous effect on a company's share price because it gives the impression that they aren't being completely honest. Field mentions the catering business Sodexo, which fired its external CEO and replaced him with Sophie Bellon, the founder's daughter. The company's stock dropped after the news, despite the fact that the move "wasn't necessarily a bad idea in itself" because "markets were sceptical about the idea of a family owner installing themselves as CEO without a proper global search."
How family businesses' outlooks vary around the world.
Each country tends to have a different family ownership structure. Many "amazing family businesses that have become multi-million, or even multi-billion-dollar firms" can be found in the United States, according to James Harries and Blake Hutchins of Troy Asset Management. Additionally, Craigie notes that the Nordic countries, particularly Sweden, have "a rich tradition of well-run family firms." Similarly, continental Europe is home to numerous prosperous, multigenerational family-run businesses.
However, many family businesses in nations like France are set up to minimize the taxes that their owners must paya crucial factor considering the wealth taxes in the nation. One holding company owning a stake in another holding company results in extremely intricate cascading structures. According to Craigie, these kinds of structures typically trade at a "discount to the discount" because the market doesn't appreciate their complexity. Asia has more problematic attitudes toward stewardship than Europe, where many family-owned businesses "have managed to survive for multiple generations," sometimes for as many as five, six, or even seven. Then, "as sad as it is to say, the old cliche about the second and third generation squandering what the first generation built up might have a ring of truth to it," which also holds true for Latin America.
Principal adviser Gaurav Narain of the India Capital Growth Fund is unapologetic about the shortcomings of Indian companies. They were notorious until recently for their founders and family owners using questionable transactions between different parts of their business empire to divert money from the pockets of both shareholders and the taxman due to high taxes and poor governance. Additionally, "the number of family members involved kept increasing to the point where you didn't know who was calling the shots" because many Indian families are considerably larger than average.
The good news is that attitudes like these are shifting. Narain notes that a large number of Indian business magnates are sending their kids to school abroad. With significant roles in their family businesses, this new generation of Indian business leaders is "trying to incorporate the best practices of the US and elsewhere when it comes to corporate governance." In other words, "with the family members providing strategic direction rather than being in charge of the day-to-day management," this entails having a strong board and hiring qualified managers as executives. As a result, Indian family businesses are "now very well-run."
In a similar vein, Craigie observes that large European conglomerates have begun to streamline and rationalize their organizational structures in recent decades. While this process is far from finished, the rate of change is accelerating, perhaps as a result of the removal of wealth taxes in nations like France, Germany, and the Netherlands. The market discount to family businesses has decreased as a result of these changes, which have also made managing them easier and helped uncover much of the value concealed in the network of interconnected holdings.
What family businesses should have (and not have) for investors.
There is broad agreement that the firm's governance is one of the most crucial factors to consider when choosing which family business to invest in. Craigie, like Narain, believes that a division of labor between family members and business executives is ideal. Such businesses "should be managed by qualified professionals, with minority shareholders' rights safeguarded, and the family offers more of a long-term ethos." Evidence that the business is effectively allocating capital is another thing he likes to see.
Transparency is another important metric for evaluating a family business's level of governance, according to Field. "The level of detail they go into about their business in terms of revealing numbers and strategy" and the documents they produce serve as examples of this. A family-run business is doing well if it turns out to be as open as its competitors. However, it is a clear "red flag" if it is unwilling to provide a lot of information about how their business is doing.
Field advises investors to exercise extra caution when funding family-owned businesses that have been shattered by "incidents in the past or various scandals." Investing in a family-run business that is sincerely "trying to take positive action to improve the quality of its governance" may also be worthwhile. Naturally, it takes some effort to determine whether the change is sincere because it is simple for businesses to make rhetorical claims that they are attempting to change "without doing anything meaningful."
According to Field, "you need to check to see the exact steps that they are actually taking." For instance, it would be beneficial to increase the number of independent, non-family members on the board of directors. as well as shifting away from certain unprofitable business areas or divisions. Even if it means family members lose out, a company's ability to "display proper accountability by having heads roll in the boardroom" is a good indication that it has moved past a scandal.
The greatest investments available right now.
AVI Global Trust (LSE: AGT) makes a lot of investments in family-run businesses because, according to analyst Wilfrid Craigie, they align with the fund's mission of "investing in durable, growing businesses at deeply discounted valuations." Vivendi (owned by the Bollor family), News Corp (owned by the Murdoch family), and DIeteren Group (owned by the Dieteren family) are among the trust's top five holdings. The AVI Global Trust, managed by Joe Bauernfreund, is trading at a 63.4 percent discount to net asset value and has outperformed similar investment trusts over the last 1, 3, and 5 years. Only 0.87 percent is the ongoing expense ratio.
"A real crown jewel" is how Craigie describes the Dieteren Group (DIE, Brussels). Despite more than doubling its revenue and growing its adjusted earnings fivefold between 2019 and 2024, the company is only trading at 12 points six times 2026 earnings. This multiple should rise if the company pursues its plans to float subsidiary Belron, in which it owns a 50% stake.
The India Capital Growth Fund (LSE: IGC) is another investment trust that has a strong family focus. According to principal adviser Gaurav Narain, Dixon Technologies and Skipper, the two biggest companies in the portfolio, are among the largest family-owned businesses. Over the last five years, the fund has outperformed other India trusts and has returned an average of 15.3% annually since its establishment in 2011. It has an annual management fee of 1.25 percent and trades at a discount of about 6 percent to net asset value.
Narain is especially optimistic about PI Industries (Mumbai: PIIND). Because it upholds intellectual property rights, in contrast to many of its competitors, it has established a stellar reputation with multinational corporations. The Singhal family's decision to professionalize management has also contributed to the company's annual earnings growth of about 20%.
As mentioned in the main story, Polar Capital's George Godber and Georgina Hamilton are huge admirers of Morgan Sindall Group (LSE: MGNS), a construction and regeneration company based in the UK that "epitomises" the kind of founder-driven business that can handle problems as they come up. The revenue of Morgan Sindall is predicted to continue growing rapidly, having doubled between 2019 and 2024. Now that the dividend has more than doubled over this time, income investors are benefiting from this expansion. Morgan Sindall offers a 34% dividend yield and is trading at 13 times 2026 earnings.
Another promising European company is EssilorLuxottica (Paris: EL), of which the Del Vecchio family (descendants of Luxottica's founder, Leonardo Del Vecchio) owns around a third. Despite not being involved in day-to-day management, Gerrit Smith especially appreciates that the family "has helped give the firm a strategic focus, as well as a long-term plan." EssilorLuxottica's sales more than doubled between 2019 and 2024, demonstrating the company's continued strong growth and justifying its 37-fold price premium over 2025 earnings.
Tom Wildgoose, Sarasin & Partners' head of equities, has a special fondness for water heater manufacturer AO Smith (NYSE: AOS). Charles Smith founded the company 150 years ago, and his descendants still hold slightly less than 5% of the company's shares. Having produced "strong and steady financial results for many years" is something that Wildgoose attributes to the business. Over the previous five years, the company's sales have increased at a rate of about 5% annually, while normalized earnings per share have increased by more than two-thirds and returns on capital employed have exceeded 20%. The stock has a dividend yield of 11.97% and trades at a comparatively low rate (for the US market) of 17 times 2026 earnings.
Leave a comment on: How to invest in family businesses and the reasons it makes sense