The idea that investors can profit from family-owned firms seems to be a contradiction at first, but it’s not. Publicly traded companies with a substantial insider ownership outperform their non-family owned peers on many different metrics, according to research from analysts at Credit Suisse.

Of the 1,000 family-owned firms studied in a recent report by the investment bank, the cumulative return was 126% since 2006, outperforming the MSCI AC World Index by 55%. More precisely, family-owned businesses have outperformed non-family-owned companies in every region and every sector assessed. Geographically, Europe shows the most robust annual-average sector-adjusted outperformance at 5.1%.

Digging deeper, the bank's analysts find that there are several traits family-owned businesses exhibit that may be the reason for their outperformance.

For example, according to the data, for each of the past ten years, family-owned companies have shown stronger revenue growth than their non-family-owned peers. Also, R&D spending has been higher, balance sheets strong and margins wider.

All-around better businesses

According to the CS research, family-owned firms tend to perform better on multiple metrics because they have a long-term focus. Unlike other companies, where a significant controlling shareholder does not have their family's fortune or reputation on the line, according to the responses of a survey which quizzed 100 family-owned companies, the majority use long-term financial and non-financial metrics to remunerate senior management. Multi-year growth targets appear most popular with 35% of companies, indicating that these are the critical parameter for management remuneration. Further, only 25% of the companies asked responded that they believe family ownership of the business will decline over the long-term.

There also appears to be a greater focus on internal funding of growth. The overwhelming majority of companies surveyed indicated that they preferred to use retained earnings over external funding to finance growth and if external funding is required, managers prefer to use family-linked borrowing.

These responses point to the conclusion that family-owned firms tend to outperform because they have a long-term focus, and don't need to worry about disappointing shareholders in the short-term. As a result, they are happy to invest in R&D and retain earnings for expansion, unlike non-family owned firms that might be pressured into returning cash to investors, or aggressive expansion policies.

Looking to buy family-owned firms?

"Our 'Family 1000' universe has outperformed its peer group of non-family-owned companies by c400bps per year since 2006 and has outperformed the MSCI AC world by 392bps," begins the Credit Suisse Family Business Playbook published late last month by the Swiss investment bank's US Equity Research team.

Credit Suisse's equity analysts have done a considerable amount of work on the benefits/drawbacks of investing in family-owned public companies in the past. The research shows that on average, family-owned companies have longer investment horizons, seek better acquisitions, spend less on R&D and achieve better organic growth rates than non-family owned peers.

Family-Owned Firms: Trading At A Discount

As you would expect with companies that generate a superior performance, family-owned businesses tend to trade at a premium to the broader market. Typically, 12% above the rest of the market on a P/E basis.

However, according to CS's analysts, this premium now seems to have disappeared. Analysis indicates that family-owned firms trade at just a 2% premium on a P/E and EV/EBITDA basis to non-family owned peers.

This valuation pullback could present a rare opportunity for investors to take advantage of the family-owned premium. In the Business Playbook, the analysts note family-owned firms tend to have several critical advantages over the rest of the market. These advantages include "better revenue growth, margins, and cash flow returns than non-family-owned peers" as well as a "greater focus on innovation," which is enabled through "lower dividend payout ratios."

The booklet goes on to highlight 26 public companies around the world that have a substantial family insider ownership and are rated 'outperform' by the Swiss bank. Five of these are US companies including Facebook (FB), Oracle (ORCL), Comcast (CCW), 21st Century Fox (FOX) and Regeneron Pharmaceuticals (REGN).

Of these five, Fox is the cheapest trading at a forward P/E of 13.4 and Regeneron has the highest return on equity at 23%.

Family-owned value

The Murdoch family owns 39% of a controlling interest in 21st Century Fox through family trusts and has been the driving force behind the evolution of the company. Now effectively controlled by Rupert Murdoch's sons, the company is positioning itself for a digital future by continuing its global expansion through investments in India and the proposed acquisition of Sky in the UK. CS's analysts are bullish on the company's prospects for four main reasons including: 1) the acquisition of Sky UK; 2) the "significant growth opportunity at Hulu and STAR India"; 3) Fox's sports exposure to the NFL and MBL and; 4) a compelling sum of the parts value of $37 per share based on the companies stakes in its various international subsidiaries.

Regeneron was founded in 1988 by Leonard Schleifer, MD, Ph.D. and George Yancopoulos, MD, Ph.D. Schleifer remains the CEO and continues to hold 20% of the voting stake in the company. The value here is in the firm's new product, Dupixent. Analysts expect sales from this treatment, which recently showed efficacy in a Phase 3 trial in asthma, could generate sales of $5 billion by 2023.