Business counts more than family in Italian family businesses
Why dynastic multinationals outperform listed companies by often eye-popping margins
The past decade has been a miserable one for anyone investing in the average Italian listed company. Since February 2010, the country’s FTSE MIB index has returned a meagre 1.5 per cent compounded per year, or less than if an investor had simply bought a 10-year Italian government bond and headed off for a decade-long excursion to the beach.
The explanations for this dire performance may seem obvious. The Italian economy has been stagnant for decades, the country’s banking sector went through a painful crisis, and a succession of weak governments have failed to push through reforms.
But simply glancing at the terrible aggregate performance of the Italian stock market over the past 10 years misses the bonanza that has been enjoyed by many of the country’s largest family-owned empires, which have outperformed by an often eye-popping margin.
Exor, the Agnelli family holding company, has increased its value by almost seven times over the past decade. Davide Campari Milano, majority owned by the Garavoglia family, is up nearly five times over that period. All of these performances exclude dividends, which would make the gap between the average Italian company and these business dynasties starker still.
The pharmaceuticals group Recordati, which until 2018 was still majority owned by its founding family, has increased its value by almost eight times, while Leonardo Del Vecchio’s Luxottica, now merged with France’s Essilor with Mr Del Vecchio still as the largest single shareholder, is up more than three times.
Then there are a number of privately held Italian family multinational businesses, such as Ferrero or Barilla, which have managed healthy profit growth through international expansion as the domestic economy has flatlined. If they were listed, they would be among the most valuable in their sectors globally.
There are of course notable exceptions. Ex-prime minister Silvio Berlusconi’s Mediaset has lost more than half its value in a decade, mirroring Mr Berlusconi’s own political fortunes. Other once-wealthy families with money concentrated in industries unable to escape Italy’s downturn and debt crisis, such as construction and banking, have not enjoyed the last 10 years at all.
The clear outperformance of certain large family-controlled companies has piqued the interest of academics and investors. A type of capitalism that was once viewed as encouraging nepotism and poor governance is now cited by some business school professors as a model for long-term thinking and sustainable practices.
Credit Suisse has complied research that argues family-controlled businesses — defined as founders or their dependants controlling at least 20 per cent of the equity — generate faster sales growth, higher margins, and use less debt to achieve this than regular listed companies.
Family owners, the argument goes, can take a more long-term view because they do not need to worry themselves with month-to-month management of the fickle concerns of the stock market.
Most importantly, their vast fortunes depend on not blowing up their business. Outside investors can buy shares in their companies safe in the knowledge that if they wake up one morning to news of some ugly event, such as an accounting fraud, it will cost the family far more than a minority shareholder.
Yet investors who conclude that just because a business happens to be family-owned, it will do better than average are making a risky bet.
The reason many of these family-owned multinationals do so well is often because they are great businesses, with valuable brands, high barriers to entry, large returns on capital and are hugely cash generative.
It is precisely for this reason that these businesses are able to stay under family control. Bad businesses in general consume capital and require constant access to it. Businesses that require ever greater amounts of capital are forced to either take on large amounts of debt, or dilute their shareholders, meaning founders eventually lose control.
It is no coincidence that many of Europe’s largest family-controlled companies are in structurally more profitable industries, such as luxury goods and consumer products. Far less remain in the world of banking, where successive crises have washed out controlling families in countries such as Spain, Portugal and Italy.
Backing a family business while ignoring the industry they are in, can have terrible results. The Botin family, perhaps the most celebrated banking dynasty in modern Europe, barely control a sliver of the equity of Santander after successive capital increases.
They may have survived while many of their rivals did not, but they no longer own much of what they spent generations building. And the shareholders who invested alongside them since the turn of the millennium have lost just over 4 per cent a year compounded per year over 20 years.
The best family-owned companies will continue to outperform the rest of the market. This will not be because they succeed simply because they are owned and managed by families, but because they are among the best businesses in the world. The dynasties that control them are far too shrewd to ever give them away.