Comparing the performance of promoter-driven and professionally managed companies

According to a McKinsey Report, family-owned businesses (FOBs) contribute over 70% to global GDP, with an annual turnover of $60-$70 trillion and employing about 60% of the global workforce. In India, FOBs contribute 79% to the national GDP.

FOBs in India have become integral to our daily lives, from Bajaj’s two-wheelers to Reliance’s Jio. In this article, we look at some of the largest FOBs operating in India, and their wealth creation journey and compare them with professionally managed ones.

But what exactly are FOBs? These are companies where the family/promoter stake is more than 25%.

Let’s now dive in and look at their performance versus professionally managed companies over FY14-23. We cite data from a survey that examined the top 500 listed companies (350 - FOBs, 150 - non-FOBs) and performed a comparative analysis between both types of companies.

Cash flow generation and wealth creation

FOBs have demonstrated the ability to deliver much higher growth (almost 2x) in free cash flow generation (one of the most important metrics of fundamental performance) during the period FY14-23. We also note, better cash flow generation is typically associated with higher operating profitability as well.

Given their performance. FOBs outperformed non-FOBs, delivering higher total shareholder returns (TSR) of 24% versus 18% by non-FOBs.

FOBs have delivered better performance and returns

Source: Bloomberg, ASK Capital

In this next part, we look at some domestic Family Owned Business (FOBs). The list in India is fairly exhaustive, but below we have tried to collate a list of some of the largest businesses that have been around for a few generations.

Source: Public sources; * Latest available data

Similar to our analysis above, we also look at their share price performance over the past two decades and compare it with the broader markets. The table below indicates that a majority of them have managed to outperform the broader markets.

Source: investing.com; *Where holding companies are not listed, we have taken the result of a major group company as a representation

Why are FOBs outperformers?

According to the McKinsey study:

• FOBs demonstrate the ability to focus beyond profits. They are purpose-driven, giving them long-term focus
• They typically have a conservative and cautious stance on finances
• Consequently, this leads to efficient decision-making, which bolsters their performance

Investor insight

Before investing in a business, it's crucial to thoroughly examine the promoter or the management, their financial and operational capabilities, and their qualifications. Past performance is no guarantee of the future. Investors should evaluate a company’s operational performance, management’s capital allocation and other fundamental factors before deciding.