Until the global financial crisis overturned the prevailing wisdom of institutional investors, the UK family-controlled brewer and pub owner Fuller, Smith & Turner was considered almost an anachronism in a highly-leveraged world. Listed on the London Stock Exchange, the firm had such low borrowing levels that it was shunned by most analysts and big investors in favour of much more highly-geared rivals who had not, in the phrase of the period, "tied up capital in the business".
But that view has changed dramatically in the last three years. Founded in 1829, Fuller's today has annual sales of £227 million. Although the company still has a debt:earnings ratio of just 2.5, it's the only one of Britain's seven major pub chains to have climbed up the FTSE rankings as individual and institutional shareholders have bought into the company on the back of profits that surprised the market in recession-hit UK. With revenue up 8% and profits up 17%, Fuller's lifted capital expenditure to £44 million, which it mainly spent on the purchase of new pubs.
The business hasn't changed though. Executive chairman Michael Turner, whose family has been involved since 1845, says the firm has no intention of abandoning its habitual caution. "Our long-term, risk-averse strategy is paying dividends," he said.
To prove the point, Fuller's were one of the winners of the Family Business Honours programme organised by JP Morgan private bank and the Institute for Family Business in June this year.
The new-found popularity of Fuller's with institutional investors is just one example of a belated discovery of the often hidden virtues of family-owned or controlled businesses in the post-crisis fall-out. They are increasingly seen as a way of shock-proofing portfolios.
As Joachim Schwass, professor of family business at Lausanne, Switzerland-based business school IMD, said earlier this year: "During the crisis and subsequent recession, family businesses were like a beacon in the storm. While images of many institutions such as banks, insurance companies and publicly listed companies were seriously damaged, the reputation of the family firm as an economic institution remained largely unscathed."
In a survey of professional investors, IMD discovered that family firms owe their popularity to qualities that were not rated particularly highly in the boom years. By an overwhelming majority, investors prize them over multi-ownership companies for higher quality standards and more reliable products, trustworthiness, comfortable working relationships, dedication and stability in the middle of turbulence. And although a smaller majority – just 55% – perceived investments in family firms as generating higher returns, they were generally valued because they were less likely to suffer heavy financial losses.
It seems that even a small family shareholding is perceived as a source of stability. When Myers, Australia's leading retail chain, was listed on the Australian Stock Exchange late last year by private-equity giant TPG and others after a buy-out, the Myers family trust, which controls the interests of the founding family, considered selling all their remaining 42 million shares.
However, pressure from institutions saw them retain over 1% of the 110 year-old company.
A series of post-crisis studies tend to confirm why such firms exercise their current attraction for institutions as stabilising assets in a portfolio. A UK and Europe-wide survey by the Oxford's Said Business School and London Business School found that European family businesses were more stable for one convincing reason: "In continental Europe they are more profitable than non-family firms."
It's the performance of companies like Fuller's that illustrates the value of a long-term approach known increasingly as "patient capital". And in the renewed quest for stability, the investment axis could be turning. David Rubenstein, co-founder and managing director of private-equity giant Carlyle has highlighted the thousands of Middle-East family firms of significant scale as the new focus for portfolio-builders, particularly in Saudi Arabia. Others identify Syria as another bright spot.
As he told the latest annual gathering of Berkshire Hathaway shareholders: "Most of our managers use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organisations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly – or not at all – because of a stifling bureaucracy."
Although Berkshire Hathaway allocates capital, sets remuneration and monitors performance closely, this relative hands-off policy seems to work. For instance its 89.5%-owned MidAmerican Energy Holdings, in which the Scott family retains a significant shareholding and exercises management control, is one of the highest-performing utilities in the US.
Similarly, Berkshire Hathaway's 80%-owned Iscar group, the Israel-based third-ranked supplier of small cutting tools in the world, has done far better than its bigger competitors in the crisis. According to Buffett, this is largely because of the influence of the Wertheimer family, who own 20%. "Nothing stops Iscar, not wars, recessions or competitors," he told shareholders.
According to professor Schwass, this is the way forward. "[Buffett] buys family businesses and insists that family leaders continue by giving them enormous freedom," he told Campden FB.
However the lesson hasn't fully sunk in yet. And it may never do so. While pointing out the mounting interest in family businesses that come on the market for non-financial reasons such as succession issues, ownership conflicts and bad investments in other sectors, he adds: "Rarely do buyers value the generational family commitment and values for which family businesses are known, unless the buyers are family businesses themselves."
That's one reason why families don't stay long as managers under the new owners. It's also why, he adds, most family businesses prefer to grow organically rather than through M&A or other avenues. As family firms increasingly become targets, the lesson may be that institutional investors should leave them well alone.