How purpose and flywheel synergies create high and sustainable returns

In an era marked by increasing volatility and uncertainty, what strategic options do investors have? For decades, the market has been shaped by significant capital inflow into short- to midterm return-oriented asset classes. But a sustainable, long-term approach to investments and value creation generates returns above the S&P 500 level for long-term investors and owners (LTI&Os). LTI&Os are marked by long-term-oriented, active management of investment portfolios, and differ from conventional conglomerates by limiting operational integration within the business.

Our research finds that a representative sample portfolio of listed companies owned and operated by LTI&Os achieved annual returns averaging 14.5 percent during the past 20 years, almost five percentage points higher than the annual growth of the S&P 500¹Based on McKinsey analysis of data from the McKinsey Value Intelligence Platform, S&P Global Market Intelligence, and company annual reports. (for more on our methodology, see sidebar, “About our research”).

The common thread? Patience and prudence. LTI&Os strategically position themselves to capture unique, long-term growth opportunities. They also create ecosystem synergies across their portfolios and continuously build the capabilities and expertise to be active and engaged owners of their portfolio companies. This article analyzes the investment approach and historical performance of LTI&Os and outlines how they can position themselves to navigate the complexities of the modern market—while continuing to drive sustainable value creation in the new macroeconomic era.

LTI&Os: A history of persistent differential returns

LTI&Os are a formidable force in the global financial ecosystem, with assets under management (AUM) estimated at €5 trillion to €9 trillion (Exhibit 1).²Private markets: A slower era—McKinsey Global Private Markets Review 2024, McKinsey, March 2024; Josipa Majic Predin, “The rise and rise of the family office: An analysis,” Forbes, January 11, 2024; The family office boom: Contrasts between East and West, The Economist Intelligence Unit, 2020; Josipa Majic Predin, “Rise of family offices: Trillion-dollar shadows in global finance,” Forbes, September 9, 2024. They share some common characteristics: investment horizons of more than ten years, active ownership models (a minimum of 10 percent ownership) in multiple businesses, and few limited partner (LP) commitments, although their size, governance structure, and investment mandates vary.

Exhibit description begins. This is a bar chart showing total global assets under management by long-term investors and owners. A single stacked bar at the right-hand side shows global assets under management across assets and funding for long-term investors and owners was five trillion to nine trillion euros in 2023. It shows the world’s top 50 long-term investors and owners hold assets under management of 1.4 to 1.8 trillion euros, while a further three to six trillion euros of assets are managed by additional family offices. To the left of the bar displaying total assets under management are six bars showing different asset classes. They show buyouts made up about 3.7 trillion euros of assets under management in 2023, venture capital about 2.6 trillion euros, private debt and real estate each 1.6 trillion euros, infrastructure and natural resources about 1.4 trillion euros, and growth about 1.3 trillion euros. The footnotes on this exhibit note that the numbers in this exhibit are based on publicly reported figures of assets under management, net asset value, or total assets of long-term investors and owners. Additional family office assets are calculated by triangulating estimates from DBS Private Bank, Deloitte, and the Economist Intelligence Unit, and select family office assets were not included because they did not fit the criteria specified in the article. Exhibit description ends.

LTI&Os include family- and foundation-backed holding companies with diversified portfolios, publicly listed investment vehicles that take a long-term perspective and active ownership approach, and investment-focused conglomerates, which manage a portfolio of businesses through a lean corporate structure, emphasizing portfolio strategy and performance management (not operationally integrated conglomerates).

LTI&Os are behind some of the best-known companies in the world, many of which have evolved over decades to become industry leaders. Numerous LTI&Os pursue a dual-purpose objective function in addition to, or combined with, their investment activities, contributing to positive, lasting impact across society. One example is Swedish investor Wallenberg, which has a stated ambition to benefit its home country and invests nearly 80 percent of its returns in research and education in Sweden through a foundation.³“SEB – A part of the Wallenberg Ecosystem,” Skandinaviska Enskilda Banken AB, accessed May 13, 2025.

Measuring the growth gap

Our research shows not only that a weighted portfolio of long-term investor-owned companies achieved an average annual return of 14.5 percent over the past two decades—almost five percentage points higher than the S&P 500—but that the trend held true across five-, ten-, and 15-year periods (Exhibit 2).

Exhibit description begins. This is a line chart showing how the investment portfolios of long-term investors and owners have outperformed the Standard & Poor’s 500 by about five percentage points annually since 2003. The chart calculates portfolio returns by examining the compound annual growth rate for cumulative returns between 2003 and 2023. That process shows the portfolio return of the Standard & Poor’s 500 was 9.7 percent annually from 2003 to 2023, while it was 6.1 percent for the so-called Standard & Poor’s 493, which excludes from the calculation the seven largest technology companies: Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla. Removing those companies gives a sense of the performance of the balance of companies in the Standard & Poor’s 500. The other two lines on this chart show the performance of listed long-term investors and the portfolio of listed portfolio companies owned by long-term investors over the same 20-year period. It shows the portfolio return of listed long-term investors from 2003 to 2023 was 10.5 percent annually, while the return for companies owned by long-term investors was 14.5 percent—the latter representing a 4.8-percentage-point premium on the portfolio return of the Standard & Poor’s 500 over the 20 years leading up to 2023. Footnotes at the bottom of this exhibit explain the methodology for the calculations, and sources comprise S&P Global Market Intelligence, McKinsey Value Intelligence, and McKinsey analysis. Exhibit description ends.

This underscores the ability of LTI&Os to capture long-term growth through economic cycles. LTI&Os operating as publicly listed investment vehicles also outperformed the S&P 500, with an average annual return of 10.5 percent. While the return volatility on the long-term investor-owned company portfolio is slightly higher than that of the S&P 500 and S&P 493 and can be attributed to a lower degree of diversification within the portfolio, publicly listed long-term investors exceeded the S&P 500 at comparable volatility.

In addition to being competitive with public markets, portfolio companies of LTI&Os have outperformed the net returns of median private equity funds, which achieved an average public market equivalent annual return of 9 to 11 percent from 2003 to 2023.⁴MSCI Burgiss Private iQ (end date September 30, 2024); US and EU Kaplan Schroar Public Market Equivalent, 2003–21 vintages, capitalization-weighted average returns; S&P Global market intelligence (2003–23 S&P 500 annualized return). Gross returns of private equity are higher, but when accounting for management and performance fees, capital commitment periods of LPs, and lower liquidity, only the private market equivalent return of top-quartile private equity funds delivered similar returns to portfolio companies owned by long-term investors.⁵Gross deal returns of 9.8 to 24.5 percent; Burgiss reports 12 to 20 percent net fund returns (accounting for management and performance fees). Accounting for commitment periods and liquidity in KS PME, median returns are 10 to 12 percent and 12 to 14 percent for the top quartile (based on 9.7 percent, 2003–23 S&P 500).

The primary source of outperformance for long-term investor-owned portfolio companies is their superior management of established companies in mature industries to foster growth. Our research found that LTI&Os have cultivated “superstar” companies—mature firms outside of high-growth industries that have achieved TSR of more than 20 percent annually since 2003, comparable with the performance of the S&P 500’s “Magnificent Seven.”⁶The “Magnificent Seven” technology-related companies are Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla.

We also found that roughly the top third of portfolio companies by size,⁷All with an average market capitalization of more than $10 billion. excluding two superstar companies, have delivered a median TSR of 10 percent annually since 2003—a return four percentage points higher than the S&P 493.⁸The S&P 493 comprises the S&P 500 excluding the “Magnificent Seven” technology companies.

A detailed financial analysis revealed that portfolio companies grow in line with industry peers. It also uncovered the following insights about the largest one-third of companies in each LTI&O’s portfolio by average market capitalization:

• These companies achieve annual ROIC of about 14 percent, versus about 11 percent for their industry peers, while the full sample achieves median ROIC of about 12 percent, in line with peers (Exhibit 3).
• They achieve higher gross margins, highlighting their strong market positions, but demonstrate lower productivity in terms of capacity costs because they have higher SG&A expenses.
• They demonstrate a greater commitment to long-term investment, evident in their higher spending on R&D and capital expenditure.
• They demonstrate more stability in performance (indicated by lower volatility in gross profits and EBITDA margins) and investment levels compared with peers, and they have higher and more stable dividend payouts. This outcome is likely because LTI&Os’ long ownership periods enable them to set strategic goals that support consistency in priorities and operations, even in times of turbulence.

While LTI&Os excel in established industries, they have lower representation in fast-growing sectors such as technology. Specifically, LTI&Os are better represented in industrial companies (which make up 31 percent of LTI&Os’ listed portfolio companies while accounting for only 23 percent of large companies generally) and in the consumer sector (16 percent versus 8 percent), where they can leverage extended investment horizons for steady growth and long-term value creation.

Conversely, LTI&Os are underrepresented in technology (3 percent for LTI&O portfolios versus 15 percent generally) and healthcare (8 percent versus 11 percent). This underrepresentation could be attributed in part to the rapid growth and relative youth of technology companies. In addition, the long-term, through-cycle approach to value creation and capital structure of long-term investors might not be a natural fit for technology and healthcare industries, where more-frequent breakthrough innovations can require very large short-term investments. Our analysis shows that about one-third of LTI&Os’ lowest-performing portfolio companies (relative to the industry) are technology-enabled companies.

Understanding the competitive advantages of LTI&Os

LTI&Os face three primary structural headwinds. First, a lack of diversification can expose them to higher risk. Their deep roots in heritage investments lead by default to an overrepresentation in select industries, making them more vulnerable to sector-specific downturns or economic shocks.⁹This overrepresentation is relative to an efficient-frontier investment portfolio, or one that is expected to provide the highest return for a given degree of risk. Second, in most situations, LTI&Os may have reduced flexibility to reallocate capital quickly in response to changing market conditions because heritage investments, such as historical properties or legacy businesses, can lock up capital for extended periods. Finally, parts of LTI&Os’ portfolios may face less pressure from public markets to improve operational efficiency or pursue growth opportunities.

Yet LTI&Os also possess distinct competitive advantages across their value creation systems. Different LTI&Os often excel at different elements, such as identifying and capturing growth from long-term trends or attracting and building a strong talent base. These elements can be summarized into seven competitive advantages that make LTI&Os stand out among other investor groups (Exhibit 4).

Exhibit description begins. This is a text-based exhibit explaining the seven competitive advantages that shape the creation system of long-term investors and owners. On the left-hand side is a column titled “Value creation system” that defines four overarching objectives for long-term investors and owners. The second column then lists the seven competitive advantages along the value creation system, aligning them with the relevant overarching objective. The first value creation system is for long-term investors and owners to capture unique, long-term growth opportunities. There are two competitive advantages related to this objective. The first is the ability capture long-term growth opportunities backed by fundamental trends, enabled buy a flexible, patient capital structure. The second competitive advantage is access to unique and privileged investment opportunities because being regarded as a long-term owner can provide distinctive access to owners and management teams. The second value creation system is creating ecosystem synergies in the portfolio. Long-term investors and owners have two competitive advantages with this. First, they have flywheel synergies around core investments from factors such as leveraging privileged access to brand and heritage, research, networks, operations, and deep industry knowledge. The second competitive advantage is exploiting deep industry expertise around a core area or simply knowing your niche better than anyone else. The third value creation system is being the best active owner. This is enabled by two competitive advantages: the ability to attract and secure the right talent and capabilities, and a well-functioning governance system that allows long-term investors and owners to build high-caliber boards and embed ownership objectives within portfolio companies. The fourth and final value creation system is leveraging dual purpose. This has one competitive advantage: the ability of long-term investors and owners to leverage their dual purpose to amplify their investments—.for example, by providing grants for research within the industries of portfolio companies. The foundation for this exhibit is McKinsey team analysis. Exhibit description ends.

Capturing unique, long-term growth opportunities

By focusing on long-term trends and emerging megatrends, LTI&Os build portfolios strategically positioned to harness future growth opportunities. Despite varying degrees of diversification across assets, LTI&O strategies typically revolve around heritage assets. In other cases, the development of majority positions has moved far beyond a few select industries. McKinsey research from 2024 shows that 12 specific areas—including e-commerce, biopharma, and cloud services—contributed to an outsize share of economic profit from 2005 to 2019, growing from less than 10 percent of total global economic profit to 50 percent in 2019.¹⁰“The next big arenas of competition,” McKinsey Global Institute, October 2024. This shift of economic value in just 15 years underpins the importance of positioning investment portfolios to capitalize on long-term trends.

Almost half of our sample LTI&Os also have venture portfolios, providing growth exposure and allowing them to leverage their domain knowledge to successfully identify and develop venture businesses that can tap into emerging megatrends.

This portfolio structure is enabled by the flexibility of LTI&Os’ capital structures, which leads to diverse portfolios across asset classes and mandates, such as debt, principal equity, and venture equity.

Creating ecosystem synergies in the portfolio

LTI&Os often use their heritage-controlled investments as a foundation to strategically expand, using their extensive networks and industry expertise to create synergies within their portfolios. This generates “flywheel effects” enabled by long holding periods, allowing LTI&Os to cultivate long-term synergies drawing on their decades of expertise building around their assets and their industries. These reinforcing synergy effects help LTI&Os amplify the impact of their investments by fostering innovation and growth. Typically, LTI&Os anchor this on five archetypes:

• Geographic. Capitalize on a strong regional presence to drive synergies by enabling local networks and partnerships—such as investing in local researchers and companies, influencing local competitiveness, and driving niche innovative hubs. For example, one European family office capitalizes on its strong national presence to exert influence and enhance its home country’s competitiveness through active ownership of leading local companies and funding of research and education to develop the next generation. This also helps the family office foster local networks and partnerships, contributing to the continuous development of its ecosystem.
• Networks. Use extensive networks to access a wealth of knowledge and experience, foster informed decision-making, and create a robust environment for success. These networks often stem from a strong legacy of serving family- and founder-led businesses, enabling LTI&Os to share best practices, stay ahead of market trends, and foster collaborative innovation. For example, an Asian investment-focused conglomerate with a strong focus on network building urges talented individuals to take leadership positions across its group companies and emphasizes talent development, with a culture of continuous learning integral to driving innovation and growth. Another example is an American investor whose strong legacy of serving family- and founder-led businesses gives it unique access to an unparalleled global network where business owners share insights and connect.
• Industry or sector. Invest within a narrow industry or sector to drive deep expertise and collaboration across related businesses, allowing for a depth of knowledge, capabilities, and experience built over decades that extends significantly beyond what shorter-term investors can achieve. This entails cross-brand collaboration to leverage synergies from shared resources, access to top talent, and the development of industry-leading innovations. By concentrating investments in specific sectors, LTI&Os can cultivate specialized knowledge and foster a collaborative environment that promotes growth and efficiency. For example, a European foundation-led investor uses its heritage assets as knowledge-building pillars to continuously develop expertise over decades, gaining an edge in selecting and growing ventures in related sectors. Another family-led investor, which has built a portfolio of brands in the luxury goods market, leverages cross-brand collaboration, shared resources, and access to top talent across the group to strengthen brand value, operational efficiency, and market reach.
• Value chain. Take strategic positions across the same value chain, without direct integration, enabled by the ability of LTI&Os to leverage different investment mandates. This approach allows LTI&Os to create an information and expertise advantage—for example, by using scale to invest in research benefiting multiple portfolio companies. In this way, LTI&Os can leverage portfolio synergies to help unlock or accelerate emerging value chains, where knowledge barriers are often high. For example, in addition to its heritage asset, a Northern European family office invests strategically in companies focused on supply chain technologies, benefiting multiple portfolio companies.
• Operations and collaboration. Create synergies by collaborating on business activities in network or value chain intersections within portfolio companies. These synergies leverage the combined scale of the portfolio in joint activities without requiring operational integration—for example, by sharing distribution networks, a brand name, or technology. One European family office, for instance, leverages the scale of a large-scale portfolio company on indirect procurement across its full portfolio.

While many different types of flywheels can be established, a clearly defined industry, sector, or geographic focus appears at the ecosystem core of many well-performing listed long-term investors, whereas lower-performing peers appear to be more broadly diversified or have divested heritage assets. Regardless of the archetype, ever-evolving flywheel synergies can be enhanced through various initiatives, such as engaging with research institutions, establishing industry-specific centers of excellence, fostering partnerships across companies, leveraging cross-brand customer interfaces, and scaling sourcing and supplier relationships.

Creating value as an active owner

LTI&Os also create a competitive advantage by taking an active role in their portfolio companies, although both the magnitude and type of active engagement can vary significantly and involve different elements.

One area in which LTI&Os can leverage their long-term perspective is people and talent. Many LTI&Os have deep networks, cultivated over many years, from which they can tap people with specific, industry-leading capabilities for leadership positions in the portfolio companies. At the same time, they can provide opportunities for continued talent development—often with the same people involved over longer time periods and across the ecosystem.

LTI&Os attract and retain the right talent through comprehensive approaches such as attractive incentives, succession planning, talent rotations, external talent management, and appealing values. This approach differs from public markets, in which dispersed groups of investors have less direct influence on business management and talent development and cannot build or use the same types of networks, given their often shorter time horizons.

In addition, LTI&Os are often closely involved in setting companies’ long-term strategy to ensure that the direction is aligned with their values and objectives. They exert continuous influence through carefully selected boards and can act as a close and long-term sparring partner to CEOs, without the pressure of focusing on short-term results.

Last, LTI&Os often involve industry experts and specialists beyond boards to support their portfolio companies and provide industry-leading advice on key strategic topics. This may also involve collaboration and knowledge-sharing across companies in the ecosystem, creating a competitive edge over traditional investors, which are unable to create the same type of synergies across investments because of dispersed ownership structures and investment areas.

In practice, LTI&Os can consider multiple actions to best position their portfolios for long-term, sustainable value creation:

• Set direction and leadership. Actively participate in the selection of company senior leaders—leveraging networks and reputations in the search process—to ensure alignment with the LTI&O’s objectives.
• Engage to achieve the long-term strategy. Develop the strategy in partnership with company leadership and continuously support key strategic topics by being a confidant to the CEO.
• Promote and share best practices. Encourage the adoption of industry best practices, often cultivated through involvement of industry-leading experts and knowledge-sharing, while respecting the portfolio company’s decision-making autonomy.

Leveraging dual purpose

LTI&Os with a strong family or foundation anchor often strive to achieve both financial returns and broader societal impact. This involves maximizing long-term, attractive, risk-adjusted returns while accepting uneven pathways with patient capital and allowing for alpha-generating strategies.

Simultaneously, LTI&Os aim to ensure the longevity of their businesses and act as responsible long-term owners while integrating values that ensure positive contributions to society, such as environmental and social considerations. The dual purpose sometimes also has an inherent connection to the investment ecosystem, creating a circle of positive reinforcement. For example, one European long-term investor actively supports children’s educational development through play, an endeavor closely linked to the activities of its heritage asset companies. By integrating societal considerations, LTI&Os not only ensure the longevity of their investments but also reflect a commitment to creating value that extends beyond the bottom line.

For family-owned LTI&Os, considerations of continued involvement of the family and protection of assets also play a role in the dual purpose. These LTI&Os often build on values that have been handed down through the generations, continuing to preserve and cultivate them through their investments.

Five strategic questions for LTI&Os

LTI&Os continuously evolve their investment strategies to stay relevant and spur continued growth. While LTI&Os are committed to long-term value creation, they are not resistant to change and often look further ahead than peers with shorter-term investment horizons. They react to macro- and megatrends including evolving geopolitics, shifts in the climate agenda, an aging population, and the emergence of groundbreaking technologies.

Three trends in particular are redefining the investment and portfolio strategies of LTI&Os: identifying major disruptive forces to invest in for the long term; the implications of geopolitical shifts; and the rapid advancement of technology, particularly gen AI. The ability to continuously improve and evolve will remain paramount in generating superior performance in the new era. The coming decades are expected to bring significant changes to the operating environment for investors, and LTI&Os can leverage their unique position to be at the forefront of change and sustainable value creation.

To prepare for the future, LTI&Os can address five questions:

1. What is their reason for being? Identify the LTI&O’s purpose as an investor to set the direction and align current and long-term priorities.
2. Where and how should they invest? Determine how to invest and allocate capital to create an “efficient frontier portfolio” based on core assets. Specific opportunities for value creation include investing in assets that require longer time horizons than private equity investors can offer, and investing in long-term macrotrends that require patience few other investors are willing to accept.
3. How should they create portfolio synergies? Understand how to create flywheel synergies and propel growth within the ecosystem. For example, LTI&Os can leverage existing core asset positions in emerging value chains or leverage their scale to make cross-portfolio investments in key emerging technologies (such as in gen AI, which is expected to become a €6 trillion to €8 trillion annual productivity pool).
4. How can they create value as a long-term active owner? Decide how to become an active owner that creates value for the portfolio in the long run. This should include a focus on long-term talent acquisition to remain at the forefront, ensure in-house capabilities and expertise, and offer extensive support for portfolio companies to navigate today’s volatile geopolitical environment.
5. How can they operationalize the dual purpose? Determine how to leverage the purpose to amplify investments, turning any “beyond returns” ambitions into advantages.

A shift toward an increasingly long-term-oriented investment approach can be motivated by both strategic and return objectives. Our research finds that LTI&Os, with their patient capital and active ownership models, are well equipped to navigate the complexities of the modern market and drive sustainable value creation.

To position themselves for the long term, investors can reallocate investment capital toward long-term trends, continue building their ecosystems and developing their unique flywheels, and invest in cutting-edge technologies, innovation, and research to stay ahead of industry disruptions. Investors who take advantage of new opportunities in an evolving private capital landscape can support portfolio resilience in the face of increasing geopolitical changes, and they can embrace the dual-purpose objective of balancing financial returns with broader societal impact by integrating environmental, social, and governance considerations into investment strategies.

Over the past two decades, LTI&Os have consistently outperformed the broader market. To continue to do so, they will need to embrace a dual-purpose objective, make the most of ecosystem synergies, and focus on long-term trends—an investment approach that may also lead the way toward a more resilient and prosperous future.