The financial crisis and the deleveraging cycle of the last five years continue to bring significant challenges to the many family companies around the world.
What a difference a few years make…
With a recession in Europe, a significant slowdown of growth in China and a slow recovery in the US, most family companies are looking at very grim prospect for growth in the foreseeable future. This is not what the baby boom family business owners were contemplating on the eve of their retirement…
In the financial markets, large financial institutions have shrunk their appetite for middle-market investments and banks find middle market loans too expensive in the context of the new reserve requirements and other bank regulations. Yet, family companies continue to require outside capital to defend their global market position or take advantage of growth opportunities. In addition, as we embark on the largest generation wealth transfer ever in history, thousands of family businesses will require massive liquidity capital to transition to the next generations.
So what are the financial options still available for family companies?
Private Equity Funds and the public markets remain two financial alternatives for family companies. Most private equity funds by their very structure are too short-term oriented for families looking for more “patient capital”. Managers of private equity funds have a fiduciary responsibility to return capital gains and principal to their investors within the time frame of the fund. Conversely, the public markets remain inhospitable to most family companies due to the expenses associated with going public and the increasing regulations of public companies.
As an alternative to private equity funds and the public markets, a growing number of family companies have discovered the merits of partnering with a single family office to raise capital for growth or liquidity needs. We call it “Families Investing in Families”®.
The concept of families investing in families and families partnering with other families is not new. In Latin America for instance, many families have invested with other families or have been partners in each others businesses for decades.
What is new is that there is a growing number of single family offices looking to make direct investments in private companies and partnering with the existing owners of family companies. Through de Visscher’s unit Family Capital Partners, we have identified well over 400 single family offices around the globe interested in making direct investments. There are several reasons for this growing interest of family offices in direct investments in family companies. For one, family offices worldwide are growing in number and are flush with liquidity. In a low interest rate environment and with an uncertain stock market environment, investing their excess liquidity becomes a real challenge. So most single family offices are looking for safe, stable and profitable long-term investments to replace financial assets, which value has been heavily damaged in the financial crisis. Direct investments in family companies can generate healthy returns for family offices without all the expenses and fees associated with private equity funds.
Secondly, family offices are thinking of their wealth as being trans-generational: today’s generation is only the steward of the wealth for the next generations. As one family said to me: “In our family we don't know the meaning of long-term, but short term for us means 50 years!!” Owning or being a partner in an operating business held for future generations is in the DNA of the family and much easier to comprehend for a family office than trying to understand the nuances of alternative fund investments. After all, the family made its money through a family business before it became a family office.
The advantages of having a family office as a partner are plentiful. Family Offices invest their own capital and therefore have more flexibility when it comes to length of investment horizon, control requirements and the ability to finance liquidity events, not just growth investments. Given their history, family offices also understand the multiple aspects of family companies, respecting their history and values.
Bringing in a family office as a partner requires however a certain commitment and preparation. The family has to be committed to staying invested in the business for a long period of time. The family governance system has to be perfected to ensure that the family stays together. Typically, a family holding company is set up to regroup the family’s interest in the family company. Finally, significant liquidity events have to be identified and planned before the entry of a new partner in the family business.
While family offices are numerous and their capital is abundant, finding the “right” family office as a partner is the most challenging part.
Families have to decide what kind of family office partner would be best suited for their needs and cultural specificities. In addition to the cultural differences, family offices vary greatly with regard to their degree of involvement and control, their level of sophistication, their knowledge of specific industries and their own family or corporate governance. A partnership with a family office is a long-term marriage. Finding the right mate is crucial to the success of the partnership.
Over and above the financial considerations, the success of the partnership with a single family office – like any other partnership - comes down to one simple word: TRUST. So before you enter into a long term partnership with a single family office, ask yourself the question: “Can I trust this new partner?”