Private equity offers more than just capital for family businesses
Family businesses are oftentimes perceived as small mom-and-pop shops with just enough cash flows to sustain the nuclear household. The reality however could not be further from this.
Today, family businesses are a key economic driving force across the globe, accounting for over 70 percent of global GDP. Locally, the Association of Family Business Enterprises (AFBE), estimates that 70 to 80 percent of all businesses in Kenya are family owned. The Association further estimates that family businesses contribute about 60 percent of the labour force in the country.
The success and influence of family businesses to economic contribution is derived from their deliberate action to institutionalize the business operations, creating more corporate structures which define the nature of engagement between the owners, management, staff and the greater market. Frameworks around corporate governance and corporate strategy are now commonplace in these businesses.
As these family businesses expand, often there is need to raise the right capital to innovate, manage growth, attract the right talent and maintain their competitive edge. Traditionally, family businesses tend to either look inwards for capital or seek bank financing as available options to support business growth. While both remain quite viable options for business financing, they may fall short in injecting fresh vibrancy needed to catapult the enterprise to the next level. It is for this reason that we see more family businesses considering opening up to private equity funding as an alternative source of their business financing.
PwC’s Global Family Business Survey 2018 shows there is an increase in the willingness of family businesses to consider Private Equity (PE) with 83 percent of the close to 3,000 global firms surveyed indicating they would consider the option. In Kenya, over 50 percent of the 60-family business who participated in the survey indicated their willingness to seek private equity, with at least 26 per cent saying access to finances is a key challenge over the next two years.
Family businesses are agile and do outperform large corporations as they are able to make quick decisions, owing to their often flat structures of decision making. Despite this agility it takes more to grow any business to the next level. The survey highlights corruption, access to skilled manpower, operational costs such as energy and raw materials, increased international competition and the need to innovate and stay ahead as the leading five challenges facing family business in the country.
In looking at the above challenges, it is clear that addressing the problems of family businesses requires more than funding support, if they are to remain competitive and productive. In Tanzania, where family businesses are more in the retail and manufacturing sectors, strategic guidance is particularly important if our local enterprises are to survive disruption and vulnerability to competition against global giants.
Private equity firms are ideally placed to help family businesses grow amid changing technologies and growing globalization. As partners in the business, private equity funds work with the family to enhance the business performance and allow the family business owners to leverage on the funds’ sector experience to identify risks and opportunities in advance, making smart goal-oriented decisions. Beyond these, the family businesses can tap into the PE funds’ network of companies and markets for new business opportunities.
As external parties to the business, PE firms bring new corporate governance and decision-making systems that help in smoothening the transition to structured corporation. Private equity firms offer the businesses the capability to look beyond their internal governance structure for new ideas while at the same time cushioning leaders from being pressurized into taking decisions based on family or other non-commercial reasons. This in turn means greater organization efficiency, auditing and monitoring, better access to financing and new markets, as well as retaining the right talent to support the business growth.
The PwC survey indicates that family owned businesses are set to undergo generational change in coming decades marking one of the largest transfers of wealth in history. From an analytical perspective, this transfer often leaves businesses with three main options: direct sale, maximizing growth potential for sale or investing in growth for future generations. In all three cases, private equity is an ideal option in that it enables the businesses to gauge the real value of their business enabling them to extract maximum value regardless of the option they pick.
Strategic investments such as PE in family businesses increases the brand value of enterprise, to make them more marketable and attractive to other investors, which may result in new opportunities for market listings and strategic partnerships.
As family businesses move towards becoming economic champions, third party engagement such as partnerships with private equity will help them to safeguard generational wealth and promotes continuity of the businesses without necessarily relying on family members to conduct the day to day running of the business.
Ms. Warigia is Executive Director at East Africa Private Equity and Venture Capital Association (EAVCA).
