More Than Half of Family Businesses Struggling to Find External Finance to Fund Investment
More than half of family-owned businesses in the UK are actively seeking external investment to fund growth plans, but many are failing to target the right investment partner according to new research from professional services firm KPMG.
According to the report, Family matters: Financing family business growth through individual investors, more than a third (36%) of family businesses claim that the current economic climate has significantly impacted their ability to finance projects via bank loans, meaning the hunt for alternative sources of finance has intensified.
However, there appears to be something of mismatch between the preferred type of external investment partner and the actual factors that underpin any financing decision.
The survey, which assesses the appetite for investment in family businesses in a number of countries worldwide, looks at attitudes of potential investors and from the family business perspective.
Globally, private equity and venture capital was ranked as the number one preferred source of external funding, with corporate investors coming second. However, the nature of these two types of investors contrasts sharply with what family-owned businesses actually want from an external partner. Here, taking a long-term view towards investment returns and the desire of family-owners to retain complete control over their business were seen as key, and this is arguably the prevailing view in the United Kingdom.
Christophe Bernard, global head of family business for KPMG, explains: “The issue of maintaining control and independence certainly imposes limits on the possible routes for family business financing. Private equity funding, for instance, often requires the entire business to be sold to maximise value in the event of an exit, while corporate strategic partners often see any investment as part of a longer-term plan to secure full control.
“Such qualities contrast sharply with the desires of family businesses who do not wish to relinquish control of their business, or who wish for key business information to remain confidential.
“This means many family businesses across the UK are treading a fine line between successfully attracting funding, and monitoring the impact this may have on the family’s control of the business – something which could be limiting their growth potential.”
Gary Deans, head of Family Business for KPMG in the UK, added: “The international findings are interesting and highlight the differing attitudes taken by many family businesses to external investment. Most UK family businesses have not found external investment an attractive proposition, but with changed attitudes in bank lending over recent years this may need to be reassessed. It is not necessarily the lack of bank finance that is the issue here, but the terms that many family businesses find unattractive.”
However, the KPMG survey has identified one possibly under-utilised route for investment - the involvement of high-net-worth individuals (HNWIs) and Family Offices, many of which have family business experience as well as significant investment capital.
It is estimated that there are up to 14 million High Net Worth Individuals around the world with around $53 trillion of wealth . Importantly, the results of KPMG’s survey show that the top priorities of HNWIs and family-owned businesses align, making the under-utilisation of this source of finance surprising. HNWIs name long-term capital appreciation (37%) as their top driver for investment, with many saying they are more willing to accept minority stakes, without ambitions to secure full control or a full sale in the future.
Christophe Bernard said: “Our report has revealed some important misconceptions on both sides. Education and awareness on the potential benefits of these potential partnerships have therefore emerged as important first steps to link these two groups.”
Gary Deans, head of Family Business for KPMG in the UK, added: “There is a potential alignment of interests between the HNWI/Family Office and family business groups and certainly experience to be shared as many of the potential investors have been involved with their own family business. This knowledge – and potential finance – could be valuable in enabling many businesses to explore their growth potential. Many of the investor group have significant international experience and there is no doubt that many UK family businesses are considering expansion overseas. The investors may have to be flexible in their approach however, as there is no doubt that UK family businesses would prefer debt finance over equity. I am sure however that the potential investors and the family businesses have opportunities to work together.”
Other key findings of the survey include:
- 44% of HNWIs have previously invested in a family business and the vast majority (95%) say that it has been a positive experience in comparison to their other investments.
- More than three-quarters of survey respondents (76%) say that the family holds a majority stake in the business.
- 60% of HNWIs are looking for investments with reasonable risks and reasonable returns, and are focused on long-term capital appreciation.